Good day, thank you for standing by. Welcome to the Sappi Q3 2026 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 one on your telephone. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, CEO Steve Binnie. Please go ahead.
Thank you, operator. Good day to everyone. Thanks for joining. As always, move through the investor presentation, calling out page numbers as we move through. Just quickly starting on page two, I just draw your attention to the comments on forward-looking statements. Moving to page three, which is really just a high-level summary of the quarter. It is fair to say that we still have challenging market conditions with volatile economic macro factors taking place, which has had an impact on a number of our costs, which has obviously impacted on the margins and also selling prices for our products. On top of that, we continue to feel the impact of the strong rand against the U.S. dollar. On the positive side, we are pleased with the progress that we are making in North America as we increase our sales volumes on the packaging side, on the SBS side specifically.
Just as a reminder that the quarter did contain the Ngodwana shut, the annual maintenance shut, which had an impact of $22 million. All in all, a tough quarter, but we are beginning to see some green shoots and positive momentum on selling prices. I will talk a little bit more about that. Overall, an EBITDA of $53 million, which was in line with the revised guidance that we put out a couple of weeks ago. Slide four. Just two of the major drivers of performance, it is a slide we have shared before. The DWP price and the rand-dollar exchange rate do have a significant impact. As I have said previously, normally they move in opposite directions, unfortunately, both working against us at the same time.
Just to highlight the sensitivity there, when you are selling 1.2 million tons plus of DWP a year, 1% change can have a vast impact. Then on the rand-dollar exchange rate, it is $4 million for every $0.10. Just a reminder, I know everybody knows this, but two, three years ago, it was above ZAR 18 to the U.S. dollar, now closer to ZAR 16. Vast impact on the South African business and obviously group profitability. Moving to slide five, just to the more recent movements in dissolving pulp. It was down year-over-year, but we have seen positive momentum coming through in the quarter. The overall DWP price has risen by $53. A lot of that has not been felt yet in the numbers that we report because there is a little bit of a lag impact.
Much of that benefit will be felt in the Q4 numbers, the current quarter that we're in. What is driving those higher prices for dissolving pulp? Firstly, on the fiber side, we have seen an increase in various prices of fiber. That supports a price increase for the raw material dissolving pulp. We're also seeing costs going up, specifically on the fiber pricing. The polyester fiber, as you would imagine, is closely linked to petrochemical costs. That's supporting higher prices. VSF operating rates continue to be good and inventories continue to be low. All of those things helped. On the negative side, obviously, paper pulp prices continue to be relatively low and the uncertainty caused by the war going on in the Middle East. Slide six. One very pleasing aspect of our results has been the increased volumes coming through from our North American business.
As you know, we made that investment. We were confident in that market. We believed that we could grow the volumes, and we're doing that. We're delivering that. We're gaining market share, and we've recorded record volumes in the quarter, and there's more to come. We continue to build our customer base. The new machine, Somerset PM2. As you would imagine, as you ramp up, the efficiencies of the machine get better. There's still more to come, and we're pleased with the progress. Also pleased that there has been price increases now coming through. The first round of price increases has now substantially been reflected in the industry data. I think there'll be more to come. As many would be aware, there's been a second round of price increases announced very recently. The benefits of these price increases are not in the numbers yet.
Some of it will be felt in Q4, and some of that into Q1 of next year. All in all, feeling good about the progress. Volumes rising, selling prices rising, gaining market share. Turning to slide seven, the graphic paper market. It's our traditional business. On the last call three months ago, we did spend some time talking about the increases that we had announced. The U.S., that market is tighter following our conversion, and we were able to implement a price increase there. In Europe, we announced two. The first one was successful, the second one less so. We felt that we needed to push for it because of the higher cost, but it was more difficult to execute on the second one. The graphs that you see only really reflect the first one.
