Sappi Limited (SAP) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to Sappi Limited's Second Quarter of 2020 Results Conference Call. [Operator Instructions] Please note that this conference call is being recorded. I'd now like to hand the conference over to Mr. Steve Binnie. Please go ahead, sir.

Thank you. Good day, everybody. Thanks for joining us on the call today. I'm going to start the call by just going over our Q2 numbers. And then after that, we will talk about the whole COVID-19 thing as well, as I'm sure that's the area where you want to focus on mostly. But just as I say, to start with the numbers themselves. EBITDA for the quarter, and I -- sorry, I'll call out page numbers as I go. Page 3. The EBITDA for the quarter was USD 131 million, down 30% year-on-year, and that's pretty much in line with the guidance that we gave at the end of the last quarter. Net debt-to-EBITDA as calculated by our existing debt covenants was 3.1x. The big story of the quarter obviously is that low dissolving pulp prices continued, and that's the reason for the 30% decline that you saw year-on-year. The prices have been at historical lows. And I know in the previous results call, we talked about an expectation that things were going to start to go upwards. But obviously, with the outbreak of the coronavirus in the Far East, that put a stop to that. And then the lockdowns began, obviously, firstly in China and then spread from there. And we didn't get that upward momentum that we had expected. Leaving that aside for a second. On the paper side of the business, we actually had a pretty good quarter. The packaging segment, and you know that this is an area where we've been investing progressively over the last few years, it really is starting to reap significant rewards. And our EBITDA for the quarter almost doubled, up to USD 50 million. It's become a substantial business for us and will continue to grow as we move forward. And then on graphics, market declines that we've been seeing in the quarter were in the high single digits. We were able to gain substantial market share. And in fact, our profitability for graphic paper was actually flat year-on-year, which I think is a pretty good performance. And that was even though we began to see an impact on demand as we got towards the end of March with -- as the lockdowns began to gain traction. The Matane integration was on track. The external sales there are included in the dissolving pulp segment. Obviously, I want to stress to you that the liquidity is strong. We have cash on hand of $268 million and undrawn committed RCF facilities of $642 million. Turning to Page 4. The earnings bridge. And the big story is, as I highlighted earlier, is the decline in pricing, and it's almost entirely related to dissolving pulp. We were able to save substantial costs in the business. Obviously, pulp prices were low across the board. So that lowered our costs for -- on the paper side, the raw material costs on the paper side. And then that's the biggest part of the favorable cost positive that you're seeing there. And we were able to take out some fixed costs as well. Moving to Slide 5. This is the product contribution split. It's on an LTM basis. So obviously, dissolving pulp is progressively getting less because of the lower pricing. I'm very pleased to see the contribution now from packaging. We did talk about it in the past getting to 25% of our business, and it's done that and it's gone beyond that and it will continue to grow. Obviously, dissolving pulp in the short term will be a lower contribution. Turning to Slide 6. And this is a graph that shows the volumes and margins. And I think it underscores what I was saying earlier. Graphic paper performing pretty well and a great job done by the respective teams to gain the kind of market shares that we've been doing. And the margin is actually pretty good, in the high single digits. On the packaging side, on the top right, you can see, as we've added more volumes and ramped up following the conversions, the margins continue to be good, obviously, higher than maybe the long-term trend because of lower pulp prices. But I'm very happy with the level that we've achieved there and the growth that we're achieving. Unfortunately, and again, it's just consistent with what I've said earlier, the bottom graph shows you how dissolving pulp margins have come under severe pressure. Turning to Slide 7. It's our debt maturity profile. And the bulk of our debt is long term and doesn't pose any liquidity risk. The shorter-term stuff that we have, the yellow block in 2020 is predominantly some funding we have in South Africa. We did have a bond of about ZAR 750 million that matured in April. We've put in a bridge facility for that because we, as you'll appreciate, the public markets were -- it was not the right time to go. So we've put in place a 12-month bridge facility there. And when the time is right, we'll go back to the markets. The blue block you're seeing is a short-term facility that we have in Europe, and that just gets rolled on an ongoing basis. And it's been like that for a long period of time. On Slide 8 is our CapEx. And we've been very carefully looking at our CapEx in light of the short-term challenges posed by the virus. And we've been able to reduce our CapEx estimates for this year by -- to about $370 million. It's about an $80 million drop from the previous guidance we gave you. We've been able to defer some CapEx. The biggest areas is the Saiccor dissolving pulp expansion. Some of that happened naturally because of the lockdowns in South Africa, and we are not able to continue construction at this stage at the levels of lockdown we're in. And then other CapEx, what was regarded as nonessential, we've been able to push out. And we'll continue to focus on this area. The one thing I do want to point out is that you can see the blue, what we call, maintenance CapEx for 2020 is less than normal. Normally, that's $150 million, $160 million. We have pushed out a