Sappi Limited (SAP) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Sappi Q4 2024 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Steve Binnie, CEO. Please go ahead.

Good day, everybody, and thanks for joining. As always, I'll move through the investor presentation, calling out the page numbers as I go. And I'll start on Page 3 which has a summary of the results for the year. After a strong last quarter, I'm pleased to say that adjusted EBITDA for the full year was $684 million. I think that was very satisfying and a good result following the difficulties in the second half of the prior year and obviously, the slow and progressive recovery as we move through this financial year. That success was built off a strong performance from the pulp segment, and I'll talk about that in some more detail as we move through. Thrilled to say that we had record profitability for the South African region. That's actually the third consecutive year of record profits. In addition to the strong performance in the pulp, we also saw lower costs coming through, some good work done there and specifically lower wood costs. And once again, I will refer to that again as we move through. Paper markets did recover globally, but it was a slow recovery. And certainly fair to say that it was slower than we had expected. And that's following the significant destocking that we experienced in 2023. At the same time, as all of that, we were able to do good work on our fixed costs. We achieved significant year-on-year cost savings through strategic rationalization actions. As you know, we closed 2 mills in the early part of the year. So that enabled us to lower our fixed costs substantially. Pleased to say that we are declaring a dividend of USD 0.14 in absolute terms. That's -- I think it's $84 million, which is the same as the prior year, and is in line with our dividend policy, which is to be 3x covered. We've said for a number of years that we wanted to get back to that level, and I'm pleased to say we're there now. Moving to Page 4, which is specifically on the quarter, it was a strong last quarter and in fact, probably ahead of our -- even our own expectations, we're pleased to say. And it's always good to finish the year strongly. A number of the factors were the same. Obviously, pulp had a really strong last quarter and those same factors in terms of the performance in South Africa with lower wood costs coming through. Packaging had a couple of tough quarters in the middle of the year, but pleased to say that it's progressively now getting better and year-on-year profitability improved. And then graphic paper, despite the fact that demand remained suppressed, year-on-year profitability improved, and our margins actually were pretty healthy as we took out the capacity. Our net debt to adjusted EBITDA was 2.1x. I'll talk more about that. But obviously, our debt did increase because of the higher CapEx. It's not because of operational issues. Turning to Slide 5, which is the product contribution split, and maybe I'll start on the right-hand side, actually. We continue to transform our business. We've made a strong commitment in the past to get our levels of graphic paper down to 30%. And this year, we're down at 45% now. And with the big projects that we've got underway at Somerset and Gratkorn, by the time -- in 2 years' time, we're hopeful that we can get that down to about 30%, which was our longer-term commitment, obviously, with a strong focus on growing the higher margin, higher growth segments. And you'll continue to see the growth that you've seen in recent years. On the left-hand side, a lot of volatility in recent years, but pleased to say that pulp obviously had a very strong year, and that contribution increased. Packaging, which I'll talk into more detail, a more difficult year, but we are optimistic about the future. And in graphics, with all the -- despite the lower volumes, with all the good work that we've undertaken, managed to keep healthy margins. Turning to Slide 6, which is the earnings bridge for the year and maybe just to highlight a few significant items. Firstly, volumes relatively flat year-on-year. But what you have to take into account is that in the early part of 2023, the market conditions were still very strong, particularly in Q1. And then we saw declines as the macroeconomic environment started to take an impact. And then subsequent to that, as we ended that financial year and then into the current year, we've seen progressive improvements. That same story holds true in the price drop that you see. The paper segment is down significantly year-on-year. Pulp initially started [ 2023 ] very high, over $1,000 a tonne. It came all the way down. And then you've seen this progressive improvement as we've moved through the current financial year. On top of all of that, we were able to take significant variable costs and fixed costs, as I mentioned earlier. Obviously, most of that fixed cost reduction was in Europe, linked to the closure of the 2 mills. Bear in mind that in the other regions, you have your inflationary increases that come through, that offset some of that. All of that then serve to give us the $684 million EBITDA that I mentioned earlier. On Page 7 is earnings bridge quarter-on-quarter. I don't intend talking to that too much, just a couple of points to make. Firstly that you can see that the prices were flat effectively year-on-year, which tells you that during the course of 2024 financial year, we've been able to hold our prices pretty well in the paper segments despite the market conditions maybe not being as good as we would have liked. The other factor that I would like to call out is on the far right, the plantation fair value adjustment. You've heard me mention a couple of times that there was lower wood costs. Clearly, we benefit on the P&L or the income statement, but you get the negative impact coming through on the balance sheet as you fair value your plantations. And that's what's coming through there to -- and we did talk about that at the end of the last quarter. Moving to Slide 8, which is our major cost categories. The two big ones to call out, firstly, maybe is pulp. We saw sharp declines in the second half of '23, and that was linked to that same macroeconomic conditions that