Good day and welcome to the Sappi FY 2026 results call. At this time all participants are in listen-only mode. After the speaker's presentation there will be a question and answer session. To ask a question during the session by the phone, you need to press star 1 1 on your telephone keypad and you should hear an automated message advising you that your hand is raise. To withdraw your question please press star one one again.
Please be advice that today's conference call has been recorded. I w ould now like to hand you over to your host of the day, CEO Steve Binnie. Please go ahead.
Thank you, operator and good day to everybody. Thanks for joining us. As always, I'll go through the investor presentation calling out the page numbers as I move along. To start, just on page 2, just to draw your attention to our comments around forward-looking statements. Moving to slide 3, which is a high-level summary of the quarter and the results. It's fair to say it's been a very challenging quarter, p erhaps, to just focus on some of the larger items that have influenced the performance. It's really 2 broad themes.
Firstly, it's selling prices were down across all the regions and linked to the weak market conditions. More specifically, the DWP price was substantially lower than a year ago market prices. $130 actually lower than a year ago t hat had a substantial impact. We've seen packaging prices globally come under pressure which has had an impact on our, on our markets, even where demand has been pretty good. Unfortunately, that knock-on effect of the lower prices has influenced those markets, too.
The other big theme is the exchange rate and that specifically the ZAR dollar exchange rate is we know it's predominantly linked to dollar weakness and which is ultimately ZAR strength. Obviously us being a South African manufacturer with revenue in dollars and costs in ZARs, ultimately that squeezes margins significantly. Even in Europe, when you convert your costs to dollars , that also increases your costs on a relative basis. In the quarter, we also had the Saiccor shut.
That was about a $10 million impact. We had a couple of non-operational, once-off write-downs. Firstly, on the forestry fair value, we have to use market prices to value our forests and we typically benchmark and use the timber export prices out of South Africa into global markets. They're not our prices, t hey're woodchip prices. Interestingly enough, the dollar price was unchanged compared to the prior quarter. Unfortunately, when you convert that into ZAR and the ZAR strength that necessitated a write-down of our forests.
Then we had impairments. The main area where we had impairments was on our European business and mainly in our European graphic business. As you know, we are gonna be selling assets, our graphic assets into the UPM joint venture, if that's approved. A significant proportion of that write-down related to those assets t hen we also had a write-down of our Matane mill in the U.S. Anyone following the pulp markets and specifically the high yield listing price has also been weak.
We wrote that down as well. Moving to slide 4, we thought it would be important to just focus on a few of the big drivers of our earnings. I've already touched on these 2 themes, the lower DP prices and the ZAR dollar exchange rate. We've got data here going back t hese are our pulp segment selling prices. When you go back, we've got going back 10 years or so, you can see that they always moved in opposite directions.
For the first time, over the last year or so, unfortunately, they've moved in the same direction, which has magnified the impact of those 2 key variables. We've got some numbers down below which talks to their impact on our earnings, but y ou can see it's vast. Specifically in South Africa, that impacted on the profitability of our South African business. Moving to slide 5 which is our, the ramp-up of our, Somerset 2 volumes and our packaging volumes in the U.S. and I'm pleased to say that we saw good volume increase.
Particularly towards the end of the quarter, we saw an acceleration. I'm actually pleased with the progress that we're making and, you know, we would expect that to continue in the quarters ahead. By the end of the quarter, we were very close to the start of curves that we put together when we approved this project. Making good progress there, gaining market share and I'm confident that that will continue in the quarters ahead. Unfortunately, the SBS market prices like all global packaging markets have been under pressure.
If you compare the market prices quarter-on-quarter, you can see that they were down about $100 a ton compared to the last quarter, y ou know, that has a big impact on profitability. All in all, very pleased with the ramp-up, t he volumes are going well, but market price is in the short term under a little bit of pressure. Slide 6 is our earnings bridge from a year ago to now, it's the same themes that come through. Big impact on selling prices, negative.
We've done a lot of great work on taking costs out of the business, which offsets some of that, but clearly not all. The currency, you know, when we compared the currency conversion, that was a negative as well which ultimately led to the USD 52 million EBITDA that you saw compared to what was there in the prior year. Moving to slide 7, cost inflation which is obviously another big driver and i n the quarter that we just reported, we did see a rise in a number of our key costs.