couple of the shuts to early in the new financial year, and that's why it will -- it looks lower. But when you get to the '21 year, the maintenance CapEx will obviously have those shuts in. So the blue bar will, in '21, will jump back upwards to somewhere between $150 million and $200 million. Turning then to the segments. And firstly, on Page 10, is Europe. And under the circumstances, a very good quarter for Europe. EBITDA, up 5%. We were able to gain substantial market share in coated woodfree to offset the weak markets that we experienced. It's also important to point out that we did have the Finnish strike, industry strike, and that impacted on Kirkniemi. So our volumes for coated mechanical paper, which obviously Kirkniemi makes, were impacted. So despite all of that, we were able to grow. We were -- because of the market share gains, we had actually less commercial downtime than the prior year. Very pleased with the progress on packaging and specialities. And we'll talk a little bit more about the coronavirus impact, but what we saw in the quarter, January and February for Europe was very good. And then in that last 2-week period of March, that's when obviously some countries began lockdowns, and we started to see cancellations coming through. So it did impact on profitability for the region a little bit at the end of the quarter. We've been able to achieve significant cost savings. Obviously, pulp prices remain pretty low, and chemical costs have also been coming down as well as energy. Then on to Slide 11, North America. And a similar story. Substantial market share gains in coated woodfree. EBITDA was flat year-on-year. But it's important to point out that takes -- there's dissolving pulp in there, and obviously, the impact from the lower dissolving pulp price. So it tells you that the paper side of the business did pretty well. We were able to grow packaging volumes as we continue to ramp up, and then that gave us about 68%, actually, was the volume increase for packaging. So very pleased with the progress. Graphic paper was up 10% as well. So you can see they did pretty well, and if it hadn't been for the dissolving pulp, the earnings would have been up substantially on a year ago. And similarly to Europe, lower costs, and we began to see the impact of COVID-19 at the end of March. Then to Page 12, South Africa. And obviously, South Africa has the biggest exposure to the dissolving pulp. And with prices down $240-odd a ton, year-on-year, that is going to have a substantial impact on profitability for the region. Outside of that, the containerboard, it was a slow start to the year, but we have seen momentum pick up, and they had a better second quarter. And we will continue -- we anticipate further improvement in the second half of the year because of the strong demand for -- particularly for citrus fruit exports out of South Africa. The weak domestic economy didn't help in some of our other smaller categories, and they've been further impacted by, obviously, coronavirus as well. And we'll talk a bit more about that later. And like all the regions, good work done on costs, and variable costs were lower here. Then turning to Slide 13. We've obviously shortened the presentation focused on the historical numbers because we felt that it was appropriate to talk about the virus and its impact. And first and foremost, the safety of our people comes first, and we've implemented processes and procedures to protect our staff, ensuring that we've got screening, testing, social distancing processes in place. We've also altered our operational -- our operations to ensure that we can have continuity, changing shift systems, rotational teams, health -- strict health protocols, all the things that you would expect. We've been fortunate in some ways, although a lot of great work done across the world to ensure that we were able to continue producing and be declared essential businesses in all the countries in which we operate. Fantastic engagement with the unions and local communities, and they've been aligned to what we've been striving to achieve. The operations themselves, we had -- we were able to continue production other than the Condino mill in Italy, which was down for -- it was actually 10 days down at the end of March. But subsequently, through amazing work, they were able to get back up producing. The key now, obviously, is that we don't want to be sitting with excess inventories. We want to reduce our costs and obviously manage cash and liquidity. We are taking production downtimes where it makes sense to match demand. And obviously, we do avail ourselves of temporary unemployment support in Europe and the U.S. where we can do so. The -- moving to Slide 14. Cash management is everything in a crisis like this. And we have been proactive. We put in place a covenant waiver, and we did announce it to the market. We were very fortunate. We moved early. We anticipated the challenges that were coming. We've got great relationships with our banks, and they were very supportive and probably ahead of the curve again -- against many organizations. We were able to put in place the waiver through to March '21. So that gives us a degree of flexibility. I already mentioned that we put in place a bridge financing for an SA bond that was maturing. We reviewed the CapEx commitments. And strong, strong focus on procurement savings. We've already given an indication of $64 million of savings earlier in the financial year. Now we are upping that to $105 million, and we'll continue to look for opportunities. And then similarly, on the fixed cost side, looking to take out fixed costs. And in April, we were able to take out at least 10% of fixed costs. So -- and these focuses and projects are ongoing. Slide 15. As you will appreciate, the focus is very short term. It's on cash management. It's on liquidity, working capital. We don't want to be sitting with excess inventories, and that's why we will take production downtime, and obviously, avail ourselves to