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Sappi Limited’s Q1 2024 earnings call has revealed a company navigating through operational challenges while maintaining its financial guidance. With a strategic focus on high-margin segments and cost-saving initiatives, Sappi is positioning itself for future profitability despite the current economic headwinds and market uncertainties.
In light of Sappi Limited’s recent Q1 2024 earnings call, InvestingPro data and tips offer additional context to the company’s financial health and market position. With a market capitalization of $1.31 billion, Sappi trades at a low Price/Earnings (P/E) ratio of 5.03, suggesting that the company’s earnings are undervalued relative to its share price. This is further supported by the adjusted P/E ratio for the last twelve months as of Q4 2023, which stands at 7.97.
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The company’s strong free cash flow yield is highlighted as a valuation that implies the potential for robust shareholder returns. Furthermore, Sappi’s dividend yield of 4.86% as of early 2024 showcases its commitment to returning value to shareholders through significant dividends.
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Operator: Good day, and thank you for standing by. Welcome to the Financial Results Announcement Q1 2024 Webcast and Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to turn the conference over to your speaker today, Steve Binnie. Please go ahead.
Steve Binnie: Thank you. Good day, everybody. Thanks for joining. As always, I’ll move through the investor presentation calling out the page numbers as we move, and I’m going to start on Page 3, which has some of the highlights for the quarter. Firstly, our EBITDA was $156 million, which was in line with our guidance that we gave at the end of the last quarter. Overall, we were satisfied with those results against the challenging global macroeconomic environment. We did see gradual recovery across our segments. Graphic paper volumes were higher quarter-on-quarter. But obviously, to point out to you that we did have some big shuts — scheduled shuts, and those were successful for us. But naturally, there were lower volumes as of that, and it impacted our profits by $45 million because of the lower volume. For the first time, we’ve included forestry fair value adjustment in our EBITDA. That’s something that we took a decision because we regard forestry as an integral part of business. Obviously, the forest — the timber is sold into our operations, — and because of the adjustment to the forestry valuation, it was pushing up the cost, and we felt it was appropriate to reflect the fair value adjustment to offset that higher internal costs. The mills in Europe, stocked out in Lanaken. We had announced obviously that we were looking to close those. Those permanently cease production, and we will start to see the benefits of that in terms of lower costs later in the financial year. Moving to Slide 4. The product contribution split. On the left-hand side is the EBITDA. And obviously, the last couple of years has been pretty volatile because of obviously COVID and then we had the global supply chain challenges, then we had the bounce back from COVID and then more recently, the macroeconomic challenges you saw. It has been a little bit up and down. But on the right-hand side, I think in terms of our strategy, you can see that we continue to push the business towards the higher margin growth segments our percentage of sales coming from graphics continues to continues to come down, and that will be the same going forward, particularly, obviously, after the closure of the two mills and the big projects that we’re undertaking at the moment to convert, expansion to both in Somerset and in Gratkorn. Moving to Slide 5. The earnings bridge comparing — we thought it was more relevant to compare Q4 with Q1 to reflect the relative performance. Sales volumes negatively impacted, but that’s because of the shuts. The underlying performance is positive across the segment. Included in variable costs was some — an offset of some one-off government energy-related subsidies in Europe of about — that was about EUR17 million. And then the plantation fair value adjustment is on the far right. We have been getting some questions today about the split of that. So I’m going to give you the splits pulp segment was 10, packaging 14, and graphics 2 to make up the split of that 26. Then moving to Slide 6 is the cost, variable cost movements. And this is consistent with what we’ve talked about. We saw the peaks in the prior year and then starting to come down across the board through towards the end of 2023. And in Q1, we did see a little bit of a pickup. And all in all, payable costs were 5% up quarter-on-quarter. Then Slide 7, as our net debt, we remain committed and focused on keeping a tight control on the debt. Obviously, there was an outflow of cash in the current quarter, which I think is on our future slide. And then on top of that, we had an adjustment because of the movement in the exchange rates. Ironically, the dollar had weakened against the euro, but subsequent to that, it’s obviously come back. But in the quarter, there was — I think it was $69 million impact because of that. Page 8 has the debt maturity profile. And again, it ends a good picture in the 2024 numbers, which I’ll focus on, we’ve got two maturities in the current year, in what we call SPH term debt that’s term loans in Europe, that’s