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 in listen only mode. Please note that this conference is being recorded. I'd now like to hand the conference over to Mr. Steve Finney.
Please go ahead, sir.
Thank you. Good day, everybody, and welcome to our results call for the year ended 2019 financial year ended 2019. As always, I'll go through the investor presentation. And as I go through each slide, I'll call out the page numbers. Starting on Page 3, the highlights for the year.
It was a difficult year for us. However, EBITDA was down 10 percent to $687,000,000 That was as a consequence of lower dissolving pulp prices, which we saw dropped considerably during the year, almost $300 a tonne And then we saw weak graphic paper markets between down between 8% 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 the successful completion of the debottlenecking projects last year. And we made a nice progress on the packaging and specialities and we saw in the quarter, we saw 12% higher volumes sorry, that's for the year, 12%.
We completed the Matan acquisition, which we announced earlier in the year, that transaction was completed earlier this month. Moving to Slide 4, which is the highlights for the quarter itself. EBITDA for the same reasons, EBITDA down from $224,000,000 to $185,000,000. As I said, we saw both dissolving pulp and graphic paper under pressure. However, 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 $25,000,000 impact on EBITDA. The, EBITDA margin overall for the group was down from 14.6 to 12.7 and our net debt leverage to, EBITDA up to 2.2x, obviously, as a consequence of the lower profitability. Moving to Slide 5, the earnings bridge, last year versus this year. Firstly, we did have lower sales volumes overall, but our growth segments, showed positive volumes that's both in dissolving pulp and packaging, which and specialities, which were both up 6%. However, graphics, obviously from the weaker markets was down also by 6%.
On the pricing front, the lower dissolving pulp price is obviously having an impact on and, the average prices, and there was a bit of a mix issue that in there. Positive impact from lower variable costs predominantly coming from pulp, paper pulp costs, which did decline during the year. So we did get some relief from there. And that overall, that explains the main variances between the 2 24 and the 11,185. Moving to Slide 6, the product contribution split.
This is on an LTM basis. So obviously, you're not seeing the full impact yet of the lower dissolving pulp prices, but nevertheless for the year, it was 45% of the contribution of to EBITDA. Clearly, as dissolving pulp prices have declined, that's portion will or has in the fourth quarter. And as we move into the new financial year, that proportion will will decline naturally. I'm pleased with the progress that we're making on packaging and specialities.
It's up to 2019. And as we ramp up in the new financial year, that will clearly take an ever increasing share. Moving to Slide 7. And this is a for Graphics segment. It's the volumes and EBITDA margin.
And 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 8, packaging and specialities, and we're very pleased with this progress. And you can see that Over the last couple of years, we continue 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. And as we ramped up forward and this is something that we've 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. We are obviously the that the lower selling prices will have an impact on margins this year. We did have the extra volumes following the successful debottlenecking project that were completed.
Moving to Slide 10. The maturity profile of our debt, a lot of good work done this year, and we refinanced our 20 22 bonds to 2026. And obviously, at the same time, we extended our securitization structure, and that's now through to 2022. So over the next couple of years, we don't have any material maturities and we feel that that gives us puts us in a good place. Moving to Slide 11 and just our CapEx, You can see that, earlier this year, we were talking about substantially higher CapEx levels We've pulled that part.
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. But across the two years, we've pulled back $150,000,000 of CapEx. The 21, we haven't finalized numbers yet, but I would take that to come down further. We haven't committed any major projects beyond 2020. Turning to our segments and, firstly, on graphic paper, which is reflected on Slide 13, We have seen very weak markets during the course of the year and I quoted the number earlier.
We declines of approximately 10%. Some of that is related to the weak economies that we've seen particularly in Europe. And other areas of the world. At the same time, last year when selling prices rose substantially, there was a big infantry build and that's had to work its way through the system as well. And 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 And 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.
And the recent acquisition of Matan improves our pulp integration and will lower our costs. Turning to packaging and specialities on Slide 14, the, 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 container bulk market. We've seen conversions there as well. Selling prices have been stable.
