Sappi Ltd S/Adr

and thank you for standing by. Welcome to the SAPI Q3 2025 results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 and 1 on your telephone. You will then hear an automatic message advising your hand is raised. To withdraw your question, please press star 1 and 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Steve Binney, CEO. Please go ahead.

Good day, everybody, and thanks for joining. As always, I'll go through the investor presentation, calling out page numbers as I move through. And just starting on page two, we've got the comments around forward-looking statements there for you to refer to. Page three. Just putting the quarter in context, obviously it's been a challenging quarter marked by ongoing global economic weakness, partially obviously driven by the tariffs and the trade tensions, but broader microeconomic challenges as well. And that's had a significant impact on selling prices, particularly for us, obviously dissolving pulp. which we saw is substantially lower. But not only that, we've seen packaging grades in all our regions, packaging and speciality grades, coming under a bit of pressure. And then specifically, you know, in Europe and export markets, graphic papers also coming under some selling price pressure. We've talked about it in the past. Europe's never truly recovered from the COVID times, and that region continues to be challenged by broader macroeconomic weakness and, at the same time, oversupply in many of the categories of paper. Internally, we obviously had the Somerset PM2 conversion. which was completed. You'll recall from our last investor call, we finished that at the end of May. It was obviously later, and we shared that with you at the time. It was later than we originally expected, which meant that up to the date of completion, which was essentially April, there was obviously no production, and that meant that there was a negative earnings impact of 20%. $2 million. Subsequent to that date, you have the natural ramp-up of the new machine. As expected, you know, that starts at low levels and subsequently ramps up. And I'll talk a little bit more about that, but that's all as expected. The fact that there was delays in that early period of the quarter that had some knock-on effects in terms of operational disruptions on the other assets at the mill, and obviously impacted on people as well. So, you know, that's to be expected, but I can see things are ramping up from there, and we'll talk a little bit more about that as we move forward. So taking that all into account meant that we had EBITDA of $80 million, in the quarter relative to 148. You know, obviously a little bit lower than the guidance we gave last quarter, but predominantly linked to the lower selling prices that are referred to. Moving to page four, obviously the lower profitability has, caused us to combine with the investments that we've made, the strategic investments we've made primarily on Somerset PM2 has made that our net debt levels have risen, obviously coinciding with the weak economic conditions. Same time, unfortunately, we had a negative translation on our Euro debt. As you all know, the Euro substantially strengthened against the dollar, and obviously that all happened at the same time. That caused our absolute net debt number to rise. You can see that the net debt to adjusted EBITDA ratio rose to 3.2 from a covenant, and I know we probably get questions on this, so Just from a covenant perspective, the actual covenant net debt to adjusted EBITDA was only 2.9 times. The reason for the difference is really that on the balance sheet, as you all know, the operating lease liabilities that gets included, that's just over 100 million, that does not get counted for covenant properties. So with that all in mind, You know, a strong focus on reducing debt now. Our strategic projects are behind us. At least to say that, you know, we've managed to pull back on the capex. Well, firstly, in the current year, we've got it back down to 500 million, which is what the guidance was that we gave you at the beginning of the year. You know, we've eliminated any non-essential capex, obviously primarily focused on maintenance. And, you know, we've been going through our budgeting process in the last few weeks, and as we looked out to 26 and 27, also pleased to say that the capex numbers are going to be substantially less. Twenty-six will be less, you know, we're aiming for it to be less than 300, and obviously similarly into 27. We've also made the decision not to declare a dividend in the current year. So all of those things combined, you know, we believe will help as we focus on bringing our debt down. We want to get it back below a billion dollars. Page five of the earnings bridge, and much of this I've talked about. This is from last year's Q3 to the current years. You can see the Somerset impact, the 22 that I've referred to a couple of times. On the pricing front, I've already