Europe is more difficult because there is excess capacity, as you know, and we've talked about that many times. The earnings bridge on page eight, I'm not going to go into detail, but the big story here is that we're seeing the lower selling prices coming through. Bear in mind, this is a year-on-year comparison. Year-on-year, across many of our product categories, they are less. They are improving quarter-on-quarter, but year-on-year we're less. The currency conversion having a significant impact. Offsetting some of that is a lot of great work that we are doing on costs, and I'll talk a little bit more about that in a future slide. Just page nine, on costs, generally, we have seen headwinds, right? The wood costs in Europe and North America have been going up, not in South Africa, but certainly in those regions.
The big drivers of higher costs have been chemicals and delivery costs, and a lot of that's linked to the war in the Middle East. We specifically, at the bottom of this slide, we quote some of the specific raw materials that have gone up, and we do have a slide specifically on sulfur, which is the biggest one. Other costs, like pulp, are relatively stable, which have helped. The proactive work that we are doing on taking costs out of our business have been able to mitigate some of this impact. Slide 10, we thought it would be useful to share with you. This is the sulfur price, and you can see a commodity that was below $200 a ton, it's jumped all the way up to close to $1,200. Just to put it in context for you, we quantify this impact.
This is a year-on-year impact for the 2026 financial year, $350 million just on that one raw material. You can see it's a vast impact and, hopefully, when the markets normalize there will be a potential reduction in these costs. Having said that, we are not resting on that, and we are looking at alternatives to mitigate much of this impact or some of this impact. Similarly, on page 11, the logistics costs. The war has caused higher shipping costs, higher diesel costs. Specifically on delivery itself, we estimate this year will be $106 million, but that's only on the direct delivery cost of the South African business. It doesn't include the forestry, the logistics. It doesn't include the other regions. I know there's been a lot of focus specifically on South Africa, and we thought it would be useful to share that information.
Slide 12 has our net debt to EBITDA, and obviously on the back of lower profitability, it's meant that the leverage ratio has increased. On the debt side, interestingly, you can see we've kept it relatively flat, and I think that's a great effort on the back of the lower profitability. It shows you that the actions that we're taking are reaping rewards. You see the benefits flowing through there. Specifically on the leverage covenant, as you know, and we announced last quarter, that's suspended until March 2027. We continue to have strong relationships with our banks, and they support the business. They understand the headwinds that we've been facing, and I'm confident they will continue to be supportive into next year as well. On page 13, the debt maturity profile.
I think the first important point to highlight is that we have substantial liquidity and reserves on hand and facilities on hand. That's on the left-hand side of the graph. On the right-hand side, the first big material debt refinancing is the 2028 EUR bonds. That's something we will monitor as we get closer to that maturity period. Otherwise, liquidity looks good despite the lower profitability. On slide 14, just again highlighting the same points that I've already raised, a disciplined approach to capital allocation. Despite the lower profits, only a small outflow of cash. As part of that, the CapEx, we're estimating $240 this year. As I've mentioned previously, we've pulled back on any expansionary CapEx. This is focused on maintenance and essential CapEx. We're not putting our assets at risk.
This is what we believe that we can reduce it to and maintain the quality of our assets. Slide 15 is our Thrive strategy. I don't intend going into detail. It is a schedule we've seen many times. The emphasis shifts, and at the moment, with the back to basics focus, our priorities have to be on driving operational excellence, lowering our cost base, improving production, and then ultimately sustaining our financial health with the number one priority to reduce debt. Slide 16 takes us to another level, and we call them our self-help pillars. I don't intend going through all these bullets, but just to highlight a few. In terms of optimizing our portfolio, Somerset progressing very nicely, and we're excited about the prospects ahead.
The work that we've done on the joint venture, and I've got a slide on that. We are confident that that joint venture will bring substantial synergies. We were thrilled that the shareholders supported the transaction in the recent vote. We got 98.5% vote. We're pleased with that. We believe that this is the right course of action for our European business. We've been putting through selling price increases across all our key segments. It takes time. Yes, some of it is to offset higher costs. Market conditions in some of the segments are better, are getting better. I specifically call out the U.S. SBS market. The disciplined allocation of capital guides our principles. A number of these points I've already talked about.