we referred to. We saw a subsequent increase and then in more recent quarters, a leveling off. And in fact, as many of you will know, global paper pulp prices are now coming down. We will -- there's a bit of a lag for Sappi as we buy that, so you'll start to see benefits coming through in the first quarter of the new financial year. The wood prices, which I referred to a couple of times, you see that coming down sharply. And obviously, we benefit from that. The rest of the cost, relatively flat year-on-year as we've moved through the year. Turning to Page 9, the net debt evolution. Year-on-year, obviously, the debt is up. The [ three ] big factors to call out. One is the higher CapEx, which is mainly associated with the conversion of this -- an expansion at the Somerset Mill. On top of that, we had to close the 2 mills in Europe. We incurred costs associated with that. And then -- and obviously, the final factor, we obviously -- we declared the dividend, which we're going to be maintaining going forward. This was planned. And as soon as the project is completed at Somerset, I would expect the net debt levels to come down sharply. Moving to Slide 10 and our debt profile. Perhaps the biggest ones to call out in the next few years is, firstly, our 2026 bonds, eurobonds, those mature in 2026. We did -- you may recall, we bought back a little bit of that last year. So the absolute amount of that now is down to EUR 240 million. we'll monitor that, and we'll pick the right time to refinance. We do benefit from a lower interest rate. So having them still out there for a little bit longer, we do benefit from. The other number in 2026 is predominantly linked to a securitization structure, and we're in the process of refinancing that, and I don't anticipate any issues there. Moving to Slide 11, which is our cash flow and CapEx. Starting on the left, strong cash generation from operations and free cash flow. And then we utilized that cash flow for the -- really for the reasons that I described earlier, that's the CapEx, the closure of the mills in Europe and the dividend. So all of that carefully planned. On the right-hand side, the CapEx, we finished the year at 2024 at [ $458 million ]. It's probably a little bit lower than the guidance we gave you. Some of the smaller projects we shifted in at '25 and is included in the '25 number. The overall CapEx for '25 is approximately $500 million. The biggest and most significant part of that is the Somerset project, the completion of that project, which is $157 million, and the bulk of the rest is maintenance CapEx and sustainability CapEx. Turning to 12, we've been very disciplined in our capital allocation and a strong focus on the balance sheet. Firstly, we recognize we've got sustainability commitments to lower our carbon footprint. In the year that's just gone by, there was about 30 million. We've guided in the past about 60 million to 70 million, and that's an average, and we continue to maintain that level, but it was a bit late in the year gone by. I've mentioned a couple of times, strong focus on our balance sheet, being disciplined, and the debt levels will come down after the completion of the Somerset project. On profit improvement, as I said earlier, my commitment is to get the graphics numbers down below 30% of our overall volumes. The closure of those mills takes us another step forward, and the big projects that we have underway will take us all the way to that level. The Gratkorn wet strength label conversion, that's the smaller machine at Gratkorn. It's about 220,000 tonnes of capacity. That project is complete, and now we're ramping up on the labels, and we're very excited about that. That's effectively taking out another machine out of graphics and excited that moving into a segment or a product category that is growing and delivering good margins. We're committed to maintaining our dividends. I said that we kept it flat in terms of absolute terms. And that gets us to the 3x cover. On our performance on ROCE versus WACC for the year, it was -- it outperformed our WACC. Over time, we have a commitment to exceeding WACC plus 2, and that's over a full-year cycle. And we have been doing that, and we continue to be very disciplined about that when we look at capital projects. And then very excited about our project at Somerset. It's a big project for us. It's -- overall, it's costing $420 million. It's an expansion, it's going to give us additional volume. It's going to give us the best machines in the industry, the most efficient machines. We're ramping up nicely, and we're very confident about being able to fill that. And just to remind you all that you don't get the additional volumes on day 1, it takes time to ramp up. And we'll finish the project in April and then progressively, the volumes increase in the second half of the year and then into the 2026 financial year. Moving to the segmental. Firstly, on pulp, Page 14, an excellent year for us. Market conditions are good. We've got strong relationships with our customers. We're fully sold out. Demand is strong. Frankly, we couldn't make enough of the product. Margins are good, disciplined management. The DP price is up. I'm very bullish about both the short-term and medium-term prospects for this. There's no new supply coming in. And as I say, market conditions are good. We were impacted on the volume front by -- I think many of you remember there was a raw material delivery, and there was a tanker explosion, that cost us about 15,000 tonnes. Other than that, the production at Saiccor specifically was very good and feeling pretty confident as we move into the new financial year. On Page 15 is the packaging segment. It's been a tricky year, mixed performance. There was a major destocking across all our regions, in fact. And taking each of them in turn, North America, we've seen the recovery and order activities picked up. We're signing up customers on the new machine, ready for the completion. And market conditions, we're feeling confident about. In South Africa, we had a major destocking in the early part of the year, but we're more optimistic as we move into the new financial year, and the longer-term prospects are very good for citrus exports out of South Africa. Europe, more challenging. The European economy