However, these selling prices do tend to get negotiated annually or semi annually and we're going through a process of negotiating prices for 2020. We're hopeful that we can keep them at stable levels. The, paper pulp prices, 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 we will continue to grow. As we move forward.
And 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 was 87,000 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. And then 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 Vionic and conversion. So that meant that we've taken capacity out of that segment and would have impacted our market share there. Packaging and specialties, I've talked about and clearly, we are benefiting there and we obviously had lower variable costs led by pulp. Into 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, and we did take downtime 57,000 tons in the region. Clearly, as we build up, our strategy here is to build up the packaging volumes to offset the clients that we are seeing in the graphic. Region also benefiting from lower variable costs and fixed costs.
Then Slide 17, we talk about this dissolving pulp market. It has been a very tough year. 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 wheat paper pulp markets has meant that, swing producers, have probably 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. And then we're also seeing weak global textile markets related to the economy, the trade wars that we've seen underway. So being hit from both sides. At these price levels, we estimate about 40% of, notes are cash negative. Obviously, SATI is, almost at low end of the cost curve.
So we think that we believe that this is 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 $6.38 a year ago, they were $9.30. So it's had a substantial impact. And that's that's the main reason, why our profits are done and we have put our negative outlook statement out for next year.
The, going forward, the Saiccor project is going well. With 40% complete, that will add 110,000 tons of capacity. And our big data rangeiator 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 business, the volumes were higher, firstly, because of the extra, dissolving pulp capacity that we have had coming through. And we did benefit from a weaker rent, but clearly, the lower selling prices for dissolving pulp will have an impact. The packaging side of 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 export out of South Africa. Fixed costs, were higher, but that was because, as we staffed up because of the additional volumes coming through ahead of the additional volumes coming through at Faicore.
And wood prices are higher as well. So that puts some pressure on costs. Moving to strategy and that the four areas that we always focus on. And especially on Slide 20, on costs, periods in this period of uncertainty, the focus on cost needs to be ongoing. And I'm pleased to say that we took further cost out of the business in 2019, 87,000,000, which helped offset some of the pressures that we faced.
And there are ongoing improvement initiatives and we'll be targeting further cost reductions in the year ahead. Pulp acquisition at Matan will improve pulp integration and will benefit us, and reduce volatility as we move forward. The other benefit that the cycle project itself will will also lead to lower variable costs. Slide 21, We've talked about this at the end of the last quarter, but we're pleased to say that we successfully completed the acquisition of Montana 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 Matan is excellent. So very pleased and things are going well. The move to Slide 22, the, just to remind you the reason for the acquisition, it was very important that we secured a critical source of supply for our raw material that no supplies both our European operations and our, Somerset mill as well. So that has to be a key focus for us.
At the same time, it will, as I said, it will just input pricing and volatility as we move forward. And it was a significantly lower cost alternative than adding capacity to act the Somerset mill, but made a lot of sense for us. Moving to Slide 23, the, the declining businesses, we've obviously made these conversions away from graphics in recent times. In the quarter itself, we can sorry, not in the year itself, we completed the conversion at Lanaken. And that will allow us to get out of lightweight coated at the mill.
It's, and obviously, we talked earlier about that the real segment, the Coty Mechanical segment of in Europe is the one that's been under the most pressure. So this helps us as well. We at the end of the last quarter or the results call, we talked about the fact that we were evaluating our machines in Europe, that work is near completion. And we will hopefully be in a position to make an announcement very soon. The, slide 24, maintaining a healthy balance sheet, very good pleased with the good work that's been done on working capital.
And as you saw earlier, we pulled back on the CapEx commitment. We generated cash of $173,000,000 in the quarter. And as we move forward over the next year or so with the, low dissolving pulp prices and the uncertainty that that creates a strong focus on the balance sheet. Strong focus on cash generation. We are we renegotiated our leverage covenants at no additional costs.
