Good day, ladies and gentlemen, and welcome to the Slappy Third Quarter 20 17 Results Conference Call. All participants are currently in listen only mode. There will be an opportunity Please also note that this call is being recorded. I would now like to turn the conference over to Mr. Stephen.
Thank you. Good day, everybody. Welcome to the 3rd quarter results call. I will call out the page numbers as I move through the presentation date. And firstly, on Slide 4, the highlights for the quarter, EBITDA, excluding special items of $155,000,000 marginally down on last year's 160.
Profit for the period bottom line, up from 32,000,000 last year to 58,000,000 in the current year, obviously, on the back of significantly lower interest charge. Dennings per share was flat at 11 U. S. Dollars. We continue to bring down our net debt.
It was down 265,000,000 year on year and down to just above the $1,300,000,000 mark. And during the quarter, we repaid $400,000,000 of our bonds from available cash reserves that we had on hand. Then Turning to Slide 5. Some of our key financial ratios, net debt to EBITDA continues to come down and you can see it the Q3 2017, we're now down at £1.7. That's below our targeted level of 2 times, EBITDA margin 12.3%.
And then the return on capital employed this is obviously the quarterly number annualized at 12.8%. The 3rd quarter is our lowest quarter because of the shuts that we have annually, that number is over 17%. Then to slide 6, EBITDA bridge from last year to this year, on sales volume. We've seen a positive growth in across all our product categories, dissolving pulp continues to be good. Facialities packaging goes from strength to strength.
And then also even in this quarter, we actually saw positive volumes coming through from our graphic paper. Prices were up in dissolving pulp. Remember, they are price, the bulk of the contract that price offers. The previous spot prices, the previous quarter spot prices. So we did continue to benefit from the higher prices.
And then also on the mix side, there's a shift away from graphics towards specialties, which sell at a higher price. Costs were under pressure because of the, well, predominantly because of higher pulp prices, but the number of the other chemical prices were up, market prices were up on a year ago. And then the big impact negatively was exchange rates. The end has strengthened significantly year on year and that had a negative $14,000,000 relative to the last year. Then turning to Page 7, the contribution splits, across product categories, you can see that EBITDA split roughly half half between specialized sales on paper.
Within paper, graphic paper, coated paper is 35 of the 50. Our specialities in packaging is 15. So that continues to grow. And I think I've said it a few times, but by the time we get to 2020. We're targeting for that to be a 25, 25 split.
Then on to Slide 8, the maturity profile for our debt, and those are very encouraging stories. We've now refinanced or repaid all of our short term debt, and we really have nothing maturing now, in the next few years. So we've pushed out the curatization to 2020 and all our bonds in 22 and beyond still in a very good position. Then on to page 9, the CapEx and for the year, we are looking at about $330,000,000, and that's a bit higher than prior years, but that's because we've commenced these conversion project, from going from graphic paper to specialties and the debottlenecking down in South Africa. Next year, we'll be we're estimating at about the 4.50 mark the continuation of the conversion project.
And then also we're putting in a new wood yard at our FICO mill, to give us more space there and get it ready for future growth Moving then forward to Slide 11, trends in graphic paper market. And as I said earlier, the demand for graphic paper was better this quarter. It's the first time we've seen growth in some time. And it was particularly strong in the export markets. Facialities, the markets continued to look good for us and and they're growing at between 1% 5%.
Unfortunately, selling prices are down on where they were a year ago. In both Europe and the U. S, we have announced price increases effective 1 July. And looking at the performance in July and the order book going forward, we're encouraged by how those price increases have been undertaken. Unfortunately, costs have been an issue and in particular, the paper pulp for our European business because it's only 55% integrated.
Latex is another cost that was up year on year. Going forward, we'll continue to look for opportunities to convert capacity away from Coty to towards packaging and ongoing focus on costs. Then turning to each of the regions page 12. Europe firstly, and I've mentioned it a couple of times, but the higher raw material prices did impact on margins, although graphic paper volumes were up. During the quarter.
