Sappi Limited

Thank you. Good morning, everybody.

As always, I'll go through the investor presentation that has been loaded, and I'll call out the page numbers as I move through the deck. And I'll start then on Page 3, which contains some of the highlights for the quarter.

It was a tough quarter for Sappi. The markets for graphic papers were weaker than we had expected.

And as a consequence of that, we had to take production downtime. That was approximately 85,000 tons of graphic paper, and the impact on EBITDA of that downtime was $23 million.

However, that enabled us to normalize our inventory levels because of a lower demand. And we are in a better position from an inventory perspective as we move forward.

Dissolving pulp volumes were good, post the debottlenecking projects that were completed in South Africa. And then for the specialities and packaging, mixed performance, some good markets, particularly containerboard down in South Africa and in some of the speciality grades in Europe, but others being more challenging.

At the same time, we were going through a ramp up process following the conversions at Somerset and Maastricht. And obviously, that naturally has an impact on profitability as you optimize the machine and moving between the grades.

As a consequence of all that, just some of the key numbers on – and you'll see them on the page. EBITDA was down 11%, and net debt ended the quarter at $1,680,000,000.

In terms of the ratios themselves, the leverage ratio, 2.1, and I will remind you that we work around a 2x target and obviously, the lower profitability is briefly pushed back to that limit, but we're always disciplined to maintain it at those levels. The EBITDA margin following the profit is down at 12.4%.

Turning to Page 4, which is our earnings bridge between 2018 and 2019, and obviously, the big story here is that costs were higher, predominantly related to the pulp side of it, but not just pulp, other raw materials as well. In order to offset that, as you know, we've gone through a series of selling price increases over the course of the last 12 months.

That has been good for us. However, it has had an impact on downstream demand, at the same time as the global economy, particularly in Europe, has been slower.

The volumes, obviously benefiting from the higher dissolving pulp, offset by the production downtime that we took. The exchange rates, both the dollar – sorry, both the euro and the rand weakened against the dollar.

And the net impact of all of that was $7 million on our earnings benefit. Moving to Slide 5, the product contribution split.

The EBITDA continues to tell the story that we've been going through for some time that dissolving pulp, now being the largest segment. Printing and writing papers will come down further.

Obviously, we've got the ramps up – ramp ups at Somerset and Maastricht, so that will lower those further. And packaging and speciality grades will continue to grow .

Moving to Slide 6, the maturity profile of our debt. We did make a little – an adjustment there because the repayment of the 2022 bonds, which were refinanced during the quarter, that occurred just after the quarter end, so we just adjusted for that to reflect the true picture as it currently stands.

And you'll see it, it does look good, and we have no immediate pressures, and the bond issue itself was very successful. We're now at the lowest rate that we've actually ever achieved.

Slide 7 has our CapEx profile. And you will have seen obviously the 2019 number before.

The big projects contributing to the $550 million are the commencement of the expansion at Saiccor, the 110,000 tons, we got the conversion at Lanaken from mechanical – coated mechanical to coated woodfree. And in others – other projects include the – at Cloquet, we expanded our capacity for dissolving pulp there by 30,000 tons, glad to say that that's now been successfully completed, and now we have that additional capacity available.

And then the other kind of big project we've had over the last few months is the new wood pulp down at Saiccor to enable us to invest for the growth that's coming in. And again, that's now behind us as well.

2020 estimated CapEx is $419 million, and the big project contained in that, obviously aside from the maintenance CapEx, is the Saiccor expansion, which will be completed towards the end of the 2020 financial year. Turning to the segments themselves and the markets, and moving to Slide 9.

It's fair to say that the graphic paper markets has been tough. During the quarter, we saw declines of between 8% and 13%, particularly tough on the reels side, whether it's coated wood-free reels or on mechanical reels.

And if you look across all the categories, between 8% and 13% down both in U.S. and Europe.

So that did put pressure on us. As we look forward, there is expected to be significant capacity coming out from competitors over the course of the next 18 months, and that's both in U.S.

and in Europe. We estimate between 15% and 20% of capacity.

So that is going to relieve significant pressure on the operating rates for the graphic paper business. At the same time, we ourselves, as we ramp up on packaging, will take further capacity out as well.

So that will help. On selling prices, following the increases of last year, we've actually seen stable selling price increases through Q2.

