Good day, ladies and gentlemen, and welcome to the Sappi Q2 2015 results teleconference. All participants are now in listen-only mode, and there will be an opportunity to ask questions later on. If you should need assistance during the conference, please signal one of our operators by pressing star and then zero. Please also note that this conference is being recorded. I would now like to turn the conference over to Mr. Stephen Binnie. Please go ahead, sir.
Thank you. Good morning and good afternoon to everybody. I'm going to go through the investor presentation slide deck. As I go through each of the slides, I'll call out the slide number to make it easier for you. Firstly, starting on slide four, it has some of our highlights for the quarter. Firstly, profit for the period was $56 million. That's up from $32 million for the same quarter last year. That's a rise of 75%. Earnings per share excluding special items was $0.11 compared with $0.05. EBITDA excluding special items, $170 million. That's in line with what we achieved last year, the $171 million last year. Made significant progress on reducing our debt. The number came in at $1,916 million at the end of the quarter. Compared to the same time last year, that was $2,248 million.
Big highlight for us during the quarter was the successful refinancing of the 2018 and 2019 bonds, which will significantly lower our interest costs as we move forward. Turning to slide five, that has the historical EBITDA and operating profit trends by quarter. You can see that typically Q2 is a relatively stronger quarter. Q3 is less. That's mainly because of the fact that we tend to schedule a number of our larger annual maintenance shuts at our mills during that Q3. We put that in our outlook statement later. You'll see that will be the same for this quarter. The most important quarter for us and the one in which we generate the most cash is Q4. That will be the same for this financial year as well.
On slide six, we have an EBITDA earnings bridge between 2014 and 2015. I'll just talk to some of the key items relative to last year. Firstly, sales volumes were down. The main reasons for that, firstly, related to the fact that at our Cloquet Mill in the U.S., as you know, we have the ability to switch between dissolving pulp and kraft pulp. During this quarter, there was a shift back to our volumes to make kraft pulp. That lowered the overall sales volumes. We also had the impact of the severe U.S. weather in the northeast this quarter. Again, impacted our logistics and productivity. In Europe, we saw a slow start in January. That subsequently did pick up. There was a slow start in January.
That was exacerbated by the fact that we had the Gratkorn shut in December for the project that we invested in, we talked about that on prior calls. You had the delayed impact of the lower volumes into Q2. On slide seven, you can see our earnings split between our two product categories. On the right-hand side, you will see that roughly approximately half-half split between specialised cellulose and paper. Then on the left-hand side, from an EBITDA perspective, you can see that 61% came from paper. We had a good quarter for paper, and each of the businesses have picked up nicely there. On slide eight, the trend in terms of our net debt and the net debt to EBITDA ratio.
You can see that following the peak of our borrowings in Q1 of 2014, that was after we funded the costs for the chemical cellulose conversions. You will see that we have been able to significantly decrease our debt over the past six or seven quarters, and we would expect that trend to continue as we move towards the end of this financial year. Slide nine has our maturity profile for our debt, this is the first time that you will see the new bonds, the 2022 bonds, 450 million EUR reflected. Obviously, that helped to push out our maturities and improve the profile. Some other key items to call out. Firstly, in 2015, you will see that there is some short-term borrowings, $172 million.
A lot of that arose as a result of the refinancing transaction that occurred, we will be looking to repay that from the cash that we have on hand. You will see we have a significant amount of cash of $399 million. That will reduce considerably. In 2016, we have our securitization structure. In Europe, that structure, the 326 million EUR. The good news there is that we have just managed to refinance that has been extended to 2018. Moving to slide 10. It reflects our CapEx, we have split this between maintenance CapEx and we call it expansion, but perhaps a more appropriate description here is efficiency and cost reduction project. You can see that the CapEx is split roughly half-half between the two. Typically, our maintenance CapEx is around $150 million, you can see it has been relatively constant.
