Good afternoon, ladies and gentlemen, and welcome to Sappi Limited's fourth quarter and full year of 2019 results conference call. All participants will be listen-only mode. There will be an opportunity to ask questions when prompted. If you should need assistance during the call, please signal an operator by pressing star and then zero. Please note that this conference is being recorded. I'd now to hand the conference over to Mr. Steve Binnie. Please go ahead, sir.
Thank you. Good day, everybody, and welcome to our results call for the financial year-ended 2019. As always, I'll go through the investor presentation. As I go through each slide, I'll call out the page numbers. Starting on page three, the highlights for the year. It was a difficult year for us. However, EBITDA was down 10% to $687 million. That was as a consequence of lower dissolving pulp prices, which we saw drop considerably during the year, almost $300 a ton. Then we saw weak graphic paper markets down between 8% and 12% in the regions that we operate, which forced us to take 268,000 tons of downtime. We did have higher dissolving pulp sales following the successful completion of the debottlenecking project last year, and we made nice progress on the packaging and specialities. We saw in the quarter 12% higher volumes.
Sorry, that's for the year, 12%. We completed the Matane acquisition, which we announced earlier in the year. That transaction was completed earlier this month. Moving to slide four, which is the highlights for the quarter itself. For the same reasons, EBITDA down from $224 million to $185 million. As I said, we saw both dissolving pulp and graphic paper under pressure. We did have a nice increase in profitability from packaging and specialities. The downtime that we took in the quarter in graphic paper was 94,000 tons, which had about a $25 million impact on EBITDA. The EBITDA margin overall for the group was down from 14.6% to 12.7%. Our net debt leverage to EBITDA up to 2.2 times, obviously as a consequence of the lower profitability. Moving to slide five, the earnings bridge last year versus this year.
We did have lower sales volumes overall. Our growth segments showed positive volumes, and that's both in dissolving pulp and packaging and specialities, which were both up 6%. Graphics, obviously from the weaker markets, was down also by 6%. On the pricing front, the lower dissolving pulp prices obviously having an impact on the average prices. There was a bit of a mix issue there. Positive impact from lower variable costs, predominantly coming from paper pulp costs, which did decline during the year. We did get some relief from there. Overall that explains the main variances between ZAR 224 and ZAR 185. Moving to slide six, the product contribution split. This is on an LTM basis. Obviously you're not seeing the full impact yet of the lower dissolving pulp prices.
Nevertheless, for the year, it was 45% of the contribution to EBITDA. As dissolving pulp prices have declined, that proportion will or has in the fourth quarter, and as we move into the new financial year, that proportion will decline naturally. I'm pleased with the progress that we're making on packaging and specialities. It's up to 19%, and as we ramp up in the new financial year, that will clearly take an ever-increasing share. Moving to slide seven, this is for graphics segment. It's the volumes and EBITDA margin. Clearly you can see the impact of our strategy to reduce capacity in this segment over the last few years and also more recently, obviously, the production downtime that we've taken. Despite that, because of obviously the lower pulp costs, our margins actually for the quarter did improve compared to the previous quarter.
Moving to slide eight, packaging and specialities, we're very pleased with this progress. You can see that over the last couple of years, we continued to increase volumes, and we had a nice margin for the quarter, being just under the 14% level. It's higher than it was a year ago and up substantially from the Q3. As we ramp up forward, this is something that we talked about on previous results calls, as this business continues to grow, the margins will obviously benefit from that. Moving to Slide 9, on dissolving pulp. Obviously, the lower selling prices will have an impact on margins this year. We did have the extra volumes following the successful debottlenecking project that we're completing. Moving to Slide 10, the maturity profile of our debt. A lot of good work done this year, we refinanced our 2022 bonds to 2026.
