Good afternoon ladies and gentlemen, and welcome to the Sappi Limited Third Quarter of 2018 Results Conference Call. All participants are in a listen only mode. There'll be an opportunity to ask questions at the end of today's presentation. Please note that this conference is being recorded. I'd like to hand the conference over to Mr.
Steve Binney. Please go ahead, sir.
Thank you. Good day, everybody. As always, I'll move through the investor presentation deck, and I'll call out the page numbers as I move through. Firstly, on page 2, just some forward comments around forward looking statements and regulations there for you to read. Moving on to page 4, The highlights for the quarter.
EBITDA excluding special items was 155,000,000 dollars the same as the same as the same period last year. Profit for the period was 51 versus 58,000,000 that drop was entirely related to a higher depreciation charge. So it was a non cash item. Nx per share was 10¢ US cents compared to 11 in the prior year, and net debt was 1603,000,000 compared to 1318, a combination of the acquisition of Calm, earlier this financial year and obviously movements and exchange rates with the Europe being significantly stronger than a year ago. Moving to slide 5.
We thought it would be useful just to reflect back over the last few years, and our how our strategy has evolved, there's been 3 distinct phases. Firstly, from sort of 10 to 13, there was an element of balance sheet risk reduction, but at the same time, we were balancing that with investments in, dissolving pulp and specialty packaging. That was the conversions that we made at, cloquet and in Gudwana. And conversion at all felt for Specialty Packaging. Then in 14 to 16, a strong focus on reducing the leverage.
We We saw it come all the way down below 2 and we two times and we're still intending at these levels. And then in 'seventeen to 'twenty, we've seen a shift towards investing for future growth. Particularly in the areas of dissolving pulp and packaging, the higher margin growth areas. There's a number of global trends that are shifting in Sappi's favor. We've obviously seen a strong drive for sustainability, which is benefiting textiles and dissolving pulp, obviously benefiting there.
And and then on on packaging with, plastics being replaced with paper. The, in more recent times, we've seen rising pulp costs and a shift in recycled paper trade flows, which has encouraged graphic paper conversions. And and and more recently, a drive for bio products and bio materials. Slide 6, just just some graphs taking those 2 dis those 3 distinct periods. And, obviously, since 10, we've seen a significant rise in packaging, a corresponding reduction in printing and writing papers, And then on specialized cellulose, rising significantly since 10, it did go a little bit back in the current year, but that's almost predominantly, associated with movement and exchange rates.
The EBITDA margins on the on the top right of that slide. Firstly, specialized sales, the blue block, running at about 30%. The specialities and packaging at 13. Obviously, that's a little bit impacted by the fact that we have the ramp up period from the 2 recent conversions at Somerset And Maastricht. So that we've always talked about that margin being in the teens and we're still confident of that.
And then printing and writing papers at 9%, which is in terms of relative to recent trends is pretty good. Moving to Slide 7, and I won't go through this in detail, but these are all the mills that now have capabilities of making packaging and specialty grades. I think that perhaps the biggest point to point out is the the recent conversions are giving us flexibility, at Maastricht and Somerset, we now have the ability to swing between graphic paper and specialty and packaging grades. So that allows us to take advantage of the respective dynamics in each of those markets. Slide 8, I've already touched on some of the trends, but specifically to specialities and packaging, a big push, obviously, on the environmental side, is creating opportunities, a lot of innovation in this space in terms of customized packaging and smart active packaging, and those further support our decision to invest in those areas.
And you and you see that in in in slide 9, just some of the recent headlines, clearly it's picking up momentum. And that our decisions to invest, at Somerset And Maastricht were made, a couple of years ago, the momentum behind the shift has has gathered pace since we made our announcement. So we're we're even more confident about our strategy as we move forward. Slide 10 has the breakdown of the viscose sorry, the Dissolving wood pulp market. And predominantly, the the the largest sector is is this course, at just over 6,000,000 tons, and that's where, almost entirely all our capacity is is focused towards.