The one that we are excited about and we have been proactive, we've been able to take $120 million of costs out of our business. I know that doesn't show up in the overall profits because of the other headwinds. These are real actions that we have taken to mitigate much of that impact of those headwinds. The savings are across the regions and include fixed costs and variable costs. Specifically on Europe. That, by the way, the 29 is in the 129. Specifically in Europe, we've done a lot of great work to reduce our fixed cost base. Then deleveraging. I've said it once, I've said it twice, I'll say it many times. Our number one priority is to reduce debt. It's going to take some time, because we need to get the profits back to normalized levels.
With the discipline around capital allocation and the improved profitability that we anticipate in the quarter and the year ahead, we will begin on that path, and we will remain committed to getting our debt back to a manageable or more reasonable levels. On slide 17, again, there's quite a bit of detail, and I don't intend going through everything. Just on the packaging side, we've got a strong business and a strong platform in North America, great assets, and you can see the evidence of our ability to grow the portfolio. In dissolving pulp leadership position with a strong influence on our profitability, a non-integrated supplier with long-term relationships and well established for increased profitability that we envisage will come in the future. Graphics, we know that graphics demand is in structural decline. We've been proactive by proposing this joint venture with UPM.
We think it will deliver substantial synergies, ultimately preserve flexibility for future upsides divestment. On the joint venture, page 18, we've already achieved a number of milestones. The big one, we've talked about it previously, the big one is to get approval from the competition authorities. The big one there is Europe. That process is progressing. We're still feeling good about fulfilling the conditions by the end of 2026. Turning to the segments. Firstly, pulp. Underlying demand is good. I've mentioned it a couple of times. We have been impacted by the lower selling prices year-over-year and the ZAR-dollar exchange rate. Other shorter term dynamics have meant that we have seen an increase in price in the quarter.
Just important to point out, the Ngodwana shut was in this quarter as well. That did have an impact on this segment. The next segment is on page 21, the packaging. We've gone through a tough period. The markets here globally have been tough. Excess capacity in Europe. We've had the project that we undertook at Somerset. More specifically in this quarter, the South African business was impacted by the shut in Ngodwana. Looking forward, underlying demand for container board in South Africa is good. We're starting to see global container board, well, certainly in North America and a little bit in Europe now starting to come through. Hopefully that will all be beneficial for pricing in the South African environment. We anticipate higher volumes coming through in the North American business. In graphics, we've got the structural decline.
We did take costs out, particularly on the fixed costs. The rising input costs that I talked about earlier have impacted on margins. The U.S. market is in a more resilient, or a more in balance position following our conversion. That will boost profitability. Also seasonally, Q3 is a lower quarter for graphics and normally Q4 is our bigger quarter. Slide 23 has the regions, I don't intend going through that. The big themes coming through here is lower selling prices year-over-year, starting to rise quarterly. That's the overriding story with regards to the margins and a great ramp up in volumes in North America. On the outlook, firstly, demand, I've talked a few times obviously about dissolving pulp being healthy, packaging ramping up as I referred to. Prices moving slowly in the right direction, which will support profits going forward.
Importantly, we're not just sitting back and doing nothing on the cost front. We've been proactive at taking costs out, we'll continue to look at opportunities across all our regions. If you move to slide 26, we are targeting further operational efficiency improvement and fixed cost reductions. Excuse me. We've got to finish the joint venture which I talked to, or the proposed joint venture as I referred to earlier. Taking that all into account, we do have a smaller shut in the quarter, at Somerset, but it is smaller. Taking everything into account and the improved conditions, the fact that we don't have a major shut, a higher dissolving pulp price coming through. Based on all of that, our guidance for the quarter is that Q4 will be materially above the Q3 numbers. Operator, that's me 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, you will need to press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. Please stand by as we compile a Q&A roster. Our first question comes from the line of Sean Ungerer of Chronux Research. Please go ahead. Your line is open.
Afternoon, Steve. Can you hear me?
Yes. Hi, Sean.
