Sappi Limited (SAP) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the financial results announcement Q3 2023. [Operator Instructions] Please be advised today's conference is being recorded. Now I'd like to hand the conference over to your speaker today, Steve Binnie, Group CEO. Please go ahead.

Thank you. Thanks, everybody, for joining us today. As always, I will go through the investor presentation, calling out the page numbers, and at the end, put it back for questions. . So we're going to start on Page 3, which is just a summary of the quarter. It was a challenging global economy that we were up against with ongoing weaknesses in paper and pulp markets. That's something obviously we talked about at the last results call. It has continued into the third quarter. And the destocking influence, which we did talk about on the last call, did continue and has been bigger and lasted longer than we had expected. We did start to see a little bit of improvement towards the end of the quarter, but it's still -- it's not going to be a sharp V-shape type recovery. It's going to be a gradual recovery. And certainly we saw that towards the end, and we'll talk a little bit more about Q4, but we've seen it continue into Q4. In order to mitigate the impact of the weaker market conditions, we're obviously implementing production curtailments to ensure that we didn't sit with an inventory liability. We proactively implemented a number of cost-saving initiatives across the group, and working capital continued to be a focus. Our EBITDA for the quarter, obviously down on the highs of last year, at $106 million. And then I'm pleased to say that on the debt side, we continue to do good work. We generated cash. So despite the fact that the earnings was less, we were able to generate cash and year-on-year we're $350 million down on last year. Turning to Slide 4. The contribution split of our product segments. On the left is the earnings, EBITDA. And look, obviously, in recent years, it's been volatile with COVID and then the great rebound that we had and obviously, under a little bit of pressure this year. But I think the overriding story is that packaging continues to contribute a larger proportion as we move forward. And that is confirmed if we look on the right-hand side, our strategic priority, and we've talked about it many times, is to reposition the business with less exposure to graphics and invest in growing segments. And you can see that in this time horizon, graphic paper has moved from just under 70% down to less than 50%. And that journey will continue, and we've set ourselves a medium-term strategic target of getting that below 30%. And we'll touch on that a little bit more later. Slide 5 is our earnings bridge. And what we've done here is just compare quarter-on-quarter because of the volatility, and it was a better reference point in terms of the underlying trends. I think, firstly, you can see the sales volumes relative to the last quarter were relatively stable. Obviously, at low levels, but it's confirmed that we've reached the bottom. And as I said to you, it's got a little bit better towards the end of the quarter. So no V-shaped, but improving. And then we did start to see selling prices come down, which we did talk about was going to be something that happens. They've been remarkably stable, but they did give up a little bit in the quarter-on-quarter analysis. Overall, net selling prices were down 7%, but that -- obviously, that takes into account all the segments. And then, as I said earlier, a strong focus on costs, raw material prices are coming down, and that's creating some opportunities. But some good work done on fixed costs and the like. So ultimately, that gave us $106 million that I referred to earlier. And then Slide 6. I always mention this when I present this slide, I think it tells a great story because we fundamentally repositioned this business from a balance sheet perspective. We will continue to be disciplined. We're generating cash even though the profits were less, the end number as you can see -- or the debt number at the end of the quarter was $1,176 million. And interestingly, that includes a translation loss of a conversion of our euro debt into dollars. That was $105 million. If you back that out, we would have been very, very close to the $1 billion target that we set ourselves. And we're committed to getting our debt below that $1 billion, and you can see that we're well on the path despite the fact that we've got loss -- or short-term pressures. And then on Slide 7, the debt maturity profile. And again, it tells a good story. We don't have any major debt maturing in the next couple of years. There's a couple of shorter-term facilities in Europe, and we've got excess cash to manage through that process. Our next big bonds are only maturing in 2026. Then turning to Slide 8, the cash flow. I've mentioned a few times already on this call but obviously not at the levels of last year, which were record levels, but still positive and enabled us to get the debt levels down to what we talked about. And then the CapEx, still around the $400 million mark that we talked about last quarter. Then turning to Slide 9. And I keep emphasizing on these calls that disciplined capital allocation is an important priority for us. And not to run through the entire slide, but obviously, we have certain regulatory and sustainability commitments that we have to meet and those come first in our priorities. We do want to reduce our graphic paper business. And obviously, if there are closures, there could be costs attached to that, and that comes high up in our allocation. We continue to look for cost opportunities with quick paybacks. And ultimately, it's important that we deliver a return on our capital employed at our targeted level above 2% above WACC. And then once we've done that, we want our debt below $1 billion, we'll invest for further growth. And that's what we've done with the investment that we're making at Somerset for the PM2. We're managing through that project with a commitment to keep the debt down below $1 billion. And