That's market, interestingly, if you look back over 10 to 17 has grown at 7.5% compounded. And in fact, in recent years, it's It's been double digit. And as we go forward, we we would expect, we model around about 6% and we we continue to see a very favorable environment. Slide 9 shows a number of the characteristics, of stylistic fiber versus cotton and polyester. In addition to the functionality and the feel of the product, which, is very favorable.
The strong sustainability message, is creating opportunities for us. Moving to Slide 12, we thought it would be useful to just update on the recent projects and conversions and so on that we've done. And firstly, on the specialty and packaging side, Maastricht, that project was on time within budget The products that we're now producing are, of the right quality, and we are confident about the prospects moving forward. Eingen was a smaller project, but that was all done on time. Somerset, and it was in our results.
As you as you know, and from the commentary is we we did have some challenges, that was predominantly related to problems with 3rd party vendors. There was delays and an overrun. I just wanted to put it in context the impact on profits for the quarter was $8,000,000. That is a big number, but in the bigger picture, it's It's not that material. In terms of CapEx, that was, we estimate that the overrun was, $30,000,000 between $30,000,000 $50,000,000.
The reason we can't give it a definitive number is we're still in negotiations with lenders. The CapEx guidance that we've given you assumes assumes the maximum number. I I do wanna stress that although the project did take a little bit longer, the quality of the product coming off, the machine is excellent. And we're in a very strong position as we move forward. This impact that I've talked about is a once off.
In terms of the metrics for the project, this was an extremely, favorable project for us. And despite the fact that the CapEx is running a little bit higher, the paybacks are still just over 4 years and an IRR of around 20%. So still very favorable and we're well positioned to take advantage of the growth moving forward. In, specialized sailors in Guidwana and Psycho had annual shut, we used those opportunities to do much of the work for, our expansions on the, dissolving pulp, we the ramp up post the, completion of the work took a little bit longer, and we estimate that that impact on profitability was $3,000,000 for the quarter. So moving to Slide 13, you can see, the net debt to EBITDA still around the 2 tons.
The 2 production issues combined, add up to 11,000,000. So we reported 155 for the quarter. If if we had, maximized the the period of the shuts, then it would have been 11,000,000 extra. As I said earlier, that's that is a significant number, but in the bigger picture, it's not that material. Page 14, the EBITDA bridge between this year and last year, the big story is obviously During the year, we've seen costs rise, significantly, mainly on the pulp side, but other clinical prices as well.
And we've been able to offset most of that impact through higher selling prices, in in all the regions. The exchange rates, you can see here is is is a net number of only 2. It's a small impact, but within the the different, regions, there's obviously an impact. Firstly, on the rand to the dollar, the average rate for this quarter was, was 12:60. I know that today it's 14:40 or whatever the number is, but In the quarter that we're reporting, it was only 12 60.
A year ago, for the same period it was 13, 20. So we were still up against a significantly stronger ran than a year ago. And I'll just remind you all that we estimate that it's about a, for every 10¢ move, It's about a $4,000,000. So based on the numbers I've just given you, 60 60¢, you multiply that by $4,000,000. That that's an annual number, 24,000,000, and and you divide that obviously by 4 to give you the rough quarter impact.
So We we were still up against headwinds there of currencies. Clearly, in the current quarter, things have moved. Especially over the last couple of days, but I will I will point out that half the quarter's gone already. We we we we we clearly didn't get advantage of the exchange rate close to 14, in the 1st month of this quarter. Moving to slide 15.
The product contribution splits that with with the move in the respective exchange rates, obviously, specialized sailors came down
a little bit.
And, printing and paper writing papers up at 41%. We would expect that to normalize going forward. Encouraging to note that specialities in packaging is now 18% of the business. Page 16, our maturity profile for debt, no debt maturing and material debt until 2022. CapEx on page 17 has the, reflects the higher number for for 2018, as I said earlier, including the estimated cost overrun for the Somerset outage.