talked about as well the lower prices coming through, and then on the variable costs, also a negative. Interestingly, some of the variable costs, the actual raw material costs themselves are less, but With that disruption that I referred to earlier, you know, particularly at Somerset, it meant there was some negative usage variances which impacted that and as part of that. So overall, that gives you the $80 million that I referred to. Slide six turns to the major categories of variable cost. Interestingly, you know, in certain categories the domestic amounts were less, but when you translated it, when you translated the euros and the rands back to dollars, you also had a negative impact there. Specifically, pop, actually, that was one of them. Turning to the other costs in Europe, we have seen wood costs and some of the chemical costs increasing. North America, energy, and South Africa, across the board, a number of the categories. We're all together about 5% up. Turning to slide seven, which is our net debt evolution, and we share quite a long history line here. We felt that was important to, you know, as our debt levels have risen, we're now at the peak. And it was important to put this in context of our history. Clearly, the jump to 1.9 billion is higher than, you know, even we expected. You've got 100 odd million debtors. of the currency translation with the stronger Euro, which, you know, didn't help. A little bit of bad luck there, but it didn't help. And then, obviously, the capex coming through, you know, accounts for much, you know, much of that increase. And we obviously deferred the dividend earlier this year, right? We have to pay that in this year. So that is obviously not going to be repeated in the next year. So you can see as you scan across the page, our debt levels have been higher before. And as I say, a strong focus now, our strategic investments are behind us, and now a strong focus to bringing that back down in the next two years. Going to the maturity profile on page 8, with the lower profitability that's come through, and obviously the capex that we've had, it's meant that the short-term debt has risen a little bit. Our focus at the moment is to we're in discussions to term some of that short-term debt and we're confident that we can do it. That's a process that's underway and it's being proactively managed. Other than that, none of the major bonds are maturing anytime soon. We're comfortable with our our profile and obviously our primary focus at the moment is pushing out that short-term date that we're referred to. Slide nine has the CapEx and cash flow. Obviously, this year we've got the negative cash generation, which You know, obviously, primarily comes from the, you know, the higher capex coming through. The same themes, obviously, we declared a dividend with the lower profits. It meant that there is a cash utilization in the current year. The capex, as I said, reducing the current one to 500. In the last quarter, we had 550. We pulled that back and done a a very close focus on our capex for the next two years. And as I say, we want to get that under 300, and we're confident to do that. Slide 10, linked to all this, we're very much focused on our discipline capital allocation strategy. Strong focus on getting the debt under a billion again. And, you know, clearly, from a profitability perspective, there's going to be, there's no major projects coming. We need to ramp up on the label investment that we did at Gratcon, and then the SPS packaging conversion and expansion that we did at Somerset. And, you know, I'll touch on that a little bit more later as well. But, you know, all in all, our primary focus going forward is, in the next few years is on cost management, discipline, and reducing debt. Turning to the segments, and firstly on pulp, which is page 12, the current quarter, obviously significantly impacted by the lower selling prices coming through. Needless to say that It does look like it's bottomed and it started rising in the last couple of weeks. You see the price here dropped to 8. Actually, I think it dropped to 7.98 and it's now back at 8.10. And, you know, ultimately we're confident that prices will recover to where they were previously based on the economic fundamentals. And as I say, already recovered to 8.10. So feeling better about that. And then we had an 18-month shortage, which obviously impacted margins in that segment. We have a dissolving hotline there as well. Then turning to page 13, a tough quarter on packaging, and it's probably best to think about it regionally. I mean, firstly, in Europe, I've already talked the fact that you have your broader macroeconomic challenges, and that's also magnified by the oversupply in many of the paper, or many of the packaging paper categories. Some of the oversupply is obviously linked to the fact that the demand has been less than was expected, but there has been additional capacity coming through