For the year, we did include this in the outlook statement, we expect CapEx for this year to be $280 million. Turning to the divisional overviews, I will move to slide 12. Firstly, talking about the paper markets. Firstly, it is fair to say that the coated wood-free demand decline has been in line with the expectations. I did talk about in Europe, January was lower than expected. However, since that period, it has resumed the same downward trend in Europe of about 2%-3% down. Coated mechanical, those declines have been more severe and more of a concern. We are often asked a lot of questions about how the stronger dollar and weaker Euro has impacted on imports into the U.S. We have analyzed that, it has not had a significant impact so far for us. Turning to the costs and the selling prices.
The good news is that coated wood-free sales prices have moved up in Northern America and in Europe. As recent as last week, we've just announced some price increases both on the reels and sheet side moving forward. From an input cost perspective, softwood pulp prices have been following. However, hardwood prices have been high, and that's put a little bit of pressure on input costs. Moving forward, we will continue to look for opportunities for price increases, and as I said, we have been relatively successful in recent times to achieving some price increases. We will always look for opportunities to improve efficiencies and costs, and I think a lot of good work is being done across the regions to reduce fixed costs. We will manage our capacity in line with our demand expectations. Moving to slide 13. This is now the specialised cellulose trends.
Firstly, we've seen a deceleration of capacity expansion. As you know, there was a significant amount of capacity that came on board sort of two or three years ago. That has certainly slowed down, and there are further expansions planned, but we have, in the short term, seen a slowdown. In fact, with the pricing in the market as it is at the moment, we have seen some of the capacity switching back to paper pulp, including ourselves, for some of our production at broke. Overall, the underlying demand trends for dissolving pulp are still moving up, and our expectations are consistent with what we've communicated with you in the past, around about the 6% mark in terms of annual growth. In terms of selling prices, commodity-grade dissolving pulp prices are still low.
The good news there is that we have started to see some stability in textile fiber prices. We've seen it cotton prices, we've seen it with polyester prices, and even obviously with VSF prices, we have seen stability coming through. Input costs have been declining for producers with the movement in exchange rates for producers with non-U.S. dollar costs. That obviously includes our two South African mills. We will continue to manage our capacity, and it's very important that we continue our strong relationships with our key customers and align our growth strategies with theirs. We will look for further opportunities to investigate other end uses for dissolving pulp. Now turning to each of the regional businesses, I'll start with Europe. We have a couple of graphs on this page.
The first one shows the EBITDA trends over recent times. I think there's been significant improvement now. You can see all the way back now to the middle of 2013-2014 financial year. We've seen consistent improvement. A lot of that, obviously, is a result of the costs that we've managed to take out of the business. On the top right, we have the demand development. The forecasts that you see attached there are the RISI forecasts. You can see that they are forecasting for graphic paper are down around about 2%-3%. I think for coated wood-free, that's consistent with our internal thinking. Mechanical, we believe may be a little bit softer than that. The better margins that you've seen year-over-year are a result of higher coated wood-free selling prices, the lower fixed costs. We've taken out significant costs.
As you know, we sold the Nijmegen mill last year, and we were able to carousel those production volumes. We also got a benefit from the transfer of the Dutch pension fund. The weaker euro has lifted export prices for us, but that has been offset somewhat by the higher US-denominated pulp costs. Logistic costs have been rising on the back of those increased exports, and there have been higher freight rates coming through there. In addition to all of that, our specialty business has been stronger, and we achieved better volumes and higher pricing. In North America, the same structure for the slide. As you know, 2014 was a tough year for the North Americans. However, since then, we've seen improvements. We've taken costs out of the business, and we've been able to put through some price increases.
On the top right there, the forecast outlook from RISI is slightly better than what the European situation is and estimating down about 1%. Our estimates are in a similar range. The improvement that we've seen over the last year and the increased profitability has arisen from the fact that we did get the higher sales prices. There's been a better mix on the sales side with a higher emphasis on premium sheets, and we've been able to achieve lower variable costs. However, the severe weather that we did see during the quarter in the Northeast did impact negatively on productivity and logistics. Dissolving pulp sales volumes were down, and I've talked about this already, but we did switch back some of that production to make own fiber for our paper mills at Cloquet.