Pulp prices have started falling over the few months, but bear in mind that they're obviously coming from historical highs, and we're still higher than a year ago. So that did put further pressure on the business.

Going forward, we will, as always, an ongoing focus on costs to maintain margins. We've obviously got the conversions that have been completed, which will enable us to take capacity out of the segment, and we will monitor clearly if markets continue to be tough, and the declines continue to be tough, then we need to look at more assets.

And whether those are conversions or closures, we need to monitor the situation. However, we do believe that with the significant capacity coming on – out that I mentioned earlier, that will relieve the pressure.

The other major focus, and it's the thing that we've been exposed to as we've gone through the cycle, is pulp integration, and that is a focus of our attention. We do have projects internally that will enable us to boost it a little bit.

But beyond that, we continue to look at that as a key long-term strategic driver. Turning to specialities and packaging.

We have seen other conversions coming on to the market, but the same time, we have seen smaller packaging and speciality producers exit. And those tended to be the nonintegrated players, and obviously, they were facing the cost pressures of the higher pulp price.

Demand continues to grow across the segments, and we are strongly encouraged by the long-term prospects and the feedback that we're hearing from brand owners in terms of their push for paper-based packaging solutions. A lot of that is driven by the changing legislation and consumer preference and the shift towards e-commerce.

Selling prices did rise. What I should point out here is that the pulp integration in this segment for Sappi is lower than the overall pulp integration, so those pulp increases had more of an impact on packaging relative to graphic paper.

So obviously, equally as prices come down, we will benefit from that more in this segment. Our strategy is to ramp up those conversions and just to point out that they do take time, that you have to go through a very careful coordinated process with customers to get accreditation.

It does mean that you are moving back and forth between grades, different SKUs, testing new products. It has an impact on profitability, and if you recall, the same thing happened in Alfeld when we converted a few years back.

And that's what we're experiencing once again with Maastricht and Somerset. I stress to you that the long-term prospects for this business, we are still very positive, and I would also point out if we hadn't done those conversions, then we would have had to take potentially more downtime on the graphic side because we would've had to pull those machines with an alternative product.

And pulp integration is an important aspect. Sorry, someone on the line, if you can go and mute.

Turning to the regions themselves, Sappi Europe, the – as I've said, the graphic paper markets were weak. We had to take 46,000 tons of downtime.

The good news is that, that enabled us to destock and move forward with better inventory levels, so we've taken our pain. And we would not anticipate the same levels of downtime in the future quarters.

Selling prices were higher obviously, as we offset the higher cost that came through. As I said, pulp prices reduced but remain elevated.

The packaging and speciality segments, a little bit of mixed performance, but a lot of that was linked to the kind of economic activity that we saw in Europe, and the main product category for that was in self-adhesives. Having said that, we have started to see things improve in recent times.

The other thing I should mention is that we've got the Lanaken conversion under way at the moment. It's moving from – out of coated mechanical to coated woodfree.

That's the worst segment for graphic papers for – not just in Europe, globally, so that will help us. And then obviously, as we ramp up at Maastricht, again, over the next couple of years, we – in addition to what we've got now, we could be adding or taking out of graphic papers 130,000 tons out of coated woodfree.

Then moving out of – moving on to Page 12, Sappi North America. The – again, many of the points are similar that graphic paper market is under pressure.

We did see increased imports. I would stress that we are part of that, and that's part of our biggest strategy.

When we converted at Somerset, we knew that we wanted to keep as much of the business as possible, so we are part of the increased inflow coming through there. The legacy packaging and paper pulp volumes are growing, and the ramp up at Somerset continues.

But as I mentioned earlier, the product mix is not yet optimal. That takes a little bit of time, and we are making significant process – progress each month.

And volumes are picking up nicely. The – and then obviously, the region benefited from good dissolving pulp sales volumes.

And again, like what I've said to you on Maastricht for Europe, Somerset will ramp up further. And ultimately, there's another 350,000 tons that would shift away from graphic paper to packaging and help reposition Sappi as we move forward.

Turning to dissolving pulp on Page 13. The markets have been good, demand was strong.

Unfortunately, VSF capacity has grown at a faster pace than demand, and that's meant that VSF operating rates have been under pressure and put VSF pricing lower than it was. At the same time, the encouraging news is that nearly all the same capacity, we believe, is now on dissolving pulp.