That gives us more flexibility. And, yes, good work done here. One thing I should call out to you is that the new accounting statement, IFRS 15, where you have to capitalize operating lease costs. When we report our next numbers, it's going to add $90,000,000 to debt. On the balance sheet.
And honestly, that's like lots of businesses. It's important to call out that has no impact on any covenants. That's an accounting adjustment, but it doesn't impact there. Moving to Slide 25, the investments in terms of growth areas. Very pleased with how the conversions went at Cyclone with Wanda and Cloke.
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 and good one and together. And, similarly on the bioproducts side, the lignancy sugars, we, as you know, we put in post pilot plants and we continue to make progress. The key here is, ramping up as fastly as possible at Maastricht and Somerset.
Following the completion. We're also excited about the barrier coating opportunities, that we are making. And we announced some nice work that we've been doing with Nestle. 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 opportunities.
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 lowered do provide some relief and the capacity that's likely come up will help operating rigs.
But with prices where they're at at the moment for dissolving pulp, we have to 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 price improving those conditions approved. We feel it's a prudent thing to do. And, 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.
So operator, let me read through the deck. So I'm going to put it back to you now for questions.
Thank you very following this process, we'll place you in the question The first question comes from James Triman of Precient.
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. I mean, Europe's probably tough, but hopefully you should be seeing some improvement in the U. S.
From verso closure. And secondly, on the machine closure that you're planning, I mean, 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? And then finally, I'm sure there aren't any, but are there any noncore assets you have, which you could sell, just to help the desk along a little bit?
Thanks.
Okay. Firstly, on the downtime, And things are a little bit better. We do estimate downtime for the quarter at about 17000 for the quarter. And that's predominantly in Europe. We are, October, November, we've been relatively full, December, we were still looking to fill the machine, but our latest estimate is about 17,000 tons mainly in Europe.
The impact of machine closures. Yes, you're right. We did announce or we did talk about it at the end of the last quarter. You have to appreciate there are there's a lot of work that needs to be done and discussions that need to be had. And we are very close.
Impact, depending on we estimate, depending on the machine, hopefully, it will be able to take about 20,000,000 of costs out of the business if we close a machine. Barry, in terms of costs without, because clearly, we haven't decided, made a final decision. You just want to talk broadly about cost of machine closures?
Well, in terms of cash cost, Steve, the cash costs paid in the order of about 1 2 to 1.5 years. You do have a balance sheet effect as well, of course, but doesn't have a significant.
Sorry, very, yes, I think you broke up a little bit there. Just just repeat that?
Yes, it's in terms of cash cost and the payback plan will be between 1.2or1.5years. There is also a balance sheet of write off, but that, of course, does not have a cash impact.
And James, just remind me what was your asset sale. Look, I don't think there's any at the moment. Clearly, we continue to monitor the situation, Jim.
Okay. Thank you. So just on that, on the one before, you're saying there is no cash impact from the closure so that
No, no. What we said is we estimate approximately $20,000,000 of fixed costs would come out. The cash cost of the closure would be about 1.5 times that. Thank you very much.
The next question comes from Brian Morgan of Rami 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.
And then obviously the next question is, so how do you work at trade off between participating in the spot markets and, or maybe pulling out of the spot markets and let the price recover a bit?
We believe that maintaining relationships with our key customers in China is strategically important, Brian. Clearly, if there are opportunities to reduce, our production and swing a little bit to at cloquet. We would look for those opportunities, but 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, I don't we don't think prices are going to drop further, but 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 Angura of Auken Capital.
Good afternoon, guys. Just a follow-up from Brian's question. I mean, just a comment around his introduced customers in China. Maybe you could just elaborate a bit more on that in terms of your sort of quality offering. And then just two or three more questions.
Just 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 BSF. Maybe you could just give us a very high level view on how you see BSF playing out given the line of capacity coming online. And then if you also look at the SA business in terms of cash fixed cost inflation this year was pretty high and you obviously attributed to a couple of reasons. Maybe you could just expand on that a bit more as well as your sort of outlook for that variable? Thanks.