As I said, we put through a price increase, and it is encouraging so far. Facialities continues to really do well for us and up 17% year on year. In North America, performance in absolute terms similar to last year, benefited from better dissolving costs, prices and volumes and costs well managed. Unfortunately, the coated paper prices are down 6% on last year. That was obviously before the price increase that we announced in July, which is looking encouraging for us.
And then On the packaging side, albeit from a relatively small base, but, the volumes there are up 20%. And those will accelerate once we complete the Somerset conversion. The dissolving pulp market Next, and that's summary on Slide 14. We continue to see strong demand, And in terms of capacity, if we look out towards capacity that's been announced in the marketplace, we expect over the next 4 or 5 years, for it to grow at about 5% and that is consistent with our expectation on the demand side. So we continue to believe that the market is encouraging and in balance.
Shorter term, we did see the prices come down April through June. But in July, we've seen a recovery and we're encouraged that prices will continue to rise, as we move forward over the next couple of months. Also with paper price, pulp prices being so high, there may be some capacity being attracted back away from dissolving pulp awards paper pulp. We continue to work closely with our customers to look for growth opportunities. We have some short term opportunities in South Africa to give us, up to 100,000 and, Longer term and I talked about this on previous calls, we are looking to add further capacity.
We estimate we're in the next few years, we need about 500,000 tons, and we are evaluating opportunities both internally and externally. In South Africa, turning to Slide 15, Unfortunately, the stronger RIN does have an impact on margins. That was the number I shared with you on the earlier slide. And then during Q3 is when we have a big shut in Goodwana. So you do have higher maintenance costs associated with that.
Visolving pulp prices I've talked about were good, relative to year on year. And our paper business predominantly in packaging towards the citrus export market is very strong for us and continues to grow and we think there'll be further opportunities in the future. Moving to the strategy side and our 5 pillars of our strategy. And then Firstly, on Page 17, ongoing focus on cost, firstly, the we've listed a few of the projects we're working on. The first one is the Somerset, Woodyard project, which we're going to be commencing soon.
We estimate the costs of that, will be about $50,000,000. And that's in the CapEx numbers that I highlighted to the procurement initiatives ongoing and successful for us. We promised the $100,000,000 and we're on track for that. And by the end of this year, we'll be tracking at 63. We also had a project for the Somerset mill as well also Woodyard, and that's expected to be completed in the next couple of months and we'll we'll be ready for production, from the early in the new financial year.
Moving to Slide 18. Rationalizing our declining businesses. We and I've said it many times, but we continue to anticipate demand reduction for coated paper, and we look for opportunities to move that capacity elsewhere. We announced earlier this year, some projects in Europe, firstly, to take Lanakin out of slightly coated mechanical paper. And then reducing our coated woodfree exposure at a number of our Maastricht predominantly in Europe a little bit in and the Somerset EM1 machine as well.
Moving to Slide 19, We look for opportunities to expand growth through moderate investment. The projects that we left here, some of them we talked about previously, but just to reemphasize, with the debottlenecking Cycor and Ingridwana. Obviously, the conversions that I talked about, we made a small acquisition, for a business called Rockwell. It was small that we acquired it for its technology. It was £8,000,000 we paid for that upfront.
And that's to help us on the barrier paper side for our specialty packaging, and, we've got on board their R and D. The we continue to believe that there are opportunities for, expansion in packaging in South Africa at Ngodwana and Together. And what's important strategically is to continue to secure hardwood timber supply. Moving to Slide 20, the balance sheet focus done a lot of good work over the years. We obviously repaid the bonds in this quarter.
And going forward, our cash interest cost is now down to between 1,000,000 $70,000,000. By 'twenty one, obviously, as we continue to reposition the business, away from coated paper. We look for opportunities, in a few areas, the specialty packaging will continue to to accelerate, on the bio materials front. As you know, we've put in a place a few different pilot plants for different product categories and those are ongoing and hopefully we'll generate revenue in the future. And then dissolving pulp excited about the opportunities.