was obviously more subdued than the -- perhaps the other large economies. And in some of the segments, there was some excess capacity as a result of that. We are seeing green shoots. Some of the categories are better, but others a little bit slower. And for that reason, the recovery is taking longer, and you are going to see that as we move into the new financial year. Taking that all into account, we did see improved margins. It's not where I want it to be. Clearly, over time, we want to get it back to the mid-teens, but we are making progress towards those levels. On graphics, we do get a seasonal boost. Overall, 10.6% EBITDA margins is healthy. Obviously, we benefited from taking that capacity out of Europe. Our machines are relatively full. And I think, all in all, a good performance. And just to reemphasize once again, we continue to be more proactive about how we manage here. We are going to have capacity coming out because of what's happening in Somerset, what's happening at Gratkorn, and we continue to be very focused on ensuring our machines are full and optimizing productivity. Turning to the regional segments on Page 17. I won't say too much. But firstly, Europe, a gradual recovery. Selling prices actually held up better. Despite the difficult market conditions, they held up pretty well. EBITDA margins lower than we would like them to be. But we're focused on recovering, particularly in the packaging segment. In North America, a good year, a good quarter, tonnes up, selling prices held up well and a very healthy margin. And then South Africa, as I said, great year, good benefits from selling prices, good benefits from cost and giving us a very healthy margin of 28%. Next page has this all represented graphically. I won't repeat everything. Just to say that in Europe, obviously, we benefited from the fixed cost savings coming through. And in terms of North America, everything is on track there and a strong performance in South Africa. Moving to Slide 19, our price strategy, this is a slide we show you every quarter. We are focused on our strategy, and it's built around transforming our business away from graphics towards pulp and packaging. It's focused on improving our margins, disciplined cost management, disciplined balance sheet management. We're obviously thrilled by the awards that we've been given for our employee engagement, and I'll talk a little bit more about that now. But we've maintained our BBBEE certification at Level 1, and we're committed to our science-based targets. We have the projects underway, which I've referred to a couple of times, which will help boost our profitability and then ultimately, get back to those debt targets that we've set ourselves. Moving to Slide 20, which is our sustainability targets. On the people and prosperity front, generally, we met most of them. In fact, we met them all. I think, firstly, on safety, we continue to improve our injury rates across all our regions. Tremendous work done on diversity and particularly on women, and we've won awards for that. So I'll touch on now. With employee engagement -- and I think you see the benefits of the employee engagement coming through in our good results, and that's being recognized externally. Our next engagement survey is only in 2025, but we've closed out all our action plans from the last engagement survey in '23. As I said earlier, the -- our target is to achieve a ROCE plus 2 through the cycle over WACC. On sustainability -- on the planet side of sustainability targets, there was a couple that we missed, which relates to the commercial shuts or the commercial downtime that we took, particularly in the early part of the year. As you would appreciate, your mills are [ not ] operating at optimal levels. And that has an impact on your efficiencies and your carbon emissions as you measure them. But in terms of the utilization of renewable energy, good progress made there during the [ year ], and we achieved our targets. Slide 22 is something that we are very proud of that. In the last couple of months, we've received a number of prestigious awards from external sources, and we're one of the few South African companies to be recognized in these awards. We're one of the few industry players to be recognized and to be in the top 1,000 companies in the world recognized by Time and one of the best employers globally by the Forbes magazine. And we're particularly proud that Sappi was recognized seventh in the world in terms of world best company for women. We think that's a tremendous achievement. We were not involved in these awards. These were done externally and independently and -- but it's great to receive this recognition. Turning to the outlook on Page 24, it's fair to say that there's still challenging macroeconomic conditions up there. But hopefully, they're starting to improve. Interest rates are coming down. We are seeing slightly better forecast for GDP growth coming through next year. China, for example, is obviously focused on their stimulus packages. So hopefully, that -- we'll get some benefits from that. But it's still a challenging global economic environment. DP, the market conditions are still expected to remain favorable. Packaging in North America and South Africa are healthy. Europe, a little bit slower to recover. And on the graphics side, as I said earlier, we'll continue to manage our assets around our anticipated demand. We should benefit from the -- or we will benefit from lower pulp prices that will come through, particularly in Europe. We buy about 500,000 tonnes there, so we should benefit from that coming through. Just on the wood prices, you will see a negative fair value adjustment coming through in the first quarter of next year for the same reasons that we described earlier. The CapEx is around $500 million. Just one thing I should call out is that our CapEx next year, as you saw earlier, is about $500 million. A majority of that is in the first half of the year because that's related to the Somerset project, and that will be completed in April. So our guidance for the year is our adjusted EBITDA will be significantly above that of the equivalent quarter of the prior year. So operator, that's me gone through the investor presentation. I will now hand it over to you for questions.