Great. Thanks for that update, Steve. Just to turn to the fourth quarter guidance, in terms of being materially up quarter and quarter, that's great news. What is your sort of threshold on significant materiality? I guess there was no specific reference to Q4 last year, where I think the print was about $111 million.
Sure. Look, the market conditions a year ago were very different, so we didn't think it was appropriate to reference it against that. I'm not going to give you a specific number, but what I would highlight to you, if you use the current quarter as a starting point, you don't have the Ingonyama shut, you've got a higher DP average price, and improved volumes coming through in North America. When you combine all of that together, that should give you a rough feel of the kind of territory that we're talking. I can't get more specific than that. It will be materially higher than Q3.
Okay. I appreciate that. Thanks, Steve. Then just in terms of your commentary around normalized profits to sort of bring net debt down, I guess the million-dollar question is, when do you anticipate normalized profits again?
Look, it's too early to call next financial year. If you do the math and you work backwards, you've got a maintenance CapEx number of around $250 and an interest bill and a tax bill. It's clear that to begin paying down debt, you have to get close to $500 million of EBITDA, right? That needs to be the immediate target. I'm not giving guidance, I'm purely giving you math on debt reduction. That's our initial target, and I think that market conditions are improving. It's not clear as we sit here today when we can get to that number.
Okay, perfect. Thanks, Steve. Just moving to North America on the SBS price increases. Just to confirm, in the current quarter, there was no benefit from higher pricing. Is that correct? Perhaps if you could, I know you did mention the further benefit in Q4 and Q1, but are you able to give us any sort of weighting towards those quarters?
Look, there's no benefit in the Q3 numbers. None. The first announcement was $60 a ton. It's not all come through yet on the recent numbers. I think it's fair to say that a proportion of that will be realized in Q4 and then the balance in Q1. Some of the contracts are linked, and some of them are based on spot pricing. It takes time to realize. There's typically a two or three-month lag.
Okay, got it. Steve, just in terms of the cost base, appreciate a couple of the slides to explain the sort of cost pressures you have been experiencing across the business. I think the numbers quoted are sort of for the full year impact, right? Just to confirm, I think most of these sort of pressures only started filtering through in the third quarter and obviously are going to be then Q4 with H1 fairly clean or is that an incorrect assumption?
Yeah. At a high level, you'll recall our last results announcement, we had a substantial increase in costs in the Q3 and there is incremental increases in Q4 as well. The jump is not of the same magnitude that we experienced from Q2 to Q3. There is further cost, and that's part of our outlook guidance. That's been taken into account.
Okay, perfect. Then-
To answer you more clearly, most of that cost increase has been in the second half of the year.
Yeah. Okay, perfect. Then just in terms of shuts for next year, I know you don't want to provide any guidance, but sort of at least on my numbers, the impact on EBITDA is likely to be similar-ish compared to FY 2026, whereas obviously 2026 was a lot lower than last year. Is that a reasonable assumption at this stage? If you could just-
Yeah. Broadly, that's right. Our North American mills are on an 18-month shut, so you rotate the quarters for those two in South Africa, broadly in line, right?
UA and not Ingonyama.
Oh, yeah. Sorry. The team are just reminding me that the Ingonyama shut for next year will only occur in October, Graeme.
Yeah.
There will not be an Ingonyama shut in financial year 2027.
Yeah. Okay. Perfect. That's great. Then just last one, perhaps just for Glen. Just in terms of the net working capital for the fourth quarter, normally we see quite a sizable inflow. How should we be thinking about that for this quarter? Is that sort of in line with last year or perhaps you can share some insight?
Yeah, Sean, it's Glen here. You're right, we do usually see a net inflow. We're anticipating a slight outflow this year, and that's really because of the ramp-up that you're seeing in our operations, increases in prices, and we're building up into next year for Ishat and Cloquet.
Okay, perfect. Thanks guys. Thanks for the questions.
Thank you. We will now take our next question. Please stand by. Our next question comes from the line of Brian Morgan of RMB Morgan Stanley. Please go ahead. Your line is open.