temporary unemployment support that we can get. Receivables, interestingly, so far, the overdues is constant with prior quarters. And I would extend that into April as well. I -- clearly, there's more risk, and it's something that we are managing very, very closely. I've talked about the government assistance. And as I said, very short-term focus. We've got detailed processes in place to monitor our cash, bottom-up forecasting to ensure that we can manage our way through the challenges over the next few months. Turning to Slide 16. The markets themselves. Firstly, graphic paper, and these won't be surprises to you. But obviously, as the virus spread and lockdowns occurred, the spend on advertising and marketing dropped off substantially. We started to see the impact at the end of March, and obviously, it carried into April as well. And we'll talk about it later, but April was down 27% in this segment. Just for information's sake -- and clearly, this is an unprecedented time, but in 2008, 2009 was a challenge as well. We had the global financial crisis. And at that time, we also saw 30% declines at the height of the crisis. Incidentally, the following year, we were able to recover about 2/3 of that decline. So whilst we think the short-term challenges will be there, we do anticipate in time in the future, there will be a recovery. We have lower input costs. A lot of our raw material cost prices have come down. So that's helped a little bit to support margins. Selling prices for graphic paper, down a little bit but holding up reasonably well. And interestingly, the operating rates are -- well, obviously, prior to the big shuts that we're taking now, operating rates were pretty good. Then on packaging and specialities. Anything to do with food and hygiene is doing very well, as you would expect. Anything else exposed to consumer goods, which, perhaps the retailers are closed or is related to clothing or luxury goods, under more pressure. But overall, the segment is doing well and continues to ramp up. The lower pulp prices and lower chemical costs will help us as well. Slide 17, dissolving pulp. Obviously, lockdowns has had a tremendous impact on demand for clothing, which is an indirect impact, obviously, on dissolving pulp. And we've got a couple of slides to show you some of the numbers. In April, we are -- volumes were about 35% lower than we had expected, the -- prior to the crisis, that is. Exchange rates are helping us as the rand has weakened. And obviously, there are a number of suppliers that are taking shuts. So that will help with the balance of the market a little bit. BCTMP, incidentally, prices actually started going up. So that will help the Matane external sales. Slide 18, we included just as a reference point. But this is U.S. retail sales in March. It's the latest data we have, anyway. And you can see that clothing is down 50%. That is obviously worse than the 35% we experienced in April for dissolving pulp. That tells you that we're probably not at the bottom of the crisis, and that won't be a surprise to you because the lockdowns are still ongoing. So from a dissolving pulp perspective, the rest of the quarter is probably going to be worse. And if the lockdowns get extended, obviously, then there's a risk into Q4. But at some stage, we would expect recoveries, and hopefully, that will begin to happen as we move into the new financial year. Slide 19, just has textile orders across a number of geographies and just tells a similar story to what we're seeing. You can see it's across the world. And it's consistent with what I was saying earlier, that demand in May and June is going to be under significant pressure for dissolving pulp. The -- turning to the strategy. We just -- we've got less slides on this. But obviously, we can't lose sight of the long term as we face the short-term challenges. And Slide 21, just talks about a few things that we continue to work on. Obviously, cost is everything, and ensuring that we are competitive and that we can minimize the impact of the virus and the lockdowns and the downtime that we're having to take. The -- we'll continue to manage our capacity in the graphic paper space. The Stockstadt PM 2, we've talked about this and the potential closure of that in the next -- in the near future. That's currently operating at about 80% less than previously. And we've announced a temporary shut on the Lanaken PM 7, again, just so that it minimizes our costs and reduces our inventory exposure. We will focus on the balance sheet, and obviously, ensure that we have something in place beyond the March '21 period to give us the flexibility as we move forward and a big push on growing our packaging and specialty segments. We need to continue those ramp-ups and take advantage of the opportunities that we have out there. So turning to the outlook. Obviously, we've withdrawn guidance -- earnings guidance, we announced that previously, due to the uncertainty of COVID-19. But obviously, we know that dissolving pulp and graphic paper demand will be under pressure because of the crisis. A strong focus on cash flow and liquidity, working capital, CapEx, all the things that I've talked about. We will look to ramp up further on packaging. I already said that we're looking at some encouraging numbers coming out of South Africa for citrus exports. So that's going to boost the containerboard sales out of South Africa. The Saiccor expansion project, we don't know. We don't know when that will start up again. Obviously, the government's lockdown rules will need to be eased further. But more than likely, the project now will only be completed in the second half of the financial year 2021. And the last bullet, obviously, we talked about maintenance shuts, saving some cash flow there by pushing them out a little bit because we don't need them at this stage. And we would expect CapEx in the second half of the year to be about $200 million. Operator, that's the presentation. I'm going to hand it back to you now for questions.