[Operator Instructions] We will now take the first question from the line of Brian Morgan from RMB Morgan Stanley.

Congrats on the numbers. Steve, perhaps you can just help us with PM2 conversion and the impact on earnings sort of sequentially over the next couple of quarters, as mills taken down and then converted and then you begin to ramp up in packaging. Are we going to see a negative earnings impact in the short run and then only a recovery? And if so, when -- what would your expectations be?

Yes. Yes. Thanks, Brian. Well, firstly, at a high level, when -- just prior to going live with the new machine, we have about a 70-day shut. And now bear in mind, that's a machine that was predominantly on graphic paper. So you're talking roughly 2 months. But offsetting that a little bit is that we have been taking curtailment, right? So when you're comparing year-on-year, you had curtailment in the prior year. And even now, we're still taking a small amount of curtailment. So your impact is less than that 70 days. On the packaging side, you don't get all the new tonnes immediately. Obviously, we [ start ] production in April, and there's a gradual ramp-up. That's normal in our industry and you'll have seen that with machines in the past. So we would -- ultimately, the machine will get up to 500,000 tonnes, but it's going to be progressive in the second half of the year and then into 2026. So taking that all into account, we're anticipating significantly less curtailment than we had last year. So all in all, graphic, we're not anticipating because there's less curtailment. Yes, you have the shut that I referred to. But all in all, your graphic volumes should be relatively steady compared to the prior year. And then on the packaging front, with the additional volumes associated with that ramp-up period, you will get additional volumes. If you're thinking about it sequentially quarter-on-quarter, clearly, you will have the impact of the shut in Q2.

Okay. Cool. And then can I just follow up on the packaging? Do you still need to get customer approvals, acceptances on the new paper? Or is that done already?