Obviously, at the same time, we extended our securitization structure, and that's now through to 2022. Over the next two years, we don't have any material maturities, and we feel that puts us in a good place. Moving to Slide 11, just our CapEx. You can see that earlier this year, we were talking about substantially higher CapEx levels. We've pulled that back. We've deferred and postponed some of the CapEx and stopped some of the discretionary CapEx. No impact on maintenance CapEx, which is clearly very important. Across the two years, we've pulled back $150 million of CapEx. The 2021, we haven't finalized numbers yet, but I would expect that to come down further. We haven't committed any major projects beyond 2020. Turning to our segments, firstly, on graphic paper, which is reflected on Slide 13.
We have seen very weak markets during the course of the year. I quoted the number earlier. Declines of approximately 10%. Some of that is related to the weak economies that we've seen, particularly in Europe, Other areas of the world. At the same time, last year, when selling prices rose substantially, there was a big inventory build. That's had to work its way through the system as well. Obviously, global trade flows has also had an impact. As we move forward, the capacity reductions that are being announced by some of our competitors, Also as we ramp up on packaging, that will help improve operating rates over the next 12 months. Selling prices have held up reasonably okay.
We've seen small decline, but in terms of protecting our margins against the production curtailment that we've had to take, we have had the benefit of lower paper pulp prices. Going forward, we will continue to focus on costs to protect our margins, managing our capacity as the markets do develop. We continue to evaluate our portfolio of assets. The recent acquisition of Matane improves our pulp integration and will lower our costs. Turning to Packaging and Specialities on Slide 14. We all know that there's significant trends happening across the globe with a push for paper-based packaging solutions. The big brand owners pushing for solutions, and that's creating opportunities. On the other side, we do know that there's been a number of conversions, also in the containerboard market. We've seen conversions there as well. Selling prices have been stable.
However, these selling prices do tend to get negotiated annually or semiannually, and we're going through a process of negotiating prices for 2020. We're hopeful that we can keep them at stable levels. The lower paper pulp prices obviously helped us as well to preserve margins in this segment. The ramp-up of volumes, I've talked about it already. It's picking up momentum, and will continue to grow as we move forward. Clearly, the whole innovation and looking for sustainable solutions in the packaging segment is creating opportunities for us here as well. Next, we turn to the regions, and Slide 15 is Europe. The profitability of the region was impacted by the production downtime that we had to take in the quarter. It was 37,000 tons, and due to the lower graphic sales.
Interesting, coated woodfree, we've gained substantial market share and a lot of good work's been done there. However, on coated mechanical, that is a segment which we've talked about in the past, that has been under pressure. For us, obviously, we've made the recent Lanaken conversion, so that meant that we've taken capacity out of that segment and would have impacted our market share there. The packaging and specialities, I've talked about, and clearly we are benefiting there, and we obviously had lower variable costs led by pulp. Moving to slide 16, the North American region. Nice progress on packaging and specialities. Volumes are now up 36%, margins are increasing, and the PM1 machine at Somerset that we completed is now about a quarter on packaging grades, and that will ramp up further in the year ahead.
However, obviously profitability down because of the, one, lower dissolving pulp prices, and secondly, the very weak graphic paper markets. We did take downtime, 57,000 tons in the region. Clearly, our strategy here is to build up the packaging volumes to offset the declines that we are seeing in the graphic. Region also benefiting from lower variable costs and fixed costs. Slide 17, we talk about the dissolving pulp market. It has been a very tough year. It's fair to say there's been supply side issues and demand side issues. On the supply side, we have seen extra capacity come on board, and the weak paper pulp markets has meant that we're not getting any relief from swing producers. On the demand side, a lot of new viscose capacity coming on board. It's made the viscose prices are under pressure.
We're also seeing weak global textile markets related to the economy, the trade wars that we've seen underway. Being hit from both sides. At these price levels, we estimate about 40% of mills are cash negative. Obviously, our mills are at the low end of the cost curve, we believe that puts us in a good cost competitive situation, albeit that we are facing the pressure of short-term lower selling prices. The prices dropped by close to $300 during the year. They're currently today at $638 a ton. A year ago, they were $930 a ton. It's had a substantial impact, and that's the main reason why our profits are down, and we have put a negative outlook statement out to next year. Going forward, the Saiccor project is going well. We're 40% complete. That will add 110,000 tons of capacity.
