Sappi Limited (SAP) Earnings Call Transcript & Summary

Good day and thank you for standing by. Welcome to the Sappi First Quarter 2025 Results Call. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to turn the conference over to your speaker today, Steve Binnie, CEO. Please go ahead.

Good day, everybody and thanks for joining us. As always, I'll go through the presentation, calling out the page numbers as I move through. And I'm going to start on Page 3, which has some of the key highlights for the quarter. And overall, we were pretty pleased with the quarter, a good set of numbers, good start to the year, ahead of expectations, both internally and externally. So we're obviously pleased with that. Segmentally, Pulp segment delivered another strong performance. We continued to see good demand. Our mills are fully sold out and we continue to be optimistic about that business going forward. Graphics. Good quarter, good margins. We did get cost savings. I'll go into more detail on this. But overall, very satisfied. Packaging was more difficult but there were some specific unique circumstances there. And once again, I've got a slide on that, which I'll go into. Having said that, profitability was better than 1 year ago. So obviously, pleased there. The other aspect of the results is that despite the higher CapEx, I'm pleased to say that our debt leverage ratio did come down to 1.9x. Obviously, we knew it was going to go up at the end of last year. And obviously, as we complete the CapEx projects in the next quarter, it is higher. But all in all, it's as expected and we would expect it to come down significantly once the projects are completed. Slide 4, which is our year-on-year EBITDA bridge. Always good to see lots of greens on the page. So we're pleased there, volumes higher and a favorable pricing mix, primarily pricing, obviously driven by dissolving pulp, which has seen further increases throughout the year. But generally, prices have been better than we had anticipated. We had cost savings, both on variable costs, raw materials, predominantly linked to pulp and I'll talk about that on the next slide. And then fixed costs, also savings. And you'll recall, we obviously closed Lanaken last year and we get the benefit of the fixed cost savings there. So all in all, a pretty pleasing set of numbers. Slide 5 has the input costs. Obviously, this is across the regions and sometimes there's local dynamics and -- that influence the respective markets. But at a broad level, pulp prices are coming down and they are at pretty low levels at the moment. Obviously, it does take time to realize some of that benefit. We got that in Q1 and hopefully that will continue in Q2. Wood costs were up a little bit overall. But again, that was a mix issue. So I'm not overly concerned. We are seeing relatively low wood prices in South Africa, which will help us. Turning to Slide 6, our net debt evolution. As I said earlier, I'm pleased with this result, leverage under 2x. It will rise a little bit, obviously, in the next quarter as we incur the big CapEx for our Somerset project but we continue to maintain a tight control here. We did benefit in the quarter from the fact that we had a stronger dollar relative to the euro. And obviously, as you all know, a big chunk of our debt is denominated in euros. So we benefited from that. And that brings me to Slide 7, which is the debt maturity profile. Very pleased to announce that we extended our securitization program. That's the dark blue bar in the 2028 year. It's been a great program for us. We get a very low cost and we've extended it once again. And the only other major or maturity that we have in the next 2 years is obviously our 2026 bond. That's for about $240 million. We continue to watch the markets and we will pick the optimal time to refinance that. Obviously, these were issued at a time a few years ago when interest rates were pretty low. So we're making the most and capitalizing on the lower interest rates. And as I say, we'll pick the right time to refinance there. Slide 8 has the cash flow and CapEx. Firstly, on the left-hand side, the CapEx, cash generated from operations, nice start to the year, obviously, on the higher profitability and that coming through. At the bottom line, obviously, we had to fund the higher CapEx that came through. So giving us a net outflow for the year of $62 million, which -- that was offset by the impact of the stronger dollar that I said. On the right-hand side of the CapEx, previously, we had guided you to $500 million for the year. As we got closer to the completion of our Somerset project, we have seen a rise in labor costs associated with that project. And obviously, we're at a very important stage. We're in the shut at the moment, actually. And as we got closer to the completion stage, we have estimated that the labor costs will be higher. And as a result of that, we have adjusted the overall CapEx for the year to $525 million. The project is going very well. As I said, we're in the shut. We are meeting our deadlines and we're still very confident about the start-up date, which will happen in April. So very pleased with the progress. Unfortunately, you have had wage inflation in the U.S. and that had an impact on labor costs coming through. Slide 9 is our capital allocation. We continue to be very disciplined. It's a busy slide, so I'm not going to go into detail. But just to focus on the fact that we are committed to our longer-term net debt targets. In absolute terms, it's about $1 billion. One project is complete, which I've just indicated was April, there's going to be a strong focus across the business on debt reduction. We've got no major capital projects in the second half of this financial year and into 2026. So by the time we get to the end of 2026, we're confident that the debt will be substantially lower and obviously much closer to this target that we have set ourselves. Profit improvements, we're going to start to reap the rewards of the 2 big projects that we've had. Obviously, at Somerset, will complete in April and then we're going to see a progressive ramp up thereafter. A very exciting project with very good returns. And as I say, ramping up quarter-by-quarter. And then at Gratkorn, as you know, we spent some money there to give us the capability of making wet glue labels and that is now complete and we're ramping up there quite nicely. So feeling good about the 2 big projects and that they can deliver the exciting returns that we had in our business cases. Then moving to slide -- I am moving forward now to Slide 11 and focusing on the product segments. Pulp, just