Even before the Iran War started, things were starting to increase, but that was exacerbated when the war broke out. It's had an impact on the quarter, but we thought it would be useful just to share with you what it meant for the quarter ahead. You can see that there are some significant rises. The one we're most concerned about is the delivery cost because that's a big number a nd fuel, we all know that fuel prices, oil prices rising, shipping costs are rising as well a nd that's got a vast impact.
But also a number of our raw materials that we're using in our mills and we list 3 t here, 3 big ones, sulfur, caustic, and latex. With the constraints on shipping globally and what's happening in the Hormuz Strait, a lot of that product, particularly sulfur, is not really flowing a nd there's a bit of a scramble to get your hands on these products, y ou know, things like latex is obviously linked to the oil price, t hose have been rising substantially.
You know, when we take these all into account, we estimate quarter- on- quarter, that that's about a $30 million increased cost. It's for that reason, I know there's probably some questions about why our outlook statement would be negative because other things are improving. Selling prices for DWP are going up. Graphic prices are going up. Unfortunately, you know, when you get a $30 million increased cost, that is why we had to be cautious with our outlook statement.
Moving to slide 8, is our net debt leverage. Obviously, with the lower profitability, our leverage ratio has increased 6 times, y ou know, it's very important with that in mind that we proactively negotiated a suspension of our leverage covenant. I'm very pleased to say that that was achieved t hat emphasizes the strong relationships with the banks that we have, our partners, and their understanding of our business, I'll touch on that in a little bit more detail.
Pleasingly, despite the lower profitability, our debt, if you look across the last 4 quarters, our debt has actually been very stable. That emphasizes how the discipline that we're bringing in despite the low profitability that we are able to proactively manage our debt and keep it at these levels. I think that's a big achievement despite the low profitability. Moving to slide 9, just has our debt maturity profile, y ou know, we don't have any major maturities in the next 18 months or so.
The next big one is our 2028 bonds and we're just monitoring the markets a nd we'll pick the optimal time to when to refinance those. Moving to slide 10 which just has the cash generation c learly the lower profitability impacting the cash generation. As part of our back to basics and our focus on strengthening the balance sheet, we've brought our CapEx down. We're looking at about $250 for this year and a similar number for next year.
Moving to slide 11, it's a theme that I've touched on already, but really very pleased that we were able to proactively engage with our banks. We got unanimous support from our bankers t hey've been with us for a long time. They understand Sappi, they understand the markets that we're in and they're very supportive, so v ery pleased with that progress. In terms of our flexibility, we have $800 million of liquidity across cash on hand and our unutilized RCF facilities.
We're pleased with the liquidity that we have and we believe that gives us the flexibility to negotiate through these tough times. Maybe just one point on the covenants that suspension period is through to March 2027. Also, we did talk about this at the end of the last quarter, but it occurred during this quarter. We moved out some of our short-term debt, once again emphasizing the strong relationships with the banks.
As I illustrated earlier, that improved our maturity profile. Strong focus on back to basics, w e talked about CapEx. On the cost front, yes, there's a lot of challenges and I've called out the numbers for you, but we have been able to implement a number of cost saving initiatives. We've been giving you updates from prior quarters. A lot of it's in Europe, as you know, w e took out some machines and some capacity, some support costs and it's not just that region, other regions and we've been able to achieve $71 million savings year to date.
Slide 12, is our Thrive strategy still very relevant. As I keep emphasizing, back to basics, back to focus on what we can control, around operational excellence, sustaining our financial health and discipline, trust across all our stakeholders remains important, with our people. They're aligned with what we're doing and what we're focused on.
Ultimately, in terms of growing the business, I think, you know, one highlight of our results despite the weak performance is our volumes are actually pretty stable and we've been ramping up in the U.S. as I mentioned. You know, we've taken out a lot of capacity in graphics over the last few years, but our volumes are still stable and I think I've got a graph on this now to emphasize that to you. Move to slide 13, something you've seen before in terms of our joint venture with UPM.