Our big differentiator here is our wood certification. It puts us in a very strong competitive position. We have a strong green story to tell, and that ensures that we have close alignment with our key customers. Moving to South Africa. The volumes were higher, firstly, because of the extra dissolving pulp capacity we have had coming through, and we did benefit from a weaker ZAR. Clearly, the lower selling prices for dissolving pulp will have an impact. The packaging side in South Africa, the packaging market has been weaker of late. It's a sector that's done well for a significant period of time, but we have seen recent weakness, and that's related to lower citrus exports out of South Africa.
Fixed costs were higher, that was because as we staffed up because of the additional volumes coming through, ahead of the additional volumes coming through at Saiccor. Wood prices are higher as well, that put some pressure on costs. Moving to strategy and the four areas that we always focus on. Firstly, on slide 20, on costs. In this period of uncertainty, the focus on cost needs to be ongoing, and I'm pleased to say that we took further costs out of the business in 2019, $87 million, which helped offset some of the pressures that we faced. There are ongoing improvement initiatives, and we'll be targeting further cost reductions in the year ahead. The pulp acquisition at Matane will improve pulp integration and will benefit us and reduce volatility as we move forward.
The other benefit, the Saiccor project itself will also lead to lower variable costs. Slide 21. We talked about this at the end of the last quarter, we're pleased to say that we successfully completed the acquisition of Matane. Very pleased with how things have progressed. The integration is going well. We're very excited about the high-quality people, the assets that we've acquired, and the quality of the pulp at Matane is excellent. Very pleased, and things are going well. Moving to slide 22, just to remind you the reasons for the acquisition. It was very important that we secured a critical source of supply for our raw material. That now supplies both our European operations and our Somerset mill as well. That has to be a key focus for us. The same time, as I said, it will reduce input pricing and volatility as we move forward.
It was a significantly lower cost alternative than adding capacity at the Somerset mill. It made a lot of sense for us. Moving to slide 23, the declining businesses. We've obviously made these conversions away from graphic paper in recent times. In the year itself, we completed the conversion at Lanaken. That will allow us to get out of lightweight coated at the mill. Obviously, we talked earlier about that the real segment, the coated mechanical segment in Europe, is the one that's been under the most pressure. This helps us as well. At the end of the last quarter, the results call, we talked about the fact that we were evaluating our machines in Europe. That work is near completion. We will hopefully be in a position to make an announcement very soon. The slide 24, maintaining a healthy balance sheet.
Very pleased with the good work that's been done on working capital. As you saw earlier, we pulled back on the CapEx commitment. We generated cash of $173 million in the quarter. As we move forward over the next year or so with the low dissolving pulp prices and the uncertainty that creates, a strong focus on the balance sheet, strong focus on cash generation. We renegotiated our leverage covenants at no additional cost, that gives us more flexibility. Good work done here. The one thing I should call out to you is that the new accounting statement, IFRS 16, where you have to capitalize operating lease costs. When we report our next numbers, it's going to add $90 million to debt on the balance sheet, obviously that's like lots of businesses. It's important to call out that has no impact on any covenants.
That's an accounting adjustment, it doesn't impact there. Moving to slide 25. The investment in terms of growth areas. Very pleased with how the conversions went at Saiccor and Ngodwana and Cloquet. Obviously, we've got the additional 110,000 tons coming through. That project will be completed third quarter of calendar 2020. We continue to believe that we have packaging opportunities in South Africa, in Ngodwana and Tugela. Similarly on the bioproduct site, the lignins and sugars, as you know, we put in place pilot plants and we continue to make progress. The key here is ramping up as fast as possible at Maastricht and Somerset following the completion. We're also excited about the barrier coating opportunities that we are making. We announced some nice work that we've been doing with Nestlé.