The 19 number we've included, that includes the beginning of the Saiccor expansion. To add extra 110,000 tons. Obviously, that will be subject to environmental approvals. Moving then to the divisional overviews. And firstly, on page 19, the printing and writing papers, with all the capacity that's come out of that market in recent times and by all accounts will be going forward as well.
Operating rates are good at the moment, and that's enabled us to put through the price increases that we've seen. Interestingly, coated mechanical actually had, a pretty good, and it's having a pretty good year. And and we think some of that's gotta do with the fact that the selling prices on the coated mechanical haven't gone up to the same extent. So you've seen a little bit of shifting around there. I I would point out that there's always a lag on selling price increases relative to costs.
You see, you saw earlier, we've done a good job there of offsetting much of the impact of costs. And in both the US and Europe, we've announced further increases which will benefit us in Q4 and as we move into the new financial year. We, continue to manage the capacity, in our mills, obviously making investments where appropriate to lower costs. Then on Slide 20, moving into the specialty and packaging grades, I've already talked about the big push for paper based packaging. The selling prices here haven't gone up to the same extent as printing and writing, And part of that is the the the the the in the contracts with with customers, there is a there is a fixed period, whereby prices stay fixed.
So there's a there's a more of a lag relative to printing and writing. That is all coming up now for, expiry, and we will be focusing on improving prices. The Calm acquisition has done very well, then the metrics are ahead of our business case at time of acquisition, and we're feeling very good about the acquisition. Then moving to Slide 21 on dissolving pulp, the Demand has been good for dissolving pulp. This cost prices have been somewhat depressed there was a little bit of an inventory build there prior, and and and also a lot of new capacity came on board.
However, obviously, pulp prices are good. Cotton polyester prices all looking positive. We also don't believe there's significantly new dissolving pulp capacity coming on board in the medium term. We continue to look for opportunities externally, but as you see from our list of projects, our priorities is is on the internal initiatives that we have. Turning to Europe.
Page 22, an excellent quarter. Good, good profitability. As I said earlier, Coty mechanical demand was good, but Coty Woodfree has come under pressure. This year. Interestingly after 2017 where it was actually slightly positive, we have seen renewed, downward pressure in the current year.
Obviously, a big pressure from higher costs, mainly on pulp, but we have seen lower cost of latex and energy, partially mitigating that impact. Then in North America, profits were up, on a year ago, but we obviously had the missed opportunity of the 8,000,000 from the PM 1 summer set overrun. We have put through we've been very successful at putting through selling price increases, and, obviously, it's okay, has to have to buy pulp so be being impacted by that I've already talked about the PM 1 conversion. And then in South Africa, the weaker rent, which I talked about, And then the the the the the poor restarts, after the shuts at Saiccor and good one, and those are now behind us. Dissolving pulp, strong, but the the fact that production was low in this quarter will have an impact in Q4.
I I I gave the number earlier of $3,000,000 impact for Q3. Because of low inventory levels, there's a 4,000,000 impact in Q4. But beyond that, then we'll be back to normalize inventory levels. So no impact is expected for 2019. The Slide 25 onwards talks to our strategy, and these are slides I've talked to before.
We've obviously extended them and and and and updated them. So I'm only gonna call out a few highlights. Firstly, on on on slide 26, the continuing focus on costs across the business, some of the investments we're making, we've got the ongoing procurement initiatives. We on track to get the 60,000,000 this year. And obviously, as we get closer to 2019, we'll start to set ourselves targets for 2019 as well.
Perhaps the one project to call out here is the upgrade of PM9 at Gratkorn. That starts early in the new financial year, costing us $30,000,000 and should deliver paybacks less than 3 years. Rationalizing declining businesses on slide 27. These are projects I've talked about previously, but obviously, we've been reducing our exposure with all the conversions that are underway to stress the point I made earlier. We can swing these mills.