Our release business has been affected by weaker sales to China, and in addition to that, we do sell some of that into Europe, and the weaker euro has negatively impacted pricing for sales to Europe when you convert that back to U.S. dollars. The lower variable costs arose from lower chemical and energy prices, which have more than offset higher wood input costs. In South Africa, we continue to see strong earnings growth. We've seen an increased contribution from our paper business. The margins are picking up nicely there as we streamline there and have a focused marketing strategy. In terms of the dissolving pulp, what you see on the top right-hand side is the outlook for dissolving pulp demand growth, and it's consistent with what I said earlier. The expectations are around about 6% per annum growth.
In terms of the earnings growth, the exchange rate gains on export sales benefited us, and in addition, we were able to achieve further fixed-cost savings. Good work done there. That did offset the lower dissolving pulp selling prices, the US dollar-denominated selling prices. In addition, the dissolving sales volumes were negatively impacted by a boiler tube leak at Ngodwana. In fact, that occurred in December, in our last quarter, and I think we did talk about it at the time, but obviously you have the delayed impact of the sales in this quarter. Our paper business, I've talked about. It improved further. It's making good margins now, and it is making an increased contribution to our profitability. We're seeing higher volumes and improved pricing there as well, and we've been able to lower logistics and fixed costs.
Part of the reason for the improvement has been the strong fruit export sales, which has boosted the demand for our virgin fiber packaging grades. Turning to the strategic focus moving forward, Slide 18 is a slide that you've seen previously, but it's important to reemphasize what we're focusing on. In terms of the key focus areas going forward, we will continue to achieve cost or look for cost advantages. I do have some examples on further slides where I'll expand on some of the initiatives that we're taking for each of these areas. We will continue to rationalize our declining businesses. We will, in the short term, look for smaller opportunities to grow through moderate investments, never losing sight of the key focus, which is to generate cash to strengthen our balance sheet and reduce net debt.
You know that we have our target of net debt to EBITDA of two times. Turning to Slide 19, as I said, I would talk to some recent examples of each of these pillars. Firstly, on achieving cost advantages. Some of these have been the investments that we've made at the power plants in terms of Somerset, Kotka, Niemi, the changes that we made at Gratkorn on the paper machine. We talked about that one on the last quarter. Important that we call out that we do have the flexibility at Cloquet to switch between the kraft and dissolving pulp. That enables us to benefit from price movements in the two respective markets. We're also putting a lot of energy behind our group procurement initiatives, and we do think there are some saving opportunities there. Moving to optimizing and rationalizing declining businesses.
As you know, we've been transforming over a number of years now. Some recent examples of that has been the cessation of kraft paper production in South Africa. Recently, Metsä announced that they are switching their Husum mill, and they did produce volumes on our behalf, and we will have the ability to transfer those volumes into our production locations in the second half of this financial year. We're also on the lookout for opportunities to make more packaging grades at our mills around the globe. Moving to Slide 20. As I said, growing through moderate investments, again, we list a few examples. We have made some investments in lightweight recycled packaging at our mill in Enstra in South Africa and some upgrades to [inaudible] in Ghana. All these mills have picked up in terms of their profitability.
We also announced recently the nanocellulose pilot plant in the Netherlands, and that project is ongoing at the moment. Strengthening the balance sheet is extremely important for us, and we will continue to focus on having a cleaner, stronger balance sheet so that we can accelerate growth in adjacent businesses. We continue to pursue the Twello forestry sale. We have talked about that in prior quarters, and that is an ongoing process. The bond refinancing, we're very pleased with the outcome there. Going forward, our annual interest costs will be $110 million per annum estimated. In addition to that, we repaid a smaller South African bond, which was ZAR 450 million. We continue to look for opportunities on that front. Turning to Slide 22, our outlook as we move forward.