There was a press release earlier in October and making exciting progress with the big brand owners there, and we think in time there will be substantial opportunity. Turning to the outlook. Markets are still tough. dissolving pulp prices are still low. We're making good progress with customer acceptance on the packaging side, and that will ramp up further. Global graphic paper markets are weak. However, paper pulp prices being lower, that do provide some relief, and the capacity that's likely to come out will help operating rates. With prices where they're at at the moment for dissolving pulp, we have to put out a negative outlook statement for the first quarter. The profits will be lower than a year ago. As a consequence of that, we made the decision to temporarily halt dividends until the market prices improve and those conditions improve.
We feel it's a prudent thing to do. Along with all the other good work that we're doing on the cash management side will help us get back down to the leverage levels that we've targeted long term. Operator, that's me read through the deck. I'm going to put it back to you now for questions.
Thank you very much, sir. Ladies and gentlemen, at this time, if you'd like to ask a question, you're welcome to press star and then one on your touchtone phone or the keypad on your screen. At which time you'll hear a confirmation tone. Following this process will place you in the question queue. If you decide a question has been addressed and you wish to withdraw your question, you're welcome to press star then two on your touchtone phone to remove yourself from the question queue. Just a reminder, if you'd like to ask a question, you're welcome to press star and then one. The first question comes from James Twyman of Prescient.
Yes. Thank you very much. A few questions from me. Firstly, on the downtime that you've taken, could you just give us some idea of where you see that going in Q1? Europe's probably tough, but hopefully you should be seeing some improvement in the U.S. from the Verso closure. Secondly, on the machine closure that you're planning, you must be pretty close to it now. It's been a little while. Could you give us some idea of what the cost of it would be and what you would expect to save from that? Finally, I'm sure there aren't any, but are there any non-core assets you have which you could sell just to help the debt along a little bit? Thanks.
Yeah. Okay. Firstly, on the downtime, things are a little bit better. We do estimate downtime for the quarter at about 17,000. That's predominantly in Europe. October, November, we've been relatively full. December, we were still looking to sell the machines, but our latest estimate is about 17,000 tonnes mainly in Europe. The impact of machine closures. Yes, you're right, we did announce it, or we did talk about it at the end of the last quarter. You have to appreciate there's a lot of work that needs to be done and discussions that need to be had, and we are very close. The impact, we estimate, depending on the machine, hopefully it will be able to take about ZAR 20 million of costs out of the business if we close the machine.
Berry, in terms of cost, because clearly we haven't decided, made a final decision. Do you just want to talk broadly about cost of machine closures?
Well, in terms of cash costs, Steve, the cash costs paid in the order of about 1.2-1.5 years. You do have a balance sheet effect as well, of course, that doesn't have a cash effect.
Sorry, Berry. I think you broke up a little bit there. Just repeat that.
Yeah. It's in terms of cash cost and the payback time would be between 1.2 and 1.5 years. There is also a balance sheet effect of write-off, but that, of course, does not have a cash impact.
Yeah. James, just remind me, what was it? Oh, assets sale. Yeah, look, I don't think there's any at the moment. Clearly, we continue to monitor the situation, Jim.
Okay. Thank you. Just on that, on the one before, you're saying there is no cash impact from the closure?
No.
Okay.
No, what we said is we estimate approximately $20 million of fixed costs would come out. The cash cost of the closure would be about one and a half times that.
Okay. Thank you very much.
The next question comes from Brian Morgan of RMB Morgan Stanley.
Hi. Thanks, guys. Thanks very much. Are you still selling DWP in the spot market?
Brian, good question. Yes, we are. We think strategically that makes sense. As you know, that's the Chinese market and we believe we've got some very important customers there, and we think it makes sense to stay in that market. Yes.
Obviously the next question is how do you work out the trade-off between participating in the spot market and, or maybe pulling out of the spot market and let the price recover a bit?
We believe that maintaining relationships with our key customers in China is strategically important, Brian. If there are opportunities to reduce our production and swing a little bit at Cloquet, we would look for those opportunities. I would be very hesitant to lose our customers in China because it may be difficult to get them back.