then Slide 10, it's been a big story over the last few years. The cost, obviously, we saw significant rises in '21 and '22, but obviously, that's easing now and costs across the board are coming down. And that's helping mitigate the impact of the -- or certainly some of the impact of the weaker market conditions. Moving forward and then turning to the segments, the product segments. And firstly, on Page 12 is the pulp segment. I mean, firstly, let me emphasize that the demand for pulp continued to be strong. We've seen very encouraging viscose operating rates, which is obviously supporting the demand for dissolving pulp. Internally, we've seen more stable production, particularly obviously at Saiccor, where we did have some challenges. And we didn't have any maintenance shuts in Ngodwana or Cloquet in the quarter. So that obviously helped. In the prior year we had the big floods in South Africa. So that does impact the year-on-year comparison of the volumes. We -- on a slight negative side, we saw selling prices coming down. Net-net, we are positive about dissolving pulp market. There are conflicting forces. VSF prices are down a little bit and paper pulp prices. And albeit whilst that's not swing capacity, it does sometimes influence the pricing. The -- on the positive side, as I said, high operating rates for the viscose producers and inventory levels downstream are coming down, whether it's at the viscose level, all the way down to retail levels. So coming off their highs. So net-net, positive, albeit that there's a little bit of -- and the other thing that's happening is cotton prices have started going up again, which is obviously a competing fiber. Then turning to Page 13, the packaging segment. Overall volumes down 26%. This is a little bit of the economic situation because there is a little bit less spending, but it's almost entirely driven by the destocking and the high inventory levels. And that's across all our regions. And we're confident that this will bounce back in terms of volume. Prices have been pretty stable. And obviously, there is pressure out there, but we've been able to hold selling prices. And as a consequence of all that, the EBITDA margin did come down. And then graphic paper on Slide 14. And obviously, this is -- this has been weak, and we talked about it last quarter, significantly lower demand. A lot of it is destocking, but it's not only destocking. The economic situation, particularly in Europe where we have a big exposure, has dampened demand for graphic paper. And then obviously, on top of that, we all know that there is a longer-term downward trend line for graphic papers of about 6%. Then as I said, prices, stable somewhat, although they did start to come down a little bit in the quarter, which, obviously, on top of the volumes, meant that the margins were less. Slide 15 has the regions at a very high level. Europe and North America, lower volumes linked to the destocking process that I referred to. South Africa more stable, obviously benefiting from higher DP volumes. And graphically, you see the impact of all of that on Slide 16. I'm not going to repeat what I just said, but you can see how that translates into margins. Then Slide 17 is the strategy, our Thrive strategy. We continue on that path with our 4 pillars. Firstly, on operational excellence, ever more important in times when margins come under pressure because there's a strong focus on costs. Over time, we've talked about in the past, pulp integration is an important aspect. We think that -- to improve that is something that will help reduce volatility of earnings. Enhancing trust, I've got a slide later on a lot of the great work that we're doing on the sustainability side, but it's an important part of our strategy. And on top of that, our forestry certification, I said every time, it gives us a -- what we believe, a competitive advantage, particularly in -- well, across all the segments, but particularly dissolving pulp. And then growing business, I referred to the Somerset conversion and expansion. And we talked last quarter about labels upgrade at Gratkorn. We want to reduce exposure to graphic paper. We made an announcement a few weeks back -- a couple of weeks back on the potential closure of our Stockstadt mill in Germany. That is a mill that has been EBITDA negative and has been in a weak situation. So we're going through a consultation. And obviously, as we complete that, then we will update the market. And a strong commitment to sustaining our financial health. As I said earlier, we are committed to the $1 billion, we're nearly there. And then from a gross debt perspective, we did have another bond in -- one of the South African bonds that matured close to about $59 million. We took that off the table, and we continue to look for opportunities to maximize the use of our cash resources. Slide 18, just confirming that sustainability is at the core of our culture, our Thrive strategy. And Slide 19 just shows you a bunch of the awards and ratings that we have. The one maybe to call out as the most recent is the FTSE4Good. That was confirmed in July, and we're very proud of that. Then Slide 21, in terms of our outlook. As I've indicated, the weak global macroeconomic conditions are still there. I think we're nearly through the destocking. And as I've said earlier, there is slight improvement, but it's not a V-shaped recovery, but we are seeing gradual improvement. The DP demand remains strong. As I said earlier, mixed influences, but net-net, we believe it to be positive. On the paper side, fair to say that the destocking lasted longer than we expected. However, having said all of that, we continue to focus on the balance sheet, liquidity remains healthy, and we will match production to demand. And then on the final Slide 22, most of this I've talked about, but just to recap or finalize is that on the back of the slow recovery, we anticipate that the fourth quarter earnings, EBITDA is likely to be above that of the third quarter. So operator, that's me going through the presentation. I'm going to hand it back to you for questions.