maturing in the current year, and we’ll in the process of finalizing that refinancing. So there’s no concern there. And in terms of South Africa, included in the $164 million is about ZAR1.5 billion of bonds, which are maturing soon, and we’re confident that we’ll be able to refinance that. Moving on to Slide 9, which is the cash — cash generation on the left-hand side, the $69 million I referred to earlier actually I made a mistake. The cash utilized in the current quarter was $69 million, and that was a seasonal thing, and that’s normal. The CapEx is reflected on the right-hand side. And as consistent with prior quarter, which we referred to, we expect it to be around $500 million for the year. Turning to Slide 10. The focus on disciplined capitation remains, and you can see our priorities. In the far right-hand column, some of our targets for the year and some of the things that we’re working on. Obviously, we continue to focus on our sustainability targets, our journey towards the science-based targets, but there’s some projects there, which are on-track. We remain focused on getting our debt below $1 billion. Obviously, the current year will be impacted negatively by the shuts in Europe. But longer-term, once we’ve completed the projects that I referred to, the debt will come down. And then — in terms of profit improvement and growth, we’ve obviously got two nice projects underway, Gratkorn is basically converting one of the machines to labels and giving it the functionality to make it strength labels. And then we’ve got the conversion and expansion of Somerset PM2, that’s going so far in time, on budget, and we included in the CapEx. Now the biggest chunk of the CapEx relates to this project, $154 million. Moving forward to the segmental overview. And firstly, on the product segments, Slide 12. The quarter-on-quarter tons were down, but that was two reasons. One, we had a big shot that came through. But Saiccor and Cloquet — sorry, Saiccor and Ngodwana, and there was a Cloquet shop actually. And then the other reason was the fact that we had high volume sales at the end of last year. So our inventory levels going into the quarter or less. The underlying demand is very good. And we expect that to continue to be. So the market prices were in a fairly narrow band in the quarter, subdued ahead of the Chinese Lunar New Year. That’s normal. Having said that, the last week or two, it’s crept up a little, but I think the latest prices in China, spot prices are $895 a ton. So that’s encouraging. In this prior period, that’s encouraging. And obviously, the fact that there were lower volumes that would have impacted on margins. Moving to the Packaging (NYSE:PKG) segment, once again, impacted by the shut the — in Ngodwana was an extended shut because it was an 18-month period. It was — it’s a product category that we make there, containerboard, which is very profitable for us. So that would have had a negative impact on margins. Having said that, after a slow start to the year, we are seeing more encouraging signs coming out of South Africa. North America, the paperboard demand is showing sign of recovery. And volumes were up. And in Europe, although volume is a little bit better, the underlying demand still remains sluggish there. And then Page 14, we graphics showing signs of a muted recovery. Volumes were up, and you see the benefit coming through into the margins. And then, on top of that, we concluded the closure of the stock start mill. The carrier selling of that product to the other mills has been successful. And then more recently, we concluded the consultation process for the closure of Lanaken, did cease production, and we are similar to stocks that we’re moving those volumes to our other mills. Moving to the geographic regions on Slide 15. All in all, looking at the volumes, Europe, as I said, a slow recovery, volumes up but it’s not a sharp recovery, but things gradually improving. We’ve had to give up a little bit of pricing, but relatively held up relatively well. In North America and South Africa, both of those regions impacted by the shuts. The underlying businesses are continuing to improve and selling price is pretty good actually. You can see the impact on margins graphically on Slide 16. Europe, a little bit better, obviously coming off a low. North America being impacted by the shut. But as I said earlier, underlying demand for paper continues to recover. And in South Africa, good margins despite the big impact from the shuts. Slide 17 has the strategy or strategic pillars. And once again, I’m not going to go through this in detail, just to highlight a few key items driving operational excellence critical for us and particularly relevant now as we close the two mills in Europe, and we moved that production that enables us to fill up the remaining mills as the demand for our product continues to recover in all the regions. It means that the mills become full once again, and that enables you to achieve better operational efficiency rather than stop starting the whole time. And then enhancing trust, we are very proud of our BEE certification and we continue to believe that our sustainability position gives us a strong competitive advantage across all the per segments, but in particular, in the dissolving pulp space. And then in terms of growing the business, we’ve got the two projects that I talked about, labels at Gratkorn and Somerset conversion and expansion. And then in terms of sustaining financial health ongoing focus