Graphic paper markets, especially mechanical paper, remain difficult and continued pressure from higher paper pulp and wood prices are putting margins under pressure. However, lower oil and energy prices are providing some relief for us. Textile prices have stabilized over the last few months. I mentioned it earlier. In fact, we've actually started to see small rises in prices there, and dissolving pulp has been following that same trend. There's a very strong correlation. At the same time, we remain well-positioned with our strong relationships and the fact that our assets or many of our production locations are located in South Africa. The weaker rand does help with costs there. Well, Q3 is a seasonally weaker quarter for the U.S. and Europe, and we do have maintenance shuts across all three regions. These will negatively impact results.
What we've done here is we've compared the costs of the shuts this year relative to last year, and there's an incremental impact, once-off, of $21 million. We expect the operating performance for the year will be broadly similar to 2014, despite a number of once-off impacts from those capital projects that I discussed. At current exchange rates, the translation of euro and rand results into dollars may have an impact on group results. Nevertheless, earnings per share, excluding the special items, is expected to be substantially better than that of the prior year. Okay. I've gone through the deck now. Operator, I'll put it back to you for questions.
Thank you. Ladies and gentlemen, at this time, if you would like to ask a question, please press star and then one to join the question queue. If you decide to withdraw your question, please dial star and then two to remove yourself from the list. Our first question comes from Caroline Learmonth from Barclays. Please go ahead.
Thank you. Three quick questions, please. On cost control, and you've displayed some positive news on that in Europe, and you've also given some examples going forward of how you're further going to focus on costs. Can you give any indication in terms of number or % of how much further you can potentially get costs down in Europe in terms of a target? Secondly, Cloquet. Can you give any indication of what the return on invested capital has been like at Cloquet, given that dissolving pulp markets haven't been quite as you might have expected and you've had to swing capacity there into the paper side? Just finally, there's a special item in the employee liability benefit settlement. Is that to do with the Dutch pension fund transfer that you were talking about in the presentation? Thank you.
Okay. If I take each of these questions in turn. Firstly, in terms of the cost opportunities in Europe, as you know, we've taken out significant amounts of costs over the last few years. The opportunities as we move forward, obviously, we have a process of continuous improvement. Probably, in terms of giving you a number, they're not as sizable as what you've seen over the last couple of years. I'm a bit hesitant to put a specific number to it, but it's substantially less than you've seen in the last couple of years. We do think there are further opportunities. In terms of Cloquet, we don't manage our capital at Cloquet in isolation. We look at the investment in the dissolving pulp business as an overall investment.
We have to do that because we service the same customers, and we have consistent pricing and volumes being supplied to the same customers. I would rather answer the question relative to the overall investment, and it has been successful for us, and we're happy with the conversion. In terms of your last question, yes, that item that you referred to does relate to the Dutch pension fund.
Thank you.
Thank you. The next question comes from Bank of America's Roger Spitz. Please go ahead.
Thank you. A few questions, one at a time. Regarding the April North American announced coated wood-free price increase, can you say how much of that was realized?
The April price increase?
May. People have told me different months. Can you say a recent price increase in coated wood-free? Has there been one?
We've recently announced one in Europe last week. Mark, I don't think there was other price increases in the U.S. Well, on the sheet side. Okay. On the sheet. Mark, do you just want to expand on the U.S.?
Sure. We announced price increases back in the end of Q1 and again in the beginning of Q2. They were both initially on web and the last one on sheets, we have been implementing those price increases as we went through Q2, and we are seeing most of it come through.
Okay. You've given a roughly broadly flat 2015 guidance or profitability or perhaps EBITDA. The cellulose is going to be down. Can you say if the difference will be made up? Where is that in your thinking, U.S. paper, European paper, or Southern Africa other than cellulose?
Yes. In fact, it's all three of the paper businesses are improving on last year. Yes, that does make up the shortfall.
Okay. Can you provide any insight into the rough contribution of Cloquet dissolving wood pulp for fiscal Q2 2015 EBITDA? I know you probably don't want to give a number perhaps, but maybe you can give us some broad sense of % of profitability.