Look, what I would say to you, and I'll let Mike expand further, but it's an ongoing process. You don't sign up everybody today, but it's going well. We're getting good feedback from customers, discussions are going well. And I'm feeling confident that we can meet our ramp-up costs. Maybe Mike, I don't know anything you want to add to that?

Sure, Steve. Brian, the way it's going to start out is we're going to carousel a number of our existing customers on start-up volume that we've had -- we've been in negotiations with right along. And the intention is that the 2 machines are substantially similar, and we'll be able to model the grades on to or mirror them from PM1. So there should be a very short learning curve, but it is starting up brand-new equipment, but it is substantially similar to what we're already running. So our expectations are that the qualifications ought to go fairly quickly, but many of our customers do want to see the product off the new machine before they sign up for an annual basis.

Yes. And that's natural, Brian.

We will now take the next question from the line of James Twyman from Prescient.

Yes. So firstly, a great set of numbers for Q4. It sets you up great for this year. My first question is just in terms of Europe, could you give us some idea of where your operating rates were sort of towards the end of the year in graphics and more importantly, in packaging? And where you see the industry in those grades of graphics and in the various packaging areas? Because I think they're probably fairly different. And then secondly, in terms of the CapEx of $500 million, could you give us some idea about this environmental spending? I think you said it was $30 million in 2024. Where do you see it in 2025? And what sort of things are you looking at spending in 2025? Because I think there is the assumption that it's money without any return. It's all good stuff, but it's not giving a return. But I think in reality, there is some benefit to the business as well, but it's difficult to know. That's it for me.

Sure. On the -- well, firstly, on operating rates for our European business, the overall -- on the graphics side, and it's predominantly obviously coated wood-free, we are relatively full. Our operating rates are in the high 80s, the industry is closer to 70. But we're part of that average. Specialties, yes, we did take some downtime. And in fact -- well, actually, the number was about 80% as well. The industry is a tougher one to get because you have so many different product categories and kind of swing machines. So I don't really have a benchmark. Look, I've got a broad one. I think we're above the industry overall, which is probably about 70%. The CapEx levels on [ sustainability ], you're right, it was $30 million in the year. Most of our CapEx spend on sustainability, as you would imagine, relates to South Africa. And Alex, maybe you could just talk about a couple of the projects that we're underway at the moment.

Thanks, Steve. And most of that is -- it does actually have a return. For example, we're installing a turbine generator [ 8 at ] cycle that just replaces fossil fuel was internally generated and with really good returns. And then similarly, at the other mills, we are looking at more renewables, whether that's biomass projects or other alternatives. And they, across the board in South Africa, have decent returns.

James, I don't know if that answers your question. So obviously, we've got $500 million of CapEx during the year. As I said earlier, $157 million relates to Somerset. You do the math, you get to the low 300s. Our maintenance CapEx is somewhere around [ 250 ]. And then the projects that Alex referred to and a couple of other small cost-efficiency projects make up the difference. There's a couple of smaller ones in Europe.

Okay. Great. So in terms of the sustainability stuff, it's mostly in South Africa. There has been quite a lot in Europe in the past, but most of it is in South Africa at the moment, and you're saying that there's returns from that?

Yes. There's a bit -- Marco, there's a little bit we're doing at Gratkorn to lower the footprint there, and maybe you want to refer to that. But other than that, [ South Africa ], Marco?

Yes, Steve, thank you. And the sustainability roadmap, decarbonization roadmap that we have embarked on in Europe is already for a couple of years ongoing. It included a biomass boiler in Gratkorn and [ multi-fuel ], mainly biomass, boiler in Kirkniemi and an e-boiler in Maastricht. So still some other ones to go, but the main elements of that roadmap are very clearly set out.

Some of the ones that Marco mentioned have obviously already occurred and are in the historical numbers.

Correct.

We will now take the next question from the line of Lars Kjellberg from Stifel.

Yes. I just wanted to start off to come back a bit to get some further clarity on what you've now said, Steve, about Somerset to try to [ help ] out. You kind of sound like you don't expect any meaningful impact on the P&L, given what you said about curtailments last year, but at the same time, losing contribution, I guess, in the fixed cost to cover those costs that Somerset. And then, should we not expect any start-up costs as you ramp up the new machine? How should we think about that, if you can give us some sort of sense of a number or at least a range of headwinds?