It's progressing as we would have expected, finalizing the final terms, and still committed to ultimately we've got to get shareholder approval and then targeting to complete the transaction by the end of 2026, as we've talked about before. The key deadline or the key influencer of the timeline is the regulatory approval on the competition side. That moves into slide 14, the next one. Just to say it's progressing as expected, w e knew it was gonna go into phase II.
With a transaction like this, of this scale and significance, it was always gonna go to a phase II investigation. We continued to engage with them and ultimately we think we've got a strong case and looking at a final decision closer to the end of this calendar year. Turning to the segments and page 16. Firstly, on pulp, it's clearly been a challenging time and it's for the same factors that I've already described, the combination of the lower DWP prices and when you convert that, the ZAR dollar exchange rate.
You know, what I would say is that market conditions for DP have improved in recent times. Didn't come early enough to influence on this quarter, but we did see $845 a ton by the time we got to the end of the quarter. Most of the quarter, I think it was under $810, so had very little impact. Subsequent to that, you'll see in the outlook statement, it's in the last few weeks it's gone up to $880 a ton. That is helping us and we're feeling good about the demand and we're feeling good about the outlook on pricing.
With taking all that into account, it meant that, unfortunately for the quarter that we've reported, it was close to breakeven. In the packaging segment, I think the big story here is that volumes have been better, ramping up in North America and I've already described that to you, a good progress and certainly accelerating. Europe, actually, we've seen nice volume improvements. In South Africa, demand continues to be healthy. Unfortunately, these global markets are all interlinked.
You know, we know there's excess capacity in Europe and selling prices across the globe have been under pressure and that's influenced all of our markets. In South Africa specifically, once again, the ZAR dollar exchange rate plays a role because that makes it makes imports cheaper on a relative basis. All in all, feeling good about demand and feeling good about volumes, but clearly, we need to get selling prices up as we move forward.
On graphics, page 18. Firstly, to my point I was making earlier, if you look at the 3-year volumes for graphics. They've been relatively stable. That's despite us taking out Stockstadt, despite us taking out Lanaken, closing a machine at Kirkniemi, you know, converting a machine at Somerset, other smaller capacity taking out. We've been able to keep our volumes and improve our market share, so we are very pleased with that. We are proactively managing it. It's not a great margin, but it's a reasonable margin.
Europe, slightly lower than the U.S. in terms of relative margins. One of the tricky aspects, as we know in Europe, is there is excess capacity t hat has influenced their margins. Having said that, you know, we're pretty proud of what we've done here and, you know, we've always talked about proactively managing graphics and I think this page illustrates that we've done a reasonably good job here. Page 19 talks about the regions themselves and all these things we've touched on.
Volumes, okay, u nder the circumstances, okay. North America, obviously last year, we had the graphics before the machine conversion, but we are picking up the volumes now as we ramp up on Somerset PM2. The big theme is the prices, y ou can see that that's coming through. On variable costs, although Europe and South Africa are down, when we consolidate those, when you convert that all back to dollars, it does have an impact. For example, the EUR is down 11%, but our costs are down 7%.
The ZAR is 12% stronger, our costs are down 5%. When you bring that all together, that's why variable costs at the group level, you don't see that same decline. Slide 20, our ESG is an important part of who we are and why we do business. A number of awards, we won Best Employer at Forbes once again across a number of categories. We've won various sustainability awards and our forestry certification is good. Our B-BBEE status continues to be at the top level. A lot of good work being done on ESG.
Moving to the outlook statement and slide 22. Firstly, I've already touched on this, DP prices have picked up and demand is good. I would argue that some of the challenges with the Iranian War are helping us because there is some concerns about supply chains and getting product, t hat will help us. The volumes in North America are benefiting as we ramp up that curve and we are confident that we can continue to do that as we've continued to promise to you.
Pricing is the headache that we have across all our 3 regions on packaging. Graphics, we've announced price increases in Europe and in the U.S. Firstly in Europe, the first price increase was effective first April, we're making good progress. We've announced the second one for mid-May, we're working on that, i t's obviously early days. In the U.S., we announced also for early April, coated free sheet and labels. You know, once again, making good progress. Unfortunately, I've touched on it already, is costs.
