Thank you for standing by. Welcome to the Sappi Q3 2025 Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question -and -answer session. To ask a question during the session, you will need to press star one and one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one and one again. Please be advised that today's conference is being recorded. I will now like to hand the conference over to your speaker today, Stephen Binnie, CEO. Please go ahead.
Good day, everybody, and thanks for joining. As always, I'll go through the Investor Presentation, calling out page numbers as I move through. Just starting on page two, we've got the comments around forward-looking statements there for you to refer to. Page three, just putting the quarter in context. Obviously, it's been a challenging quarter, marked by ongoing global economic weakness, partially obviously driven by the tariffs and the trade tensions, but broader macroeconomic challenges as well. That's had a significant impact on shipping prices, particularly for us, obviously dissolving pulp, which we saw as substantially lower. Not only that, we've seen packaging grades in all our regions, packaging and specialty grades coming under a bit of pressure. Then specifically, in Europe and export markets, graphic papers are also coming under some selling price pressure.
Europe, we've talked about in the past, Europe's never truly recovered from the COVID times, and that region continues to be challenged by broader macroeconomic weakness and at the same time oversupplying in many of the categories of paper. Internally, we obviously had the Somerset PM2 conversion, which was completed. You'll recall from our last Investor Call, we finished that at the end of May. It was obviously later, and we shared that with you at the time. It was later than we originally expected, which meant that up to the date of completion, which was essentially April, there was obviously no production, and that meant that there was a negative earnings impact of $22 million. Subsequent to that date, you had the natural ramp-up of the new machine, as expected. That starts at low levels and subsequently ramps up.
I'll talk a little bit more about that, but that's all as expected. The fact that there were delays in that early period of the quarter, that had some knock-on effects in terms of operational disruptions on the other assets at the mill and obviously impacted on people as well. That's to be expected. As I say, things are ramping up from there. We'll talk a little bit more about that as we move forward. Taking that all into account meant that we had EBITDA of about $80 million in the quarter relative to $148 million. Obviously a little bit lower than the guidance we gave last quarter, but predominantly linked to the lower selling prices that I referred to.
Moving to page four, obviously the lower profitability has caused us to combine with the investments that we've made, the strategic investments we've made primarily on Somerset PM2, has meant that our net debt levels have risen, obviously coinciding with the weak economic conditions. At the same time, unfortunately, we had a negative translation on our euro debt. As you all know, the euro substantially strengthened against the dollar. Obviously, that all happened at the same time. That got our absolute net debt number to rise. You can see that the net debt to adjusted EBITDA ratio rose to 3.2x from a covenant. I know we probably get questions on this. Just from a covenant perspective, the actual covenant net debt to adjusted EBITDA was only 2.9 x.
The reason for the difference is really that on the balance sheet, as you all know, the operating lease liabilities that gets included, it's just over $100 million. That does not get counted for covenant purposes. With that all in mind, you know, a strong focus on reducing debt now. Our strategic projects are behind us. Pleased to say that we've managed to pull back on the CapEx. Firstly, in the current year, we've got it back down to $500 million, which is what the guidance was that we gave you at the beginning of the year. We've eliminated any non-essential CapEx, obviously primarily focused on maintenance. We've been going through our budgeting process in the last few weeks. As we look out to 2026 and 2027, also pleased to say that the CapEx numbers are going to be substantially less. 2026 will be less.
We're aiming for it to be less than $300 million and obviously similarly aim to 2027. We've also made the decision not to declare a dividend in the current year. All of those things combined, we believe will help as we focus on bringing our debt down. We want to get it back below $1 billion. Page five of the earnings bridge, and much of this I've talked about. This is from last year's Q3 to the current year's. You can see the Somerset impact, the 22 that I've referred to a couple of times. On the pricing front, I've already talked about as well, the lower prices coming through. On the variable costs, also a negative. Interestingly, some of the variable costs, the actual raw material costs themselves are less.