Hi, guys. Good afternoon. Thanks for the time. Can I just ask on the 2028 bonds, when does that window open? Just chat to us maybe a little bit about your strategy in that regard. Would you be looking to refi those with bonds? Could you do term debts? Just what are you thinking in that regard?
Glen, do you want to take that?
Yeah. In terms of refinancing, we're constantly monitoring the market. We will want to refinance it at least a year before the time. It's in April 2028 that it matures. The window is a two-year window prior to that. We're looking at it, Brian.
So at least-
Brian
April 2027.
That's right. Early 2027.
Yeah.
Brian, to your other part of your question, we have to get to that refinancing, but our goal would be to refinance it with bonds. Yes.
With bonds. Okay.
Yeah.
That's fine. Can you give us a little bit of color on the SBS market as you see it? You guys are adding quite a lot of capacity into that market. There's not a lot of capacity coming out of that market. The industry's been able to pass through price increases into a lower operating rate environment. Is demand just that strong? How should we interpret this ability to put through price increases?
Yeah. I'll briefly answer them and then I'll let Mike elaborate further. Brian, there has been capacity come out. I don't like naming other competitors, but two competitors have taken capacity out this year. In terms of the demand side, we have seen a pickup, Mike, maybe you want to just go in to elaborate further.
No, Steve, I think you are correct. Two competitors have taken assets out of the SBS market in North America. We continue to expect and we continue to see a growth of the 1%-2%. In addition to that, there's been another mill that's been down on the West Coast due to failure. I think all that has had an impact on the market. Our market orders specifically have been continuing to grow, and the machine's running well, and now we're working to speed up as we planned. Right now, we've kept all our assets full on SBS.
Okay, cool. Thank you. Just to confirm, you've received all your customer approvals now?
I'm not sure of the question.
Yeah.
Qualification for all of our products?
Qualifications, yeah.
Yeah. All our base products are going very well. We've introduced several other products to the market, such as an oil and grease resistant and those types of things which are still in the process of being qualified. Those are new products to the market as opposed to the standard products.
Okay.
Brian-
Last question. Sorry.
Sorry, Brian, just one other comment. Typically in the industry, as you gain new customers, they do want to trial the product on the machine. You may be making it for another customer, they do go through trials. That happens all the time.
Yeah. Better put, Steve. We do have to qualify with brand new customers, but the majority of that has been accomplished at this stage.
That's cool. No, thanks very much, guys. Just on DWP, we've seen net paper pulp prices drop in the last couple of weeks by around $20. Does this sort of cap the upside to DWP in the short run?
Yeah, look, it's an interesting question, Brian. I'll let Mohamed jump in after I do. Look, there are numerous positives. I highlighted them earlier. The one negative has been these lower paper pulp prices. Just to reemphasize once again, that there are only a limited number of players who can use paper pulp in their viscose manufacturing process. That kind of puts a cap on it. Similarly
Swing capacity on the DWP producer side, there's only so many machines that can do that swing capacity. A lot of that's already been directed to DWP. It is a negative factor, but it is somewhat limited in terms of its influence. Mohamed, maybe you can talk more broadly.
Steve, I would just add to what you're saying is that the VSF industry in China, in fact, outside of China also, the operating rates have continued to remain very, very high, low inventory levels. The value of those very high operating rates, even though we are now in a seasonally slow time, means that from a quality perspective, dissolving wood pulp makes it easier for the guys to run harder. With demand being good for fiber, I think the need for running, let's say, higher quality raw material is also much higher. That also, I think, continues to create a positive situation for dissolving pulp and also limits the usage of BEK to just the guys that have the technology to actually use BEK.
That's excellent. Thanks, guys. Appreciate the time.
Thanks, Brian.
Thank you. We will now take our next question. Please stand by. Our next question comes from the line of James Twyman of Prescient. Please go ahead. Your line is open.
Thank you very much. Thank you for the presentation. The first question is, Steve, the covenants with the banks are until March. Could you give us some idea of when the timing is for extending that and how long you would plan to extend that by? Related to that, how much of your debt would you say is subject to those covenants?