I'm going to I'll start briefly and then I'm going to hand you to Mohammed to heads up our dissolving Top business on the first 2. And then Alex, I'll come back to you for the last question as well on the fixed costs. Before I hand to Mohammed First, we believe we've got a quality project product. We've got a strong sustainability story detail. And as I've emphasized with Brian earlier, we want to preserve our customers in China.
On the VSS. So I'm going to hand you to Mohammed to elaborate a little bit further and Mohammad, you can just talk about the outlook for VSF?
The VSF market still continues to grow. So 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%. And, 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. So the positive is that there is growth.
The sustainability side of the business is, all the trends that are that are moving in the direction of sustainability are also, helping the underlying growth for fibers that are biodegradable and cellulose fibers are, provide that benefit.
Just on that, I mean, in terms of the catch up, I mean, when do you sort of envisage the inflection point?
If I look at where the underlying demand is at the moment and the installed capacity, 6% growth is about 3 1000 tons per annum. Typically, what we've seen is when the operating rates get to around for VSF around the 80, 85 thing start firming up. At the moment, it's around the 78%. So I reckon middle of next year, end of next year, the underlying demand should get closer to the capacity. The other one thing that I think, everyone is in the market is expecting, to help this gross 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 wrong with 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. And, a big part of the phase 1 agreement that, people are expecting is including a large amount of agricultural products.
That, China will buy from the USA and as part of the agricultural products, cotton is expected to be one of those products. And if, or when this deal happens and is made public, I suspect the one positive outcome will be increase buying of cotton. And that will be very positive, I think, for the fiber market in general.
Thanks. Thanks, Mohammed. Alex, do you just want to talk about the fixed costs, Donna, for that?
Yes. The drivers for the year were really as we get ready for 110,000 tons of additional dissolving pulp at cycle, we I've taken the 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 roads running then. And we've seen this very positive results at, in Gatwana.
2nd issue We had a bit of, additional maintenance costs. We had some boiler, tube leaks, which we had to spend money on money. And then finally, with the project 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 Grittle of JP Morgan.
Thanks guys. And just to follow-up on just with regard to the DWP market and to follow-up on Sean's question. So I understand how that operating rate moves up with the growth in demand, but, is there not still quite a lot of capacity coming on stream from Sotari? And then 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?
And related to that, there's also a lot of capacity expected to be added to the DWP market. Is any of that being delayed or how do you see that impacting the market?
Yes. Okay. Firstly, on, so Terry, you'll appreciate we're not going to talk specifically about our competitor. However, obviously there has been a lot of new capacity coming on board. That, the company you referred to as an integrated player So 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. However, And at least into your second question, we do estimate that 40% of production is underwater. And again, Rosa, even though we can't name them, but there are we are hearing stories of certain producers stopping production. Mohammed, without naming Mohammed, you maybe want to elaborate further?
Yes. Keith. 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.
And what we are picking up, in China Although production 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. So not shutting down the lines altogether or the sites, but shifting out of DB to one particular grade, called unleashed crop top because they need the containerboard guys need fiber and there's an issue with importing fiber from the U. S.
So there are lots of activities suggesting that, output is being reduced. And 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 are 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 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. And again, I get you'll appreciate you can't name individual companies, but there are some large Fapor Pulp produces in the last few days that over announced substantial reductions in inventories. And they're major players.
And that will, help paper pulp prices. And 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.
Thank you. The next question comes from Wade Napier of Babier 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 the last year, inventory levels were rising and it sort of compounded to cause the sharp decline in demand that we're seeing this year. Second question is, given the sort of state of the balance sheet, Is there sort of possibility to sort of license your Rockwell Technology with sort of paper producers and converter really capitalize on a market that's likely to sort of grow well ahead of where you are able to supply us over the next 3 to 5 years. And then the 3rd and final question is considering you mentioning energy inflation in South Africa as a sort of headwind what are the sort of opportunities to sort of scrap the sort of lignos alphinate production at Saiccor and sort of and move towards a more energy, more energy production for internal use at the mall?