There was news dissolving pulp capacity coming into the markets, but we believe that the demand is more than large enough to take up that demand. Selling prices as I said, declining.

And on the cost side, obviously much of this business is done in South Africa, and wood prices have been a little bit higher. So that did push up cost a little bit for South Africa during the quarter.

The strategy, and I've mentioned this many times, we continue to do everything we can internally to grow volumes. We have – now have small people to making projects at Cloquet – sorry at Ngodwana and Saiccor, all adding volumes.

We've got the next 110,000 tons down in Saiccor, which will be available for the 2021 financial year. We look at the external opportunities, but we are not going to overpay for assets, and I've said that to you in the past.

So we'll monitor them, we'll monitor the situation. But there's – we don't see any immediate opportunities to build dissolving pulp volumes externally.

The big story there, as you will imagine in the textile sector, is sustainability becomes ever more important as the downstream brand owners are pushing for visibility on the supply chain. Turning to South Africa.

Good performance in South Africa. The numbers you see on the left are the dollar numbers, and just in rand, EBITDA was up 18% year-on-year, so another good quarter.

Strong dissolving pulp sales volumes, obviously benefiting from the projects that we've recently done. Packaging, packaging was lower, but it was really a timing difference based on the timing of seasonal demand.

We had an excellent first quarter, a little bit lower in the second quarter, but overall, the business is doing extremely well, and we think going forward, there are further growth prospects there. The selling price increases did help us offset some of the cost.

And obviously, the rand was weaker, so it boosted us as well. Turning to the pillars of our strategy, and they're outlined again on Page 15.

Taking each one in turn, firstly Page 16, ongoing focus on costs, and I think we've done a tremendous job over the years. And we've committed in 2019 to take a further $60 million out, and we're on track to achieve that as well.

So ongoing focus on continuous improvement across all our mills. The big story there, and it's been evidenced by what has happened, is this pulp integration.

And we look at our mills in the U.S. and in Europe to see whether there are – we can undertake some debottlenecking projects, which will improve pulp integration.

The Saiccor expansion that we talked about, obviously, we're focusing on the sales side. But it will lead to lower variable costs as well.

I'm pleased to say that the Gratkorn paper mill upgrade that we talked about earlier in the year, that was successfully completed on time. And the mill is operating nicely following the work that was undertaken.

Moving to Page 17, the rationalizing of declining business, and it's probably – with what we've experienced in the last quarter or 2, it emphasizes why this needs to continue as an important focus point for us. We, obviously – as we move through the ramp-up phase following the conversions, that will help relieve the pressure, and then at the same time, all those capacities that are coming out.

And in Europe, we are talking, we estimate somewhere between around 1.5 million ton mark, and then in the U.S., upwards of 500,000 tons. That's – if you look at the capacity in those marketplaces, we're talking 15% to 20%.

That's going to make a significant difference and push operating rates well up into the high 90s. The more short-term, as I said, we did take downtime at the mills to lower inventories and derisk the business.

The other thing I would say is if the markets continue to decline, obviously, competitors taking capacity up, we will continue to monitor ourselves. And if it were to continue on ongoing basis, then we obviously have to consider whether we have to take further capacity out.

Whether it's through conversions or closures, we will monitor that on an ongoing basis. On to the balance sheet.

And as I've said, committed to the 2x leverage, I'm very pleased with the bond issuance that we successfully did during the quarter, then investing in areas of where we believe we had strong growth. I want to come back to the overall strategy.

This has been an ongoing process to derisk Sappi and reposition it for growth. We have been taking significant capacity out of graphic paper over a number of years.

We've been converting, and we've been making the business in a stronger position for future growth and to derisk. So yes, there has been some short-term challenges in the graphic paper markets, but that doesn't change our long-term strategy, and we continue to believe that it's the right one, and we've made significant progress.

And we will continue to do that. In terms of the segments themselves, obviously, all the debottlenecking projects has gone extremely well.

We're very excited about the additional volumes that Saiccor will give us in South Africa. The packaging business, as I said, is very strong, and we think there are opportunities to grow it further by some investments at Ngodwana and Tugela and also down in South Africa.