Okay. On the first one, look, we're in constant contact with our banks. We have great relationships with them. We share our estimates with them, and they continue to be very supportive. In terms of what would happen in 2027 after the covenants come back, we would be proactive. We've always been proactive, and we will ensure that we have sufficient flexibility in next year when we come out of that suspension period. That's work that is an ongoing process, and we're doing that already. In terms of the covenant itself, Glen, it's specifically, it's the RCF, right?
Yeah. It's linked to the RCF.
the-
The OeKB loan.
The OeKB.
Yes.
It's the RCF facility and that OeKB loan.
Okay, great. Thank you very much. Would you expect us to have an idea of the extension this year or this financial year? What are your thoughts on that?
Look, it's an ongoing process, James. I didn't say extension. You said extension. What I was saying is that we will have flexibility based on the outlook for our profitability next year. We are going through a process to put that in place. It's difficult to give an exact date, but it will be hopefully very soon.
Okay, thank you. In the U.S., obviously, as you mentioned, you're expecting a much stronger fourth quarter as PM2 ramps up and prices are picking up. There is always this big seasonality element as well, and I just wondered if you could talk about that impact, because sometimes we get a huge seasonal impact and sometimes we get a really small one, and it sort of depends on where your inventory levels and other factors. Is that an additional factor that you would see helping in the U.S.?
Thanks, James. Mike, do you want to take that seasonality question?
There is a bit of seasonality, but with the move, it was more driven by graphics historically. I think we're going to see less of an overall seasonality impact with the balance between our pulp business, our SBS business, and our graphics business than what we've seen in the past. Although, there always seems to be a bit of seasonality around the holidays in the U.S.
Okay. Thank you. If I could just ask one more. Over the years, you've always talked about cost cutting as a general part of what you do, and you often talk about $50 million or EUR 50 million of cost cutting each year being something that seems to keep happening. You're talking about $120 million this time, and you've said that without a lot of fanfare. It's a huge number. Could you talk really about whether that's all in the base? I think in the presentation you talk about that being a year-to-date number. I'm sure it's annual year-to-date or something, but is there more to come there, and could you give us a bit more detail on that? Around the EUR 29 million of savings in Europe from restructuring, but this $120 million is a very big number to be happening.
Indeed. Roughly, it is about half fixed cost, variable costs. The fixed cost, a big chunk, as we have indicated, is in Europe, but there are fixed cost savings in the U.S. and in South Africa as well. On the variable cost side, a significant proportion of that relates to usage and other cost saving initiatives on raw materials. Once again, it is across the regions, but Europe is probably the largest of the three regions that make up the variable costs. Going forward, to the broader question, we cannot relax. We have got these headwinds. We have got to continue to look for opportunities, and more specifically, in South Africa, because with the stronger rand, it has put pressure on us. Graeme, I will come to you now.
We are being proactive at looking at usage and alternate raw materials, which can build a more resilient South African business with the headwinds that we are facing. Graeme, obviously, we cannot give specific numbers, but broadly, the areas that we are looking at the moment.
Certainly. Obviously the best starting point is the highest expenditure areas or those areas where we have seen the highest growth in costs over time. Timber, although obviously market prices declined, and you can see it in our fair value accounting. We need to adjust our own forestry costs in line with what we see from a market price point of view. Certainly savings on timber, and ongoing in the timber side. Our highest raw material costs, focusing both on usage and, as Steve has said, can we use potentially a lower quality, lower priced version of that material, and understanding the pros and cons on our production process. Benchmarking ourselves against our own best performances, but also best in class and saying, "How do we drive ourselves?
What do we need to change from an operational point of view to get there?" We are looking for long-term sustainable changes to our cost base in South Africa. Try and get our ZAR costs down to where they were five or six years ago, I guess.
Coming back to your question, I think when we go into 2027, this is gonna be a big area of a focus for the business.