Thank you.
Okay. I will talk briefly about each and, And then I'm going to hand you to Mike, I'm not the vacancy or just to elaborate a little bit further on inventory levels. When I get to the Rockwell question, Barry, I'll start and then I'll hand it to you. And then Alex, I'll come back to you on the, on the Lignan energy trade off 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 was we believe was a combination of the the economy in Europe, which had a significant impact on demand. And secondly, the price elasticity issue related to the selling price increases that we saw last year.
So So 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. And 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 curtailment in the 4th quarter to bring inventory levels into balance and where they're at, right now today is, has is at our historical levels for, our Q1. So we feel comfortable with where things are today. And I think that's what I have, Steve.
Okay. Thanks, Mike. And on Rockwell, we are, as you know, we're very excited and we've done some great work with Nestle and we're very excited about the prospects. And clearly, we would want to keep that IP in house. And there is more development, what that needs to be done.
And again, maybe very over to you if you just want to expand further.
Very briefly. It is it is a combination of 2 unique things. It's the chemistry in the recipes and it's the coating technology itself. So It is not a question that you could go to another company and say, what would you make this for us? Because the technology to do so, they don't have.
So it's very much a question of how quickly we can step up our capacity for that. And the second thing is that there is a generation, there are several generations of developments coming over the next couple of years. So this is just one development part of a, of a sort of development program, which you're going to see continuing generations coming onto the market to solve specific issues.
Yes. And, Wade, just to add to what Barry is saying, and perhaps it was your bigger question. Clearly, we are pulled back on CapEx, in 2020. We do believe dissolving pulp price will recover in time for all the reasons that we outlined. So we are going to be conservative, but clearly, when the balance sheet does improve, This would be, an area that would be very exciting for us.
And there are there is work on R and Ds, further work to be done to, as Barry has alluded to, to do to extend it and get further developments going. But that would be something in time, which would be, extremely exciting for Cepi. The third question was on the, trade off between Lignon and Energy. Alex, and I'm going to hand it to you.
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 what we're now getting from the, putting in the 3rd recovery boiler. But that is going to take some CapEx There are shorter term opportunities and we're actually, busy implementing them where we can reduce our scheme usage in our current production process that gives us additional steam to run our turbine generators fully. And we will probably, in the course of the next 3 months also start utilizing that but certainly the, converting calcium to magnesium is a project we're working on as well.
Thanks very much.
The next question comes from Raja Switz of Bank of America.
Thank you. I've got two questions. First on the Metane term loan, 8 year term loan. What was the principal amount, the interest rate and is it secured?
This is Glenn Ham, no, it's not secured. The term loan is it's an 8 idea term loan and the interest rate is between because it's in 2 tranches, between 1.5% to 2.5%.
Thank you. Yes. Go ahead.
The overall amount is close to $170 odd 1,000,000 U. S.
$170,000,000, close to $170,000,000. Got it. And, regarding the bank maintenance covenants which you, expanded between fiscal Q220 and fiscal 321 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 do you 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 quarter 3fiscal quarter 34. Of 2020.
And I just want to expand on what what Glenn said. And 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 'twenty one, CapEx levels come down and that's and that ratio starts to decline after the period that Planus mentioned.
Got it. And
How is under your bank definitions for EBITDA and net leverage, net debt, Is EBITDA as defined under the bank agreements similar to the EBITDA that you report or is there some differences And is there any nuances in net debt? For instance, perhaps you can only take off so much cash, I. E, $50,000,000 or $100,000,000, not total unrestricted cash?
There are some nuances, but they're relatively immaterial. The only large large one going forward is, as Steve indicated in his slide presentation, that will be the EFS 16, which won't apply? Well,
it's a frozen gut. So any changes to GAAP would not or IFRS would not have impact on the covenant.