As you know, timber supply has – is a constraint, and we continue to look for opportunities to boost the supply. And then a lot of good work being done on the – on a buyer materials side, and we think in time that we have future opportunities there.

And obviously, the conversions of the board grades, the ramp up of that needs to accelerate. Turning to the short-term outlook.

We – the demand for dissolving pulp continues to be healthy. We will have the impact of the lower prices.

As you know, our contracted prices were at a quarter in arrears, so you will have the impact in Q3. We know that.

However, the longer-term and medium-term prospects for dissolving pulp are very good, and we are confident about the pricing as we move forward and beyond. The packaging and speciality segment, strong demand there.

We're ramping up, and the business is in a strong place. Our product is being well received and excellent quality.

Yes, graphic paper markets are weak. However, with all the capacity that's coming out and including the conversions that we're doing, operating rates will increase significantly in the near future.

CapEx for the rest of the year is $370 million, many of the projects that I've talked about. And because of the short-term pressures for the financial year, we're seeing that the second half of the year will be down on last year.

So that's the deck itself. I'm now going to hand you back to the operator for questions.

Hi, guys. Thanks very much for the call.

If you could just touch about this demand decline in graphic paper, maybe a toughish question, but just to go the feel, that 8% decline rate that you see in Europe and 13% decline rate that you see in North America, if you were to maybe pin it down a little bit further, what portion would you say is general economic malaise? And what portion would you say is price that's specific to that in the write up?

Yes. It's a good question, and we have done a lot of work internally on this.

We estimate that the real trendline is down about 5%. Of the difference, we've attributed half of the difference to the prices' elasticity issue that you referred to, and the other half of the difference to the economic slowdown.

That's our estimates based on the analysis that we've done.

Okay. Thanks, Stephen.

And then carrying on from that, so do you – what trend decline do you forecast in your planning?

Yes. Brian, it has been 5%, and obviously, that's why when we talked at the beginning of the year, we put out the outlook statement as it was.

I think with the – as we go forward – and I think that's what your question relates to.

Yes.

We are using a 5% to 6% decline over the next three or four years.

Okay. And if the decline rates are worse than that, what – could you give us an idea of your margin for error?

Just what are your degrees of freedom here? I think that's a better term.

Okay. Well, look, if you look at the capacity that's coming out, obviously operating rates are in the high 80s.

If you take the capacity out that I talked about earlier from our competitors and ourselves, then the operating rates are going to be in the high 90s. And that gives you breathing space for a little bit of time.

If – and it probably buys you some time. If things were to continued to be worse than 5% or 6%, then clearly we need to look at our own assets and whether we need to take out further capacity, whether it's through conversions or closures.

We would need to do that.

Okay. Cool, that's fine.

And if I can just ask on the U.S., the Somerset conversion, when do you expect – you said in the write-up that you've achieved customer approvals for the SBS. Could you give us an idea of when you would expect to start running that kind of higher price point in paper on that machine?

Okay. Thanks.

Mark's here with me. I'm going to just pass it to Mark.

Okay. Thanks, Steve.

Yes, we're ramping up the machine. It's getting qualified with quite a few customers.

We expect as we move through the rest of this year, we'll see that mix start to change. We do have some very large and some very successful fully serviced board customers, and that is actually where the machine is running the most right now.

But the folding carton customers are coming along, and we would expect as we get into the end of this year and going into next, we'll probably be about 50/50. And as we go into this time next year, we would be 75 or 70/30 with the folding carton customers through the food service because the capacity of the machine is quite large.

And we have plenty of room to service both those segments.

Okay, that’s great. Thanks very much, guys.

Yes, thank you. The first one is just on dissolving pulp, what your view is on pricing over the next three to six months.

We've seen obviously, a lot of weakness recently, but the premium to paper pulp seems to be at record levels. So just some idea of where you see that in terms – especially in terms of the Chinese market.

Yes. I will – I'll give you a little bit of feedback, and I'll hand you to Mohamed, who runs our dissolving pulp business to elaborate further.

But from our perspective, yes, prices have come off. You are right.

The current differential to paper pulp prices as of now as it has been for some time, so being down at $200 or less. And as you know, the breakeven is $300.

We are – we don't think it will go much further, lower than it is currently. And as we look out to next year and beyond and you look at the supply demand balance, both in the paper pulp markets and in dissolving pulp markets, we continue to be confident about the prospects for pricing.