on costs and never losing sight of the long-term target of net debt at $1 billion. Slide 18, ESG, we continue to focus on this and rethinking what we do and how we do it. There’s a number of awards that we’ve achieved, maybe to call out the BBBEE certification came through once again, and we’re at the highest level, Level 1. And we’ve been there for a couple of years now. So we’re very proud of that. And then on the CDP front, yesterday, actually, we got feedback that our climate change score had improved and our water score. So that’s more good news on that front. Then turning to the outlook, Page 20. Obviously, we’re still facing the challenges of the weak global consumer environment and high interest rates for economic growth. Having said that, order activity is improving, albeit slower than we’d like, but it’s improving, and it’s progressive. And the DP demand remains robust. We will complete the restructuring closing at Lanaken mill. And just to remind you all that there’s over EUR100 million of savings, fixed cost savings that we should achieve because of the closure of these two mills. Obviously, you’re not going to get the full benefit in the Q2 to get a little bit of the buffer. But ultimately, when we get into the second half of the year on a run rate basis, we will achieve those savings. And on top of that, obviously, as I said earlier, it enables us to fill our coated or other coated woodfree mills in Europe and that leads to efficiency benefits. Then in terms of Slide 21, cost inflation remains a risk. It’s stable at the moment. But obviously, it remains a risk. We’ve got a little bit of risk on costs related to logistics because of the various challenges that are out there putting the Middle East conflict. And obviously, that pushes up the cost a little bit. And it also creates a little bit of pressure in terms of securing capacity on the ships because they’re on the water longer. The CapEx, I’ve spoken about. And then in terms of our guidance for Q2, we say in the announcement that our EBITDA for the second quarter will be in line or similar to the first quarter. And that’s obviously despite the macroeconomic uncertainty. What I want to add to that is that obviously, in the first quarter, we had the benefits of the ones-off environmental subsidies in Europe, which was, as I said, EUR17 million, $18 million. And another number that was in there was the forestry fair value adjustment. Now our estimate for Q2 on the forestry fair value adjustment is that it will be lower, at least half of what the Q1 number is. So if you back that into the numbers, both the ones-off impact of the subsidies and a lower forestry fair value that will tell you that the underlying business is better to enable us to achieve the even or similar earnings to Q1. Operator, that’s me to finish going through the deck. I will hand it back to you for questions.
Operator: [Operator Instructions] And your first question comes from the line of James Twyman from Prescient.
James Twyman: I’ve got three questions, if I may. The first one is European prices go to paper prices are holding up pretty well whereas they do seem to be falling in the U.S. Can you talk around this given that the U.S. market is clearly performing seeing better volumes than Europe? And why one is sold, but therefore, why it’s not holding up as well as Europe? Secondly, the key benefit from the closures is keeping the volume at the new mills where they’ll be producing given that they’ve now closed, could you give us some idea of what sort of percentage of the volume you’ve managed to keep or what volume you expect to keep? And then my third question is the cash cost of the closures, I think you were talking at around $150 million for the two of them this year. Is that still broadly what you’re expecting?
Steve Binnie: Sure. I’ll give you brief answers on the pricing in the U.S. and Europe and I’ll let Mike and Marco to go into a little bit more detail. And then just give you some feedback on the volumes and then the cash closure costs. Yes. In terms of pricing in Europe, I would argue that both regions, the volume — the prices had held up pretty well, better than we feared. Having said that, the U.S. prices has held up better over a period of time. So I suppose it was always natural that a little bit would have been given up. Having said that, they are holding up better. In Europe, you have seen announcements across the industry and the various players have been very disciplined at keeping prices high. You’ve also got to bear in mind that the cost on a historic basis is still relatively high. Maybe on that, I’ll — Marco, do you want to start on Europe’s pricing?
Marco Eikelenboom: Yes, Steve. Thank you. And I think you covered it pretty well. The cost pressure in Europe will continue also in the next quarter as we see it, both on the pulp side as on the chemicals and therefore, for us to keep a healthy margin we will need to keep our prices at least able. We’ve slightly increased them to at least sustain these margins. So that’s one thing. The other part, of course, playing in Europe is that after the closure of the two mills Stockton particularly Lanaken. The balance between demand and supply has tightened somewhat, and that’s being felt in the market. Lead times have gone up basically from December onwards — from low levels. But it’s good to see and encouraging to see that lead times are getting slightly longer, which is which is supporting the pricing. So that’s from a European perspective.