Yeah. Okay, impressive. The $120 you've talked about is an annual number, and would you say that that part of the cost cutting is in the base for last quarter?
Yes. Yes, it is.
Okay. Then just related to that, you mentioned usage a few times. Could you just say what you mean by usage? Is it less wastage or sort of operational factors? What do you mean by that? Because that's clearly something where you've made quite a bit of headway.
Typically for us, for example, at Saiccor Mill, how much sulfur do we use per ton of pulp produced? Back to basics approach, what should you be using relative to what you are using? Where is there waste? Where are you overusing and can compensate somewhere else to reduce that use? It is the physical use per ton of any raw material, I guess, in the production process.
Okay. If I may, just one more. In terms of dissolving pulp, obviously there is weakness ongoing in paper pulp because of capacity and various other things. Did you envisage that the market in DWP is tight enough to actually get the premium picking up significantly to offset any weakness that we're seeing?
Yeah, look, it's a good question. We obviously saw the rise. More recently it's kind of stabilized just around $900, just below $900. I think it is a seasonally slower time. We're not anticipating any increases in the next short period of time. We've got to get through this quiet period and then assess the market conditions beyond that. Mohamed, I don't know if there's anything else you want to add there.
Yeah. Steve, just to again reemphasize that it is a seasonal feature that we are seeing in the DP and viscose market. Just to point out that even though we are in a seasonally slow time, operating rates remain at, I was going to say, historically high levels. Even going through the seasonally slow time, the fiber inventory levels across the value chain also remains very low. As we come out of the seasonally slow time, as we get towards the end of August into September, again, historically what we've seen is that the DP prices start to move up again. That's what the history tells us. The supporting factors that I've just mentioned would tend to indicate that we have a good chance of history repeating itself as we get towards the end of September.
Okay. Thank you very much indeed for all of that.
Thanks.
Thank you. We will now take our next question. Please stand by. Our next question comes from the line of Detlef Winckelmann of J.P. Morgan. Please go ahead. Your line is open.
Hi, guys. Maybe my first one would just be regarding Somerset PM2 ramp-up. Are you able to share roughly where you are at right now in terms of operating rates, relatively close, not close at all, relative to EBITDA breakeven? Any kind of color you can share? Even within that, expectations as to when we should expect the EBITDA breakeven?
Look, there's a couple of questions there, Detlef. I think firstly, in terms of the operating rates, in the quarter that we've just been in, we are at about 75%, and we're anticipating closer to 85% in the fourth quarter. We're ramping up nicely. In terms of breakeven, we don't give the specific numbers, but the North American packaging business was positive.
Okay. Thank you. Maybe one other one just on this whole SBS tightness at the moment that we're seeing. If I recall back to calendar year Q1 peer results, everyone was telling us that CRB was relatively tight, SBS was quite loose, but the SBS price relative to CRB was relatively compressed. We might see some substitution by customers. It looks as if we've seen that. Commentary is now that SBS is looking a bit better. At the same time, a lot of the peers are saying CRB is looking a bit worse. I'm just curious in terms of, is this a temporary shift? Is this something that could reverse if SBS price increases go too far? Just curious how to think about this going forward. Thanks very much.
Yeah. Once again, I'll come over to Mike just now. Just from our side, it's not had a material impact on our results, the switch to CRB. There's been a tiny amount, but our focus has been on existing SBS customers, and that's where we've taken market share. So Mike, I don't know if
I think that's accurate for us. I think if you think about it in this way, there's a small portion of customers, if you want to call them price sensitive, that might move back and forth based on their advantage. CRB announced a price increase within the last week. Certainly not something that we're selling directly into, but clearly that business maybe is improving also. For North America, that hasn't really been our target. There might have been a little bit, but I'm not sure that that's a huge influence on Sappi.
Okay. Thank you.
Thank you. We will now take our next question. Please stand by. Our next question comes from the line of Cole Hathorn of Jefferies. Please go ahead. Your line is open.