Is there a price point where you would say, "Sorry, this is as far as we can go?
Look, we don't think prices are going to drop further, but look, I guess we didn't expect them to get to these levels. At these levels, we would still want to stay in the Chinese market. That's all I can say, Brian.
Okay, that's fine. Thanks, guys.
The next question comes from Sean Ungere r of Chronux Research .
Good afternoon, guys. You just elaborate a bit more on that, in terms of your sort of quality offering. Just two or three more questions. Specifically, I think if you look at your outlook statement, I think everything hinges pretty much on the DWP price, understandably, and obviously in turn, VSF. You could just give us a very high-level view on how you see VSF playing out given the amount of capacity coming online. If you also look at the SA business in terms of cash fixed costs to inflation this year, it was pretty high and you obviously attributed it to a couple of reasons. You could just expand on that a bit more, as well as your sort of outlook for that variable. Thanks.
Yeah. I'll start briefly and then I'm going to hand you to Mohamed, who heads up our dissolving pulp business on the first two, and then Alex, I'll come back to you for the last question as well on the fixed costs.
Sure.
Before I hand to Mohamed first, we believe we've got a quality product. We've got a strong sustainability story to tell. As I've emphasized with Brian earlier, we want to preserve our customers in China. On the VSF I'm going to hand you to Mohamed to elaborate a little bit further, and Mohamed, you can just talk about the outlook for VSF.
The VSF market still continues to grow, although there's been a lot of new capacity that has come on stream, the underlying growth continues to remain positive. We're still seeing longer-term trend growth rates of around 6%, the market is just at a point where it just needs a little bit of time where the underlying demand catches up with the installed capacity. The positive is that there is growth. The sustainability side of the business, all the trends that are moving in the direction of sustainability are also helping the underlying growth for fibers that are biodegradable and cellulose fibers provide that benefit.
Just on that, in terms of the catch-up, when do you envisage an inflection point?
If I look at where the underlying demand is at the moment and the installed capacity, 6% growth is about 340,000-350,000 tonnes per annum. Typically what we've seen is when the operating rates get to around, for VSF, around the 80%-85%, things start firming up. At the moment it's around the 78%. I reckon middle of next year, end of next year, the underlying demand should get closer to the installed capacity. The other one thing that I think everyone in the market is expecting to help viscose demand grow probably even faster than the underlying long-term growth is the whole cotton issue. One of the things that has prevented, or I would say, not prevented is the wrong word. One of the things that has delayed the China government from buying larger quantities of cotton because the cotton stocks are very low in China.
It's been this issue between the U.S. and China. A big part of the phase one agreement that people are expecting is including a large amount of agricultural products that China will buy from the USA. As part of the agricultural products, cotton is expected to be one of those products. If or when this deal happens and is made public, I suspect that one positive outcome will be increased buying of cotton and that will be very positive I think for the fibers market in general.
Thanks.
Thanks, Mohamed. Alex, do you just want to talk about the fixed costs down in South Africa?
Yes. The drivers for the year were really as we get ready for the 110,000 tonnes of additional dissolving pulp at Saiccor, we have taken an approach to employ 100 odd people, additional people. We do think it makes sense to actually train them early. You do get them hitting the road running then, and we've seen very positive results at Ngodwana. Second issue, we had a bit of additional maintenance costs. We had some boiler tube leaks which we had to spend money on. Finally, with the project, the additional volume at Saiccor, during the shut we do have to do some tie-ins and that does add a little bit to costs.
Okay, great. Thanks.
The next question comes from Ross Griffith of JP Morgan.
Thanks, guys. Just to follow up with regard to the DWP market and to follow up on Sean's question. I understand how that operating rate moves up with the growth in demand, is there not still quite a lot of capacity coming on stream from Sateri? Below that, within the DWP market, it sounds like with a lot of production underwater from a cash perspective, it sounds like a lot of that needs to close. Are you hearing any stories of capacity closing? Related to that, there's also a lot of capacity expected to be added to the DWP market. Has any of that been delayed or how do you see that impacting the market?