Steve Binnie: Yes. Sorry, Mike, but just before you answer, prices have actually been pretty stable in North America. I’m not quite sure. James where you got that, but it has been pretty stable in graphics. But Mike, maybe you want to elaborate further.
Mike Haws: I guess the only thing I’d add is, overall, prices have been very stable in North America. Graphics has held up pretty well. Packaging down slightly as the volumes improved, but certainly not something…
Steve Binnie: Maybe, James, it’s actually on the packaging side, volumes have gone down a little bit in North America. But…
Mike Haws: Volumes are up on package, price is down just…
Steve Binnie: Correct. And then in graphics, pricing has been stable. Then in terms of the carrier selling in Europe, so far, so good. Stock that we’ve been able to move all the volumes across. And Lanaken, the early signs are very good, and we’re Marco, we’re confident of keeping all the volume.
Marco Eikelenboom: Yes. I think the only addition maybe, Steve, is that obviously, we’ll need to create the capacity to keep the entire order book. But it’s looking very promising. And we’ve been very focused and very close to our customer base. So we’re very encouraged with the first results.
Steve Binnie: And then in terms of your other one on the cash flows of cost, obviously, we’re still finalizing it. But yes, we stick to our estimates that we gave you last quarter.
Operator: And your next question comes from the line of Sean Ungerer from Chronux Research.
Sean Ungerer: Just in terms of the changing accounting in terms of the fair value gain on the forestry assets. So obviously, you’ve given us guidance for Q2. And I just sort of compare that looking back to 2023, even though it wasn’t treated as going through EBITDA. It was quite chunky about $128 million. I think just looking for the rest of the year, are you in any position to sort of giving us a feel sort of how much less or how much more will be late to that? That’s my first question.
Steve Binnie: Yes. Look, I’ll let Alex elaborate further. It’s obviously we’re trying to predict future. Last year, wood prices rose very sharply and that’s why last year was much higher. We’re not seeing the same rises. But Alex, maybe you want to give more detail.
Alex van Coller Thiel See: Maybe just in the short-term, with the NCT5, there’s been a reason why the prices haven’t risen. But I think our anticipation is by the — towards the end of the year, there will be a price increase in which would obviously start marine the number.
Sean Ungerer: Okay.
Steve Binnie: Interesting thing, Sean, as I was saying in the deck. In prior years, you always had the higher charge coming through to the paper and the pulp businesses because your forest valuation was going up all time. And now you’re getting a true measurement of the underlying profitability of the African business by including [indiscernible].
Sean Ungerer: For sure. And if you just going to Europe, I mean sort of being on to James’ question. But if I just look at the index pricing at least — and what I can see for Europe, it looks like cut would be down 1% your state, Canada goes down 3% your state, whereas pulp is sort of up between anything and 6% and 10%. But just sort of wondering, outside of the closures, which I do agree, obviously going to provide significant upside in terms of fixed cost reductions. Are there sort of any other levers you could sort of expect? And sort of what I’m asking or getting at is you’ve obviously guided to a bit of cost risk in Q2. And if you strip out the one-off energy rebate you received in Q1, it looks like profitability in Europe come under a bit of pressure in Q2 relative to Q1.
Steve Binnie: Yes. I think the big driver of the recovery, right, is — we anticipate volume demand to continue to rise across both graphics and in the packaging segment. So you — the other big issue you’ve got to take into account is higher volumes. And whilst you say, yes, pulp is up a little bit, there are other costs like energy and chemicals that maybe are not rising by the same extent. So obviously, that helps a little bit as well. So all in all, with the fixed cost savings, a higher volume, you get better efficiencies in the mills because the mills are full. So that boost — that helps with Airbus as well. So all in all, if we — if we take that all into account on an underlying performance basis, we see an improvement in Europe in the second quarter.
Sean Ungerer: And then just around your commentary in terms of packaging and specialty volumes lagging in Europe. I’m just trying to sort of tie that into, for example, Sniper has a pretty positive update in terms of Q4 volumes for packaging sort of being flat in Europe in Q4. So I was just sort of wondering if that comment from a stacking perspective, is that linked to containerboard exposure that you guys have — was it perhaps another sort of buckets that is causing that and the line demand to be quite light relative to, say, North America.