Yes, yes. Look, I think the best way to think about it is that, obviously, as you ramp up, you are still in the process of optimizing productivity, the machine and so on. As you ramp up, you do get the incremental volumes coming through. So net-net, if you look at -- you're going to have lower profitability in Q2 associated with the shut. And then as you move into Q3, when the machine starts, the machine is not at optimal levels and then subsequently gets better quarter-on-quarter. So if you take -- I can't give you a specific number, but if you take all of that into account, the incremental that you get in the latter part of the year substantially offset the shortfall that you would achieve in Q2. As Mike has indicated, because you initially start off in Q3. So there's a little bit in Q2 and a little bit in Q3, and then you start to make it up as you get towards the end of Q3 and into Q4.

And the rebuild itself does not necessarily impact your maintenance schedule at Somerset. Should we still have a sort of bigger one in your fiscal Q3 as you normally do? Or are there -- anything we need to think about that schedule in relation to...

So major maintenance in North America, we have an annual outage in Cloquet, that's in April. And we do not have a Somerset outage in 2025.

Yes, I remember the last one was 18 months, Lars. So there's none scheduled for this year.

Got you. Two quick ones. Well, we'll see if they're quick or not. But so can you provide any more color on fiscal Q1? Of course, significantly above the comparatively weak number last year, that's sort of almost a given. But how should we think about sequentially and what's going to drive that? And then if you can -- on the controllables that you know today, in terms of the mill shutdowns that you've now executed, you obviously did get some cost benefits, as you spoke to the fixed cost reduction in '24. Should we expect any incremental from that, that you can talk to us today? How much more should come in '25 of those benefits?

Yes, obviously, you're right, it will be substantially higher than last year. Last year was at a relatively low level. Maybe first thing to point out that -- and I know you followed us a long time, Lars, but Q4 is seasonally our best quarter. So you do get volume benefits associated with that. In terms of the big factors influencing our performance in Q1, we've got lower pulp prices coming through. So clearly, that is a benefit. The -- on top of that, DP prices have improved a little bit further as well. And so when you take those into account, I can't give you a number, I'm not going to give you a specific number here, but we're going to be well above last year. And effectively, I don't anticipate it being at Q4 levels [ because that's our biggest ] quarter.

Okay. And then on the carryover from the fixed cost savings, anything we should think about in the full year?

Yes, our -- we closed Lanaken during the course of the year. So you still have the full costs coming through there. So -- and we always give guidance that the fixed cost savings was around EUR 120 million a year. So you do have that coming through. But bear in mind, you do have other inflationary increases coming through in other regions, which offset a little bit of that. So you've got -- if you do the math, you take your EUR 120 million divided by 4, obviously offset by other inflationary fixed cost increases.

So the final one for me, which is slightly different from elsewhere. You are seeing your wood cost coming down in South Africa. What is driving that? Is that still the export chip market that is driving that in -- what is your sort of visibility on the wood cost heading into fiscal '25?

Yes. Indeed, I'll let Alex elaborate. But yes, the market prices -- and by the way, it's hardwood prices, specifically that have been coming down. A lot of the export -- those chips are exported. We did see prices come down. And I think longer term, we would expect them to go back up again, but there was this short-term pressure. Alex, maybe you just want to...

Maybe you recall, Lars, there was an operational issue, the fire in Richards Bay on the chip export plant of NCT. And that obviously affected the ability to export with concurrent impact on prices, but also just a weaker export market, which we see is a short-term issue, and it will in the medium-term increase. But I think a lot of it was triggered by that fire in Richards Bay which just -- the cost of that didn't allow the cooperatives to pay higher wood prices to their customers either.

All right. So we should see this turning around and turning up at some stage in the not-too-distant future then, I guess?

Yes. Look, it's difficult to predict, Lars. Certainly, and Alex can confirm with me, we do think these lower prices are going to be with us for at least another quarter, but they may come in the latter part of next year.

I think our view is if things go well 9 months to 12 months, I might be optimistic, but I think that's -- that could be a likelihood.