Good afternoon. Thanks for taking my question. I've got a couple on my side. I'll take them one by one. Firstly is just on dissolving pulp. I'm just wondering, have any of the changes and restructurings at Lenzing impacting your business? Just like your thoughts of how it might or might not impact Sappi. Then second is one probably for Graeme. I'd just like to follow up on how you're going to improve the South African wood sourcing and business overall. If I look at LATAM and I look at globally, the cost of wood's gone up, the cost of diesel's gone up. It has been an inflationary environment for wood, but I'm just wondering what action Sappi is taking to be more efficient in the forestry operations and try and kind of lower the wood cost delivered to the mill. And then I'll come up with a third too.
It's already too many. Thanks.
On the first question, Lenzing's closures, it's only just been announced, and we need to have dialogue with them. Net-net, we're not worried about it. We think if there is lower volumes, I don't think it's that material, but if there is lower volumes, we are confident that we can place that in the Chinese market at a better price for Sappi. Mohamed?
Yeah. Steve, I would agree with that. Also, we have the flexibility of also making more paper pulp if we choose to do that.
Yeah. That's true. Graeme, on additional wood sourcing.
I think there's a number of elements. Some have been a long time in coming. Obviously, as we've changed our South African business over the last 10 or so years, the mix of mills and the mix of products, we've been steadily converting softwood plantations to hardwood. That's meant that over time, our self-sufficiency, the proportion of hardwood that we source from our own plantations, has increased. Typically, that comes at a lower cost than purchasing from external suppliers. Current market conditions globally, you're absolutely right. Generally, timber prices have trended upwards globally over a long time. Right now, with what's going on in China and pressure on market pulp prices, we have seen a weakening in timber wood chip prices in, call it, the Asia-Pacific region. That's allowing us to renegotiate longer-term contracts where we were purchasing from external parties.
Then, in the very short term, prior to these diesel increases, we'd already started looking at electric trucks. They were offering good savings even prior to the diesel price increases that we've seen. The opportunity to convert more of our fleet or more of our logistics, we don't own the trucks ourselves, to electric-powered trucks is looking very attractive right now. Then, there's the usual efficiency through our own forestry operations. There's a number of things, as I say, that have been going on over a long duration, but also actions that we're taking in the shorter term to reduce timber costs.
Thank you. I always find it interesting when someone puts in a chart on sulfur when none of your competitors have put it out. I always think about caustic soda, but wrongly, you don't quite think about sulfur for the white and black liquors. I am just wondering, does dissolving pulp use more sulfur in the mix than other traditional pulp, and that is why you are highlighting it? Or is there something to be aware of on particularly calling out the sulfurs, just as an aside? The other question is on North America, which is on the demand side and coated papers. Is there any potential boost ahead of the midterm marketing, things that we should be aware of that is ultimately going to allow the utilization rates of the full mill system to be a bit better in North America? Thank you.
Yeah. Graeme will talk about the sulfur usage. Mike, I will come back to you on the midterm elections.
Yeah, I think obviously the key thing for us is that Saiccor is a sulfite pulp mill. Inherently, they do use sulfur, whereas a typical kraft pulp mill wouldn't. You do get other sulfite mills across the world, but they may be set up to use SO2 gas and not sulfur in pure form. That is the key differentiator that applies particularly to us.
Mike, on the midterms.
I'd say that we haven't seen a huge impact in midterms. The truth is, our graphic machines are running full. We don't have any underutilization. I'm not sure where you're getting that thought from, but our graphics have been running full and I think the business is still very steady.
It was just more of a comment just to make sure order books are good and, if you get more orders, it's always helpful, even if you have to put people on extended lead times. Thank you for all the color.
That's absolutely true. Yeah. I think as we get closer to elections, you might see a boost more on the sheet side of the business.
Thank you.
Thank you. We have reached the end of time allocated for the call, and I will now pass back to Steve Binnie for closing remarks.
Thanks, operator. Once again, let me just thank everybody for joining us on the call today, and we look forward to discussing our year-end results with everyone in three months' time. Thank you very much.
This concludes today's conference call. Thank you for participating. You may now disconnect.