We – the fact that the price gap at the moment between the two grades is as narrow as it is, we think that creates further potential upside as well. Mohamed, I don't know if you want to expand anything further?

Yes, Steve. I would just add that if you look at the high cost producers for dissolving pulp, they're largely sitting in China.

A major reason behind why that cost structure is very high is their reliance on imported wood, and that cost continues to go up because supply is starting to be constrained for a variety of reasons. And two, if you look at pricing in terms of where it is at the moment, it's now at a point where those high customers in China are in trouble.

So I also don't expect pricing to go much lower than where it is at the moment.

James?

If I could follow up just one other thing. In the European coated paper market, you haven't really taken a lot of capacity out.

You've taken out more in magazine. I'm sort of hoping that the store closure helps things out, which I'm sure it will, but if that takes quite a long time to happen and demand remains weak, is that the opportunity to actually start looking into the next stage of conversion, sort of sooner rather than later?

And if so, how much would that cost you, do you think?

Yes. And I'll hand you to Barry now just to expand a little bit further.

But yes, look, it's something that we monitor on an ongoing basis. We monitor our competitors.

And based on what we hear and what we see, we do think a significant capacity will come out in the near future, which will help us and help the market balance. Look, obviously, the conversions are part of that process of taking capacity out, and what we've done in Maastricht is part of that.

And then obviously, a couple of years ago, we did Nijmegen and took that out of the marketplace. There's been significant capacity come out.

And obviously, more to come from the competitors. Barry, do you want to just add to that?

Just one thing, Steve, and I think it's just – if anything, the woodfree coated market for Sappi is the one where we do better. It's a natural strength, and so it tends to be the case that customers are beginning to swerve towards Sappi as a safe haven as other people get out of the market.

So our operating rates in coated woodfree – and because the woodfree segment, particularly the sheet segments, are higher. So as we begin to shift Maastricht more and more from graphic to specialities, that tends to sort of equal out the capacities for Sappi.

And so it will be a while yet before we have to consider any further action. It will depend on just when those happen.

I always think that if there's an economic effect on the demand, then that will pass. It's nasty while it's happening, but it will pass.

So – then we will go back to what Steve was talking about, sort of 5% reduction.

Thank you very much. Thanks.

Thank you. Just a few questions for me.

Could you comment where you are today in terms of how much SBS you are producing at Somerset? And what do you expect that to be in, I guess, your fiscal 2020?

And also if you can have any view or share your view on what it means where you're dissolving wood pulp business if China goes ahead to remove the duties as they've been discussed from various countries while including – I guess the benefit will be for you, for the Cloquet business. But overall, for you, as a company, what that really means if anything.

And also, how you – when you talk about integration of pulp or increased degree of integration, is that simply because you're shrinking your paper business? Or is that really some initiatives to drive up your pulp production?

Yes. Okay.

In terms of the SBS, as Mark indicated to you, there are other grades on the machine. The – by the end of this financial year, the total packaging and grades on the machine we estimate is about 130,000 tons markup.

And your question, I think, was to the end of 2020, so 250,000 tons by the end of 2020. The second question on duties, bear in mind, we – you're right.

We haven't been selling from Cloquet into China. So the removal of the duties theoretically would create an opportunity, but bear in mind that we – a large proportion of our volume is committed to long term customers.

So I don't really think it's going to have much impact on Sappi either way. The pulp integration, yes, their smaller projects, particularly in Europe, because that's where we're – our pulp integration is at its lowest.

We're – I think we're about 51% at the moment. Barry, maybe just talk about some of those smaller opportunities.

Yes, Steve. We have possibilities to move our integration rates to just over 60% with relatively low capital extensions both in Lanaken and Ehingen and Alfeld and Stockstadt.

Beyond that, you would need to do something bigger possibly at Gratkorn to get us up to around about 70%. And that's kind of where we feel the comfort rate is.

Yes. Just to emphasize Barry's point, we want to get it up to 60% as near as possible.

And then obviously, we'll evaluate that Gratkorn project and see what that entails.

Steve, you mentioned tail end of 2017, you came up with this brilliant word called Chexit as China exited from export markets. Have you seen any change or any return on the Chinese in any market as pulp prices have come down?

Is that a factor in seeing the European exports come down quite appreciably in spite of the big increase to the U.S.?