We will now take the next question from the line of James Perry from Citi.

Just a couple of ones. So it looks like North America had the highest margins for several quarters really. Do you think this is representative of what we could expect for the next few quarters? Or was it somewhat one-off with a combination of the high paper volumes and high pulp prices? And secondly, there's been reports, Brazilian pulp producers trying to swing about 300,000 tonnes of paper pulp into dissolving pulp in early '25. How much do you think that could impact the dissolving pulp prices?

Okay. On the margins, I'll give you some comments and maybe Mike wants to add to it. And on the Brazilian pulp producer, I mean, clearly, we're not going to talk about them specifically, but I'll give you some comments, and I'll allow Mohamed to elaborate further. Firstly, on margins, look, generally, we're -- our North American business is in a good place. We -- the reason we are shifting away from graphics -- strategically away from graphics towards the packaging segment is that we think we can get higher margins over time. In the short term, because you're ramping up on that machine, you don't get the same margins. You're bringing on customers, new customers. It's not full -- you're not operating at full optimal level. So that margin improvement, you're not going to see immediately. Having said that, in terms of -- if you're comparing it to historical levels, I'm pretty confident that our margins can stay healthy and at good levels. Mike, I don't know if there's more you want to add in terms of that ramp-up process.

The only thing I'd add, Steve, is we'll be shutting the machine down in January. So we've got the quarter we're in now, which is our Q1 or the calendar Q4 that we're running at similar levels. Our Q1 typically is not as strong as our Q4 for orders going into the holiday, the Christmas holiday and Thanksgiving in North America. And then as we go into what's our Q2 or calendar Q1, we've got a shutdown of one of the machines the whole time. So to think that quarter is going to be identical to what we just finished. I think there's going to be some challenges. And I think as Steve outlined, we'll be able to offset some curtailment comparing it to the fiscal year before that calendar quarter, but I think that's going to continue through from a full quarter Q4 to Q2 that has one asset down for the entire quarter. And there is a ramp-up in -- and I can't tell at exactly how that's going to work. But we start up all the new equipment, and we're starting it up on packaging and working from zero to fully occupied, and we've got a ramp rate that we've put into our model. But our confidence is we'll be able to fill the machine. But obviously, certain new equipment is going to be not at a full rate of a future state. I don't know, Steve...

Yes. I think that summarizes it. If you look at the year as a whole that yes, as Mike has described, that there is the impact of that shut period. But if you look at the year as a whole, with the incremental volume coming through in the second half of the year, our margins in North America, we're confident, will remain at healthy levels. So there will be an impact on Q2. On the second question, maybe -- and I don't want to get too technical on the call, but just remember, paper pulp is not a perfect replacement for dissolving pulp. Some customers -- I think he needs the swing or is it...

i I think he means the swing in Brazil. Yes.

The swing in Brazil, yes. Okay. Specifically, look, I think some of the swing producers are moving across, but the demand is strong. And I think that the one that you're specifically referring to is it's for their own internal usage. That's not going into the marketplace. So it's for their own internal usage. Mohamed?

Yes, Steve, I'll just add that, that same particular sister company in China is adding new fiber capacity, which they publicly announced. And this is part of building the required dissolving wood pulp need to service that additional fiber production capacity.

And maybe just to summarize that, overall demand for DP is, I think this calendar year, up about 7% or so. This is a market of 6 million, 7 million, 8 million tonnes. You're talking about 400,000 tonnes of demand growth every year. So the fact that there has been all the swing capacity coming onboard, that's only to be expected. The markets are tight, and we're not anticipating any significant new supply coming.

[Operator Instructions] We will now take the next question from the line of Brent Madel from Absa.

Yes. And if I could dovetail a bit on the previous question, so we think DWP price is ticking up a little bit over the last few quarters yet we've seen cotton pass under a little bit of pressure. As you mentioned, paper pulp is coming down. I mean historically, the correlation between the three [ if I'm ] correct, has been relatively close. I mean is there a reason -- I mean, I hear that you're saying that the demand supply is reasonably tight. But can you maybe clarify why the DWP price wouldn't track cotton and paper pulp a little closer in the short term?