[Operator Instructions] We'll now go ahead with the first question. This is from the line of James Twyman from Prescient.

Thank you very much for the additional details. I've got 3 questions, if I may. The first one is you've managed to stop a very sharp fall in prices in coated paper, both in Europe and North America, which is surprising given how high prices were and how weak demand has been. How have you managed to do that? And how -- where do you see that going, whether you can -- stock prices falling further in the next coming months as well? That's my first question.

Look, on that one, as we've always said, James, we always said this is primarily -- that weakness was primarily driven by destocking. And when you have a destocking, particularly to that extent, perhaps more traditional market forces are not the biggest influencing factor in terms of price. So I mean, said another way, if we had reduced prices, I don't think it would have attracted additional volume. As things are now leveling off and improving, as I've illustrated, the more traditional market forces come to play. And that is the old trade-off between volume and selling prices. And that's what our teams, our sales teams are working with at the moment, getting that optimal performance to maximize the sales line. So it's shifting away from a destocking to a more traditional market forces. And obviously, overlaying all of that, the macroeconomic economy is still weak, particularly in Europe. So I -- we can't give a specific forecast on where selling prices will be, but I think it's fair to say that they are likely to come down. However, volumes are likely to go up.

My follow-ups were, firstly, on CapEx, you're talking about $410 million this year. Is it possible to be able to keep it at that level or lower next year? Because you've obviously got a lot more to spend at Somerset. But just given market conditions, how -- what can you do there? And then my final question was there's always seasonal strength in the U.S. in Q4. Given these difficult circumstances, is this something that you still expect to happen?

All right. I think on CapEx, really, the story is -- well, I'm going to repeat something that I've always said, right? Our maintenance CapEx is around $250 million. And then we have our sustainability initiatives, which is about $60 million or $70 million. So that brings you to the low 300s. Then the big project that we're undertaking this year and in the next 2 years is obviously Somerset. So included in the current year number for Somerset is just over $70 million, and that's how you get to the $400 million. Now in terms of the way that we look at the split of the cost to complete Somerset, next year, the Somerset number, I think, Glen, is about $170 million.

$179 million, yes.

So that's the major variable I'm not giving you a specific number, but the big change from this year to next year is really the 70 versus the 170 for Somerset. On the last question, I'll start, and I'm going to hand you to Mike. Just in terms of where we're at, as I said earlier, we're seeing gradual improvement. And yes, traditionally, Q4 is a better quarter. So we are a little bit more positive. But I'll allow Mike just to add what he wants to say there.

Yes. Thanks, Steve. You're spot on. We do seasonally see an improvement in the fourth quarter in North American Graphics. And I'd offer that it's probably a slight improvement that we've been seeing this year. So it's not some kind of V-shaped recovery, but we have seen a slight pickup and we're expecting that to continue through the quarter.