[Operator Instructions] The first question comes from James Twyman of Prescient.

Yes. I've got 2 questions. First one was, can you give any idea about what sort of level of government support you're expecting to get, which I assume is mostly in Europe and North America, probably not much in South Africa. But just to give some idea of what sort of reduction in the hit you're going to get from all the downtime. And then secondly, on the Chinese market, what are you seeing in terms of closures or increased downtime in the viscose and dissolving pulp markets? I mean there should be a lot of pain going on there, which should help the market in time. I mean I'm understanding that dissolving pulp production there has come to a standstill. What are you seeing there, please? Those are my 2 questions.

Yes. The government support, it's difficult to give an exact number. As you would appreciate, there are complex rules in different countries, particularly in Europe. But I'd like to think it would be as much as $10 million a quarter. But that's not -- as I say, we're still working through that.

Is that in Europe or total, would you say?

Yes. I don't want to give an exact number, James. You'll appreciate that. I'd like to say it would be a minimum of $10 million, a guess. That's not in South Africa. It's the Europe and the U.S., a minimum of $10 million. But I don't want to give an exact number and then disappoint you. On the second question, I'll let Mohamed elaborate further. What I would say is that, firstly, on the supply side of dissolving pulp, there's very little activity on the Chinese side. The viscose side, obviously, after their lockdown was finished, that we began to see a ramp-up there, and things have progressively picked up over the last few weeks. Mohamed, I don't know if you wanted to elaborate a little bit further there.