from competitors and different product groups.

South Africa, actually, pretty reasonable quarter. However, we were constrained by low inventories going into the quarter. If you recall, a few months ago when we talked, we had some downside in , so we went into the quarter with low inventories. I'm pleased to say that demand has actually picked up nicely in the last, towards the end of the quarter, and there's a very favorable outlook for citrus fruit exports out of South Africa this year. So, hopefully, you know, we'll benefit from that. North America, obviously, the story is the Somerset TM2 obviously closed and wasn't there in April, and then the subsequent commissioning. You know, what it means, and the one thing that you should all bear in mind is that you have your fixed costs for the mill, and when the mill is not, when a machine is not producing at full capacity, you still have to absorb those fixed costs. So, you know, that's partially what happens on PM2 in the early days when it's, you know, when it's at relatively low production levels. But, you know, what is very important to stress is that the ramp-up curve on TM2 is behaving as expected. Yes, we started only at the beginning of May, and that was later than originally planned. We talked about that at the end of last quarter, but very pleased to say that it's progressing as planned after the commencement date or the production date. Graphic tapers, you know, broadly, the market declines have been as expected. And in fact, we've, you know, in Europe, we've been able to grow market share, which is obviously pleasing. A lot of good work done there. The late startup, once again, on TM2, as I said earlier, did cause some disruptions at the mill. And then you also have the added impact, once again, of the absorption costing of fixed costs. You know, when PM2 is not operating or at relatively low levels, you do get an allocation of higher allocation of mill fixed costs to your remaining graphic assets. And you must always bear that in mind. So, As PM2 ramps up further, that machine shares in a greater proportion of the overall mill fixed costs. Slide 15 is the regional numbers, and, you know, I don't intend going through all the numbers on this page, but, you know, most of them are self-explanatory, and most of it I've talked about already, but maybe just at a very high level, you know, obviously Europe, challenged by the macroeconomic conditions, which has impacted on selling prices and volume. North America, volumes, Somerset, PM2 linked. Then you've got, and then in South Africa, on the container board side, low inventories to start the quarter, which impacted tons. And selling price is what we've talked about, the impact on dissolving pulp. So that's at a very high level what impacted each of the regions. And then moving to slide 16, it's the same numbers. Obviously, graphically you can see that. I don't intend repeating everything. You can see that obviously that there was a lower profitability, but hopefully you can hear from what I've described that there are reasons to be optimistic with the ramp-up from PM2, dissolving pulp prices, recovering. You know, we're looking to take out costs in Europe. So all of those will, you know, will help. Slide 17 has the drive strategy. It's a slide you will be familiar with. We continue to use our strategy, our five priorities to guide us. Clearly, in a time like this when profits are a little bit less, you know, our primary focus is going to be on operational excellence. And, you know, that's maximizing production, maximizing or optimizing efficiencies. looking for cost opportunities. On the growth of the business, there's not going to be investments, but we're going to get extra funds coming through from Somerset in the quarters ahead. And then ultimately, all the good work that we're doing, we're going to be doing on sustaining our financial health, which I've talked about already. We've been proactive, and I'm going to talk a little bit more about that Slide 18 is the immediate priorities for us, and I've touched on some of these. You know, the good news, you know, when you don't have any major projects in a business like ours, a major manufacturing business, you know, you can focus on optimizing production and getting things right, and ultimately, improving your usage at the mills, improving your costs. So that's going to be a strong focus. The tariffs, obviously, are a moving target. We continue to assess. Where they do impact us directly, we look for opportunities to mitigate. A major priority is this commercial ramp up of PM2 at Somerset. It's going well commercially. We're signing up customers. It's going as expected, both from a production side and a commercial side. Europe, it is tough. It is a tough environment, and we're being proactive. We've always been proactive about capacity utilization. You know, we've made an announcement that we are in consultation to potentially close two of the smaller machines That's an ongoing process and we'll hopefully conclude reasonably soon. And then we've still got the ramp up of GratCon, the label investment that we made a year or so ago. And once again, despite the challenging conditions, we are excited about that. So strong focus on cash generation. On the banking side, obviously our leverage ratio has crept up a little bit. We have great relationships with our bank, long-term relationships. You can see from the debt slides that we've had, you know, we've had much higher levels of debt in the past. They understand our business. They understand the cyclicality. They know that we've made this investment at Somerset. So we are proactively managing with them. to ensure that we've got maximum flexibility with regards to the covenants that we have. And, you know, we're confident that that will be, you know, that there won't be an issue there. The non-essential topics has been deferred, and I've touched on that a few times, and obviously no dividend. So turning to Outlook and much of the sites, I've talked about already, but just to recap on one or two things. DP prices started rising again. PM2 at Somerset ramping up as expected, looking to take up a little bit of capacity in Europe, proactively managing our costs. Turning to page 21, obviously the tariffs. ensuring that we've got maximum flexibility and monitoring the situation, strong capital allocation, debt reduction, number one priority, and taking everything into account based on everything that we're seeing. We estimate that the adjusted EBITDA for Q4 2021 will be above that of Q3. So, operator, I've gone through the presentation. I'm now going to hand it back to you for questions.

Thank you. As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To answer your question, please press star 1 1 again. We will now take the first question. From the line of Brian Morgan from R&B Morgan Stanley, please go ahead.