We'll now move to the next question. This is from the line of Andrew Jones from UBS.

I've just got a couple of questions. I mean just following up on that conversation about North American graphic demand, I'm just looking at the PPPC data for June, and it seems like in coated woodfree, the demand was actually sort of lower year-on-year compared to the 6 months average, so like down 39% in June versus down 31% for the first half overall. So it seemed like it was getting incrementally worse, if anything. So I'm curious about what sort of base you're talking about when you're saying -- talking about sequential improvement. Is that versus the 2Q level? Is that versus the June level? Is that -- how much of a pickup have you seen from June into July? What's -- I mean can you just frame that for us in the context of these weak industry numbers.

I mean, obviously, they're industry numbers. We're obviously looking at internal data, and we're looking at order activity. And it's, as I say, slightly better. It's not a huge recovery, but it's slightly better. June was slightly better than May and July was slightly better than June We probably lost a couple of percentage points, Marco. We probably lost a couple of percentage points market share earlier in the calendar year, but we've started recovering that. Maybe you want to comment there?

Yes, that's exactly right. We're seeing -- and yes, we're talking industry data here. And looking at our own data, there is a slight improvement over the previous quarter, which we're confident will continue in the fourth quarter. Obviously, very, very low level still. So I can only repeat what Mike said about the U.S. It's far from a V-shaped recovery. It is step by step. We're tracking the order intake, the industry order intake week by week, and it's baby steps at best. So in that sense, it's very important that we keep our own position, and that's what we're aiming for.

Okay. And you were talking on the last call maybe about demand in 2024 and talking about a return to the sort of structural trend. I think you cited maybe down 20% compared to the 2022 level would be in line with the sort of trend you were seeing. I mean how are you seeing 2024 demand for coated woodfree overall? And do you see -- what sort of pickup in shipments do you think is possible in 2024?

Yes. Look, if you'd asked that question 6 months ago, we would have probably estimated getting back to somewhere around 80%, so between 75% to 80%. And to your point, that was on the kind of longer-term trend line because you had the bounce back last year. I think with the benefit of a few more months data points and reflection, I would say that -- and it's certainly how we're thinking about the budgeting for next year that it's probably 5% less than that, the recovery next year. So instead of being 75% to 80%, about 70% to 75%. And really, that's one of the reasons why we made the announcement about Stockstadt. I don't know if you recall me saying previously that if we had stayed at about 80%, then our machines were relatively full. But with that shift, it's been worse than we had predicted. And that's why we are taking the initiative on Stockstadt.

And that was relative to the 2022 level when you're saying -- when you talk about these percentages?

Yes. Look, Andrew, '22 was, give or take, close to 2019 because you had that big bounce back. So it recovered. So when we say 20% down and now saying 25%, effectively, that's over a 4-year window.

Yes, that makes sense.

We'll now take our next question. This is from the line of Brian Morgan from Morgan Stanley.

Just following on from that. You're talking about getting back to sort of 70% to 75%. Just looking at the capacity that's coming off the market. So it's nice to come up the market, looking at my listing here. The only one that I can see is [ Nectin ] in France, it's about 180,000 tonnes or maybe what's that about, 8% of demand? And then Stockstadt, we don't know how much -- what the split is between uncoated fine and coated woodfree, but it's not a big number. So maybe we're looking at 10%, 12% capacity of the market. Would you agree that we need to take -- that market needs to take a lot more capacity out of the market in Europe?

Yes. Look, the one thing I would say, Brian, is that remember '22 got close to 2019 levels and a lot of capacity had come out over that intervening period. So operating rates in '22 were close to full. So -- and you know we always look at sort of 10%, you want operating rate to be at about 90%, right? So you've got to take that 10% into account. That would also keep you at optimal operating rates. Having said that, yes, I mean, clearly, if the recovery does get to, say, 70%, then it's clear that more capacity will need to come out, yes. Obviously, we've announced Stockstadt. And our competitors need to evaluate their own situation. From our perspective, we continue to look for opportunities to remove graphic paper. Just remember, Brian, that label -- that machine that we've got on labels, effectively, it's like taking out a machine that 100,000 tonnes, right?