I've already talked about the fact that we want to grow capacity, and then we are evaluating a number of different opportunities. Turning to our outlook finally and on to Page 23, dissolving pulp prices, as I've mentioned earlier, are predominantly benchmark of the previous quarter's spot price, our contracts. And so that will mean lower prices in Q4 However, as I said, prices, spot prices have already started bouncing back up. And the longer term market dynamics appear very favorable. We expect demand growth to be 5% or 6%.
So it's a very good opportunity for us. In Europe, market demand has stabilized and actually, export markets are pretty good at the moment. U. S. Is tough.
The, a lot of that coming through from exports. And obviously, we're focusing on price increases across across the two businesses. Specialties continues to grow. We have margins in the mid teens, EBITDA margins, And, the conversions that we are referred to earlier are on track and we're excited about the growth prospect. CapEx for the quarter $170,000,000, which includes the projects that I've referred to, earlier.
And so all in all, based on the current market conditions, we expect 4th quarter results to be slightly below that of 2016. And that's really because of the stronger rent. That's the main reason. And full year will be, above last year. So operator, that's I've gone through the presentation deck.
It's handed back to you for questions.
You. Our first question is from Wade Napier of Avior Capital Markets. Please go ahead.
Guys, thanks for the opportunity to answer questions. Can you just maybe give us some color on what's actually driving the strong sort of growth in export markets? And then secondly, I see you want to invest in a woodyard at Saiccor to potentially sort of expand operations. I mean, if we sort of read between the lines there, that seems like a big investment to sort of expand for potential debottlenecking, does that sort of imply we may be looking at a brownfield expansion at Saiccor? And then can you just give us a bit of flavor on the North American variable costs?
Obviously, cloquet is producing more DWP, which would imply you buying more hardwood pulp does this mean? So then how did you sort of variable cost to Climate? Thanks very much.
Yes, yes. Okay. Sorry, wait, I missed the first question again. Do you mind just repeating? I'll go from exports.
Yes. Look, obviously, the fact that, raw material prices have risen significantly as created an opportunity, for better margins in the export market. And we have been able to push up push up prices a little bit, relative to European markets. David, do you want to expand a little bit further on specifically which countries the growth is coming from?
E and Steve, it's a number of countries, including South America, Middle East, Southeast Asia, a part of the reason is that demand in China has been very, very strong for Chinese home producers and a lot of old, high producing capacity in China has been closed down. This is focused. Chinese paper producers minds more on China, and they'd be less aggressive on the export market taken up an opportunity for European suppliers.
Yes. Thanks. On your second question, the Woodjada side court, I will let Alex expand further, but, if you've been to the mill, you'll know that we are somewhat restricted for space there, for expansion. And, by our spending on the woodyard, that will create space for us. Longer term, yes, we do see growth opportunities.
But we don't anticipate adding the big volumes in the next year or 2, but I'll let Alex expand a little bit further. Thanks, Steve. One opportunity we have a logistics flow issue with the restricted space. And by investing in the wood yard, we are able to improve quality by being able to sort fiber types. So the timber that we actually cook into a further variety of species.
So we cook the species specifically. And that actually has a reasonably good payback. So we're investing in the wood yard, but there is a fairly good turn in terms of dropping your variable costs, improving the quality of the product, but then also setting you up for future expansions. Yes. And then North American variable costs, I'll let Mark expand further, but we have seen yes, you're right.
They've had to put to a small pulp, but timber prices have been coming down in the U. S. Mark, do you want to talk further?
Sure. Thanks, Deep. Yeah. And you called it out with our project Renal work, a lot's been done over the last year on our variable cost, variable usage, at all of our sites. And we've been able to manage manage our costs accordingly and not really have had the margin erosion on the variable costs side due to some of the material costs going up because we've been able to offset that with a good work on, usage and also material pricing has been, been good, too, because, the way we've been able to procure to lumber too.
Thank you. Our next question is from Sean Bandura of Martin Capital. Please go ahead. Good afternoon, everyone. Thanks for your time.
Just quickly in terms of the, $1,000,000,000 savings, I mean, obviously, the ramp up at the moment is pretty decent. Are you sort of leaning towards a bit of upside after that? And then just secondly, the timing of DWP at the port, I mean, only it's about 5000 tons this time. It's about 15, which sounds a bit high. Are you worried this is going to happen again?