With that disruption that I referred to earlier, particularly at Somerset, it meant there were some negative usage variances which impacted that as part of that. Overall, that gives you the $18 million that I referred to. Slide six turns to the major categories of variable costs. Interestingly, in certain categories, the domestic amounts were less. When you translated the euros and the rands back to dollars, you also had a negative impact there. Specifically, pulp, actually, that was one of them. Coming to the other costs in Europe, we have seen wood costs and some of the chemical costs increasing, North America, energy, and South Africa across the board, a number of the categories. Altogether, about 5% up. Turning to slide seven, which is our net debt evolution.
We shared quite a long history line here, and we felt that was important to, as our debt levels have risen, we're now at the peak. It was important to put this in context of the history. Clearly, the jump to $1.9 billion is higher than even we expected. You've got $100-odd million of the currency translation with the stronger euro, which didn't help. A little bit of bad luck there, but it didn't help. Obviously, the CapEx coming through accounts for much of that increase. We obviously declared a dividend earlier this year, right? We had to pay that in this year. That won't be, it's obviously not going to be repeated in the next year. You can see, as you scan across the page, our debt levels have been higher before.
As I say, a strong focus now, our strategic investments are behind us, and now a strong focus to bringing that back down in the next few years. Turning to the maturity profile on page eight, with the lower profitability that's come through, and obviously, the CapEx that we've had, it's meant that the short-term debt has risen a little bit. Our focus at the moment is to, we're in discussions to term some of that short-term debt, and we're confident that we can do it. That's a process that's underway and is being proactively managed. Other than that, nothing, none of the major bonds are maturing anytime soon. We're comfortable with our profile, and obviously, our primary focus at the moment is pushing out that short-term debt, as I referred to. Slide nine has the CapEx and cash flow.
Obviously, this year, we've got the negative cash generation, which primarily comes from the higher CapEx coming through. The same themes, we declared the dividend with the lower profits. It meant that there is a cash utilization in the current year. The CapEx, as I said, reducing the current $100 million -$500 million. At the end of last quarter, we had $550 million. We pulled that back and done a very close focus on our CapEx for the next two years. As I say, we want to get that under $300 million, and we're confident to do that. Slide 10, linked to all this, we're very much focused on our disciplined capital allocation strategy. Strong focus on getting the debt under $1 billion again. Clearly, from a profitability perspective, there's going to be, there's no major projects coming.
We need to ramp up on the label investment that we did at Gratkorn, and then the SBS packaging conversion and expansion that we did at Somerset. I'll touch on that a little bit more later as well. All in all, our primary focus going forward in the next few years is on cost management, discipline, and reducing debt. Coming to the segments, and personally on pulp, which is page 12, the current quarter, significantly impacted by the lower selling prices coming through. Pleased to say that it does look like it's bottomed and it started rising in the last couple of weeks. You can see the price here dropped to $8. Actually, I think it dropped to $7.98, and it's now back at $8.10. Ultimately, we're confident that prices will recover to where they were previously based on the economic fundamentals.
As I said, already recovered to $8.10, so feeling better about that. We had an 18-month shot at Cloquet, which impacted margins in that segment. We have a dissolving pulp line there as well. Turning to page 13, a tough quarter on packaging, and it's probably best to think about it regionally. Firstly in Europe, I've already talked about the fact that you have your broader macroeconomic challenges, and that's also magnified by the oversupply in many of the paper or many of the packaging paper categories. Some of the oversupply is linked to the fact that the demand has been less than was expected, but there has been additional capacity coming through from competitors in different product groups. South Africa, actually, a pretty reasonable quarter. However, we were constrained by low inventories going into the quarter.
If you recall, a few months ago when we talked, we had some downtime in Gondwana. We went into the quarter with low inventories. I'm pleased to say that demand has actually picked up nicely towards the end of the quarter, and there's a very favorable outlook for citrus fruit exports out of South Africa this year. Hopefully, we'll benefit from that. North America, obviously, the story is the Somerset PM2 obviously closed and wasn't there in April, and then the subsequent commissioning. What it means, and the one thing that you should all bear in mind, is that you have your fixed costs at a mill, and when a machine is not producing at full capacity, you still have to absorb those fixed costs. That's partially what happens on PM2 in the early days when it's at relatively low production levels.