Yes. Well, let's take each one in turn. I mean firstly, cotton. Cotton prices have been relative to viscose prices and DP through that correlation. Cotton prices have been pretty strong over the last couple of years. And there's an argument this is just a normalizing of the relative pricing. Viscose prices have picked up a little bit in recent weeks. And that, we believe, will further support. On paper pulp, I think there's been a disconnect here because there's been a lot of new paper pulp capacity coming onboard on the hardwood side in recent times. The market conditions are very different from DP. Now we've touched on swing capacity, most of the swing capacity that can make DP has already moved across. And you can't get substantially more. So that's why you're getting this disconnect. And as we look out over the next couple of years, we think that, that disconnect is likely to be maintained because DP supply continues to be tight. Demand is good, you're going to have global consumers, the demand for textile starting to pick up further. And that's all going to support underlying demand ultimately for DP. Whereas the paper pulp has its own market conditions with a lot of new capacity that's come onboard, and it's very different. Those machines, the remaining capacity can't swing across. So I do think that disconnect will be maintained in the short term and medium term.

If I can just ask a follow-up. So I guess the key level is always at $1,000, which I suspect the assumption is that, that cap is going to hold. Do you hold that view that it will be very difficult to breach $1,000?

Yes, it's a great question. I think -- all I can say is that demand continues to be good, there is no significant new supply, and we are optimistic about the medium-term outlook for dissolving pulp. I think prices are being supported at these levels. They had $1,000 in the early part of the year. I don't know if they'll go through it immediately, but we are bullish about the prospects for DP prices over the next couple of years.

We will now take the final question from the line of Saul Casadio from M&G plc.

Just a couple of questions on my side. The first one is on your long-term net debt target. I mean given the current level, it's clearly going to take a long time. But I wonder whether you have a timeline in mind for that objective to be achieved.

Look, I'm not sure it's going to take a long time. You saw the slides earlier that we have free cash flow of $300 million a year. Our CapEx this year is higher because of the Somerset project. If you back that out, you're getting CapEx down in the low 300s. And we haven't committed to any material project beyond that debt. I see 2026 as a year where we will significantly pay down debt. I think we're going to have higher profits because we're going to have the increased capacity coming through from Somerset, so the increased profitability coming through, I'm talking 2026, and then lower CapEx levels. So you know we've set our targets that they are getting down back close to that $1 billion level. And I think once we get through the first half of this year, we can get down there quite fast.

Okay. That sounds -- so after that [ Somerset ] conversion, you do not anticipate to have significant process for, let's say, a couple of years? Because I guess that's what it takes more or less...

Yes, I'm not expecting any -- as I say, we're focused on 2026 being a debt pay down year.

Okay. Okay. No, that's helpful. And the second one is really a mix of a question and a request, if I may. I noticed that the change in definition in your quarterly report of EBITDA, excluding special items, I think that's the way it's defined. But now that definition includes the special items and particularly the change in fair value for the forestry. And so it makes it a bit confusing for -- at least for me. I'm not saying I can speak for investors. So wondering why that change in definition and whether there's a way to do it to make it a bit clearer. To be honest, it took me a while this time to...

I understand...

Reconcile the numbers because effectively you have a definition of excluding -- you define it excluding special items. But effectively, it includes a special item. So it's a little bit confusing.

No. What we did is we introduced the adjusted EBITDA term for the very reason that you described. In the past, we didn't include fair value adjustments on our plantations and our EBITDA. And because of that, what we wanted to do to enable the certain analysts and shareholders that wanted to see that number, and that's why we introduced the adjusted EBITDA. So the adjusted EBITDA doesn't include any special items, doesn't include the fair value adjustment, and it's comparable to the EBITDA number that we always reported. Some people obviously wanted to see the fair value adjustment, and we include that as well. So from -- either way, you can see the numbers including or excluding. But adjusted EBITDA excludes everything -- excludes those items.

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

Great. Thank you very much. I just want to take the opportunity to thank everybody for joining us on the call today, and we look forward to discussing our Q1 numbers in 3 months' time. Thank you very much.

This concludes today's conference call. Thank you for participating. You may now disconnect.