So that gives us the maximum flexibility. On slide 28, the balance sheet, managing our CapEx around the leverage ratio of two times, that that's an ongoing focus. We renewed the RCF, at a lower speed, so ongoing good work in that area. Then as we move into slide 29, all the investments and projects that we've undertaken, In the higher growth areas, the debottlenecking of dissolving pulp, the investments in technology in packaging to take advantage of the macro trends, the we think that there's opportunity Grow Packaging in South Africa in Botswana and together. And as as we complete the work on the the pilot plants for the bio products, we in time, we believe there'll be more opportunity.
Slide 30 has the the I won't talk to the slide, but we we did announce it previously. We've got the biomass, biomass energy. Facility now, in in Gudwana, and, those are the maths they're associated with that. Then in specialities and packaging, again, we've we've listed these previously, or no no changes other than, obviously, at Somerset, it cost us a little bit extra, but the math on the paybacks is a very attractive and the quality coming off the machine is is excellent. Then in dissolving pulppage 32, market strong.
We continue to look for, internal of anecdotal opportunities, well positioned for future growth. That brings me then to the outlook statement, which is summarized on page 34, dissolving pulp markets tightly supplied, limited new capacity, we're feeling good about the balance over the next few years. In printing and writing, operating rates in Europe and North America are healthy. We've done a great job at getting selling price increases through and clearly there's still a little bit more to be done, but we have made those announcements and we're confident about being successful going forward. The causing good free market, as I said earlier, a little bit softer than it has been, but generally operating rates very good.
On the specialities and packaging, feeling very good after the conversions that we've done, and we're well positioned for a strong ramp up in 2019 from those conversions. The CapEx this quarter, $180,000,000 predominantly on those that we list. We expect net debt to reduce further. In this quarter, it's always our strongest quarter, Q4. So you should see reductions And based on the current market conditions and exchange rates, I mean, obviously exchange rates have moved over the last few hours.
But as I said to you earlier, much of the quarter has already gone. So you're not going to see the full impact of that in this quarter. Clearly, if it was to remain at these levels, as we move into 2019, it would have a material positive impact on our numbers. So based on the market conditions, the exchange that we we've had, and, we expect Q4 operating performance to be similar to the last year, despite the lower inventories, that I talked about earlier on the call. That's me, finished the debt operator.
So I'm gonna put it back to you for questions.
Good morning guys. Good afternoon.
A couple of questions. Just in terms of obviously heading into budget season now, I guess the toughest question is how you're going to be thinking about what sort of rand dollar you're going to be plugging in? And then more related on the conversions, I don't know if you guys are battling with the line, but it's quite bad from our side. In terms of the supply issues you had in terms of incorrect specs and not receiving sort of help on time, I mean, what sort of actions are going to be put in place for future projects. And then from what I can understand, the spillover effect from these delays is only a Q4 story?
Is it fair to say that FY 'nineteen is going to be clean? And then in terms of your specialized paper packaging contract, Could you maybe just talk around maybe what percentage of those contracts are hedged or have cost inflation pass through clauses to that effect? Thanks.
Okay. I'll take the first 3. Barry, I'm gonna put that last question on the on the contracts. On the packaging side. I'll I'll I'll come back to you on that one.
Okay. Look, on the budget, we you're right. We're in the budget season. The the rent moved significantly in the last few days. We we had gone into this.
If you'd asked me this question last week, we were probably gonna budget around 13 20. We we
we need to reflect.
Things are moving as we as we go. Obviously, in the short term, it is, very favorable. For us, the the the shift in in the exchange rates. I'll I'll reiterate the the number I gave earlier that for every 10¢ move, it's it's a $4,000,000 annual impact, positive impact on EBITDA if it's around weekends. So, I mean, I we certainly wouldn't budget.