And then just in terms of Europe, I mean, obviously, really solid volume growth. On the cost side, is there anything else you guys are trying to do to sort of improved that a little bit. And then if you look at the U. S, in terms of breaking down the impact of domestic coated free sheet prices, how much is sort of demand versus the eurodollar at the moment.
The $100,000,000 upside, yes, we're tracking ahead of the $100 number, we were at 63. We are above those levels. Obviously, the way we measure those, as we they're independent from market mood. And clearly, some of the rises in the pulp price that we've talked about have offset the benefit when it comes to looking at the bottom line. I'm slightly wary to commit to a specific number above 100 but the 63 that we're referring to is tracking ahead of where we thought we would be at this point in time.
So I'm confident that we can beat the number. The port delay, I'll let Alex speak to a little bit more. You're right. The number is higher, in the, than it normally is. Unfortunately, there was a a shipment at the end of June that didn't get off in time.
And the numbers that, that volume will flow into this quarter. We're doing a lot of work internally to make sure that by the time we get to the end of September, there's not a there's not, spillage into next year. And that's looking at accelerating some of the shipments. Alex, I don't know anything you want to add to that.
Thanks.
Hello?
Thanks very much.
Sorry. Did you catch that? The European costs, clearly, we've been impacted by the pulp and, and, our pulp integration that I referred to earlier is, in Europe is 55%. Barry, long term strategically, we obviously want to look for opportunities to improve our pulp integration. Anything you want to add to that?
Well, I think in part, thank you, Steve. We, for the question, have we done anything to offset a rather extreme effect of pulp price rises in Europe. Yes. We did do some hedging, during quarter 3, and that took some of the edge off it. Randolph is paying a big role in terms of finding ways to purchase pulp, which takes some of the edge off it.
And then we have been improving the efficiencies and therefore, the conversion efficiency of raw material into finished products rapidly over the past year. And finally, we have been able to put through some price rises, and that's also offset those costs.
Thank you. And then finally, Mark, the question was on the price increase, for coated free sheets in the U. S. You were you wanted to talk about how successful we've been?
Yes. Thank you, Pete. Yes. The price increase that we announced for July has been going through quite well. Obviously, as we go through this quarter, we'll see We'll see more of it start to hit the bottom line.
And, it's being driven by, I think, a couple of things. One is, demand, the seasonal uptick in demand is, we're starting to see that and, it's encouraging what we're seeing for backlogs. Grow. The other is the capacity closures that have been announced with the resolute closure of PM3 and also permanent closures, it's been announced on team 3 at Anastava, and have tightened up the fully mechanical market in that carousel through to the coated woodfree market on the website in particular. So it's, moving to the right direction from what we've seen and where we're at right now.
Okay. Thanks, Mark. Thanks, Sean.
Thanks very much guys. Thank you. Our next question is from David Drill of Merrill Lynch. Please go ahead.
Hi guys. Can you hear me?
Yes.
Okay. Thanks very much. Just a couple of questions. Just just expanding on that point on the hedging of pulp in Europe. How far forward have you guys hedged And I mean, can we expect a much larger impact from variable costs in Q4?
And then my next question is, how much DWP is cloquet producing now on an annualized basis? Then two last questions for Glenn. Just on the ex dividend date, do you guys intend to follow a similar pattern to last year in which the ex dividend date was in January? Or would you guys likely revert back to the sort of pre 2008 pattern where it was in December. And then just last question, in terms of the specialty paper business, when can we expect separate disclosure of this business in the financials.
Okay. Thanks, David. Firstly, on the hedging of pulp, it's rather limited. There's a pulping hedging that we do. And clearly with pulp prices being as high as they are now, it makes less sense.
So we don't have significant, volumes of hedges in place at the moment. Dissolving Pulp at Cloke is currently projected at about 2 30,000 tons by 2 thirds. Glenn, on the dividend. Alright. Johnny, Exelindate, we don't anticipate changing it from what we had this year.
So it then the expectation is that we'll stick with the mid January of this coming year.