Okay. Firstly, on Sateri, you'll appreciate we're not going to talk specifically about a competitor. Obviously there has been a lot of new capacity coming on board. The company you refer to is an integrated player, they're adding viscose capacity as well as dissolving pulp capacity. It's clear that the excess capacity, as I outlined upfront, is having an impact on pricing. That's just the natural force that's underway. It leads into your second question, we do estimate that 40% of the production is underwater. Again, Ross, we can't name them, we are hearing stories of certain producers stopping production. Mohamed, without naming Mohamed, maybe you want to elaborate further.
Yes, Steve, thank you. Certainly, there's lots of public announcements about capacities shutting down or stopping in Canada. There's announcements that came out also about production coming out in Brazil. What we are picking up in China, although production of dissolving pulp is continuing, it's continuing to a much lesser extent in terms of volumes and some of the producers in China, from what we are picking up through our own market intelligence, are switching to making other grades of pulp. Not shutting down the lines altogether or the sites, but shifting out of DP to one particular grade, called unbleached kraft pulp, because the containerboard guys need fiber and there's an issue with importing fiber from the U.S. There are lots of activities suggesting that output is being reduced.
Ross, just to add to what was said, the other key factor, and again, that's why I called it out. With 40% of capacity being swing capacity, when the paper pulp markets recover, that is going to create opportunities for that 40% to swing production. Again, paper pulp prices have been under severe pressure, but if you look at recent data in China, things do seem to be leveling off. Another factor I would add to everything that we've said is inventory levels, both on paper pulp and dissolving pulp. They were at very high levels late 2018 and into 2019. They are still at relatively high levels, but they are coming down considerably. Again, you'll appreciate you can't name individual companies, but there are some large paper pulp producers in the last few days that have announced substantial reductions in inventories.
They're major players, and that will help paper pulp prices. Indirectly, with 40% being swing, that will, we believe, help dissolving pulp market.
Okay. Thanks so much, guys. I've got a few more. I'll leave it there for now and see if there's time at the end.
Okay.
Thank you. The next question comes from Wade Napier of Avior Capital Markets.
Hi, guys. Thanks for the call. Could you just give us an indication of where you see graphic paper inventory levels? You sort of mentioned that through last year, inventory levels were rising, and that sort of compounded to cause the sharp decline in demand that we're seeing this year. Second question is, given the state of the balance sheet, is there a possibility to license your Rockwell technology with paper producers and converters to really capitalize on a market that's likely to grow well ahead of where you are able to supply it over the next three to five years? Then third and final question is, considering you're mentioning energy inflation in South Africa as a sort of headwind, what are the sort of opportunities to scrap the lignosulfonate production at Saiccor and move towards a more energy production for internal use at the mill. Thank you.
Okay. I will talk briefly about each and then I'm going to hand you to Mike, our North American CEO, to elaborate a little bit further on inventory levels. When I get to the Rockwell question, Berry, I'll start, and then I'll hand it to you, and then Alex, I'll come back to you on the lignin energy trade-offs at Saiccor. The graphic paper inventory levels was less an issue in Europe than it was in the U.S. We saw big inventory levels rise in the U.S. Europe, we believe, was a combination of the economy in Europe, which had a significant impact on demand. Secondly, the price elasticity issue related to the selling price increases that we saw last year. There's not been any major shift in inventory levels in Europe.
However, in the U.S., clearly the economy was less of a factor, but we did see substantial rises in inventory levels. Mike, I'm going to come to you now, if you want to just expand a little bit further there.
Thanks, Steve. Very little to add. We take the curtailment in the fourth quarter to bring inventory levels into balance. Where they're at right now today is at our historical levels for our Q1. We feel comfortable with where things are today, and I think that's what I have, Steve.