Steve Binnie: Yes. Look, you quoted one player in the market. But if you look at a lot of the other results of a lot of the other players in the space, there has been pretty challenging results that are coming out. And it’s clear that across the segment across a number of the categories, there are still challenges. And a lot of it obviously, is the economic situation. We — I know we sound like a stuck record, but this is probably the one area where you’re still seeing high levels of inventory working its way through — so it’s still an we are seeing gradual improvements, but it’s still uncertain. Marco, I don’t know, is there anything specific you want to add.
Marco Eikelenboom: There’s maybe one additional element that plays here. That is the there’s still slightly unpredictable political area where a lot of emphasis is being put on the legislation around packaging. We are still hopeful with the negotiation that are going on right now between the Commission, the Parliament and the Council, that should be finished in the next four, five weeks that it will come up with a workable solution, but that has played an additional role that uncertainty around the legislation. I’m confident that we will get to workable solutions and, therefore, see more confidence in the markets.
Sean Ungerer: Okay. Excellent. And then sorry, just going to sort of full dynamics to U.S., Steve. I mean, obviously, Sap’s going ahead with the project quite hard on the line and one of your competitors has been quite cautious I mean just sort of — is there anything to sort of read into that? I mean, are you pretty happy with the sort of supply/demand fundamentals within the U.S. from that perspective store? I don’t know if there’s sort of any antidotal that we’re going to provide or insights on that.
Steve Binnie: It’s encouraging. Demand is picking up. And when we look at our machines in Europe — sorry, in North America, as we’re into we’re substantially reducing any downtime. And in fact, our Somerset machine is full now once again. So order activity is looking good, and we are encouraged. We’ve obviously given up a little bit on pricing, as Mike said earlier. But generally, looking good, Mike anything you want to add to that?
Mike Haws: No, I’m good, Steve.
Steve Binnie: All positive.
Sean Ungerer: Okay. And then sorry, I got two more, if you don’t mind. In terms of SA, obviously, there was quite a bit of impact on the fixed cost base due to shuts sort of heading into Q2, how solution think about that fixed cost evolution?
Steve Binnie: Yes. Clearly, it had a substantial impact, Alex and signal cost to going come down.
Alex van Coller Thiel See: Yes, significantly. And I want to remind you that these — Sean, this shut is an 18-months shuts. So we didn’t have it in the previous year. And we’ve completed all of that successfully. So yes, we will see cost, I think, closer to the previous quarter as we go forward.
Sean Ungerer: And then just last one, in terms of the I guess, outflows in the next couple of quarters is what’s happening at dividends and the closure costs. Is it fair to assume that CapEx for the year is going to be quite weighted to the second half of the year, not tearing in this half was spent in Q1? Or is there any sort of guidance you can give us in the next couple of quarters?
Steve Binnie: Yes. I’ll let Glen talk about the outflows related to the shuts. But certainly, on the CapEx front, yes, we maintained our guidance, the $500 million. It still looks like — it’s still our best estimate. And yes, you’re right. It is weighted towards the back half of the year. But bear in mind, as you complete a lot of the work, particularly on Elevate, more and more costs will come through. But there’s nothing unusual there, and that’s how we envisaged it was going to unfold.
Glen Pearce: Yes, Sean, you’re right, we’ll be paying the dividend in this quarter, so quarter two. And then the bulk of the restructuring costs will be paid in this quarter as well. So we’ll never sizable outflow and then start collecting it or recovering it rather towards the end of the year.
Sean Ungerer: Also appreciate the time growth.
Operator: And your next question comes from the line of Brent Madel from Absa CIB.
Brent Madel: Just one question from my side. I’m just trying to reconcile the EBITDA on pulp, which was at $64 million in Q4. I know quarter-on-quarter is always a great comparison, dropping down to $53 million. And really what I’m factoring in here is the fact that the volume has dropped from Q4 of $414 million to $335 million. Obviously, that’s factoring in the downtime due to the maintenance. My understanding is that the pulp price that you would have realized over this period would have been less than the comparable. I stand to be corrected. I would assume that it’s probably around 850 odd level. So volume is down, the underlying prices in EBITDA was down yet your EBITDA goes from $64 million to $52 million include your fair value gain of $10 million. I think you referred to in the pulp side, $10 million that effectively drop that down to $43 million. I guess my question is, it seems like pulp held up better than the underlying sort of variables would have suggested it should have held up.