Sure. When filled, which, of course, will happen over the next period, the next couple of years, it will effectively take out a machine that was on graphics capacity even more. It was over 250,000 tonnes.

Yes. So you -- for us, you add the Gratkorn machine, the Stockstadt machine, yes. And then we continue to -- we will continue to proactively manage. Obviously, we have the deal that fell through and with those other mills, Stockstadt, we've made the announcement. We continue to look for options with the other mills that were part of that process.

[Operator Instructions]

Okay. Operator, we're looking at the screen here. If there's no more questions. I'll give it a second or 2 and then talk. If there's no more questions, then I guess we'll end it here. Are there more questions?

We've got one question coming through. And this is from Andrew Jones at UBS.

Just on the variable cost trends in the fourth quarter. I'm just curious how much of a decline we might see, I mean, you called out sort of a number, you said down 6% in the third quarter. Should that be accelerating overall into the fourth quarter, given it seems like wood cost's starting to roll over, I guess, and obviously energy is still a tailwind, chemicals are coming down. You've got that -- I believe, your logistics contracts kind of rolled off at the sort of midyear stage. So there's some tailwind there. I mean, can you give us a sense of how much that variable costs could come down for the business overall and if that varies much between the divisions?

All right. Brian, it's Glen here -- sorry, Andrew. So you're right, they did go down by 6%, and it was across all our major cost categories. We're expecting a further reduction in quarter 4, not to the same degree as what we saw between quarter 2 and quarter 3 but in the same direction. It will be less than 6%, but also again, across all categories.

Okay. Excellent. And okay, just on the volume trends. I mean, it looks like DWP is basically just running full. Packaging didn't really drop off. I guess, maybe there's a bit of upside there. But I mean, do you expect much upside in volumes in packaging? And then just on printing and writing, I mean, obviously, we're quite a long way below sort of normal operating rates. I mean, as a sort of best guess, I mean, how -- I mean when you're talking about this sort of destocking sort of ending and volumes starting to sort of gradually improve, do you have any sort of best guess for sort of volume number for the fourth quarter?

We can't be that specific. What -- maybe I've got to go back a step, right? I mean, firstly, we talked a lot about the graphics side and where we expect it to be to recover to. I don't think that's all going to happen in Q1. It's going to take another couple of quarters to get to that sort of 70% to 75% that I talked about. On the packaging front, we are very confident that we'll get back to the 100% that we were previously. Again, that's not going to happen in Q1 -- sorry, Q4. It's going to be over the next couple of quarters. So -- and it comes back to what we've been talking about. It's not a V-shaped recovery. We are seeing improvement, more so in packaging than graphic. But we're not going to be at 100% in Q4, which means that there will still be curtailment in the business. So I would spread it over 2 or 3 quarters is basically what I'm saying, Andrew.

And on the packaging, you will have probably listened to your competitors and what they've been saying on their results calls. I mean we had like Metsä, Stora and Belarus, all of them basically talking about ongoing destocking and further volume weakness through the second half of the year. I mean, you're obviously a fair bit more beating your volumes in the last quarter, kind of outperformed to some extent. I mean what are the regional or market differences that you're seeing which gives you more sort of confidence in the outlook? I guess North America is probably better than Europe clearly. But can you just give us a bit of a breakdown as to sort of the different packaging grades and regions where you see the best and worst.

Yes. What I'll do is I'll give a brief comment, and then I'm going to hand it to the 3 regional CEOs to just briefly talk about our packaging markets. Look, I've said a few times on this call, it's not a sharp recovery. And with reference to our competitors, it's not a surprise for us that they're still talking about destocking because the stock levels just built up by so much last year and it's taken longer to recovery. Having said that, as we talk to our customers, as we get visibility on their inventory levels, as they give feedback in terms of where the volumes are going to be in the future, we are going to see that recover. But it's not going to -- it's not all coming in Q4. Anyway, what I'll do is I'm going to start with Marco, and then I'll hand over to Mike and then Alex. So...