Yes. Thank you, Steve. Yes, just on the dissolving pulp side, all the information we have through our various sources certainly in China indicate that there's virtually no DP production that's happening at the moment. Facilities have either shut or producing other grades of product from bleached paper pulp to unbleached craft pulp. With regard to dissolving pulp from outside of China, there also, we have seen quite a few announcements. There's been one public announcement that came out from the U.S., where a company has indicated that they are going to be taking or have taken a shutdown for about 90 days. We have also picked up information that a producer who has already converted to DP has delayed the actual production of dissolving pulp through to sometimes in June. And also in Europe, there has been public announcement around one particular company where they have also started a co-determination process on the possible temporary layoffs and also not producing dissolving pulp on the line that they have recently converted. So lots of dissolving pulp capacity is currently out of production.

And Mohamed, on the viscose side, just chat about that in China.

On the viscose side, what we have seen is prices are at historical low levels, and that is now at a point where it is causing a lot of pain for viscose producers. So we have started to see also production coming out of the viscose side in China-based on the CCF, which is a company that publishes a lot of information on the fibers market in China. The latest operating rate that they reflect is around 65%. That is down from early January, where it was around 80%. So there's also a lot of capacity coming out at the moment on the viscose side. But having said that, what we are seeing in China because of the relaxation of some of the restrictions and things getting a lot better, there's a lot more activity just in terms of overall improvement, people going back to work, shopping malls opening up, retail stores opening up. So there is already quite a lot of positive activity that's now happening in China.

The next question comes from Brian Morgan of RMB Morgan Stanley.

So if I could just ask a question around DWP and maybe the viscose supply chain. We've obviously got this global production in textile demand, and that's obviously shifting supply chains around. Inventory cycles are moving around. I'm just trying to get a sense of how quick a recovery might be. Is it going to be sort of a flatter recovery? Is going to be more V-shaped recovery? And I'm thinking specifically, as we go into the third calendar quarter, where the inventory is sitting? Are the inventories sitting at clothing retailer level? Are they sitting at manufacturer level? Where do you think those inventories are sitting? How might that translate into ultimate DWP demand sort of back-end of this year, especially thinking about things like seasonality, et cetera?

Yes. Look, it's clear based on what we have -- the data we have, it's right across the supply chain where inventory levels are high, as you would expect. So that is going to be a further risk factor as we look at the timing of the recovery. And that's obviously why I said earlier that the -- well, firstly, this quarter is going to be tough. And I think Q4 is going to be tough as well. It's all going to depend on the easing of these lockdowns and as the shops begin to open once again and then you start to get that demand for the product and flowing through the supply chain. Obviously, you have seasonality involved. And a lot of the product is the summer season for the Northern Hemisphere. And as you move into the winter season in the Northern Hemisphere, that you are going to have the pull for that kind of product coming through. The way we are thinking about it, Brian, is that assuming the lockdowns end -- or progressively end in the next month or 2, obviously, this quarter, next quarter would be under pressure. And it's probably going to spread into the first 2 quarters of the next financial year. I'd like pinpoint, there is so much uncertainty.

Yes, of course. And in terms of South African containerboard, of your roughly 0.5 million tons of containerboard, how much would you say goes into citrus and how much is into sort of the normal economy, approximately?

Alex?

Brian, it's not all citrus. It's obviously other fruit exports as well. But it's at least 2/3 that goes into the export market, 1/3 that goes into the local economy. But obviously, we are looking at opportunities, and there's actually strong demand for exporting containerboard rather than selling it to the local converters.

Okay. So the next quarter might not be that bad from a volume perspective.

No, we don't think it will be. We actually -- the citrus industry is talking about a 13% increase year-on-year in terms of crop.