another good quarter. I'm pleased to say production at Saiccor was excellent. We really have made some nice, impressive improvements at the mill over the last couple of years and very pleased with the progress. The volumes quarter-on-quarter, we may get asked that is it was really because we had such -- we started the year with low inventories because of a good prior quarter. But we are fully sold out on our production. And as I said earlier, strong demand from our customers to give them volumes. Then on the Packaging segment. It was a more difficult quarter. If I look at the -- from a regional perspective -- well, firstly, very pleased with the volumes in North America. So that's good progress. Obviously, as we get closer to the completion of the PM2 at Somerset, we're signing up new customers but there's a little bit of a mix difference ahead of that and that did impact a little bit on the margins. But all in all, feeling very confident. The European recovery continues to lag. It's predominantly linked to the European economy. It's much slower. And then across a number of the product categories, not just within Sappi but across packaging and specialties in Europe, we're still not seeing volumes back at pre-COVID levels. So it is lagging but we are confident that we will see progressive recovery. It's just taking longer. And then in South Africa, nice operational efficiency improvements helped us. On the volume side, we -- the citrus season in South Africa was lower than prior estimates, which meant that the -- our customers were carrying a little bit of extra inventory, which impacted on Q1. But the underlying business is great and we would expect volumes to pick up later in the year. And then on graphics, very pleased. I mean, obviously, we all know that this is a segment that, a category that's in long-term decline but I think what this page highlights to you is that if you manage your capacity, your efficiencies, you can make good margin. And so we're pleased with the progress. We continue to try and be proactive. We benefited from the lower costs and we'll continue to do that. And then regionally, on Slide 14, I don't intend going into great detail. The key numbers are there. Firstly, Europe, the year-on-year tons is done but that is predominantly linked to the decline of graphics, which we've talked about before and I referred to on the prior slide. We know that graphic volumes will decline over time. The reason the margin is lower is not graphics, it's actually the packaging and it's linked to the difficult market conditions that we are facing in Europe. North America, good improvement, good margins and similarly in South Africa. And you see that graphically on Page 15. I don't intend going through this. But obviously, very pleased with the margins that we're getting in North America and South Africa. North America will obviously, once the project is complete, we're going to see higher volumes coming through and good margins on the back of that. Europe taking longer to recover, as I indicated, predominantly linked to the Packaging segment. Then on Slide 16, the Thrive strategy. Again, we shared with this -- this with you many times. My intention is not to go through this but just to highlight that this continues to guide us as we move forward. Obviously, a strong focus on operational excellence. And I think you've seen the benefits of that coming through in the last year. On the cost side, in these volatile times, there are opportunities there. It's very important that we optimize supply chain. But in these volatile times, there are -- there can be opportunities. And I think we've demonstrated that and we will continue to do so. On growing the business, obviously, we've got the 2 big projects, Gratkorn now behind us, we're ramping up. And in Somerset, very close to completion. And then being very disciplined on the balance sheet side. And as I say, getting back down to those longer-term targets. Then turning to Slide 18, which is our outlook. These are interesting times, lots of challenging global macroeconomic conditions and lots of volatility. We obviously have to navigate through that. But within our product groups, DP remains strong. Obviously, we've just finished the Chinese New Year, which is typically the quiet time. And we're going to see more activity as we go forward post that period. Packaging, generally stable. Obviously, as I indicated earlier, South Africa, pickup in volumes. In the second half of the year, we've got North America completing the project, the subsequent ramp-up. And then I think a gradual improvement in Europe but it's going to be linked to the economic situation. And in graphics, it's resumed its historical decline but we're managing that very effectively and we'll continue to be proactive. The one thing I should call out is obviously when we convert that PM2 machine, that's effectively taking out more capacity in that space. And in Europe, with the ramp-up of labels at Gratkorn, that's also the equivalent of taking out a machine. So it keeps the market tight and hopefully boosts the margins and keep them at these healthy levels. On the cost side, the business -- the paper businesses will benefit from the lower pulp costs. And clearly, we want that to last as long as possible. We do have the 2 shuts in South Africa, in Ngodwana and Saiccor. Last year, they were in Q1. This year, they're in Q2. In Ngodwana, you may recall from last year, we did a 18-month shut. We felt it was not appropriate to do another 18 months shut. So we went for 15 months this time and we think that, that is the optimal period. But the net impact of those 2, if you were comparing or looking at the earnings was in absolute terms was $45 million. Moving to the next slide. We've obviously got the Somerset extended shut. And we're in that at the moment, things are going well. We estimate the impact on this quarter's earnings of $21 million. The CapEx, I've already spoken about. And obviously, the biggest proportion of this number relates to the project. And then ultimately, the guidance is that if you take into account the 2 shuts in South Africa, the Somerset extended shut ahead of the project, if you take those into account and I want to stress to you that the underlying conditions are still stable. They haven't changed. We don't see any material change in those conditions in this quarter. But if you take into account those impacts that I referred to, then that means that the adjusted EBITDA would be below that of -- the Q2 number would be below that of Q1. Operator, that's me going through the presentation. I'll now hand it back to you for questions.