And then in terms of the specialty paper, we're looking to start
not next year or the year thereafter as far as disclosing it separately. And David, the reason for that is we got the 2 conversions underway at the moment. So we want those to be completed. And then we'll be able to provide meaningful numbers at the segment level. What we'll try and do is provide the key numbers, but ultimately, give the detail after the conversion.
Okay, great. So just to
be clear, so likely from sort of Q1 'nineteen?
That's correct. Yes, sir. Thanks. Thanks David.
Thank you very much. Next question is from Brian Mobben of RMB Morgan Stanley. Please go ahead.
Hi, guys. Thanks very much. Just one question from my side is, you're adding a fair bit of capacity the, of SBB at semesters. Just wondering what your thoughts are in terms of placing that paper in the market?
Yes, yes.
I mean, obviously, the conversion is underway at the moment and we've says the market, the attractiveness for us in that market is that we are going to be an independent producer of the SBS And we've been in consultations with a number of the independent converters. Mark, do you want to briefly talk about the progress that we're making there?
Sure, Steve. Thanks. Yeah, the project's moving along very well. We have all of our major equipment, construction and engineering, progressing right on timeline, We are now starting to take, time at our annual, at our regular maintenance shuts to do some of the pretty major shut rebuild work, which is just to remind folks, we'll be doing the major part of the rebuild will go on during the in March, April timeframe of next year. We're very active on, the product The different products is a lot more than just SBS on the product, on the list of products we'll be making off the machine.
We're working very active. On that work side, product design, product development, working with customers in advance of the machine starting up, we to have a fair amount of them product coming off the machine, already pre fill in place as we move into that, into different markets that we'll move into. And, our technology that we're applying there will give us, we believe, unique and differentiated product in the market. So we're pretty excited about it and it's moving along. We're down plan.
It's brilliant. Thank you.
Thanks. Bye.
Thank you. Next question is from Ralph Krisha of JP Morgan. Please go ahead.
Hi guys. Thanks very much. I'm just looking at your conversions. I realize, I mean, it's still the way out. So things actually happen and variables can change, but you haven't or would you be able to quantify all your expectations around, any contribution in FY 2018?
And then just on your expectations of adding additional DWP capacity. Has there been any progress on that? Do you have any more thoughts on where that, where and when that could be? And then just in terms of your guidance of earnings being slightly down in Q4 sort of a cheeky, but is it fair to assume that's kind of low single digit hensors?
Yes, yes. Okay. The conversions that we're doing, obviously, there's a sequence of projects in Europe, the big one obviously being converting Maastricht. Most of that, that's going to take up most of next year. So you're only going to really see the benefits from the European conversions in the 19 year.
The North American one is expected to be at Somerset expected to be completed about April. So you'll start to see a little bit of a ramp up as we move into Q4 of our next financial year. And then you'll get the full impact obviously in 2019. Dissolving pulp capacity. And I said on the call, last call that, we're working away, looking at opportunities internally.
And externally, the what is progressing nicely, I did say we would give detailed feedback probably at the February results call for the December Results Cove, which will occur in February. But just just some of our thoughts, yes, there are smaller debottlenecking of opportunities, obviously, within our current mills. You've heard about, briefly about Saiccor. We were doing a lot of work to get Saiccor longer term. Ready for growth.
But then at the same time, from an external perspective, we're assessing what potential pulp molds are out there that we could, we could look at and that could potentially be converted to dissolving pulp. And we have a number of, possibilities which we're evaluating. And as I say, As we progress over the next few months, we'll be able to give you detailed feedback, but it's progressing nicely and we do think there are opportunities there. Then finally, the earnings, yes, I said marginally done. So in the outlook statement.
So yes, it's single digits. Yes.
Thank you. Our next question is from Matthew Harba of Capital Markets. Please go ahead.