Okay. Got you. Cool. And then finally, Steve, maybe just a question on capital allocation. I know you're managing it week-by-week at the moment, and liquidity is the order of the day. But just thinking maybe a little bit -- a year or 2 down the line, how do you think capital allocation priorities will change in the group in the next year or so?

Brian, look, obviously, our focus is very much on the short term. I -- if we see through the crisis, I think that in the kind of medium term, that dissolving pulp opportunities are probably somewhat limited. So it's unlikely that there would be investments in that area. However, we are very excited about the packaging side of the business, and the strategy is really working for us. And we think that we can grow in all our regions. The South African containerboard, you just heard from Alex, we have buoyant demand. We make good margins there. And I think in time, there can be investments there. In Europe and the U.S. as our board businesses go from strength to strength, and we see declines in graphic paper and the opportunities that the shift from paper -- sorry, from plastic to paper, as those opportunities come up, in time, that would be an area where we would like to invest. But we're not going to be doing that at this stage. It's about protecting liquidity and cash flow at this point in time.

Yes. I'm thinking more along the lines of sort of balance sheet management and balance sheet structure. Do you think that, that will need to change going forward? Or you're happy with the kind of 2x net debt-to-EBITDA kind of level that you've spoken about historically?

Yes. Look, it's been a big learning curve, isn't it? No one expected dissolving pulp prices to go this low. And then obviously, this virus is unprecedented. I think on the previous cycle, we obviously went below 2x. We went down to 1.6. And I -- as our business does recover and things normalize once again, we would probably, on the positive movement of a cycle, we would probably seek to go less than the 2x.

The next question comes from Ross Krige of JPMorgan.

Just 3 questions from me, if you don't mind. The first 2 on costs. Just firstly, on pulp costs. If you look at the price per ton that Sappi is paying on purchase pulp, could you give us an idea of the run rate of how that's moved over the last 2 or 3 quarters? I guess what I'm trying to get to is has that reached a stable level now? Or are you still seeing declines in your pulp costs? And then on fixed costs, you talked about the 10% saving in April. Do you think that's potentially sustainable for -- on a full year basis? And then in the graphic paper market, if you could just talk a bit more about the capacity situation in both North America and Europe in terms of what shuts you're seeing? And in Europe, the big conversion that's happening, if you have any insight into how that's proceeding or how those volumes are winding down.

Yes. Yes. Okay. On the first one on pulp costs, they remained flat for a significant period of time. More recently, over the last couple of months, and I'd say March, April, there's probably been a $10 to $20 a ton increase. But it's not been substantial as of yet. Obviously, everybody was talking about higher pulp prices, but then the virus came, and that probably put a brake on that. So marginal increases, but not significant at this point in time. The fixed costs, yes, certainly, as we as we take production downtime and as we're at the height of the crisis, we will -- we do believe that we can continue to achieve the 10% fixed cost savings, at least. On the graphics side, look, everybody is taking production downtime at the moment. There's been no new announcements. However, the big project, which you referred to, as far as we are aware, and we are led to believe, that is on track and will happen. Berry, I don't know if you want to add to that.

No, I think that's exactly right. So we have no other information than what is publicly available. But we do see that there's a great deal of commercial shuts going down in the entire industry in Europe.

The next question comes from Sean Ungerer of Chronux Research.

Just in terms of, I guess, working capitalization. Can you maybe just sort of flesh that out as the year progresses? Specifically, if you could give sort of procurement savings you guys are expecting to sort of monetize? I'm assuming a lot of that is linked to the sort of downside in the input cost terms. Just trying to think how you weigh up benefiting from that as well as your working capital management. That's my first question.

Yes. I'll let Glen expand a little bit further on the working capital. But I mean, obviously, a big part of that is we don't want to be sitting with inventory risks when demand is as soft as it is. But Glen, do you want to expand further?