Yes. No, we haven't really seen that happen.

Not as of yet. Obviously, it's a dynamic environment, and, yes, we're monitoring the situation.

But not as of yet.

Okay. Final question for me.

Interesting to hear your comments about strong packaging demand, et cetera when most packaging companies aren't necessarily saying the same. So I'm just – where do you see that strength?

And what sort of segments would that be in specifically?

Yes. Look, obviously a big part of that is actually in South Africa.

We've done tremendously well on our containerboard site down in South Africa, and that business makes excellent margins and continues to grow. And as I've said in the deck, we think there are further opportunities.

In the – and I think that's when you're talking containerboard itself. On the paperboard side, both in Europe and in the U.S., yes, we're ramping up.

But as we talk to our downstream customers, there is a drive for paper-based solutions, and that's what's giving us the confidence that we can ramp up quickly on the – following the conversions. Barry, anything more you want to add there.

Barry?

Well, just one thing. On the lightweight side, it's true that there has been a number of bankruptcies in Europe, and that has tended to have the same sort of effect as in graphics.

But customers are going for safe haven, so they come to a financially strong company with multisites, and then Sappi comes very quickly into their picture, and so they shift volumes to us from suppliers that are no longer there. That's clearly helping our operating rate.

That makes sense. Thank you.

Thanks everyone. Just on specialties.

Even if you assume you're making around 1% EBITDA margins, say, on the new volumes, it still looks like there's quite a significant decline in what you had maybe called organic part of that business. So just wondering if you could maybe just talk about the real key drivers behind that.

With the margin in the specialties packaging side?

Yes. You chatted about a few things, but just the real key reasons because it's quite a big – it looks like quite a big moved on.

Yes. And the pulp integration percentage that Barry and I were referring to earlier in Europe is 51%.

However, for the packaging and specialties side, it's only 30% if you look across the mills there. And so it has had a much higher impact.

Then as you look globally across the group, because we've been going through this accreditation phase with customers, you're not selling at full pricing. It's called second quality.

It's not that it's a weaker quality than ultimately, but as you bring on board new customers and as you are demonstrating to them that the consistency of your product, the reliability of your service, all of those things, you don't get the optimized selling prices. That does ramp up over a period of time.

And then there's the mix issue as well, and Mark talked about that. We're still ramping up on the SBS side.

And that's higher priced product than the other grades. Barry, Mark, anything you want to add?

I think you've covered it well, Steve.

I think you've covered it well. There is a mix of different customers in the SBS side of Somerset.

And that mix will change as we get more and more qualification.

And sorry, Ross, just one other thing you have to remember as well. When you're testing the product, you're using machine time.

You're carrying fixed costs associated with testing that product. So you are not getting the margin, and this is exactly what we saw when we experienced also as well.

So ultimately, as you ramp up and the capacity grows and you have more and more customers on the machine, you're not switching between so many different grades and so many different products, and you're getting full prices for your product, and the product mix is improving. All of those things help the profitability.

Thanks Stephen, makes sense. Thank you.

Thank you very much. I also want to get a little bit more color on kind of the – on your call in kind of H2 down year-on-year, just kind of the drivers.

You spoke about them, and obviously, dissolving wood price – pulp prices down, and then also in the – on the volume on the graphic paper side. But if I also look at on – and correct me if I'm wrong, but if I look at kind of on prices at least kind of where we are on spot, you're probably still looking at prices up a bit on coated woodfree, H-on-H – sorry year-on-year report for H2.

And with folding box board, a bit up if we look at the U.S. kind of on the SBS side.

Obviously, kind of – you're still kind of improving your product there, but not having seen too much kind of weakness there either if you look on – you'll see on a year-on-year business. And then finally on the paper pulp side of hardwood, softwood, you've been talking a lot how there's been a big cost headwind from you now like H – now it's come down quite a lot if you look at spot prices just now.

So I'm just trying to kind of understand the different drivers for H2 being lower. And then, on top of that, if I may, in your bridge where you look at the – in your presentation, you said you had $76 million negative headwind from variable and then delivery cost.

Just kind of that, how much of that, if you can comment, has been from the pulp prices?

On the dissolving pulp, it's common knowledge what the spot prices in the marketplace are. And they are currently, Mohamed, at $848 there?