[Operator Instructions] Our first question comes from Lars Kjellberg with Stifel.

Thanks for providing all the details that you've done, especially around the closure, et cetera and maintenance activities in Q2. I'd just like to fast forward to Q3. Again, as far as I understand, Saiccor goes down again and Cloquet. And then, of course, we need to consider as we start to ramp up the new Somerset machine. Do you have any ways to guide us what you expect in terms of costs for that quarter as well? And then, of course, there's the translation into Q4, that should be a fairly smooth quarter, I would assume. That's my first question. The other one refers to Gratkorn. I can only assume that you're in now some sort of approval phase, testing phase with your clients. When should we expect that to start to contribute to your numbers? And then I thought you made some comments around the dissolving wood pulp business seeing some pricing pressures around the China Lunar New Year. But do you see that as a temporary effect and then you would expect prices to recover? And the final thing on paper pulps. One of the suppliers talked about increasing rebates that's going to offset the price increase they've announced of $50 per ton for softwood. Are you seeing increasing rebates across the board in the purchased -- pulp that you're buying?

Okay, Lars. Firstly, on the shuts, yes, we've got Cloquet in Q3, you're right. And do you have the -- does someone have the estimated impact of that? It's normally about $20 million, Lars. And the Saiccor one is a much smaller shut and we would not have that material an impact. The -- in terms of the -- and in Q4, you asked about Q4, yes. Q4 will be a clean quarter and there's not any material shuts in that quarter. So all in all, obviously, less shuts than this quarter but we've got to get through the Cloquet shut. And Mike, that's an 18-month shut as well, isn't it?

Yes.

And so then the second question is on Gratkorn. I'll let Marco talk. Talk to that one, Marco, do you...