I talked about the $30 million impact from those key variables which gave us the reason to be cautious. We have a big shot in Ngodwana in the quarter, $23 million. It's important to call that out. We did have Saiccor in the last one, this is a bigger one than the Saiccor one. I think we're getting a lot of benefits from our back to basics, taking out costs. Elsewhere and the discipline around our balance sheet and CapEx. Ultimately when you take that all into account, the most important factor is the cost that I talked about.
Because of that, we had to be cautious and for that reason, we are saying that Q3 would likely be below. We are getting good traction on selling prices and cost savings elsewhere, you know, not enough to offset yet those higher costs. For that reason, we say it will be below the Q2 number. Chair Operator, That's me gone through the investor presentation. I'm now gonna hand it to you for questions.
Thank you. At this time we're gonna conduct a question and answer session. As a reminder, to ask a question via the phone, you'll need to press star 1 1 on your telephone keypad and wait for your name to be announced. To withdraw your question, please press star 1 1 again. We're now gonna transfer to our first question. The first question comes from James Twyman from Prescient. You're live. Please go ahead.
Thank you very much. Thank you very much for the presentation. I've got, let's say 2 to start with. The first one is, you talked about a $30 million increase in costs. I assume that was in the last quarter. Could you give us some idea about what you're expecting for this quarter in terms of why you're, you know, more cautious than you would have been?
You know, are we looking at a similar sort of number? The second one was in terms of price recovery, we are seeing prices going up across the board. Are you seeing that for SBS carton board in the U.S. as well? That's my first couple, if that's okay.
Yeah. On the costs, that number I gave you was Q3 compared to Q2. The reason I called it out to you was, we were getting a lot of questions about our outlook statement and we wanted to show you why we were being cautious. If it wasn't for that cost rise, we would have been saying our earnings was up. It was important that I pointed that out to you. These are big jumps. The logistics, shipping, and fuel costs is a big chunk of that $30 million, y ou know, it's not unique to Sappi, but it's a vast impact.
Clearly, if there was to be resolution in the Iranian War, you know, maybe that could come down. That's potential, but what we felt was prudent to do was to call out to you what we've included in our assumptions.
Thank you.
Sorry. Sorry. Sorry. James, your second question. No, not yet on SBS. We're getting good traction, as I said, on graphics and labels, but not yet on SBS, y ou know, we're in a ramp-up phase that's our focus and at this stage, we're not yet seeing price increase.
If I could follow up with a couple more. In North America, that was where the price was, I guess, in the quarter. But if you look at the sort of details, you sold a lot more and the prices did go up a little and the costs overall did come down a little as well. I think, given that we were expecting you to be switching quite a bit of production back to coated fine paper where the demand is, it was surprising that that's still, you know, in a loss-making situation.
Look, what I would say here, a couple of comments on North America. Well, firstly, remember, North America has pulp as well. DW, you know, that overall the pulp segment was close to zero y ou know that relatively speaking, the costs are higher in the U.S. versus South Africa. That was a contributor to why North America overall profitability would have been less. You know, as we ramped up the volumes, you are still not at full operational efficiencies, y ou know, on selling prices, there's a little bit of a mix issue going on there.
Specifically, on, in the SBS segment, you know, we gave you a slide on the market, y ou know, SBS prices were lower than, so when you add that to everything else that I've described, that explains the profitability in the North American region in the quarter, y ou know, obviously, as we move forward, we're, you can hear that we're confident of growing our volumes. That helps with fixed cost absorption. We're also able to optimize our machines because our PM1 machine in Somerset is a swing machine.
You know, if we can make a little bit of higher margin graphics as it currently stands, we can also do that as well. We are more optimistic, y ou know, and maybe one last comment and maybe Mike can elaborate further. We're not at optimal operational performance at the moment, not necessarily linked to PM2, but there's further improvement to come and maybe Mike can expand further there.
Thanks, Steve. We have had on the assets other than PM2, some re-reliability challenges that we put behind us in the last month and a half. We expect to see improved performance there which is specifically around graphics volume. In addition to that, you referenced the PM1 ability to swing to graphics, but that's something in the line of 10%, maybe 15% of the volume max as w e're still meeting customer needs for SBS. PM2 has been running very well and is right on our startup.