Yeah. As I said, it's not something that we look at in isolation. We manage it as one business. It's not a number that we do disclose externally.
Okay. On CapEx, you give the CapEx guidance that implies, I guess, second half fiscal of $166 versus $114 for the first half. Is there something in particular driving that? Will that be evenly spread over the two quarters or more this coming quarter with the maintenance turnarounds?
It's because we do have a large number of maintenance shuts in the third quarter, as we talked about. In terms of the split between the two quarters, it's roughly split half-half, if I look at the numbers.
Perfect. Last one is 2016 CapEx. Can you give any broad sense of what it might look like? Does it look like 2015 CapEx?
Yeah. Similar levels. We use $300 million as our benchmark, as our guidance, and we would expect that to continue.
Thank you very much.
Thank you. Our next question comes from Nishal Ramloutan from UBS. Please go ahead.
Hi. Good day. Thanks for the opportunity. Just on Europe, maybe just firstly to check on the price increases that you announced at the end of last year, have those all been given back? You said prices have sort of drifted down through the quarter. I think the other thing is just the trading conditions still seem pretty weak in Europe as prices sort of coming off. Why do you think this new price increase that you want to implement would be successful?
Okay. I'll take the first part of the question, and I'll hand over to Barry. The price increases that we saw at the end of the last quarter that we talked to, Mark has already indicated that in the U.S., most of that has stuck. In Europe, some of that has come back on the coated wood-free side, as we've discussed, we have put through a further price increase last week, and I'll put you over to Barry to talk about that price increase that we announced.
Thanks, Steve. The price increases we announced last week were for the reels business, both wood-free coated and mechanical. Wood-free coated reels business has been particularly strong. The price level, both for mechanical and for wood-free, are now at a level where the increase in pulp prices makes them uneconomic, so we have to raise the prices there. It's important, but there is enough demand to do so. The second thing is that capacities in the coated mechanical side are coming down, Steve already referred to the Husum switch to other coated papers or other papers that is underpinning our capacity loading. We also referred to a sheets price rise. The timing of that we are still making up our minds about, but it will be during the following quarter. In that case, it is built very much on strong demand.
Demand has been very strong from February onwards, with capacity utilization well above 90%.
Okay. Maybe just to follow up on that. What's your sense of how much of the industry in coated fine and coated mechanical is currently loss-making in Europe?
Sorry, Nishal, repeat that question.
I just wanted to see what your sense of how much of the industry in Europe on coated fine and coated mechanical is actually loss-making currently.
What percentage is loss-making? Look, we don't have those facts. All I can say is that I think a number of the competitors out there are managing their assets for cash. I've got to believe that if the machines are cash positive, they will continue to operate them. We don't have those specific numbers.
Okay. Thank you.
Thank you. Our next question comes from Credit Suisse. Lars Sjoberg has the floor.
Thank you. Barry, if I can just pick up on what you just said about high utilization rates. How do we rationalize what we've seen in coated sheet prices? If I look at RISI, prices have fallen actually below the level where you raised them back in October of last year. If you have very strong demand, what is going on with pricing, and how do we reconcile the high utilization rate and strong demand with giving back more than the whole price increase from October?
Yes. It's correct that during the last three months of the calendar year last year, demand was not so strong. That carried on into January of the quarter we just had. The January month was very low, and that saw quite a bit of price reduction. When we look at our prices, they've been stable since February, no longer going down. There's more talk of price going down than the real price going down. Part of the reason for that is the fact that prices outside Europe are significantly higher than prices within Europe. Companies have naturally started to focus on markets outside Europe, and that's taken the pressure a bit off the markets inside Europe and have also raised operating rates. I think that's the background.
Is there any issue here with PaperlinX? They're trouble? If they're putting any pressure on the market that's relevant?
I'll take a shot at that, Steve, if you like.
Yeah.