Yes. Yes, thanks, Steve. Yes, Lars, the qualification period, of course, has been very intense but it's for the biggest part behind us. So we wanted to be ready for the start of the new calendar year. It doesn't mean that overnight, this machine in Gratkorn will be filled obviously. But the ramp-up is starting. The beauty of this conversion is that we're talking about a hybrid machine. So it's both able to produce still some coated woodfree as well as the upcoming ramp-up of the label product. So yes, we're off for a good start for the first part of the ramp-up in this year.

Thanks, Marco. And dissolving pulp, I'll let Mohamed talk a little bit more about general market conditions. But typically, we always see a quiet period ahead of the Chinese New Year and activity slows down. Obviously, DP prices did come down a little bit but it's not something that we're overly concerned about. Activity will pick up and is starting to pick up. If you look at the market fundamentals in terms of the supply demand balance, we're feeling very good about short-term and medium-term pricing. But Mohamed, maybe you just want to elaborate further.

Thank you, Steve. I'll just add that going into the Chinese New Year holidays, the industry VSF operating rates in China remained high. And the inventory levels at the VSF producers remained low, well below historical levels. And we did see some price decrease for VSF, which had some impact on the DP price going into Chinese New Year. But having said that, China came back today. We've seen already some announcements on the VSF prices where they have -- they're asking for higher prices. Again, on the back of the very low inventory and high operating rates. And there's a very, very strong correlation between VSF price movements and the dissolving pulp price movements.

Thanks, Mohamed. And then on terms of rebates, I'm not sure there's much we can say on that. Those are negotiations that we have with our customers -- sorry, our suppliers and hopefully, we're better at negotiating than our competitors.

Okay. The one still outstanding is Somerset ramp-up How should we think about that in fiscal Q3 and going into Q4, if it's okay to ask?

Yes. No, no good question. Obviously, it goes live early in April. And you've been around long enough, you know that there's a ramp-up on these new machines. That will occur or begin to occur, obviously, in Q3. So you would see an impact. We don't think that Somerset will be back to full profitability in Q3. But certainly, as we get to Q4, we would cross the threshold of prior profitability. And then each quarter thereafter, a subsequent improvement.

Final for me, cadence of CapEx this year. I guess it's peaking this quarter or -- and then how should we think about the balance in Q3, Q4?

Yes. Well, Glen, maybe you can go into more detail but a big chunk is in this quarter.

Yes. The PM2 -- the bulk of the PM2 CapEx will be in this quarter, quite a bit will filter through into quarter 3. And then of that $525 million, the remainder will be in the quarter 4, quarter 4 being the lowest CapEx in -- for this year.

The 1 thing I do want to say, Lars, is -- and obviously, the CapEx has gone up a little bit but we're feeling very good about the project. And the returns on the project are still very attractive. And this is a project that's going to deliver returns of 20% plus. It's going to be -- it's obviously going to take capacity out of the graphic market and it's going to add substantial EBITDA to Sappi from next year onwards.

Our next question comes from James Perry with Citi.

I'd just like to ask about forestry. How do you see the price valuation in wood prices into 2025? And should we expect more negative moves? Or do you expect normalization to small positives? And secondly, on CapEx, you said you expect CapEx to reduce significantly once projects are completed, what kind of level are you alluding to? Is that to depreciation levels? Or are you able to give any rough figures?

Okay. Yes, the forestry one, it's a difficult one to predict exactly. Based on our short-term projections, we're not anticipating any major fluctuations. Whether they start rising again, I fundamentally believe that in the long term, forestry assets will rise. There's obviously a little bit of short-term volatility. And -- but we're not expecting any major deviation in the current quarter. Graeme, I don't know, is there anything more you want to speak generally on forestry valuation?

No, I think broadly speaking, we don't expect to see international woodchip prices, certainly out of South Africa increasing in dollar terms. So locally, it will be a function of rand-dollar exchange rate more than anything else. But again, we -- our forecast for the rest of the year is to -- for wood prices in rand terms to remain flat or maybe very marginally up. So we're not seeing any large pressure at the moment from a market price of wood nor from an own internal wood cost -- growing cost of wood either.