You know, we're expecting to keep that machine full going forward with where things are. We're pretty optimistic that, you know, the trends for manufacturing in Somerset are on track. I just offer one other caution. The startup curve improves that last, give or take 15% of machine production over the next full 12 months. That's not a light switch that comes on, i t's optimization of a lot of different processes. We expect to be by the end of this year at 85% of the nameplate and then building from there.
Thank you very much. I'll hand back.
Okay. Thank you very much. We're now gonna move on to the next question in the queue. This question comes from Brian Morgan from RMB Morgan Stanley. Your line is open.
Hi guys. Thanks very much. If I may just following on from that last point, you are talking about 85% utilization by the end of this year. At what stage should we expect to start seeing a sort of a headwind from adverse operating leverage becoming a tailwind? Would you expect that, you know, in 2027? Is that something that we will see this year?
Sorry, I'm not quite sure I get your question, Brian. Are you saying?
As you ramp up PM2.
In terms of the fixed cost absorption and yeah, look, I think broadly the curve is going well. We've accelerated, w e were a little bit behind and we've accelerated and as Mike has said, we've done a nice catch-up in recent weeks. I think from a cost and an efficiency perspective, certainly, you know, as we get to the end of this financial year and into the early next financial year, those benefits of the higher volumes will come through. The challenge, Brian, is on the selling price front.
You know, you'll appreciate we are growing market share and we are taking on new customers and we have to manage that very delicately. We're still, you know, we're a growing player in the market, but, you know, there's other players there, and, you know, selling prices are what they are. Unfortunately at the moment, they're lower than we would like them to be. There's been a lot of capacity coming out in recent weeks. As much as over the last couple of months, 300,000 tons of capacity across a couple of competitors.
That, you know, that's gonna help things, y ou know, as the demand continues to be solid and as we strengthen our position, you know, that may create opportunities. As things currently stand, selling prices, as I said earlier, are lower than where we'd like them to be.
Okay. Cool. Thanks, Steve. Can I move on to Europe? The volumes look pretty good. They've had some price increases, which you've announced on the graphic paper side of things. Is the performance on volumes front-end loading by customers ahead of the price increases or is this actual demand?
No, no. We saw order activity good even ahead of the price increase announcement. Overall market volumes have been better than we expected this year, actually, and we've been gaining market share. We don't think that's front-loading. Clearly, we gave you progress on the first increase.
The second one, you know, we're basically implementing and, you know, with any price increase, there's always a trade-off between price and volume and that's what we need to delicately manage, y ou know, Marco, I don't know. Anything more you want to say?
No, Steve. The market has been developing well since the beginning of this year already. It's just helped us implementing the price increase which of course, was basically cost-driven as well. No, it's a good situation right now from a market perspective.
Okay.
Super. Thank you. Do you have any timing on the phase II investigation?
Brian, still the same timeline, right? We are, you know, we're conservatively saying that we'll be completed by the end of the year. There was no surprises in the announcement.
Yeah.
Yeah, nothing new, you know.
There's no deadline, there's no deadline for the EC, right?
No. No.
Last question from me.
Well, I'd say, you know, I think we said in the announcement that, you know, we're getting close to signing any transaction agreements and then it's, you know, getting through that second phase with the authorities.
Cool. Thanks, Steve. Last question, if I may. With the impairments that you've taken, can you give us any guide on depreciation charges going forward?
Yeah.
Brian, the total impairments was just over $220 million. We've got an average on our heavy machinery or we've got an average depreciation lifetime of 15 years. We work it out from there.
Some of it's goodwill though. Yeah.
No, the goodwill is excluding that.
Oh, okay. All right.
The goodwill is on top of that.
Okay.
Okay. That's super. Thank you so much.
Thanks, Brian.
Thank you. We're now gonna move on to the next question in the queue. This question comes from Sean Ungerer from Chronux Research. Your line is open.
Afternoon, Steve. Can you hear me?
Yep. Hey, Sean.
Excellent. Sorry to harp on the pricing environment, just taking a step back to specifically SBS in the U.S. No price increases sort of expected, sort of as we stand today, are you still seeing pressure on prices or are they stable? That's just the first one around SBS.
Yeah, stable at the moment. As you say, we're not seeing increases, but neither are we seeing decreases at the moment.