Where it is today, but, perhaps as we reflect, 13, 20 might be a little bit too strong, but we need to think about that over the next couple of weeks. On the convergence Yeah. We were you're right. We were disappointed with the contractors. And, they didn't they didn't deliver on time, and and we were at the, unfortunately, we were at their mercy.
What what what we are Your question is what are we gonna do going forward? And clearly, we have, we we're taking a lot of learnings from this. We we we we've looked at our processes. I think the biggest challenge we've had is we've allowed we've probably allowed the the third party is too much autonomy. We need to take more control over the process.
We're fortunate that we have We are a global business. We have resources in each of the regions. We need to share our learnings, you know, it's unfortunate that the Somerset PM 1 has, has overrun like it has. But, you know, we need to take those learnings forward. We we, you know, we in in the US, we we we've had some extremely successful projects over the years.
I think back to, when when we converted at cloquet, that was to that was on time, on budget. So the team can deliver. It was just unfortunate in this situation, we were let down by third parties. Similarly, in South Africa, we we we've had smaller challenges. It's it's not a material impact, but, Again, taking those learnings on board.
We've had meetings with the key vendors. I'm not gonna name them, but, many of you know who the big players are in the industry, and we've had some forthright discussions with them. And we we we we are being proactive with regards to to new projects. The the big projects that we have coming up are, the Lanaken conversion in Europe, and the European team have been very successful at implementing projects. And we've got our a team working on that.
Again, taking the learnings from from what happened at Somerset. Then down in South Africa, we've we've got a strong team working on that. And, you know, once again, being proactive with with with regards to tight management, putting the right people sharing resources across the group. As things currently stand, we are confident that we can deliver those, those projects on time and in budget. You know, I just wanna put everything in context.
The and and this is not to make excuses, but the although the Somerset project did overrun, it's still a very, very attractive project. The metrics look very good, and, we we we are confident that, we we can take the learnings. In terms of your 3rd question on the impact on 2019? Yes. You're right.
The the the delayed impact or, on on on the two issues that I talked about is is in q 4. Nothing will be a clean 2019. And just to remind you that q 3. Sorry. Q4 impact would be 6,000,000 for, Somerset and 4,000,000 for the South African low inventory levels.
And beyond q 4, we we we'll be back to normalized levels. Barry, do you just wanna just chat about the, packaging, contracts and the terms and and how we're doing catch up there?
Yes. Well, 1st of all, overall, the charity packaging prices year on year off about 7%. They're rather similar in percentage terms with the graphics, price rise. But, obviously from a higher level. What you do have in this business is a number of misses where the that contracts are time based, you'll have either 6 annual contracts, the same way as you had with publishing papers.
And so, yes, various chances increase those prices, and most of these days are linked its way towards what's happening. So we have these are the number of those supplies that the season comes up. Those tend to be, annual ones be in November. So November is a very big So for the 6 months contract, we need to buy. So we've seen that prices move up again in July.
Expect for this to move up rather more robustly because the pulp prices have moved so much this year.
Thanks very much, Tim. I mean, just the line is quite bad, David. It's just to sort of confirm what you were saying, you were saying that the most of the annual ones are renewed in November with the 6 monthly ones in July. Is that correct?
6 monthly ones January July.
January July. Okay. Great. And then, I mean, just to follow on from that, I mean, just in terms of the actual contracts, do they provide for any cost push, when you guys are sort of seeing that, or do you have to wait for the actual contract to come to negotiation again?
It's very rare for these contracts to be broken as a result of gosh. So you take the up, but you also take it down. So when prices go down, they don't get broken up with pulp.
Okay. Excellent. Thanks very much, Steve. Barry.
Thanks.