Okay. Thanks, Mike. On Rockwell, as you know, we're very excited and we've done some great work with Nestlé, and we're very excited about the prospects. Clearly we would want to keep that IP in-house. There is more development work that needs to be done. Maybe, Berry, over to you if you just want to expand further.
Very briefly. It is a combination of two unique things. It's the chemistry in the recipes, and it's the coating technology itself. It is not a question that you could go to another company and say, "Well, would you make this for us?" Because the technology to do so, they don't have. It's very much a question of how quickly we can step up our capacity for that. The second thing is that there are several generations of developments coming over the next couple of years. This is just one development in this part of a sort of development program, which you're going to see continuing generations coming onto the market to solve specific issues.
Wade, just to add to what Berry's saying, perhaps it was your bigger question. Clearly we have pulled back on CapEx in 2020. We do believe dissolving pulp prices will recover in time for all the reasons that we outlined. We are going to be conservative, clearly, when the balance sheet does improve, this would be an area that would be very exciting for us. There is work on R&D, further work to be done, as Berry has alluded to extend it and get further developments going. That would be something in time, which would be extremely exciting for Sappi. The third question was on the trade-off between lignin and energy. Alex, I'm going to hand it to you.
Yes. Thanks, Steve. Obviously, what that will require is that we convert the calcium line to magnesium. The cost saving, if we look at the energy generation, is probably similar to what we're now getting from putting in the third recovery boiler. That is going to take some CapEx. There are shorter-term opportunities, and we're actually busy implementing them where we can reduce our steam usage in our current production process, and that gives us additional steam to run our turbine generators fully. We will probably, in the course of the next three months or so, start utilizing that. Certainly the converting calcium to magnesium is a project we're working on as well.
Thanks very much.
The next question comes from Robert Rogers of Bank of America.
Thank you. I've got two questions. First on the Matane term loan, eight-year term loan. What was the principal amount, the interest rate, and is it secured?
This is Glen here. No, it is not secured. The term loan is an eight-year term loan. The interest rate is between, because it is in two tranches, 1.5%-2.5%.
Thank you. Yep, go ahead.
The overall amount is close to $170 odd million.
170 million, close to ZAR 170. Got it. Regarding the bank maintenance covenants, which you expanded between fiscal Q2 2020 and fiscal Q3 2021 to 4.5 from 3.75. Two questions here. One is, when do you expect to hit your max leverage during that time period? Which quarter? I know you're not going to max out at 4.5 because you want to maintain headroom, but when do you think you max when you max?
It will be between our fiscal quarter three and four of 2020.
Sorry, I just want to expand on what Glen said. The reason for that is obviously our CapEx levels this year are still higher because we're completing the Saiccor expansion. As we get into 2021, CapEx levels come down, and that ratio starts to decline after the period that Glen has mentioned.
Got it. How is under your bank definitions for EBITDA and net leverage, net debt, is EBITDA as defined under the bank agreement similar to the EBITDA that you report or is there some differences? Is there any nuances in net debt? For instance, perhaps you can only take off so much cash, i.e., $50 or $100, not total unrestricted cash.
There are some nuances, but they are relatively immaterial. The only large one going forward is, as Steve indicated in his slide presentation that will be the IFRS 16, which won't apply.
Well, it's a frozen GAAP cost. Any changes to GAAP or IFRS would not have impact on the covenants.
Right. The operating leases won't impact
Yeah
the debt.
Yeah.
Got it. Thank you very much. Thank you.
The next question comes from Maggie O'Neal of Barclays.
Hi. Just one question from me. You talked about around 40% of the market being underwater on dissolving wood pulp. What is your break-even level in terms of prices?
You'll appreciate that's not a number I could give you. Clearly, our customers are listening to the call.
Okay. Thank you.
The next question comes from Julien Raffelsbauer of Millennium.
Yes. Good afternoon. Regarding your covenant level, you are now at 2.2 net debt to EBITDA, and you're not fully comfortable with the old covenant level at 3.75 in the next six months to March 2020. If I back solve it seems that you're expecting a deep decrease in the EBITDA by could be 50% for the next six months. Is the impact of DWP price decline so bad to your EBITDA? Why do you need so much headroom on your covenant so quickly?