Thanks very much. Steve, you spoke about in discussions to turn some of the short-term debt. Can we read that as basically a done deal? Have you basically done the hard yards and it's just a matter of dotting the L's and crossing the T's now?

Look, Brian, you know, that's an ongoing process and we've got good relationships with the banks and, you know, it has to go through final approvals and all that stuff, but, you know, we're confident here. Okay.

And then cash balances, $200 million down to 2020 levels. Is there any potential to raise some cash as part of this as well?

That's part of the process, Brian. So, you know, we're looking at, you know, overall things. Obviously, you know, I referred to the fact that the, you know, the covenants, you know, the short-term debt. So, We're looking at it holistically, and the engagements are good, and we're confident that those will be resolved.

Okay. And then, Steve, is the bond market open to you, or is this just bank debt?

Brian, that's a hard question. You know, I can't say too much, but theoretically, yes, that is an option as well.

Okay. And then just moving on to an operational question. You did cut a few 18-month shots now, you know, the last six months. Do we have a bit of a management shot tailwind heading into 2026, or are there still some big ones scheduled for then?

Yeah. The good news is you don't have, and I'm looking at Mike, we don't have a croquet shot next year. So that's a positive. We do have the Psycorps shot, which happens in Q1. Sorry, what did I say? Cycle. Sorry, I meant Somerset. Sorry, I meant Somerset. And then Cycle wasn't on an 18-month program. Graham, Cycle spread across the year, right? Yes. And in Gdwana? Yes. Q3. Q3 next year.

Okay, cool. That's all from me. Thank you. Okay.

Thank you. We will now take the next question from the line of James Twyman from Prescient. Please go ahead.

Yes, thank you very much for the presentation. Could I start off by just asking three questions around CapEx? So you've cut CapEx by 40 million for this year. Can you just talk around what that was in terms of what was cut and whether that's just projects that are being delayed? or things have been cancelled. Secondly, would you say $300 million is your expectation, or is that like a ceiling? It sounded a bit more like a ceiling from the way you were talking. And then thirdly, of that $300 million, how much would you say is environmental spending? It's historically been around $60 million, I think. I'm wondering where that is in that. That's my first load of questions. Thanks.

Yeah, what we cut, you know, you always have kind of smaller projects that, you know, give cost-saving opportunities and the likes. We also regularly put in our budgets, and I think you know this, you know, acquisitions of more forestry in South Africa, and a little bit of the sustainability as well. So it's partially tied back to your last, the third part of your question. So sustainability this year, or going forward, we're estimating at about 20 to 30 million. What we tried to do on the first part of your question is any project that was not giving us paybacks of immediate paybacks, projects that were giving three or four year paybacks, we decided to defer those a little bit. And that's why we reduced. And then similarly, into next year as well, to your second question, Yes, you can interpret the 300 as a ceiling. So hopefully less is what I'm saying.

Yeah. Okay. Thank you very much. And then my follow-ups, if I may, were firstly, in terms of exporting to the U.S., I think you've decided to put your prices up. calling it a surcharge. Can you talk around that? Because obviously, if you're not really making money in Europe, and then you have to sell at 15% lower prices, that's just not acceptable. So could you give us some idea about, I don't know what you can say about the size of the surcharge and all of that? And then secondly, working capital, 148 million out so far this year. How much of that do you think you can get back in the fourth quarter? Because I know there's always a big move in that in the fourth quarter. And how much of that is, you know, the extra working capital that's needed for the PM2?

Yeah. Yeah. Okay. On the first one, and I'll let Marco elaborate a little bit further, but you're right. You hit the nail on the head. You know, the European business can't have solved that. And that's why, you know, we made the decision that we did. That's why we've gone out with the announcement. We're not the only ones that have done that. Maybe just from a practical perspective, Marco, you just want to elaborate further there.

Yeah, I think, James, you're right. We have decided that this is just too big to absorb. That's not what the European business currently can afford. We are right now in the process of seeing what the practicalities around these, about the passing on of the tariffs is and also what exactly the level should be. There's quite some intricacies that need to be covered, but ultimately it is like a price increase. You need to see where you ultimately end, but the direction is very clear. We want to at least partially pass on some of the tariffs to the market. Yeah.