Yes. I think in general, you're touching on the most important elements. In Europe, we're seeing that the packaging and specialties business has been somewhat more resilient than the graphics business. However, having said that, we've also, to a certain extent, been surprised how much they've been impacted by the whole stocking and destocking effect. The value chain of some of these packaging and specialty products is rather complex and sometimes deeper than the graphics one. And therefore, you've got more opportunities or risks that stock is being built up on different places in the value chain. And that has surprised us to a certain extent and also has led to the fact that this recovery took a bit longer. We are absolutely confident that the strategic segments that we have defined in our packaging and specialty portfolio will come back. There is a very healthy long-term outlook for some of these products. And as Steve just indicated, we have made strategic choices to be very competitive in some of these areas. And notably, when we talk label self-adhesive base stock with a machine like the PM9 in Gratkorn, that will take us a long way.

Thanks, Marco. Mike?

So first off in North America paperboard destocking is likely to continue into the fall at similar levels. If you break it by segment, our label paper business quarter-over-quarter has been slightly improving. Folding boxboard has been a little bit flatter and food service board has also been improving, so the trends are going in the right direction, although we do think we'll be working through the destocking through the next quarter.

Thanks, Mike. Alex?

Thanks, Steve. In South Africa, it's obviously the containerboard market. And we've got 2 main pillars, the biggest would be agricultural fruit exports and then the industrial market. We've seen some high stock levels and similar destocking. The agricultural market is about 3% weaker, but it's because of weather conditions. There's been some extraordinary wet weather conditions. So it's just not enough -- or not a similar level of fruit available. And then on the industrial market, obviously, with consumers being under pressure, we've seen a slight weakening but nothing to be concerned about.

Good. Thanks, Alex. Okay.

Yes. So it sounds like South Africa has been sort of holding things up to some extent relative to other regions, and that's probably...

Yes, the South African business had a more stable quarter. But obviously, seeing -- as Alex has said, there was some destocking going on there as well in the packaging side.

Okay. Okay. And just on the CapEx, I mean, you've reiterated the guidance, but I mean you've got to triple spending in the fourth quarter. Is that still doable? Or do you think there's risk on that number?

No, no. On CapEx, no, no, we're committed to the $400 million. And it's just timing on the projects. There's nothing -- nothing has changed there.

And we'll now move to the next question. The next question is from the line of Joffrey Bellicha Meller from Bank of America Securities.

I wanted to dig a little bit deeper into the DWP trends that you're seeing. Can you kind of extrapolate what volume trends you're expecting into the fourth quarter? What is going on with VSF operating rates at the moment and if you can sort of give a forecast of what you expect them to do in the coming quarters, I guess, even in the coming year? Have you seen real restocking happening on the textile side as well in China? That would be super helpful. And also, Steve, you mentioned cotton prices rising again. Do you think that would imply in combination with the -- I guess, the higher prices from the lows on the pulp side that we could see price increases in DWP as well in the short term. That would be super helpful.

Great. Thanks. I'll take a little bit of that question, and then I'll let Mohamed elaborate further. I mean, firstly, there is a few competing forces here as I said on -- in my intro. Generally, the demand for DP is strong. I mean, let's just say that first and foremost. And you -- and specifically to your question about volumes, the volumes for Q4 and Q3 should be relatively stable. I think that's the first point. In terms of the other positives, VSF operating rates are high, which obviously supports the DP demand. And as I said earlier, the cotton price is positive. So that will be positive. And then the inventory levels downstream, particularly all the way down to the retail levels, while they're still high, they've come down, and that's going to be positive. And further upstream at the viscose level that -- we've seen them coming down pretty sharply. Mohamed, maybe you just want to give your overall impression on where you think markets are. But generally, I'll hand it over to you.