Okay. Cool. Thanks. If I just listen to the sort of commentary on the call as well as your other sort of competitors in the U.S., sort of by the end of the year, it sounds pretty optimistic around sort of supply/demand balance, resolving itself, assuming sort of demand keeps at the pace it is and a couple more closures. I think everyone's talking about gaining market share, yourself included. Is that displacing imports?
I mean, are imports that big that everyone's gaining market share? Is there any sort of insights you can provide on that? Thanks.
Yeah. Look, a couple of comments. There has been 2 capacity closures. You know, you would have seen that in our competitors' results announcements. You've seen our volumes go up. Not everybody's volumes is going. That means we're taking market share. Secondly, on folding boxboard, or imports, folding boxboard imports. Yes, the tariff helps a little bit and we have seen that as an opportunity for us as well.
Okay, great. Thanks, Steve. Just going back to pricing around graphics, in terms of gaining traction, was that both in North America and Europe or mainly North America? If I just look at the sort of prices that we have available to us comparing sort of spot in May compared to the Q2 average, coated woodfree in Europe sort of flattish and coated mechanical is up about 2%. I'm just trying to tie that back.
Yeah. Yeah. As what I'll do is I'll give Mike and Marco an opportunity just to talk broadly in their markets. As I indicated earlier, all those announcements were effective from April. Were not in the quarter that we just announced. Maybe Mike, you just wanna talk on your side?
Coated free sheet in North America, April second, we had a price announcement for an increase. At the same time, we had a slightly smaller increase on C1S, our label grades. Those are as of the second of April and we're in the process of implementing that.
Yeah. Steve Binnie, very similar in Europe, where we announced first half of February for an effective increase beginning of April as well, second of April, basically implemented. You will see it in the coming weeks in, I guess, in the industry pricing stats, Sean . In Europe, there is a second announcement as Steve alluded to which we're busy implementing right now. That's both for our graphics as well as certain packaging and specialty grades. There is a tendency across the board that prices will increase further.
Okay, great. Thanks. Just last one from myself, Steve. Do you mind giving sort of any update on what's happening with wood costs in S.A.? Obviously, you've got the counter to that in terms of the forestry fair value adjustment, but in terms of your sort of wood costs that you're obviously purchasing in at the moment, I'm assuming those are also down?
Yeah. Yeah. I'll let Graeme talk about it further. Just to reemphasize what I said earlier there, a lot of the valuation that we've done and is built off the woodchip prices, the export market. Those are, as we stand, unchanged in dollars. When you convert that back to ZARs, you know, that was why we had the knock. Specifically to the woods that we're buying externally in South Africa, Graeme, do you want to talk about it?
Yeah. Certainly all our third party contracts for wood supply into our mills in South Africa, that pricing is set off the woodchip export price effectively. That price was adjusted downwards in the quarter as a result of effectively the stronger ZAR. We are seeing lower wood costs offsetting that certainly into the third quarter a s part of the additional cost there obviously is the cost of getting timber to the mills has increased with fuel costs. Certainly third party purchased wood in South Africa has become cheaper in line with woodchip export prices.
Okay, thanks, Graeme. That's it from my side. Cheers.
Thank you. As a reminder, to ask questions, please press star 1 1 on your telephone keypad. We're gonna move on to the next question in the queue which is from Detlef Winckelmann from JP Morgan. Your line is open. Please go ahead.
Hi, guys. Thanks for taking my question. Maybe my first one would be regarding U.S. SBS. I mean, you mentioned that you are taking some market share from everyone else. At the same time we are seeing obviously SBS prices quite, you know, depressed at the moment. I'm wondering, you know, is that market share gain quality led, i.e. your quality of product is better than everyone else's? Or is that being done through pricing?
Secondly on that, I know there's a period, you know, call it back end of last year, where people were pricing below what we could see in RISI. I'm just curious if you're seeing any of that in the market at the moment. Thanks.
Yeah. Look, the volume increase on our part and I'll let Mike go into more detail. It's not us that's been driving the price down. It began to happen before we came to market and we've been very disciplined. A lot of, a lot of the increase volumes that have come through is linked to our offering the quality of our product and the relationships that we've been building. We've talked about it many times.