Fine. Our working capital year-on-year came down by about $100 million. And we're managing our working capital as a percentage of our sales. So that was, in fact, slightly better than the same time last year. And as it progresses towards September, that percentage usually declines from the current rate of about 12% down to about 9% of net sales.

So strong focus on that. On the procurement side, yes, you're right. I mean a lot of it is short-term opportunities related to current pricing of chemicals and pulp. But I think we've demonstrated over a number of years that we are able to take costs out of the business, and we will continue to do that. Each of the regions is focused on taking costs out. So it's not just market pricing moves. And as we move forward, obviously, with the pressure on short-term profitability, we need to continue to take out costs so I think there will be an ongoing savings over and above the short-term market price moves.

Okay. And then just secondly, in terms of the 10% reduction in fixed costs, I mean, it's quite a hefty number. I mean do you mind fleshing that out a bit more across the regions? Or is it fair to say it's evenly split? And then just on that, the -- obviously, the 4 categories, if you can maybe comment across how that's coming through.

Well, firstly, it's across all the regions. We've been able to take out substantial costs. Some of it, as you would appreciate, relates to production downtime and the fact that we are availing ourselves of support from the government for that. Some of it relates to the maintenance shuts that we're putting up until early in the new financial year. As you'll appreciate, when you have vacancies in the business, you -- because the activities are [ latent ], you seek not to fill those vacancies and not employ new staff. So that's giving us further savings. And then, Glen, across the individual categories. I don't know if there's anything you want to add.

No, it's across all categories that we're looking at. So there's no specific...

Okay. Great. And then just turning to the bulk of the question about industry capacity. But I mean, if you look at European graphic capacity, and I know there obviously is a lot of down time. And I think that removement ratio is quite a nice tailwind. But outside of that [ what sort of ] permanent capacity reduction do you guys estimate there actually is to take less, barring the sort of temporary commercial downtime. Because if you look at the 30% drop and then assume you're only going to get a 8% to 10% run rate beforehand, you've got a 20% extra incremental drop, which you're saying 67% should come back. So how do you see that playing out?

Well, look, what I would say to you is before the lockdowns occurred, our operating rates were in the 90s -- in the mid-90s. Operating rates were pretty good. Obviously, we've seen this 30% decline. I've already indicated earlier that we're of the belief that 20% of that could come back next year. The big shut that we have referred to is about 15% of the market. So if there is recovery -- plus, as you know, we are looking to take out or potentially close Somerset -- sorry, Stockstadt PM 2. So we're taking out capacity as well. So if the markets recover, as we expect them to do, even if it is 10% less than when we started, we think operating rates actually, next year, can be pretty reasonable.

The next question comes from Tom Elliott of Royal London Asset Management.

My first question around working capital has already been answered. It sounds like you're going to get a bit of a release in the back end of the year. But I just wanted to ask, with the actions you're taking and everything that you're seeing in the market, DWP EBITDA margins, are you confident of being able to maintain those above where they fell to in the last crisis?

Yes. Look, it's an interesting question. Because obviously, selling prices are still at historical [Audio Gap]

Ladies and gentlemen, please remain online. We seem to have lost the main speaker. Please hold, thank you. [Technical Difficulty] Ladies and gentlemen, thank you your patience. Mr. Steve Binnie has returned.

Apologies for that. We obviously dropped off. I was talking about dissolving pulp prices. And I was saying that they are still at low levels at around $630 a ton. The one positive we have is obviously that the South African rand has weakened considerably against the dollar, and that will lower our cost base in South Africa. So that will help protect the margin somewhat. I mean in time, when things do normalize, we would expect the balance in the market to normalize, and then in time, obviously, pulp prices to go back up. But in the short term, the weaker rand, we actually think we can get reasonable margins. Obviously, the tons are less. But the margins themselves in South Africa for the tons that we sell should be okay. Yes, and obviously, input costs coming down as well.

[Operator Instructions] The next question comes from Wade Napier of Avior Capital Markets.