Okay. Thank you, Steve. I think just starting with the VSF operating rates. They're currently at around the sort of 80%, 82% in China. This is based on the CCF index. What is important about calling that out at this time of the year, we are currently in the seasonally slow time. Historically, what we've seen is the operating rates are much lower than that, closer to, say, 70%. This time of the year -- or this particular season, the industry has been operating at a much higher operating rate, and that helped demand for DP. At the same time, the industry has, I think, purposefully kept the VSF price flatter but at a lower range, and that has allowed the VSF volumes to flow through the value chain relative to, say, for example, cotton where the pricing has been much more volatile. So what we're seeing at the moment is that VSF inventory levels at VSF producers are at a low level. Currently, quoting again the CCF numbers, you're seeing them at around 18 days of supply. 5-year average, you're talking about 23, 24 days, so much lower. So that should support, I think, a continued higher operating rates. And then we're going into the seasonally strong time, which starts around September. That should lend support to a higher VSF price as we get closer to that time of the year given the fact that VSF producers are sitting with low inventories. And that ultimately should start providing some pricing support for DP.

Thanks, Mohamed. Thanks, Joffrey.

Yes. So I mean -- actually, on DWP since we're here, I mean, Steve, have you heard -- or Mohamed, if you've heard anything in terms of capacity increases or projects for capacity increases coming out of either China or Latin America or even South Africa or Europe because obviously, we're seeing a lot of capacity increases into the market -- pulp market. And obviously, we seem to have some strong trends and strong tailwinds. I'm curious to see if you're going to get any competition from peers there.

Yes. We think this is a very good opportunity because we are not aware of any additional DP capacity coming. And as we've indicated in the past, a big project would take some years to pull together, and we're not aware of anything. So we still are bullish about the longer-term prospects. We think demand for dissolving pulp will continue to grow at 4% to 6% per annum. That's about 400,000 tonnes a year, 300,000 to 400,000 tonnes a year. And there is no new capacity coming. So if you look at the -- if you project out the operating rates, out say, 3 years from now, you're looking at a shortage. So that's a very exciting proposition, and we think will be favorable for DP prices.

And consequently, do you expect yourselves to kind of participate in capacity increases in that market?

Not in the short to medium term. Our focus, as I said earlier, get our debt below $1 billion. We've got to finish the Somerset conversion, and those are our priorities.

We'll now take our next question, and this is from the line of James Twyman from Prescient.

Just a couple of quick follow-ups, if I may. You've talked quite a bit about where demand is likely to be for coated paper in Europe at sort of 70% to 75% of where it was and need for closures and there's obviously some serious issues that the industry needs to deal with. But the U.S., I think we're all probably a little bit more hopeful that that market is in much better shape. Could you just talk around that about whether there is a need for any closures at all there or not? It seems an awful lot better. And then secondly, you did mention on the call about cost savings. Just interested to know whether that's a significant new initiative that you're doing there?

Yes. Look, I think in terms of the U.S. market, as we have alluded to throughout the call, the U.S. is not as bad as Europe in terms of where the drop in graphics has been. Having said that, there's going to be a significant decline, just like just like in Europe, but more capacity, relatively speaking, more capacity actually did come out in the intervening period. So at the height of the great results last year, there was a severe shortage of graphic paper in Europe and operating rates were theoretically well above 100%. I think in terms of a relative drop to say once again 3 or 4 years ago and because of the recovery last year, a similar amount, you're still talking 75%. But so much capacity did come out in the intervening period. Now there's a big difference, particularly for Sappi, right, is that we're converting this machine. So that machine will be completed in 2025. So from a risk perspective, it's a relatively short-term window. And we do think it will bounce back to those levels. That will enable us -- and if it does, that will enable us to sell our machines. And then when the machine -- the conversion is complete, obviously, at that point in time, we will take another big chunk out of the graphic paper market. So if I had to summarize all of that, I think there's less risk in the short term. And with the additional capacity coming out, it does mean that longer term, these markets in the U.S. are, in our opinion, going to be even tighter. And we think that will get favorable conditions for the remaining capacity that we would have left in graphic paper in North America and may create opportunities for us to sell some more tonnes out of Europe into the U.S.

And at this point, there were no further questions so I will hand back to the speakers for closing remarks.

Thanks, operator. I just want to thank everybody for joining us today, and I look forward to discussing the Q4 results in 3 months' time. Thank you very much.

Thank you. This does conclude the conference for today. Thank you for participating, and you may now disconnect.