The next question comes from Wade Napier of Avio Capital Markets. Hi guys, thanks for
the call. Just you flagged coated woodfree, losing market share to coated mechanical in Europe due to prices. Can you just sort of provide some color on how you're sort of thinking about coated your coated wood free and coated mechanical exposure over the next 2, 3 years, given that a large part of your conversion to specialty paper and packaging sort of envisioned you shifting European coated wood free volumes to Lynequin, which currently produces coated mechanical. So should we sort of think that your proportion of coated mechanicals potentially gonna be higher over the next 2 or 3 years than initially sort of planned within within Europe given given the sort of downgrading trend that we're seeing in the market. And, second question is, what's the weakness in the renminbi?
Have you seen sort of Chinese coated wood free producers into the export markets. We we obviously saw a massive clear out last year, which supported volumes. Thanks very much.
Yeah. On the first question and then if Barry wants to elaborate further, I'll pass it over to him. But Bear in mind, it it's it's only on the web grades, the publishing segment that, has been impacted. The on on on the the sheet side, that that that has not been a material impact. In terms your question is in terms should we expect more?
Look, once we complete the the Lanaken conversion, it's predominantly just gonna be our cut. We need know that that that's focused in this segment. Betty, I don't know anything else you wanna add.
Well, just to say also, of course, we are reducing the wood free sheet capacity in Maastricht And Stockstadt as those mills start going more into specialty markets. So what you're seeing is a sort of carousel whereby Lanar can take up the lightweight area of coated woodfree, which is the sweet spot of that machine, while other machines start transferring more to specialty. So, no, we wouldn't necessarily see more mechanical code. It is possible to make mechanical code still at Lanar can And we'll do whatever the market rewards best, but the main focus is on a carousel to get the wood free coated machines operating to their sweet spot and growing the specialty business.
Yes. And also, just, there's been a lot of potential capacity closures announced in the coated wood free space. So we we we're feeling pretty positive about the market balance in that area over the forthcoming years. On the Chinese coated wood free, we haven't seen major shifts with the recent, the the recent move in exchange rates. Mark Barry, Do you know if anything different?
No. From my end, no, Steve. Also because those Chinese producers have these enormous increases in the cost of their pulp as well. So they have had to, they've had to increase their prices in their own markets and it's been very difficult for them to export.
Mark, anything on your side? No?
No. It's it's similar to what just Perry comments were. We're not seeing that plus on the sheet side. We still have the original, duties put in place quite a few years back.
Yep. Okay. Thanks. Wait. Wait.
Anything else?
Yeah. May maybe just to follow-up, on sort of slide 14, we got the EBITDA bridge. And I think it's safe to say that we got very strong graphic paper markets. We got a very strong dissolve in Wood Pulp markets, and we got and you got a growing specialties business, but if you sort of just look at the price and mix benefits that you got in the quarter versus the increase in variable costs and increase in fixed costs, the price and mix didn't actually offset your cost increases, which surely must be concerning given that you actually operating in fairly positive markets. How should we contextualize this sort of viewpoint and what more can Sappi do to sort of take out costs?
I mean, clearly pulp is the big one. What sort of opportunities do you have within that European business to sort of increase pulp integration?
I mean, firstly, I would point out that there is a lag impact. So as as these top costs have been rising, you know, we've been playing catch up. So there's still a significant catch up, which is reflected, in that table. The other the other thing I would point out is just the sheer extent of the pope increase. You're talking 50%.
It's it's been huge. And clearly, our our ability to pass on that kind of incremental cost is is somewhat restricted. However, we've I think we've done a pretty good job and we'll continue to, you know, we'll continue to push selling price increases. I mean, we've broken a 10 year trend here by putting through selling price increases like we have. The in terms of pulp integration, we are looking at short, short term, initiatives not certainly, not short term, smaller initiatives to to boost, integration.
I I think that will that will push it up somewhat varies is running in the mid-50s. We probably have opportunities to get it, into the low-60s integration. Anything sizable that the problem you've got is that any pulp assets that are out there, as you'll appreciate are extremely expensive in times like this. So it wouldn't make sense for us to go out and buy, pulp assets to to boost that that integration level. Very, anything you want to add over and above that?