Right. The operating leases won't impact the debt. Got it. Thank you very much. Thank you.
The next question comes from Maggie O'Neil of Barclays.
Hi. Just one question for me. You talked about around 40% of the market being underwater on what is your breakeven level in terms of prices?
You'll appreciate. That's not a number I could give you. Because, clearly, customers are listening to the call.
The
next question comes from Julian Roth Spra of Millennium.
Yes, good afternoon. Regarding your covenant level, so you are now 2.2 net debt to EBITDA and you're not fully comfortable with the old covenant level at 3 0.75 in the next 6 months to March 20. So if I backsold it, it seems that you could you're expecting a deep decrease in EBITDA by it could be 50% for the next 6 months. Is the impact of DWP price decline so bad to your EBITDA, what 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. It's we just want to give ourselves flexibility. And have had some headroom. We know that the profits will be less. And I none of us wanted to get close to covenant levels.
So we're maintaining maximum flexibility. And just to be clear, we're not saying earnings are going to be down 50% definitely not that.
And typically, what's the headroom you'd like to have? Visavis your current level? Is it 50%? But I'll give you that number.
You know what my profit number is.
That's why you didn't get
3.75, the original covenant level, I we just felt a little bit uncomfortable that with the lower profitability, the uncertainty on dissolving pulp, we just felt a bit uncomfortable. And we In order to maintain flexibility, we increased it to 4.5.
Okay. And the 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?
Yes. Broadly speaking, we've spent some time talking about Chinese markets and there is spot pricing impacts as well. But, yes, broadly, yes.
So you got a decent visibility for the EBITDA for disturbing wheels, but for the next six because we got already July to October pricing. So you got good visibility, I guess, no.
Yes, reasonable, certainly for Q1. And as we get closer to Q2, yes.
Thank you. The next question comes from Jonathan Williamson of Sona Asset Management.
Thank
you. Just a follow-up to the last quarter's question. Can you speak to what EBITDA margin we should expect during Q1 for the Sovereign Results division?
Jonathan, we were struggling to hear you. Is it possible? Yes.
Yes. So just a follow-up to the last quarter'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 Repulp division.
You know, without being too specific, I mean, clearly, average pricing has declined further. So it will be lower margins than you've seen in Q4. I can't be too specific, without giving the exact number. But current pricing for dissolving pulp is $6.38 a ton. To the previous caller's question, some of it is, priced on the previous quarter.
Yes, I can't get too more specific than that.
I can't answer. I mean, is it just to get a sense, is it they be around 20% or below of that sort of area?
Again, I can't get too specific. It is lower. You should be able to work it out from the maths. Because you know what the prices were in the last quarter. You know what current pricing is and 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.
Yes. Okay. Okay. Thanks very much.
The next question comes from De Amayas of Cheena Vary.
Yes, hi. A lot of the questions that I wanted to ask were answered, but, 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 here. So our working capital game came down to a level of, a net working capital of about 4 $50,000,000, we would expect an outflow of at least about $40,000,000 to $50,000,000 on this. In this quarter.
But that is seasonal. It happens every year. But on a relative basis, at the end of each quarter with all the good work that we're doing, we are hoping to prove relative to the prior year at the same time. But to Glen's point, there will be an outflow in Q1 seasonal.
Thank you.
The next question comes from Lee Zulte Placy of APG Asset Management. Thank you for taking my question. Just in terms of the global paper, graphic paper markets, what is your expectation for the rate of decline into next year and thereafter?
Yes. Based on our outlook and where we are seeing markets, we think things will be or less worse is the right We've come from a period of declines, as I've talked about, 8% to 12%. We would expect that to be less than decline. Europe is probably in a better place than the North America at the moment. So we are estimating declines of 5 to 6
Ladies and gentlemen, unfortunately, that is the final question. So 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
That concludes today's conference. Thank you for joining us. You may now disconnect your lines.