Steve Binnie: Yes, the one number you quoted there that I would disagree with your volumes in the total segment — yes, it’s 335. Sorry you’re right. You’re right. That is correct. Yes. I’m trying to pinpoint using your math where you’re getting a difference. But I mean, obviously, the volumes are less, you’ve taken that into account. You brought in terms of the fair value adjustment. Your pricing assumption is right. It was around those levels. So it all — your logic seems — I’m throwing at a Glen, anything that he’s missed.
Glen Pearce: Your conclusions are right. It was a better result.
Marco Eikelenboom: Both held up quite well.
Brent Madel: Okay. So a bit of an anomaly as to held-up I guess that’s what I’m trying to get to.
Steve Binnie: The one thing you haven’t got is BCTMP. Someone’s pointed, embedded in those numbers is volumes for BCTMP. And it’s about 54,000 tons a quarter, and that pricing was better. And that accounts for some of the difference that you — probably most of the difference that you were referring to.
Operator: And your next question comes from the line of Brian Morgan, RMB Morgan Stanley.
Brian Morgan: Just dive into packaging in Europe. If I’m mistaken, miss me correctly, capacity in that business is about 700,000 tons. We’re running somewhere close to 450,000 tons now at the moment. Even during the boom days in 2022, 66 as far as I can see, we’re still some way off that capacity level and certainly, your own internal capacity utilization level is really low, and you’ve never really gotten it full before. Is it not time to think about some rationalization in that business?
Steve Binnie: Yes, Brian, just remember that some of that capacity is swing capacity. So for example, Maastricht, we can make a board or we can make a graphic paper. So when we talked 7 that was obviously our ultimate goal. It’s not that the Maastricht machine is going to be empty. And particularly now after the shuffling around of the capacity. And it will be the same even with Gratkorn as we — as we build up on labels at Gratkorn. I think — it’s not that we feel the need to rationalize. We think there will be a recovery like we’ve seen elsewhere, it’s just taking longer in Europe than the other regions. And that’s — it’s partially the overstocking we get the fact that that’s close to an end. But the economic situation in Europe is tougher. So we’re not looking to take any capacity at the moment. We want to ramp up the volumes. We want to continue to do that. But if you think about the entire Sappi business and where we’ve come from over the last six months or so, is it is getting better. This is the one last area segment that is falling behind. And — but we are confident that demand will continue to recover, and we will start to fill up those mills and machines.
Operator: [Operator Instructions] And the question comes from the line of Andrew Jones from UBS.
Andrew Jones: I just want to get a bit more color on the dynamics in each of the divisions. I mean, I model it on a product basis. So pulp packaging and then printing and writing papers. Could you just give us an idea of your best guess on volumes go in the second quarter, the broad sort of quantum in terms of pricing that you’re expecting given we’re already halfway through the quarter. And some of the major pricing drivers — say, cost drivers. I mean, obviously, you’ve called out pulp rising especially in coated woodfree. But can you talk about some of the cost drivers and what you expect for 2Q, if that’s okay?
Steve Binnie: Look, I obviously kind of get too specific on pricing. Look, in terms of the broad markets, what you’re seeing is that graphics slowly picking up. You’ve seen the improvement in the first quarter. Volumes continue to get better. From a margin perspective, the fact that we’re taking out the fixed costs of the two mills is going to boost profitability for graphics. In addition to the higher volumes generally, packing feeling a lot better about South Africa, you can hear our confidence in the North American market, a little bit more sluggish in Europe, but it is improving. And then in pulp, the — on the volume side, we don’t have the shut again. So we’re back to normal production, and we’re fully sold out. So you’re going to get the volume benefit. DP prices of — they went down initially, they’ve picked up again. If they stay at these levels for the quarter, you might have a slight positive on the pricing for DP if you look quarter-on-quarter. In terms of the packaging and graphics pricing. I think it’s fair to say that they’ve held up better than expected originally and something we want to continue to focus on. And so far, they’re holding up simply well. On costs, you heard from [indiscernible], maybe there’s a little bit of upside risk on pulp, Glen. But generally, reasonably stable, actually. We’re not talking sharp rises in costs. So when you bring all that together, that’s why we say to you that the underlying performance of the business, although the EBITDA will be flat for the one-offs that I talked about, the underlying overall is better.
Andrew Jones: Okay. And just a follow-up on the packaging side. I mean, I was slightly disappointed by the volume part of that. I mean it was a fair bit lower sequentially when obviously, we were, I guess, hoping for sort of gradual improvement. I think I’m just wondering what sort of number you think might be realistic for volumes on the packaging side, given the improvement in North America that you calling out and slight improvements in Europe therefore should we expect much of a jump. Or is it like a sort of very gradual pillar?