Yeah, and we can't absorb that, James, so we're not going to do that. So, you know, Marco and the team, you know, we'll work through this, but ultimately, you know, we're not going to absorb it and ultimately, you know, pass it on. There may be a little bit of impact on volume, but that's a sensible decision to take. You know, on the working capital, you're right. There has been an investment in the current year. PM2 is obviously ramping up, so we, you know, we need to We need to build up inventories and, you know, that's obviously, you know, raw materials and ultimately finished goods that you're making. So there is a higher investment with that. But maybe, Glenn, just if you want to just talk in broad terms, we can't give a specific number.

I'm talking specifics, but there will be a reversal of that outflow. And it's going to be determined on the level of operations in September, the latter part of August into September. I can't give you more than that, James, but there will be a reduction.

Yeah, I think what we're saying is there will be a reversal, but it's not going to be all of it, James, for the reasons that we described.

Okay, thank you very much. But on the surcharge, you haven't said into the market the size of that surcharge as yet. That's what you said, I think. Is that correct?

That's correct. Yeah, it's very, very early days, James. But we've set the direction, and the concrete steps will be decided upon in the next couple of weeks.

James, we're not the only ones, right? our competitors are doing it as well.

Well, some have got bigger problems in terms of exports to FDU. So, yeah, I understand. Indeed.

Thank you. We will now take the next question. From the line of Sean Ungerer from Cronog Research. Please go ahead.

Good afternoon. Can you hear me?

Yep, Sean.

Great, Steve. And just to follow on Europe, I guess just operationally, can you give us sort of any insights into the sort of current quarter, how are order books looking? Are we going to see the tailwinds from lower pulp costs? Have you seen any step change in underlying demand? I mean, just trace value, it seems like. Operating relations are a pretty tough issue with a lot of exports now being dumped into Europe. I'm just trying to get a bit of a feel for what we should expect there. Thanks.

Yeah, I don't think you're going to see any material change in the short term from a trading perspective. It's kind of continuing as is. It's tough conditions. There's obviously excess capacity out there. The macro situation is not improving anytime soon. Obviously, we're taking action to take out fixed costs, but you have to go through a process, as you know, so that wouldn't be felt immediately. So I don't think it's not getting markedly worse, but it's not getting markedly better either.

Okay, cool. Thanks, Steve. That's it from our side.

Thank you. We will now take the next question from the line of James Perry from Citi. Please go ahead.

Hi, thanks for the presentation. Just on dissolving pulp, you referenced the $10 price increase after reducing by about $100 this quarter. What makes you confident that we really have seen the bottom? Are you able to share any insights as to what you've been getting on the ground in China? Are you expecting momentum to actually pick up, or is this just some restocking after the initial disruption, do you think?

Look, I don't think it's going to recover to $900 immediately, but if you look at what happened when the initial price tariffs were announced and the consequential impact, things significantly quietened down. Subsequent to that, there was more activity and ultimately, you know, the sellers in the marketplace have been able to realize a higher price. You know, when we make these comments that we think the price is going to recover further, it At the end of the day, it's based on economic fundamentals. And the marginal cost per ton in this business across the industry is over $900 a ton. There are many suppliers out there that cannot operate or make losses in the low 800s. So, you know, we're seeing demands from our customers. in that environment, and there's more activity than there was, say, a month or two ago. And that's helped. You know, Mohammed, maybe if you want to add to what I'm saying. So I think we're cautiously optimistic. Ultimately, in the medium term, you know, we think it's going to get, it is going to recover back up above the $900. It's just a case of when. But maybe, you know, Mohamed, you can talk about some of the things you're encountering in the market at the moment.

Yeah, sure, Steve. Well, if I look at the drivers of demand for this organization, what we are seeing is an improvement. As you say, the activity levels have started to increase, and that's reflected by one higher BSF operating rate that's gone up the last couple of weeks. We have seen a reduction in the BSF at their customers. The yarn inventory levels are also improving. We are also going into a seasonally strong time, so that also is supporting increased activity. And also in China, what we have seen, increasing the exports of Disco's fiber, which have hit a 13-month high, and that is just supporting the higher operating rates. and that should support increased demand for, you know, for a dissolving loophole.