Thanks, Graeme. And then on your second question on CapEx. Yes, it would certainly come much closer to the depreciation levels. Just to remind everybody that we estimate our maintenance CapEx number around about [ $250 million ] a year. We've got some -- sorry, we've got some sustainability projects. And typically, we estimate that at about [ $50 million or $60 million ] a year. And then generally, we have some smaller cost-saving initiatives that take up a little bit of CapEx as well. So we haven't finalized our numbers for next year and we've obviously got to go through our own internal budgeting processes and all that. But that probably gives you a rough indication of where we would expect the numbers to be.

Our next question comes from Brian Morgan with RMB Morgan Stanley.

Steve, if we were to, say, fast forward 12 months from here and PM2 is ramping up and meeting expectations and generating EBITDA as it is -- or has been in the last couple of quarters and free cash flow is pretty strong. You've come to the end of the CapEx cycle. How would you be feeling about capital allocation at that stage, do you think? Is there -- are there projects in the system, which you think that you need to pull a trigger on in 12 months' time?

In terms of our -- firstly, that's going to take us through to the end of 2026. I think that -- we certainly haven't made any decisions on future projects beyond -- from '27 beyond. I think that we've got -- certainly got exciting opportunities in South Africa to grow our packaging capacity. As you know, the citrus fruit projections are pretty good. I think they're growing at 8% per annum.

Your line was muted. So you -- it's open now, you can go ahead and continue with the answer.

My line was muted. Operator, when was I muted from?

When you were answering Brian's question, his last question.

Brian, I don't know how much of that you heard.

You were talking about containerboard options in South Africa.

Yes. I was saying that there's -- the citrus industry is indicating that they need more capacity to -- for their growth over the next few years, which is estimated at about 8% [Audio Gap] and product group for us. So we would evaluate our options there. So that would be a very exciting opportunity longer term. But we're not even at engineering phases on that kind of thing, Brian. We're laser focused on the debt reduction in the short term. And in North America, we've just finished this big project. So we want to ramp up there and focus on efficiencies and stability and giving the returns that we promised. So all in all, that is our main focus of attention at this point in time.

Our next question comes from James Twyman with Prescient.

Yes, I've got 2 questions, if I may. The first one is, in terms of the European business, compared with Q4, volumes came off quite a bit but you managed to maintain your operating profit. And I'm just wondering whether that was due to a bit of a benefit from pulp costs or whether there's any more cost savings that have come through and sort of just trying to understand whether the pulp benefits are fully in now? And then the second question was Billerud talked about a $50 a ton price rise in the U.S. a few days ago. Keen to know whether you've done that, whether you led it or followed it and whether you're likely to do it just for reels or whether the sheets market could also see an increase?

Thanks, James. Mike will take the Billerud, or the market price increase question and I'll let Marco elaborate further on the European. Yes, you are right, there was lower volumes. Interestingly, we had -- October, November were pretty good but we had a slow December. We're seeing better volumes in January. But all in all, that lower volume did impact obviously on profitability. You're right. We did get nice pulp savings. The -- just remember that we were working through some of the pulp inventories from the prior quarter, right? So pulp prices are still pretty good. And we're hoping that we can continue to benefit from that certainly in this quarter and as the weeks go by, hopefully, into Q3 as well. But maybe, Marco, you want to go a little bit further there?

Yes, James, I think you captured the 3 variables. We were able to keep our pricing fairly stable quarter-on-quarter. We lost a little bit of volume and that was offset by some of the pulp benefits that we could capture. So altogether, it was a balancing act, which led to very similar profitability as previous quarter.

Thanks, Marco. Mike, do you want to just talk about [indiscernible]

So on the graphics business in North America, we did announce the pricing increase $50 a ton on web. That was towards the end of January. I really can't comment on Billerud and that was a web price increase. And that's where we've seen the strength from the shutdown of the Lanaken mill. And we see that further strengthening with the transition on PM2.

James?

So just in terms of the graphics, is -- there wasn't an increase on sheets, which I think is what, 1/3 of your business? What the -- whether -- what your thoughts are regarding that?

The sheets in North America are heavily dependent or impacted by imports. And that's not a business that we typically -- we weren't in a place to see the same level of demand that we were seeing on the web. So we announced with just the web.

Okay. And could I just ask whether you led the increase or whether Billerud led the increase?