What is very important to stress is that the ramp-up curve on PM2 is behaving as expected. Yes, we started only at the beginning of May, and that was later than originally planned. We talked about that at the end of last quarter, but very pleased to say that it's progressing as planned after the commencement date or the production date. Graphic papers, broadly, the market declines have been as expected. In fact, in Europe, we've been able to grow market share, which is obviously pleasing. A lot of good work done there. The delayed startup, once again, on PM2, as I said earlier, did cause some disruptions at the mill. You also have the added impact, once again, of the absorption costing of fixed costs. When PM2 is not operating or at relatively low levels, you do get a higher allocation of fixed costs to your remaining graphic assets.
You must always bear that in mind. As PM2 ramps up further, that machine shares in a greater proportion of the overall mill fixed costs. Slide 15 is the regional numbers. I don't intend going through all the numbers on this page. Most of them are self-explanatory, and most of it I've talked about already, but maybe just at a very high level, obviously Europe challenged by the macroeconomic conditions, which has impacted on selling prices and volume. North America, volumes, some I say PM2 linked. In South Africa, on the containerboard side, low inventories to start the quarter impacted tons and selling prices. We've talked about the impact on dissolving pulp. That's at a very high level what impacted each of the regions. Moving to slide 16, it's the same numbers, obviously. Graphically, you can see that. I don't intend repeating everything.
You can see that there was the lower profitability. Hopefully, you can hear from what I've described that there are reasons to be optimistic with the ramp-up on PM2, dissolving pulp prices recovering. We're looking to take out costs in Europe. All of those will help. Slide 17 has the price strategy. It's a slide you will be familiar with. We continue to use our strategy, our price priorities to guide us. Clearly, in a time like this when profits are a little bit less, our primary focus is going to be on operational excellence. That's maximizing production, maximizing or optimizing efficiencies, looking for cost opportunities. On the broker of the business, there's not going to be investments, but we're going to get extra tons coming through from Somerset in the quarters ahead.
Ultimately, all the good work that we're doing, we're going to be doing on sustaining our financial health, which I've talked about already. We're being proactive, and I'm going to talk a little bit more about that. Slide 18 is the immediate priorities for us, and I've touched on some of these. The good news, when you don't have any major projects in a business like ours, a major manufacturing business, you can focus on optimizing production and getting things right and ultimately improving your usage at the mills, improving your costs. That's going to be a strong focus. The tariffs are a moving target. We continue to assess where they do impact us directly. We look for opportunities to mitigate. A major priority is this commercial ramp-up of PM2 at Somerset. It's going well commercially. We're signing up customers.
It's going as expected, both from a production side and a commercial side. Europe, it is tough. It is a tough environment, and we're being proactive. We've always been proactive about capacity utilization. We've made an announcement that we are in consultation to potentially close two of the smaller machines at Alfeld. That's an ongoing process, and we'll hopefully conclude reasonably soon. We've still got the ramp-up of Gratkorn, the label investment that we made a year or so ago. Once again, despite the challenging conditions, we are excited about that. Strong focus on cash generation. On the banking side, obviously, our leverage ratio has crept up a little bit. We have great relationships with our bank, long-term relationships. You can see from the debt slides that we've had much higher levels of debt in the past. They understand our business. They understand the cyclicality.
They know that we've made this investment at Somerset. We are proactively managing with them to ensure that we've got maximum flexibility with regards to the covenants that we have. We're confident that there won't be an issue there. The non-essential CapEx has been deferred, and I've touched on that a few times, and obviously, no dividend. Turning to outlook, and much of this I've talked about already, but just to recap on one or two things, DP prices started rising again, PM2 at Somerset ramping up as expected, looking to take out a little bit of capacity in Europe, proactively managing our costs. Turning to page 21, obviously, the tariffs, ensuring that we've got maximum flexibility and monitoring the situation, strong capital allocation, debt reduction, number one priority, and taking everything into account based on everything that we're seeing.
We estimate that the adjusted EBITDA for Q4 will be above that of Q3. Operator, I've gone through the presentation. I'm now going to hand it back to you for questions.
Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. We will now take the first question from the line of Brian Morgan from RMB Morgan Stanley. Please go ahead.