Hi, guys. Just a couple of
questions on the Did we cover? I mean, you given guidance to the end of year. Is there any possible guidance you can give, whether it's going to go from 5 straight down to 3 or whether you're probably going to do 5, 4, 3 in terms of the daily cover. And then what assumptions are you using in your outlook And also in terms of the pulp pricing, is it do you have a 3 months, foresight as to what it will be or if pulp passes come down there's a chance that your earnings guidance could be a little bit light. And so your final question in terms of you talked about DWP passing going up, could you give a bit more color on that?
Okay. The dividend cover will be better this year. Matthew, we haven't made a call yet whether it'll be 4 or 3. We'll we'll obviously see how the last quarter unfolds. Certainly by the time we get to the end of next financial year, it will be 3.
But we'll make a call at the end of this year whether it will be 4 or 3. The outlook or let me take the dissolving pulp first. And then, Barry, I'll come back to you on the pulp. Our outlook on the pulp prices. Dissolving pulp, prices dropped to 8:30 spot prices a ton.
And if you look at the market dynamics and where the marginal tons or costs, per ton should be, it is around the 8 to 8.50 mark. So that is where we would expect the prices to bottom. Over the last few weeks, it's gone back up to 8:45 and the indications are that it will continue to rise in the next few weeks. So I don't think there's any surprising, and we think it will it will move upwards. Pulp prices, hopefully getting to the close of the top, but, Barry, I'll let you talk to where we assume the last the last couple of months for it to be.
Yes. Thanks, Steve. It's just probably worth dividing, I think, the software and hardware because they're moving at different rates. Has achieved the peak now and isn't rising any further. There's new capacity coming on in a number of places.
In starting in this quarter and then going on into the final 3 months of the calendar year. Hardwoods there is new capacity coming on, but there is sufficient demand to keep volumes pretty tight. So stocks are still pretty low in terms of pulp and of hardwood pulp. And there are still strong attempts by pulp producers to get further price rises during this quarter. We suspect that that will be repeat, but we don't expect any benefit from declining pulp prices very much during this quarter up to the end of September.
And sorry, what assumptions in terms of Rand and Pop passes are you using for your optic statement? Because this is moving around on, so much at the moment. We might be at 13 or we might be at 13.50 and it does change quite a bit.
Okay. The rent, 13.30 The pope, we're predominantly exposed in, Europe, Berry and you want to just talk about our assumption on the pulp price? Obviously, July has already been please keep. Now we're into August September, Barry, our assumption on the pulp price for those months.
The fixed prices, then we expect the hardwood prices is going to be at 8 16, at 3880. Thoughtful prices around 8.90, obviously that.
And that's consistent with our potential.
Thank you.
Thank you very much. Our next question is from Carter Obiani of Ares. Please go ahead.
Hi there. I just want to get a sense in terms of taxing power for your Credit Suisse segment. Where do you see operating rates in Europe and U. S? And how does that compare in terms of recent years or in historical context?
Thank you. Operating rates in Europe at the moment are all as an industry are just just below the 90% mark. That is above those levels, and we've seen demand growth. So slightly below nineteen, which means it's close to the market being imbalanced. Barry, anything you want to add to that?
I think the big help for the Europeans is the strong export market and that has produced a lot of extra volume, which has built capacities up. It's also the case that there has not been a summer slowdown in Europe. So you're seeing pretty good demand in Europe. Generally in quarter 3, the demand was above from the last year. So right now, capacities are well filled.
Does
it answer, Carlos? Yes, sure. No, I just want to, would you say the operating rates are higher at the moment versus, I don't know, last year and, let's say, 5 years ago? Yes. That's all.
Yes. Yes. Operating rates are higher. Obviously, there was a lot of capacity came out of the market over the last 3 or 4 years. And And as, as Barry has alluded to, the demand in Europe has been better, in recent months, and we've got a strong export market at the moment.
So it has pushed up operating rates relative to where we've seen them over the last 2 or 3 years. And obviously, all of that is causing us to be reasonably confident about the price increases that we announced. Perfect. Thank you very much.
Thank you very much. Gentlemen, we have no further questions. Would you like to make loads of comments?
Just want to thank everybody for joining us on the call. We look forward to discussing our results at the end of the year. Thank you very much.
Ladies and gentlemen, that concludes this conference call and you may now disconnect your lines.