Yeah, and that last point that Mohammed makes is quite an interesting one, because obviously most of the viscose that was manufactured in China would have been sold to domestic, ultimately domestic manufacturers of clothing. Obviously, with all the, everything that's been going on, what you're seeing now is that viscose Producers in China are now exporting the raw viscose product to be manufactured in other countries into clothing.

Okay, that's really helpful. Thanks. And on graphic paper, you said that supply has been increasing its market share. Would you be able to show any light on the approximate size of those gains, and do you think it's one-off, or are you expecting consistent share gains in the coming courses?

Hey, it's been progressive. You know, we can't get too specific, you'll appreciate, but certainly both on coated wood-free and coated mechanical, we've actually gained market share, and that's been progressively over the last two or three quarters, right?

Correct.

Marco, I don't know if there's anyone here.

No, and it's certainly not by big steps. It's a progressive development, but certainly pleasing to see over the last couple of quarters.

Okay. Without giving you specific numbers, to put it in context, we're talking a few percentage points. We're not talking You know, we're not talking double-digit type increases.

And maybe, if I can, just, yeah, there is, on the mechanical coding side, we have seen some of the players checking out, in Germany particularly. So, yeah, there's always a plan to capture some of that volume, which would be a one-off, but otherwise it's very progressive and

Okay, much appreciated. No more questions from me.

Thank you. We will now take the next question from the line of Reinhard van der Vold from Bank of America. Please go ahead.

Hi there. Afternoon, Steve and team. I just want to circle back to the conversation about the DWP market. So I appreciate the point that there are some signs of improving. But just looking on the capacity side, It sounds like Bressal is looking to do some more dissolving pulp runs into the end of this year. Is there any signs that maybe the cost curve is flattening a little bit here and that we should be maybe thinking less about the $900 per ton level and maybe thinking about something slightly lower than that as the marginal cost?

Yeah, look, when we look at the cost curve, we do take that into account. The Bracel stuff that you referred to has already been in the market, right, in recent quarters.

If I can just add, Steve, the swing from Bracel to dissolving wood pulp is required because the fiber plants in China are also starting up new capacities. So, it's designed to feed the new lifestyle capacity that's starting up in China.

Yeah. So, it's being absorbed. Yeah. You know, maybe said a different way, we don't come up against them in the market.

Yep. I've got it. Appreciate it. Maybe just on the operations side, can you just remind us what the fixed cost recovery of Somerset is going to look like over the next couple of quarters? And, I mean, if possible, can you give us a sense of where EBITDA break-even sits in terms of number of volumes?

Yeah, what I would say to you is, the best way to think about it is in terms of volume. And we've said in the past that we always knew that Q3 was obviously the initial ramp up. Obviously, it started later than we thought, but we knew that was the case. As we go into Q4 and we look at our production, we're still confident that production for the quarter will be at the levels where that machine was previously. Clearly, there are different dynamics at play with regards to selling prices. You know, one was a graphic paper and the likes, and now you've got packaging. But from a volume perspective, you are back at that volume. And then as we look into the next financial year, each quarter, and again, this is consistent with what I've said previously, each quarter, the volumes progressively get better. And that's, you know, that's the natural ramp up curve, both technically and commercially. So, you know, the Somerset mill will progressively get better. We're going to have the shut in Q1, which you have to, you know, which you have to take into account. The paper machine is still producing, but, you know, the pulp mill and the likes will be done. Mike, I don't know if there's anything more you want me to add there.

I think you're spot on. I think the thing I would just remind everybody, we have a brand-new paper machine in a brand-new market. Now, we're experienced in the market. Our commercial match for the grades matched our very first sheets that we brought to the market. So we're extremely pleased with the quality. And we're right on the ramp-up curve we intended to be on. And the ramp-up goes through 26, but it's steepest right now. So we'll see improvements through this quarter, and then it'll gradually work up to the full rates over the course of 26.

Got it. That's very helpful. Thank you. And can you maybe just give us a comment on Foxport market conditions in the U.S. at the moment? Looks like pricing is relatively robust compared to Container Board.

Mike, you want to go for it? Generally, yeah? Yeah.

So the prices on Container Board are, you know, more or less holding flat. We've seen some challenges as we've been bringing the market on, bringing the volume on with PM2. But, yeah, you know, they're where we expected.