Thanks very much. Steve, you spoke about you in discussions to term some of the short-term debt. Can we read that as basically a done deal? Have you basically done the hard yards and it's just a matter of dotting the Is and crossing the Ts now?
Look, Brian, you know that's an ongoing process. We've got good relationships with the banks, and I have to go through final approvals and all that stuff, but we're confident. Yeah.
Okay. Cash balances, $200 million, that's down to 2020 levels. Is there any potential to raise some cash as part of this as well?
That's part of the process, Brian. We're looking at overall things. Obviously, I referred to the fact that the covenants, the short-term debt. We're looking at it holistically, and the engagements are good, and we're confident that those will be resolved.
Okay. Steve, is the bond market open to you, or is this just bank debt?
Hey, Brian, that's a hard question. I can't say too much, but theoretically, yes, that is an option as well.
Okay. Just moving on to an operational question, you did quite a few 18-month shots now, the last six months. Do we have a bit of a maintenance shot tailwind heading into 2026, or are there still some big ones scheduled for then?
Yeah. The good news is you don't have, and I'm looking at Mike, we don't have a Coke shot next year. That's a positive. We do have the Somerset shot, which happens in Q1. Sorry, what did I say? Sorry, I meant Somerset. Sorry, I meant Somerset. Somerset wasn't on an 18-month program. Somerset is spread across the year, right?
Yeah, across the quarter.
In Gondwana.
Yes. Q3.
Q3 next year.
Okay. Cool. That's all from me. Thank you.
Okay. Thank you. We will now take the next question from the line of James Twyman from Prescient. Please go ahead.
Yes. Thank you very much for the presentation. Could I start off by just asking three questions around CapEx? You've cut CapEx by $40 million for this year. Can you just talk around what that was in terms of what was cut and whether that's just projects that are being delayed or things that have been cancelled? Secondly, would you say $300 million is your expectation, or is that like a ceiling? It sounded a bit more like a ceiling from the way you were talking. Thirdly, of that $300 million, how much would you say is environmental spending? It's historically been around $60 million, I think. I'm wondering where that is in that. That's my first load of questions. Thanks.
What we cut, you know, you always have kind of smaller projects that give cost-saving opportunities and the like. We also regularly put in our budgets, and I think you know this, acquisitions of more forestry in South Africa and a little bit of the sustainability as well. It's partially tied back to your last, the third part of your question. Sustainability this year, or going forward, we're estimating at about $20 million - $30 million. What we tried to do on the first part of your question is any project that was not giving us paybacks of immediate paybacks, projects that were giving three or four-year paybacks, we decided to defer those a little bit. That's why we reduced. Similarly, into next year as well. To your second question, yes, you can interpret the $300 million as a ceiling. Hopefully less is what I'm saying.
Yeah. Okay. Thank you very much. My follow-ups, if I may, were firstly, in terms of exporting to the U.S., I think you've decided to put your prices up, calling it a surcharge. Can you talk around that? Obviously, if you're not really making money in Europe and then you have to sell at 15% lower prices, that's not acceptable. Could you give us some idea about, I don't know what you can say about the size of the surcharge and all of that? Secondly, working capital, $148 million out so far this year. How much of that do you think you can get back in the fourth quarter? I know there's always a big move in that in the fourth quarter. How much of that is the extra working capital that's needed for the Somerset PM2?
Yeah. Okay. On the first one, and I'll let Marco elaborate a little bit further, but you're right. You hit the nail on the head. The European business can't absorb that. That's why we made the decision that we did. That's why we've gone out with the announcement. We're not the only ones that have done that. Maybe just from a practical perspective, Marco, you just want to elaborate further there.
Yeah. I think, James, you're right. We have decided that this is just too big to absorb. That's not what the European business currently can afford. We are right now in the process of seeing what the practicalities around these, about the passing on of the tariffs is, and also what exactly the level should be. There are quite some intricacies that need to be covered, but ultimately, it is like a price increase. You need to see where you ultimately end, but the direction is very clear. We want to at least partially pass on some of the tariffs to the market.