No, it's not that we think we're going to reach the covenant level. We just want to give ourselves flexibility and have some headroom. We know that the profits will be less. None of us wanted to get close to covenant levels. We're maintaining maximum flexibility. Just to be clear, we're not saying earnings are going to be down 50%. Definitely not that.
Typically, what's the headroom you'd like to have vis-à-vis your covenant level? Is it 20%?
If I give you that number, you'll know what my profit number is.
That's what I was trying to get.
3.75, the original covenant level, we just felt a little bit uncomfortable that with the lower profitability, the uncertainty on dissolving pulp, we just felt a bit uncomfortable. In order to maintain flexibility, we increased it to 4.5.
Okay. Last question. On the dissolving wood pulp, the price you're getting for this quarter is mainly the average of the previous quarter. Is that it?
Yeah. Broadly speaking, we've spent some time talking about Chinese markets, and there is spot pricing impacts as well. Yeah, broadly, yes.
You got a decent visibility for the EBITDA for dissolving wood pulp for the next six months, because we got already July to October pricing, so you got good visibility, I guess, now?
Yeah, reasonable. Certainly for Q1, as we get closer to Q2, yes.
Yeah. Okay. All right. Thank you very much.
Thank you. The next question comes from Jonathan Williamson of Sona Asset Management.
Thank you. Just to follow up to the last caller's question, Keith, in terms of what EBITDA margins we should expect during Q1 for the dissolving wood pulp division.
Jonathan, we're struggling to hear you. Is it possible to?
Can you hear me now?
Yeah.
Yeah. Just to follow up to the last caller's question. I'm just looking for a sense of what EBITDA margins we should expect during Q1 and Q2, if possible, for the dissolving wood pulp division.
Without being too specific, clearly, the average pricing has declined further. It will be lower margins than you've seen in Q4. I can't be too specific without giving the exact number. Current pricing for dissolving pulp is $638 a ton. To the previous caller's question, some of it is priced on the previous quarter. I can't get too more specific than that.
Okay. Just to get a sense, is it possible would they be around 20% or below or that sort of area?
Yeah. Again, I can't get too specific. It is lower. You should be able to work it out from the math, because you know what the prices were in the last quarter, you know what current pricing is, and you can work backwards and work out our costs and work it out. You should be able to do it from the data that's available.
Yeah. Okay. Thank you very much.
The next question comes from Diamades of Chenavari .
Yeah, hi. A lot of the questions that I wanted to ask were answered. One of them is on the working capital. You had a very nice inflow this quarter. I was wondering, should we expect an outflow in the first half of next year in line with seasonality?
Yes, that's correct. It's Glenn, yeah. Our working capital gain came down to a level of a net working capital of about $450 million. We would expect an outflow of at least about $40 million-$50 million on that in this quarter.
That is seasonal. It happens every year. On a relative basis, at the end of each quarter, with all the good work that we're doing, we are hoping to improve relative to the prior year at the same time. To Glenn's point, there will be an outflow in Q1, seasonal.
Thank you.
The next question comes from Lizelle du Plessis of APG Asset Management.
Thank you for taking my question. Just in terms of the global graphic paper markets, what is your expectation for the rate of decline into next year and thereafter?
Yeah. Based on our outlook and where we are seeing markets, we think things will be better or less worse is the right term. We've come from a period of declines, as I've talked about, 8%-12%. We would expect that to be less that decline. Europe is probably in a better place than North America at the moment. We are estimating declines of 5%-6%.
Thank you.
Ladies and gentlemen, unfortunately, that is the final question. Do you have any closing comments?
No, I just want to thank everybody for joining us on the call, and we look forward to discussing our results at the end of Q1. Thank you.
Thank you very much, sir. Ladies and gentlemen, on behalf of Sappi, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.