A couple of questions on my side. In the specialty packaging, and particularly the boxboard market, you spoke of strong sort of consumer and through sort of demand relative to weak luxury sort of demand. Can you give us a sort of a bit of color about the sort of end markets and what percentage each comprises? My second question would be like -- would be with regards to Ngodwana. With -- can you just sort of give us some color about that mill's ability to swing from a bit of DWP production towards more containerboard? How does that look in your upcoming quarter and 2 quarters potentially? And then final question on the cost efficiency and procurement savings of $105 million. What sort of run rates are you currently at? I just want to get a sense of what's still to come.

All right. Just on the first question. We don't -- we obviously don't split it by each of the categories in the results that we release. But probably about 3/4 of the segment is doing well under these circumstances, and the other 1/4 is under pressure in terms of the exposure. So that's the rough relative size of what is doing well versus being challenged. The -- in Ngodwana, Alex, do you want to just talk some more about the ability to swing to paper pulp there?

Sure. We're constrained on the paper machine in terms of making containerboard. So we don't have -- there's some, I would say, still the maximum of about 2% efficiency improvement that we could achieve. However, we are fully capable of making fully bleached hardwood market pulp. We actually have completed our first run, which we are selling, we're exporting and selling in the rest of the world. So we'll continue with that. That will be the flexibility that we have.

And that will give us, obviously, flexibility in the weak dissolving pulp markets. The cost procurement, the $105 million, we would -- it's about 40% in the first half of the year and the other 60% in the second half.

We've been rejoined by Sean Ungerer by Chronux Research.

Steve, sorry about that. The line cut out. Just my last question in terms of -- if you look at the balance sheet. I mean obviously, Q1, Q2 -- or, sorry, calendar Q1, Q2 mix is pretty key in terms of what's going to happen in terms of the covenants and how the balance sheet is looking. So I guess, devil's advocate question, at what sort of net debt-to-EBITDA or how would you look about it, that a potential capital injection would be required? How do you guys think about that?

When you say capital injection, you're talking about equity?

Correct, yes.

Yes. Look, that's not something we're considering at the moment. We think we've got significant cash reserves and liquidity to manage through this crisis. And when markets do normalize early next year, our leverage ratio has come down very quickly. So that's not something we're considering at this stage.

The final question comes from Senan Kiran of Muzinich.

Thank you very much for the detail you gave around CapEx and the changes to the guidance. I understand it's around [ $370 ] million for the full year, given [ $200 ] million for the remainder of the year. Is there any room to cut it even further down if need be, if you are watching it closely and only [ $100 million ] maintenance? And how much more could you potentially cut it?

Yes. Look, the problem we have is that obviously we had this big project at Saiccor. So a lot of the work was undertaken. So it would be difficult to take it down much further there. There may be $1 or $2 here and there, but I don't anticipate it being substantially lower than the $370 million guidance that we've given.

Okay. And then you also talked about the market share in the graphics part of business. Is that purely on the expectations of the shutdown that's expected from one of your competitors? Or is it just a better mix? I just wondered what was the driver behind the market share then.

Yes. Look, I wouldn't put it specifically to the competitor that's coming out. Clearly, it's a factor. I mean it creates opportunities for us. But I think, yes, I think we've done a tremendous job in both regions, in North America and Europe, providing consistent, reliable, high-quality product. A lot of competitors have gone through up and downs, and we've been very consistent, and we've had a focused proactive strategy with our customers. I know this sounds like a marketing spiel, but that's what it's all about. Fantastic work done by our marketing teams to keep the relationships. And then on the manufacturing side, reliable, consistent supply. That's what it's all about. And we've been able to do that, and we've done it over a number of years. And we've gained substantial market share, and we would look to continue to do that.

That was the final question. Do you have any closing comments?

No. Operator, I just want to thank everybody for joining us on the call today, and we look forward to giving an update in 3 months' time. So thank you very much.

Thank you, sir. Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.