Yeah, I think if you go back a step, the markets that we're looking at on specifically in the SBAs, The trend line has continued. The overall market growth, we're looking at about 1.5% to 2%. Pricing, obviously, there was a little bit of pressure that came prior to us completing PM2, and obviously, as we've come to market, the competitors see that, and we can't say too much about that on a call like this, but But broadly speaking, the markets, you know, we're confident of filling the machine as we ramp up. And, you know, the economics are holding up as we would expect.

Perfect. Thanks.

Thank you. As a reminder, to ask a question, please press star 1 and 1 on your telephone. We will now take the next question from the line of Ephraim Ravi from Citigroup. Please go ahead.

Thank you. Most of my questions have been answered. So just one fairly high-level hypothetical question, if I may. So if the rate of debt reduction is lower than expected, a billion is half of your current sort of net debt and you know, you need to generate at least probably 500 million of EBITDA per year to kind of, you know, basically be cash breaking, I suppose. Given that kind of scenario, how long would you wait before you get to that billion? Would auctions like an equity raise or asset sales be on the cards if the net debt is not below a billion by, let's say, two or three years? by 2028. Thank you.

Yeah, we're not going to do an equity raise. You don't have to worry about that. Look, what I would say to you is, you know, we're going to focus on what we can control. We're going to have the extra volumes coming through on Somerset, which is going to, and we're not going to have a repeat of obviously the downtime that we had on the machine this year, which if you add the two quarters together, you know, you're over $40 million. So, you know, based on what you know now, the lower capex, you are right in terms of your max. But, you know, we are confident that the EBITDA can, you know, can be higher than that. And there will be a reduction, you know, a reduction in debt progressively. And ultimately... it may take longer to get there. We're obviously focused on getting there within the next three years, but, you know, if it takes a little bit longer, you know, we will maintain our discipline and, you know, we're not going to go after any new projects. Our immediate priority is to reduce debt and maintain, you know, maximum flexibility. So I think the answer to your question is it may take a bit longer, but... You know, at some stage, we're confident that DP prices will recover. You'll have the higher profitability from Somerset, from the higher volumes, and the EBITDA will be higher.

Thank you.

Thank you. We will now take the last question. from the lane of James Twyman from Prussian. Please go ahead.

Yes, thank you very much. Just a few follow-ups from me. Just in terms of PM2, please, the 22 million cost that you refer to, what does that really mean? Does that mean that that's like the EBIT loss that the machine is making or the EBITDA loss or... So trying to understand whether, you know, in Q4, that should mean that there should be an improvement of at least 22 million or, you know, might it be not quite that much. And then related to that, at the moment, your issue with PM2 is production. There'll come a point where it's more about, you know, getting the customers to engage. Otherwise, you're just sort of making cups and plates, which isn't obviously the plan. How are you feeling about the customer interest at the moment? Thank you.

Yeah, I'll talk about the numbers on the jar, and I'll let Mike just share at a high level how it's going with the customers. The, yeah, the 22 million is essentially the EBITDA. The EBITDA on the lost production. Yeah. And, you know, obviously, obviously, as you ramp up, James, and this is normal, right? On a big machine like that, you have, you know, you're testing different grades, you're you know, there's a little bit of start and stop and that kind of thing. So, I think as you think about Q4, you know, it's difficult to be too definitive that you would get all, you know, all of that profit back, but certainly, because bear in mind you're comparing it to, you know, what, because the machine was done, what you lost. And So I think it would take time. It may not be all the 22 million.

And then, Mike, on the customer side of the – The customers – so our rate book, as I mentioned earlier, the qualification process has gone extremely well. Everything we've taken to the field as we've worked through the whole grade structure, our commercial match between PM1 and PM2 has been spot on. So everything that we planned in this paper machine has worked just the way we had on PM1. We've had several of the new customers and existing customers in to see the machine. And there is a huge amount of interest. You know, I believe they see... a brand new state of the art asset with state of the art technology putting out very high quality products. And our confidence is high that we're going to be able to work our way into more than just the food service board business. And I'd offer that we already have much of that qualified on PM1. We've base loaded PM1 with food service board to seed PM2 startup. So, we'll be bringing some of that volume back and, you know, we feel confident that it'll be well accepted in the field.

Thank you very much. Thanks for your time.

Thank you. I would now like to turn the conference back to Steve Beeney for closing remarks.

Thank you. Just want to take the opportunity to thank everybody for joining us on the call today.