We wouldn't know, James. We did what we wanted to do -- we felt was appropriate. We don't look to Billerud.

Our next question comes from Brent Madel with Absa.

I have 2 questions, if I may. Yes, so just in light of the Somerset conversion, which is taking place at the moment, obviously, the strategy around reduced graphic paper exposure for the group overall. I mean it's evident that the U.S. graphic paper market appears to be holding up materially better than the European graphic paper market. So maybe just thoughts on whether the U.S. graphic paper market is doing better than you had previously expected? My second question is, obviously, there's reference around pulp prices coming down and that potentially improving your margins. I've read some news items that some of the pulp producers are looking to increase prices. Just your thoughts on this lower trend of pulp prices potentially coming to an end relatively soon? Or you think that, that might potentially reverse in the short term? And just my last question, just on the DWP market. Obviously, we've seen a number of integrated producers increasing supply. And that hasn't had a material impact in the market because once again, we've seen quite a bit of disruption -- disrupted supply. Just your thoughts around the probability of that coming back into the markets in the short term, which could change the dynamic in terms of the DWP price.

Thank you. Your first question in terms of the graphic markets getting better, in North America. No, I don't think they're getting better but what has happened is that and Mike alluded to it earlier, one of our small competitors in the U.S. are closed and that took more capacity out of the market. So that's why you're seeing our year-on-year volumes for graphics in North America higher than 1 year ago. But overall market conditions, we continue to believe that it will drop around about 8% a year. And I think what we've done a good job of in recent times is to be proactive around that. So what -- we anticipated this drop and we think the timing of the PM2 conversion is appropriate. And it will further tighten the market, obviously and we think will help maintain healthy margins for graphic paper. Just remember, we always have the ability to swing on PM1. So we can always choose the best margin there. So I think you're going to have a tight market situation. And as Mike also touched on, on -- particularly on the website, there's really only 2 domestic players. So it's a tight market and we think good opportunities there. The second question was pulp and when pulp prices are going to increase. Look, we all think that pulp prices will rise. And really, it's just how long do they remain at depressed levels and can we maximize that opportunity. It went down further than we had anticipated. And yes, there is a little bit of upward pressure. But relatively speaking, there's still opportunities there. But based on our estimates, certainly in the second half of calendar we would expect paper pulp prices to rise. On the DWP front, you referred to integrated producers. You are right that they may have -- or they have ramped up production but it is for their own internal use. It's not that they're competing with us in spot markets in China. So yes, overall, the capacity has increased but demand continues to grow. We saw a nice growth in demand in 2024. And we continue to believe that demand will grow 4% or 5% a year and will more than absorb that capacity. And just to repeat what I've said for the last couple of years is, there's still no significant new capacity. There is 1 or 2 smaller capacity additions. But all in all, the market balance is very healthy for the medium term. And look, I've been saying this for the last couple of years. And I think that's why the DP price has been pretty stable at nice levels and we think that will continue to be the case.

Just on the last question. So in principle, you don't think some of the disrupted supply will come back to market. And even if it does, you think that there's sufficient demand to absorb it.

That's right. Yes.

Our next question comes from Sean Ungerer with Chronux Research.

Just first question around the U.S., Steve. Just obviously, there's been quite a bit of noise and news flow around tariffs. Perhaps you could just comment on how you envisage that's going to affect your U.S. ops and how you're going to manage them? And then maybe just digging a little bit deeper in terms of perhaps raw material procurement. That's the first question.

Thanks, Sean. Well, look, the first thing to say is there so much uncertainty and one day, there's maybe tariffs and the next data there is not. Like any prudent management team, we have to evaluate different scenarios and we're doing that as events unfold. The first thing I would say is just -- remember that our North American business is a domestic producer. And that will put us in a healthy position with regards to imports. And we don't know where tariffs will be, whether there'll be tariffs on Europe or there'll be tariffs on wherever. But as an overall principle, the fact that we're a strong domestic producer puts us in a very good position. Obviously, raw materials, some of them are sourced outside of the U.S. and there could be an impact there. We have to evaluate that and we have to determine what -- whether there's alternative sources to supply. And we're evaluating that on an ongoing basis. So I think net-net and that's why we called it out in the statement -- outlook statement, negative impact maybe from some of the raw materials but a positive impact on the fact that we've got domestic production and it may impact other importers against us. It's hard to be more definitive in terms of numbers, Sean, because it changes every day. And we're evaluating and -- but net-net, the fact that we are a domestic producer and it does seem like the Trump administration wants to boost domestic producers and production, hopefully, we can benefit from that.