Steve Binnie: Yes. Bear in mind, you heard from Mike earlier, North America was up, right? South Africa — South Africa was down for the reasons that we talked about. We had to shut an extended shut, and we went and Alex with lower inventories right as well. So…
Alex van Coller Thiel See: Yes, and we had fairly low demand in the beginning of the quarter. As you said, it’s starting to pick up, but it was low demand.
Steve Binnie: So I can’t give you specific numbers, but I’m anticipating improvement across all three regions.
Operator: And the final question comes from the line of Peter Osovich from Serernt Capital Management.
Unidentified Analyst: I just wanted to ask on a bit higher level. When you’re looking at the DP business, obviously, you have significant investments in this business and then we go COVID in ’21 then ’23. So it’s very difficult to see a normal year in the DP. So how should we think about this business EBITDA and cash flow potential going forward? Also quick notwithstanding. That’s my first question. And then just on the cash items, if you could please comment on the expected level of cash taxes this year. And kind of steady state CapEx beyond the guidance for 2024?
Steve Binnie: Yes. Yes, you’re right. There was a lot of noise in the DP volumes in prior years. We have COVID and then we had obviously some production challenges. The volumes will continue to pick up. And I’ll allow Alex just to talk about production in — particularly at cycle because it’s obviously the biggest mill. So we are expecting margin improvement and we are — everything we make gets sold and we’re fully sold out. So — but I think we’ll expand a little bit further on the production at Saiccor in South Africa. The cash taxes…
Glen Pearce: So our cash taxes for 2023 were just over $50 million, and we benefited from the investment allowances in South Africa on the cycle upgrade. So this year, we’re not — 2024, we’re not going to have those investment lines. So we’re anticipating that those cash taxes will increase above that. I can’t give you more than that.
Steve Binnie: And then in terms of the backing out the big projects, obviously. We — through the combination of the maintenance CapEx, the sustainability commitments that we’ve made, we estimate that, that on a run rate basis is about $350 million. Alex, do you want to talk about production?
Alex van Coller Thiel See: Yes. Maybe briefly, what we’ve seen through the quarter and the last couple of quarters that we’re gradually stabilizing the mill. And it’s a matter of having spent money on the areas where we’ve had instability. For example, we still have Eskom disruptions, and we’ve managed to do quite good work there to minimize that. And obviously, also just on the liquor circuits and the areas where we’ve had a concern. And as a result of that, we’ve seen several production records being broken. Obviously, one has to do that consistently compared to a quarter ago, we are performing much better in that regard. So we’ll see volume growth from a reduction perspective.
Steve Binnie: Yes. And it continues to improve, and we’re very pleased with the progress that we’ve made.
Unidentified Analyst: This is very helpful. But on the on this front, if — should we think about it as a sort of $300 million, $250 million, $350 million over the cycle business when all the production issues are resolved? Or what kind of range should we have in mind?
Steve Binnie: Yes. We estimate that through the cycle, based on what we think is a normalized price for DP and where we think costs are going to be that this be can make EBITDA margins between 25% to 30%.
Unidentified Analyst: Okay. That’s helpful. And just following up on the 2050 steady-state CapEx. Can you give us a sense how much of this relates to the segment, especially to graphics.
Steve Binnie: Yes, that’s not a number I have here now, sorry.
Glen Pearce: We don’t split up CapEx according to our product segments. We split it up according to maintenance, environmental CapEx and expansion of the CapEx.
Unidentified Analyst: Right. But would it be fair to say that the graphics is disproportionately lower portion of this CapEx compared to revenue or EBITDA? Or that’s roughly the same?
Steve Binnie: Yes. Well, look, you’ve got to look at the various mills, right? We still have a number of graphics mills in Europe and obviously, still in the U.S., we certainly have machines in the graphics space. South Africa less so. And in South Africa, it’s predominantly almost entirely in the pulp and packaging segments. But from a maintenance perspective, we still have some big mills that are in graphic space. We’ve got Gratkorn. We’ve got some of Somerset. But we don’t give that specific breakdown according to according to segment.
Operator: I will now hand the call back for closing remarks.
Steve Binnie: Yes. Thank you very much. Thanks for joining us today, and we look forward to discussing our Q2 results in three months’ time. So thank you very much.
Operator: Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.
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