We think we've got the best, the best machines in the industry. I think the customers are supporting that view. Specifically on pricing below market, Mike, I haven't really heard that, no.
Sure. You know, I'd offer that technically you look at our assets, our product consistency, uniformity and, you know, the overall SBS that we're making is extremely well received by our customers. Extremely happy and it's very rare for us to not get follow-up after we've run trials. It's been really well received and performing very well in the field, y ou know, our growth has been very consistent. Now, when the tariffs first came through, that opened a lot of doors. We did see quite a bit of opportunity there.
That market is a growth market. It's not a market that's in decline like graphics. There's a 1%-3% growth, and we've been seeing things improve. You know, as we stated earlier, you know, right now, we are on the curve and you know, our orders are full. We're moving forward, and we've got to continue to grow that as we improve the machine run ability or the machine uptime, y ou know, it's been consistent and, you know, I don't know how to frame it any other way.
Yeah. Thanks, Mike. If I can ask one more, I mean, regarding pricing in the U.S. I mean, we're seeing SBS prices and CRB prices virtually the same. I mean, I would argue after yield, et cetera, you're probably finding SBS is almost cheaper than CRB today yet a higher quality. Are we seeing any substitution from customers away from CRB into SBS? Curious, you know, is that actually quite easy to do or is it, you know, quite a decision for customers to do and there's a cost involved?
Yeah, look, you are right. The prices are very close and it probably does create some opportunities. Yeah, Mike.
Yes, it has. We'll leave it at that.
Yeah. Yeah, we can go into detail there, Detlef, as you know, but it does create opportunities.
All right. Thanks, guys.
Thank you. We're now moving on to the next question in the queue. This question comes from Saul Casadio from M&G. Your line is open. Please go ahead.
Yes. Hi, thanks for taking my question. The first one is on, you mentioned the effects. You singled out the importance in the numbers. I was wondering whether you could kind of single out the impact in the quarter of the effects move, particularly USD/ZAR.
Yeah, look, we've got that bridge, which is obviously to a certain period. I think the best way to think about Forex specifically, ZAR dollar. It's something that we've consistently said and we still think is relevant. That's for every $0.10 move, ZAR dollar on an annual basis, that's about $4 million. The ZAR, Glen, a year ago in Q2 was?
The average rate was 18.50.
In Q2 of last year?
Q2 of last year, yeah.
Yeah.
This year, this one is 1,636.
You know, that's give or take, you know, ZAR 2. You know, you multiply that by, you know, 20 by 4, then it's one quarter. You're talking in this quarter alone, $20 million just on that, just on the ZAR dollar exchange rate.
Okay. Okay. You know, considering your division results and looking at the results for the chemical cellulose, wondering whether the move in the FX is big enough to shift the position of Saiccor on the cost curve. We used to think of Saiccor as a first quartile, wondering whether that might shift with the FX moving in the wrong direction.
Look, what I would tell you is other currencies have moved as well, y ou know, the Brazilian real has strengthened substantially, t he Chilean mixed currency has strengthened substantially. In effect, what it does is it moves everybody, right? Including the Chinese, y ou know, the Chinese are now, you know, sitting, you know, with a stronger currency as well. Everything's relative, but I don't think it's grossly changed the relative positioning.
it certainly, you know, it certainly squeezed margins across the board. I think that's another factor that's contributing to the higher selling prices that we're seeing over the last few weeks.
Okay, thanks. For your Q3, fiscal Q3 guidance, so you've given a sequential cost increase, but not a sequential, let's say, price impact from your, from the various actions in terms of increasing price. Was wondering whether that $30 million that you have provided is net of those price actions, or we should factor in if we have to, you know, have a sense of what, where Q3 might land, we should also factor in some positive coming from the price increases?
Yeah. Look, you can imagine, that's a much more delicate number and, you know, it's been, my colleagues and I have talked about, our confidence in terms of implementing price increases. I can't give you a specific number, y ou've got the DP number. You, you know where markets are at and the math, you can do the math on that one.
Yeah.