Certainly as far as we're concerned, we have no major problem with the changes at PaperlinX, with the decline of PaperlinX. We don't see that as a particular negative to the market because final demand at printers has not halted. It's just the route to the market that's changing.
Thank you. Just a couple of bigger picture questions, I suppose. Steve, when you're talking about the once-off things that have gone on, obviously various things at various mills, can you give us a sense of what you think the once-off impact is? Also, when you talk about the $21 million higher year-on-year, how that's split between the pulp upgrades at Gratkorn versus maintenance, and if you can share with us what it means quarter-on-quarter as opposed to year-on-year.
I didn't catch all the question, but let me try and answer how I interpreted it. I think you were asking for the breakdown of the $21 million, and its impact on what it arose from. It's essentially made up of two larger items, the incremental impact. Firstly, as you know, we've been investing in the boiler at Gratkorn, and that makes up about $13 million of the $21. That is a once-off project. Then the balance of the change relates to a shift in the Ngodwana annual maintenance shut in South Africa. That was in Q2 last year and has now moved to Q3.
What I'm trying to also understand is the full year impact of these once-off items that you refer to, including Gratkorn and Somerset, et cetera. When you lap those heading into 2016, what would be the cost you can have in 2016 to carry, so to speak?
Yeah, understood. If I take the two projects at Gratkorn, the impact from Q1 and the Q3 that I just talked about, and the Somerset project that also occurred in Q1, add it all together, you get to about $35 million-$40 million.
Understood. A final question to Mark. It's been seen in the statistics that there hasn't been any particular imports coming into the United States besides very strong prices versus Europe, which to me looks somewhat surprising. I saw just the other day some North American statistics coming through showing a significant decline in North American coated paper shipments, in fact, the weakest month all year. Should we interpret that as now the import starts to come, or is that something else going on?
Lars, I think you're referring to the most recent monthly data that you're on the.
That is correct
yeah. We're aware of that data, too. This is a slow period of the year, when you look at the entire year in the North American demand cycle. I think we haven't been able to put the two questions together yet. We haven't seen a whole lot of imported product come in other than the product that we bring in. The other thing that's going on, too, and I don't have the data, Lars, maybe somebody's seen it by now. There was a fair amount of backup of, I'm going to say, Asian product because the backup was on the West Coast, and those ports have now opened up after the slowdown in strikes out there. That may be changing some of the dynamics in the month of April.
Understood. That makes sense. Thanks.
Thank you. Our next question comes from Sean Ungerer at Avior Research. Please go ahead.
Good afternoon. Couple of questions. Just in terms of the pension fund transfer, are there any other sort of opportunities along this line? In terms of the revised finance cost guidance, does this include or exclude the possible refinancing of the 2030 bonds? Just in terms of CapEx guidance as well, it seems sent down. Is there anything that sort of drove this specifically? Just looking at the SA paper packaging business, in terms of those margins, how are you guys sort of thinking about that in terms of the cycle? Just following onto that, SA cash costs were down about 5% year-on-year in ZAR terms. Could you give a little bit of color as to what's helping that?
Lastly, in terms of the further optimization for the European specialties business and the test run, I guess, of the folding box board, could you sort of give an indication of how material this is sort of in the European business? I presume not that big. Thanks.
Okay. There was quite a few questions there. I'll take some of them, and I'll pass some of the others to my colleagues. Firstly, in terms of further pension opportunities, Glen, do you want to take that?
Yes. We have a number of pension funds that are funded across the group, and we're constantly looking at opportunities as far as that is concerned. The Dutch pension fund was a specific opportunity that we managed to take advantage of. There are no known or immediate opportunities in other areas of the world, but we continue to look at them.
Thanks. The second question was about the finance costs going forward and the guidance we gave. No, it didn't include any savings on the 2032 bonds. That was as our bonds currently are. We've got the 2017 and the 2021 bonds, but we were only able to refinance those in sort of 18 months, 21 months time. That's not obviously in the guidance either. The CapEx percentage, why did we pull it down? Well, as I said earlier, we have about $150 million maintenance CapEx per annum. We identify a number of other initiatives, mainly focused on improving productivity and our cost base. This year, they added up to $280 million. As I said earlier, going forward, $300 million is what we target each year. The SA paper business has been strong and has been growing and strengthening.