Yeah. We can't absorb that, James. We're not going to do it. Marco and the team will work through this. Ultimately, we're not going to absorb it and ultimately pass it on. There may be a little bit of impact on volume, but that's the sensible decision to take. On the working capital, you're right. There has been an investment in the current year. Somerset PM2 is obviously ramping up. We need to build up inventories, and that's obviously raw materials and ultimately finished goods that you're making. There is a higher investment with that. Maybe, Glen, just if you want to just talk in broad terms, we can't give a specific number.
I can't talk in specifics, but there will be a reversal of that outflow, and it's going to be determined on the level of operations in September, the latter part of August into September. I can't give you more than that, James, but there will be a reduction.
I think what we're saying is there will be a reversal, but it's not going to be all of it, James, for the reasons that we've described.
Thank you very much. On the surcharge, you haven't said into the market the size of that surcharge as yet. That's what you've said, I think. Is that correct?
That's correct. It's very, very early days, James. We've set the direction, and the concrete steps will be decided on in the next couple of weeks.
Thank you very much.
James, we're not the only ones, right? Our competitors are doing it as well.
Some have got bigger problems in terms of exports to the U.S. than you. Yeah, understood.
Indeed. Indeed.
Thank you. We will now take the next question from the line of Sean Ungerer from Chronux Research. Please go ahead.
Good afternoon, Stephen. Can you hear me?
Yep. Sean.
All right, Steve. Just to follow on Europe, I guess just operationally, can you give us any insights into the current quarter? How are order books looking? Are we going to see any further tailwinds from lower pulp costs? Have you seen any steep change in underlying demand? I mean, just at face value, it seems like operating conditions are pretty tough, especially with a lot of exports now being dumped into Europe. I'm just trying to get a bit of a feel for what you should expect there. Thanks.
Yeah. I don't think you're going to see any material change in the short term from a trading perspective. It's kind of continuing as is. It's tough conditions. There's obviously excess capacity out there. The macro situation is not improving anytime soon. Obviously, we're taking action to take out fixed costs, but you have to go through a process, as you know. That wouldn't be felt immediately. I don't think it's getting markedly worse, but it's not getting markedly better either.
Okay. Cool. Thanks, Steve. That's it from our side.
Thank you. We will now take the next question from the line of James Perry from Citi. Please go ahead.
Hi. Thanks for the presentation. Just on dissolving pulp, you referenced obviously the $10 price increase after reducing by about $100 this quarter. What makes you confident that we really have seen the bottom? Are you able to share any insights as to what you've been hearing on the ground in China? I expect the momentum to actually pick up, or is this just some restocking after the industry disruption, do you think?
I don't think it's going to recover to $900 immediately. If you look at what happened when the initial tariffs were announced and the consequential impact, things significantly quietened down. Subsequent to that, there was more activity. Ultimately, the sellers in the marketplace have been able to realize a higher price. When we make these comments that we think the price is going to recover further, at the end of the day, it's based on economic fundamentals. The marginal cost per ton in this business across the industry is over $900 a ton. There are many suppliers out there that cannot operate or make losses in the low $800s. We're seeing demand from our customers in that environment. There's more activity than there was, say, a month or two ago. That's helped. Mohamed, maybe if you want to add to what I'm saying, I think we're cautiously optimistic. Ultimately, in the medium term, we think it's going to recover back up above the $900. It's just a case of when. Maybe, Mohamed, you can talk about some of the things you're encountering in the market at the moment.
Yeah. Sure, Steve. If I look at the drivers of demand for dissolving pulp, what we are seeing is an improvement. As you say, the activity levels have started to increase. That's reflected by one higher BSF operating rate that's gone up the last couple of weeks. We have seen a reduction in the BSF inventory held by the BSF producers as well as their customers. The yarn inventory levels are also improving. We are also going into a seasonally strong time. That also is supporting increased activity. Also in China, what we have seen, an increase in the exports of viscose fiber, which have hit a 13-month high. That is just supporting the higher operating rates. That should support increased demand for dissolving wood pulp.
Yeah. That last point that Mohamed makes is quite an interesting one because obviously, most of the viscose that was manufactured in China would have been sold to ultimately domestic manufacturers of clothing. Obviously, with everything that's been going on, what you're seeing now is that viscose producers in China are now exporting the raw viscose product to be manufactured in other countries into clothing.