That's correct.

At the – they probably come off $40, $50 over the course of the last few months. Our business is priced quarterly in arrears, so we didn't have the impact of that lower selling price in Q2.

It's going to be in Q3. That is a big part of it – of why we took it down.

In terms of graphic paper, yes, we did have the weaker markets, and we did take significant downtime. However, there is some downtime in Q3 as well, so you've got to take that into account.

The paper pulp prices, bear in mind there's a bit of a lag there. We sit with inventories, and that's got to work its way through the system.

And so typically, in terms of its impact on the P&L, you're probably talking a month or two behind. So you don't get all these benefits immediately.

It progressively gets better. The final question was on the variable cost and how much...

Yes. How much of that was pulp?

How much of that was pulp.

The majority of that is – the majority of that is pulp. We had some increases in wood costs and slight increases in energy costs.

But the bulk of that is pulp.

Okay. So then it's fair to – is it fair to assume, I don't know, be it with a bit of lag, but given kind of that pulp prices are reversing now that, that is just kind of the extent of reversal you should get on the variable cost side?

Yes. Obviously, over time, cognizant of the fact that there is a time lag that are effects to arrears.

But yes, I mean theoretically, if the prices went back to the levels they were 12 months ago, then you would get much of that back.

Yes. But just so I understand kind of when you give that outlook, do you – so do you expect prices to stay at spot for the rest of the year?

Or do you expect any further decrease in other grades? And also do you expect an increase in the paper pulp prices?

Look, in the short term, we do think paper pulp prices will come down a little bit further, so we do think that, that will help the business. Longer term, who knows?

I talked earlier about the supply/demand dynamics, and we think the market for pulp, generally whether it be paper pulp or dissolving pulp, longer term means that prices are going to be relatively high. But in the immediate short term, we do think those paper pulp prices will continue to come down.

Okay, thank you very much.

Good afternoon. In terms of the outlook when you say for the full year, you expected to be down year-over-year, I'm guessing you want to leave it at that.

But is there any further comments you can give us as a magnitude of that?

No. Not really.

I mean if we thought it was going to be materially down, we would have said materially down.

Okay. That's helpful.

And in terms of the 1.5 million ton of capacity that you expect to be taken out of the European market, that's purely coated woodfree?

Yes.

And – but you don't have any from Sappi in that number do you?

Yes. Obviously, on mechanical, there's also capacity coming out on that side as well.

And we estimate that could be as close to 1 million tons.

So for mechanical, you expect 1 million tons?

Yes. Over the year.

And coated woodfree, about 1.5 million tons.

Okay. And that 1.5 million tons, you don't have from any from Sappi, do you?

Well, as I said earlier, the Maastricht ramp up, that will take about 130,000 tons over the next couple of years out.

Okay. Right.

And this 1.4 – 1.5 million tons, that's over a 6 million ton market. Is that right?

Yes. And there's more than that.

I think it's 6.8 million tons.

Okay. Okay.

And in terms of your capital structure, obviously, you just recently done a transaction. But just to confirm, you don't have any plans to come back to the markets for the remainder of 2019?

No. Not at this stage.

Sorry just one thing. Sorry, that coat would be marked – I said 6.8 million tons.

It's 6.4 million tons.

Okay. So out of the 6.4 million tons, 1.5 million tons.

Yes. Yes.

Okay, great. Thank you.

Hi, guys. Sorry.

Thanks for the call. Just regarding the National Energy Regulator's announcement about the electricity price hike of 9.41% in April and how this is to be followed by a further increase of 8.1% in 2020 and 5.2% in 2021.

How do you expect this is going to impact your operations? And do you plan on offsetting this increase?

I'll give that to Alex.

You've – as you are aware, we are largely self-sufficient for about 65% self-sufficient. We own generators.

We also sell into the group. I don't think that this is going to have a material impact on the group as we also are doing further projects in terms of increasing our own generators.

Okay. Great.

And also what do you – what's your expected working cap over the next two quarters? I'm sorry if you've already answered that.

We expect it to come down by – between $50 million and about $70 million off of the levels that we had at the end of March. And that's a normal season.

Okay, great. Thanks very much.

Thank you, everybody, and thanks for joining us on the call. And we look forward to discussing our results with you at the end of Q3.

Thank you very much.