I'm going to put you to Alex just to talk in some more detail about the opportunities there. Alex, maybe you can follow that up with the question on the cash costs, which was the next question.
Sure, Steve.
Thanks, Steve.
Just in terms of the margins, in terms of the cycle, a lot of that business is based on a very strong agricultural export market out of South Africa, and we see that that's going to continue. We also make products which are very much sought after. We are keeping up with market expansion, so we think we can maintain those kind of margins. From a cost perspective, what is helping that? We are focusing on simplifying the business. That gives you opportunities in terms of your recipes and production efficiencies, and that all drops down to the bottom line. We have taken some actions in terms of closing our coating operation at our Stanger mill. We've also reduced some of our finishing house costs at [inaudible] and at Stanger.
I think the other two key issues is we're continuing to take some costs out of SG&A and looking at recipes, how do we drop our variable cost continuously? I think that really covers it.
Thanks.
Thanks, Alex. Your last question was about the specialty paper packaging in Europe and the opportunities, and you specifically asked about folding box board at Maastricht, and we estimate the opportunity there is about 30,000-40,000 tons. It's relatively small, but it certainly will boost the profitability of that specific mill.
Great. Thanks, guys.
Thank you. We have time for one more question, which comes from RBC Capital Markets', Bill Hoffman. Please go ahead.
Thanks. I wonder if, Mark, you could talk a little bit about what you're seeing in the competitive situation after the Verso-NewPage, as well as the spin-off and sale of some of those mills to Catalyst, what you're seeing in the North American markets. The second question is just, I wonder if you can talk a little bit more about Cloquet, its mix of fluff versus hardwood versus dissolving, what you're seeing in the fluff markets. Obviously, there's more capacity coming into that market as well. Thanks.
Okay. Just in terms of your first question, we don't like to talk specifically about our competitors. All we can say broadly is that post the Verso-NewPage merger, obviously the emergence of Catalyst into the U.S. markets, that has put a little bit of pressure on prices. We really don't want to talk about them specifically. Cloquet, you asked about the fluff markets. Mark, I don't know if there's anything you want to comment on that side.
Yes, Steve, I can say to you. First, we do not make fluff pulp at Cloquet. When we swing, we swing from the dissolving wood pulp to kraft pulp, which we use all internally on the machine, the paper machines. We do have the capability, if the economics warranted it, to also go to the market with kraft pulp, but not fluff. The fluff pulp demand is apparently very large, we've seen a lot of conversions being announced and being done. Most of them, though, are down in the southeast of the United States, where they tend to use a lot of the softwood. Requires the softwood for that product.
Thanks. Maybe if I could just go back on the competitive situation. I was not looking for a sort of discussion about Verso versus Catalyst, and you mentioned the increased competitiveness. I guess the real question is, from a contract standpoint or a customer standpoint, what is the reaction from customers? Are they trying to really lock in with, obviously, have two sources of supply, and are they trying to get more contracted business, or are they looking to keep the spot markets open for them?
Mark, do you want to take that?
I'll say a few things there. I think customers are evaluating their situations. Our contract customers are continuing about the same this year as prior years. I think there is a lot of change yet to happen in the market as people figure out how this is all going to settle out and who wants to supply what to which customers, and I think it's going to take a while to play out still.
Thank you.
Mr. Hoffman, any other questions?
No, that's it. Thank you.
All right. Mr. Binnie, do you perhaps have any closing comments?
No, I think that's it. I want to thank everybody for joining us, and we look forward to discussing our results at the end of next quarter. Thank you for joining us.
Ladies and gentlemen, on behalf of Sappi, that concludes today's conference. Thank you for joining us, and you may now disconnect your lines.