Okay. That's really helpful. Thanks. On graphic paper, you said that Sappi's been increasing its market share. Would you be able to shed any light on the approximate size of those gains? Do you think it's one-off or expecting consistent share gains in the coming quarters?
It's been progressive. We can't get too specific, you'll appreciate, but certainly both on coated woodfree and coated mechanical, we've actually gained market share. That's been progressively over the last two or three quarters, right?
Correct.
Marco, I don't know if there's anything you want to add there.
No. It's certainly not by big steps. It's a progressive development, but certainly pleasing to see over the last couple of quarters. Yeah.
Okay. That's useful.
Thanks very much. Without giving you specific numbers, to put it in context, we're talking a few percentage points. We're not talking double-digit type increases.
Maybe if I can, just, yeah, there is on the mechanical coated side, we have seen some of the players checking out in Germany particularly. There is always a plan to capture some of that volume, which would be a one-off, but otherwise, it's very progressive and a steady development.
Okay. Much appreciated. No more questions from me.
Thank you. We will now take the next question from the line of Reinhardt van der Walt from Bank of America . Please go ahead.
Hi there. Afternoon, Stephen and team. Just want to circle back to the conversation about the BWP market. I appreciate the point that there are some sort of, some signs of unimproving. Just looking on the capacity side, it sounds like Brussels is looking to do some more dissolving pulp runs into the end of this year. Is there any signs that maybe the cost curve is flattening a little bit here and that we should be maybe thinking less about the $900 per ton level and maybe thinking about something slightly lower than that as the marginal cost?
Yeah. Look, when we look at the cost curve, we do take that into account. The Brussels stuff that you referred to has already been in the market, right, in recent quarters.
If I can just add, Steve, the swing from at Brussels to dissolving pulp is required because their fiber plants in China are also starting up new capacity. It is designed to feed their new livestock capacity that's starting up in China.
It is being absorbed. I've got to say, maybe said a different way is we don't come up against them in the market.
Yep. Got it. Appreciate it. Maybe just on the operations side, can you just remind us what the fixed cost recovery of Somerset is going to look like over the next couple of quarters? If possible, can you give us a sense of where EBITDA breakeven sits in terms of number of volumes?
What I would say to you is, look, the best way to think about it is in terms of volume. We've said in the past that we always knew that Q3 was obviously the initial ramp-up. It's far too late for them to thought, but we knew that was the case. As we go into Q4 and we look at our production, we're still confident that production for the quarter will be at the levels where that machine was previously. Clearly, there are different dynamics at play with regards to selling prices. One was a graphic paper and the likes, and now you've got packaging. From a volume perspective, you are back at that volume. As we look into the next financial year, each quarter, and again, this is consistent with what I've said previously, each quarter, the volumes progressively get better. That's a natural ramp-up curve, both technically and commercially. The Somerset mill will progressively get better. We're going to have the shot in Q1, which you have to take into account. The paper machine is still producing, but the pulp mill and the likes will be done. Mike, I don't know if there's anything more you want me to add there.
I think you're spot on. I think the thing I would just remind everybody, we have a brand new pair of machines in a brand new market. Now, we're experienced in the market. Our commercial match for the grades matched our very first sheets that we brought to the market. We're extremely pleased with the quality, and we're right on the ramp-up curve we intended to be on. The ramp-up goes through 2026, but it's steepest right now. We'll see improvements through this quarter, and then it'll gradually work up to the full rates over the course of 2026.
Got it. That's very helpful. Thank you. Can you maybe just give us a comment on boxboard market conditions in the U.S. at the moment? Looks like pricing is relatively robust compared to containerboard.
Mike, you want to go for it? Generally, yeah.
The prices on containerboard are more or less holding flat. We've seen some challenges as we've been bringing the market on, bringing the volume on with PM2. They're where we expected.
If you go back a step, the markets that we're looking at specifically in the FDA, the trend line has continued the overall market growth. We're looking at about 1.5% - 2%. Pricing, obviously, there was a little bit of pressure that came prior to us completing PM2. As we've come to market, the competitors see that. We can't say too much about that on a call like this. Broadly speaking, the markets, we're confident of filling the machine as we ramp up. The economics are holding up as we would expect.