No, I think you've answered it completely.
The next question comes from James Twyman of Presian Securities. Yes,
thank you. I've got 3 more questions. The first one is you mentioned in South Africa what the cost in Q3 was and the cost in Q4 was of the problems. Could you say what it is for Somerset where there was an $8,000,000 hit in Q3? Just wondering what the follow on hit in Q4 is.
Secondly, you're increasing South African dissolving pulp production by 50,000 tons. You've lost 30 this year. So, you know, is it reasonable to say that your dissolving pulp production in South Africa could be 80,000 tons higher next year? If not, just why that would not be the case. And then finally, just to download pressure on coated fine paper, just squaring that with the fact that you are attempting a price rise attempt, you know, given that's doable, and, of course, it is a very seasonally weak period and that you're looking for the increase being after that.
Yep. Well, the first one, on Somerset's impact for q 4, it's $6,000,000. And, obviously, we've taken that into account when we give our our our earnings guidance. I'll I'll let Alex go into a little bit more detail on dissolving pulp, but Yeah. Yes, you're right.
We we we that the production that we were shot this quarter, we would expect that to come back next year. Plus plus obviously, the the the the the debottlenecking volumes. Alex, Steve, I
think the the 80,000 tons is the correct number. That's should be the upside of it. You know, we had the problems, but most of those problems are now fully addressed. We act in Ghana, except for the evaporator that we have to commission, we are running the machine at an effect of 250,000 tonne capacity. We have to wait for the vaporizer later to do that continuously.
And at cycle, we are roughly at the 780, so we've achieved what we've wanted.
Yep. And in fact, Alex, it's probably a little bit more because we we we had some production challenges in Q1 as well. So we we would hope that, know, that that volume would come back, next year as well. That's right. On the coated fine paper, Yeah.
We're pushing. Barry, do you want to elaborate how further on on on the latest price increase?
Yeah. The latest price increase has gone through. So we noticed that there was greater acceptance this time around. Also because it's so obvious what's happening on pulp prices, but there really isn't that much choice. There has been a number of bankruptcies, a number of those have come back from the dead, but even so, the, there is really no escape from, from passing on these price increases.
So it is a cost in force price increase, but the operating rate is good enough to allow it to happen. So, it's going through well. And we have another one announced for October.
Thanks. And Mark, that latest increase of yours?
Yeah. You know, it's actually a pretty seasonally strong period right now, and it usually is during late summer and fall. And, you know, we've announced the the latest price increase here just a couple of weeks ago. Again, it's all in in line with the increasing costs and very high demand.
Thank you very much. You do mention briefly in the statement something about the fact that the new products that you're bringing on are at much lower margin because, you know, because they're new. Is there any way you can sort of slow that process down so you can maximize coated fine production at Somerset?
Mark, do you want to carry on? Obviously, this is a process that you go through when you when you have a new machine and and you're testing all the grades, but but maybe, maybe Mark can give a full, kind of feedback in terms of the quality that's coming off.
Sure, Steve. Thanks. Yeah. The machine, we we concentrated when we first had the machine up on getting, our graphic legacy grades qualified, which we have and and have been producing. On the board grades, we've run, all the way also that.
And we've been working very closely with, a handful of, major customers as we develop those grades. We're now pretty well through that phase. And we're moving into, into 1st quality sales of the, of the board grades. And that's going very well. The equipment, the design, of the product is coming out as we thought it would.
And, we'll start to see the volume come up and, and the price come up on that product as we move through the, into rest of this quarter into Q4.
Thank you very much.
Operator, if there's no further questions, I'd like to thank everybody for joining us on the call today. And I look forward to discussing the full year results in 3 months time. Thank you.
On behalf of SAPI. That concludes today's conference. Thank you for calling us. You may now disconnect your lines.