We are confident on the graphic side. You know, all I can say is that if we didn't have the cost increase, we would be sitting here talking about, you know, higher EBITDA. We've been cautious because of that $30 million impact that I talked about. It would have been higher even in spite of the, you know, the biggest shut in Ngodwana, we would have still been higher. That gives you a broad feeling of how much additional will come through in selling price increases.
Okay. On this point, do you think that, you know, setting aside Q3, just looking more and more general, do you think that overall, you might be able to offset that cost inflation with the price increases or it's still TBD, still to be, you know, you still have to get there?
Look, we're trying. Marco announced a second price increase in Europe. We're working on that, y ou know, if costs continue to rise, then, you know, I would point to history. If you look at previous runs on costs over the years, many years in this industry and in this business, it can be over to higher selling prices. It takes time, right? Your costs go up and you have to respond.
The other thing I would say is, a lot of these costs, in fact, it's all linked to the Iranian War. If there was to be revolution there, then a lot of the costs will come back. You know, sulfur prices, Glen, they've tripled, right, since the Iranian War.
Yeah. Yeah, s ure.
You know, you've got to believe that these would normalize and that will relieve the pressure that we're currently facing.
Okay. Thank you for that. Last one, if I can squeeze you. You mentioned in your prepared remarks, you know, the scramble to get your hands on some raw materials, you talk about sulfur and latex. Just wondering whether in terms of inventory days for those raw materials, if you're getting close to the risk of a supply crunch or still far from there, is still normal level of inventories, and if you can comment on that?
Yeah, it's still normal. Eventually you can get your hands on the product, but, you know, a lot of it's trapped in the Middle East, y ou know, sellers are taking advantage of that situation, b ut we don't have, as we currently stand, we don't have a risk yet. We don't have any risks on any specific raw materials. Our inventory levels are normal there.
Yeah, certainly. I think, for example, on sulfur, to precisely to avoid that, you know, we buying from multiple sources in smaller parcels and timing when the arrivals happen. We're planning months in advance, but making sure the deliveries and our purchases are staggered so that we don't build excessive inventory at high prices.
Okay. Thank you. Thank you. Good luck for the next quarter.
Thanks.
thank you. we're now gonna move on to the next question in the queue. This question comes from Xandra Peters from Umvuzo Health. Your line is open.
Thank you for taking my questions. First one, just in terms of the European restructure. It looks like you've spent less than the kind of $40 million you initially earmarked. Do you have any spend less there? And how are you tracking in terms of the cost cut benefit there and the $60 million annualized you were expecting? Thanks.
No. We've spent most of the plans that we had as far as those closures costs are concerned. There are no large additional restructuring costs coming through in the next 2 quarters.
we've realized the benefits that we expected.
That's correct.
In the timelines that we expected. I don't think there's not been any surprises there.
No.
No. Thank you. Just my next question, in terms of volume expectations for the pulp division. Last quarter, we saw some good growth year-over-year versus this quarter, I understand there was the shuts. What are you expecting in terms of pulp volumes from here on out? What kind of annual amount do you think pulp does in a year, including shuts? Thank you.
Look, sometimes you have shipping timing differences and so on. We're fully sold out and our inventory levels are low, great demand for the product. Ultimately, you know, if you go across the 3 mills, you've got Ngodwana around $250. Saiccor, we're looking at what's about $850, $860. Then, Cloquet, you know, we do make some of paper pulp for our paper machines there, b ut in terms of Glen, have you got the number for, or Mike?
230.
230. 230 for Cloquet. That would be the annual numbers. We're fully sold out. Yeah, sometimes you get a little timing differences, but nothing to worry about.
Thank you. Thank you. Last question from my side. In terms of interest expense, throughout the years into the quarters, is there any kind of lumpiness there in terms of expectations from you? Q2 was up quite a bit from Q1. What do you expect for H2? Thank you.
Yeah. For Q2, we had, it's $26 million. I expect it to be similar levels for next 2 quarters.
Thanks. That's all from my side.
Unfortunately, this is all we've got time for today. I'm now going to hand you over to CEO Steve Binnie for closing remarks.
Thank you, operator. Well, let me just take this opportunity to thank everybody for joining us on the call and we look forward to discussing the results at the end of the next quarter. Thank you.
This concludes today's conference call. Thank you for participating. You may now disconnect.