Perfect. Definitely. Thanks.
Thank you. As a reminder, to ask a question, please press star one and one on your telephone. We will now take the next question from the line of Ephrem Ravi from Citigroup. Please go ahead.
Thank you. Most of my questions have been answered. Just one fairly high-level hypothetical question, if I may. If the rate of debt reduction is lower than expected, $1 billion is, you know, half of your current sort of net debt, and you know, you need to generate at least probably $500 million of EBITDA per year to kind of, you know, basically be cash break even, I suppose. Given that kind of scenario, how long would you wait before you get to that $1 billion? Would options like an equity raise or asset sales be on the cards if the net debt is not below $1 billion by, let's say, two or three years by 2028? Thank you.
Yeah. We're not going to do an equity raise. You don't have to worry about that. Look, what I would say to you is, you know, we're going to focus on what we can control. We're going to have the extra volumes coming through on Somerset, which is going to, and we're not going to have a repeat of obviously the downtime that we had on the machine this year, which if you add the two quarters together, you're, you know, you're over $40 million. Based on what you know now, the lower CapEx, you are right in terms of your math. We are confident that the EBITDA can, you know, can be higher than that, and there will be a reduction, you know, a reduction in debt progressively. Ultimately, it may take longer to get there. We're obviously focused on getting there within the next three years. If it takes a little bit longer, you know, we will maintain our discipline.
We're not going to go after any new projects. Our immediate priority is to reduce debt and maintain, you know, maximum flexibility. I think the answer to your question is it may take a bit longer, but, you know, at some stage, we're confident that DP prices will recover. You'll have the higher profitability from Somerset, from the higher volumes, and the EBITDA will be higher.
Thank you.
Thank you. We will now take the last question from the line of James Twyman from Prescient. Please go ahead.
Yeah. Thank you very much. Just a few follow-ups from me. Just in terms of PM2, please, the $22 million cost that you refer to, what does that really mean? Does that mean that that's like the EBIT loss that the machine is making or the EBITDA loss? Or just trying to understand whether, you know, in Q4, that should mean that there should be an improvement of at least $22 million, or, you know, might it be not quite that much? Then related to that, at the moment, your issue with PM2 is production. There'll come a point where it's more about getting the customers to engage. Otherwise, you're just sort of making cups and plates, which isn't obviously the plan. How are you feeling about the customer interest at the moment? Thank you.
Yeah. I'll talk about the numbers on the EBITDA, and I'll let Mike just share at a high level how it's going with the customers. Yeah. The $22 million is essentially the EBITDA on the lost production. Indeed. As you ramp up, James, and this is normal, right? On a big machine like that, you have, you know, you're testing different grades. There's a little bit of start and stop and that kind of thing. I think as you think about Q4, it's difficult to be too definitive that you would get all of that profit back, but certain, because bear in mind you're comparing it to what, because the machine was down, what you lost. I think it will take time. It may not be over to the $22 million. Mike, on the customer side.
So our ramp-up is, as I had mentioned earlier, the qualification process has gone extremely well. Everything we've taken to the field as we've worked through the whole grade structure, our commercial match between PM1 and PM2 has been spot on. Everything that we've planned in this paper machine has worked just the way we had on PM1. We've had several of the new customers and existing customers in to see the machine, and there is a huge amount of interest. I believe they see a brand new state-of-the-art asset with state-of-the-art technology putting out very high-quality products. Our confidence is high that we're going to be able to work our way into more than just the food service board business. I'd offer that we already have much of that qualified on PM1, and we baseloaded PM1 with food service board to seed PM2 startup. We'll be bringing some of that volume back, and we feel confident that it'll be well accepted in the field.
Thank you very much. Thanks for your time.
Thank you. I would now like to turn the conference back to Stephen Binnie for closing remarks.
Thank you. I just want to take the opportunity to thank everybody for joining us on the call today, and we look forward to discussing our year-end results with you in three months' time. Thank you very much.
This concludes today's conference call. Thank you for participating. You may now disconnect.