Okay. No, that's perfect. And then just going back to the price increase in graphics in the U.S. Sorry, I don't know if I misheard or didn't hear properly but what percentage of remaining volumes, does that price increase apply to?

It's roughly 2/3, 1/3, right? So the web is 2/3 and that's what that price increase related to.

So 67% of the remaining graphic paper volume is after the conversion?

Yes.

Okay. Perfect. And Steve, just turning to the Somerset conversion. So just to confirm, total project cost goes from $418 million plus $25 million. Is that correct?

Yes. Our estimate -- our best estimate is approximately $450 million, yes.

Okay. Great. And then just in terms of that, you've obviously flagged that is largely driven by labor inflation. Is that like just -- I mean, sort of how recent is that, I guess, now that it's being flagged. And then I guess, secondly, it sounds quite material. So how should we sort of think about the flow-through onto the U.S. ops on the next sort of, I don't know, guess, 2 years, I guess?

I'll let Mike go into more detail. I don't think it's specific to our ops cost because you're sourcing the labor costs on the construction side from different parts of the U.S. So you don't have to worry about that. Specifically about the emergence of those costs. Mike, maybe you just want to talk to that. Yes.

I think the best way to think about it is as you go into a major shutdown like this, we have roughly 250 local contractors that are available and we peak in excess of 800 contractors on site for the 70-day outage. Those [ travelers ] were more expensive to get them to come to Maine than what we had originally expected.

Okay. Great. And then just, Steve, I think I'm not sure if I heard you correctly earlier. I mean this obviously does seem that pulp prices have come off but that they are likely to sort of rise in the coming quarters. Is that sort of your view as well?

DP, you mean?

No, no, no. Purchased pulp in Europe.

Yes. They've obviously come down but you have seen a little bit of rise in prices in China. And typically, that leads the market. So that's why there's normally a lag into Europe and that's why we -- why I said what I did. I mean it's obviously -- at the moment, spot prices are lower than we had anticipated 6 months ago. And obviously, we want to extend that for as long as possible. But yes, in the second half of the year, all forecasts seem to be indicating that there'll be some rise. Having said that, longer term, obviously, we know there's a whole bunch of new capacity, particularly obviously on hardwood pulp. So let's say, the medium-term outlook for us as a buyer of the paper pulp, hopefully, there's some opportunities for us.

Okay. I'm just trying to sort of weigh that up with -- if pulp prices start rising and you've obviously seen quite a sharp fall in graphic paper demand in this quarter and pricing, I mean, there doesn't seem to be any price increases announced in Europe. I'm just sort of trying to understand the trajectory here.

No, no. I get it. Look, just bear in mind that the pulp, we hold inventories, right? So -- and it takes time to work through inventories. And we're already halfway through -- we're in February now, right? So you've got your inventories, you know where current pricing is. So if you forward project that, that's taking you beyond Q3.

[Operator Instructions] Our last question comes from Andrew Jones with UBS.

Just -- yes, a couple of questions for me. First of all, a follow-up on that tariffs question. Can you just remind us on the actual sort of distribution of where those imports coming from in the main product areas? And I guess, specifically, obviously, Canada and Mexico. I mean, I know a lot of volume obviously comes over from Europe on the cartonboard side and that's probably 1 source but specifically on those countries that have been targeted in recent times. Can you just give us a bit of a breakdown on the data? And then just a second one, just on the ramp -- with the ramp-up. Can you just give us an idea about how to expect the working capital to play out over the course of the year in the next few quarters?

Sure. Glen, I'll come back to you on the working capital evolution. So Andrew, when you asked about imports were you talking about imports of paper?

Yes, I'm thinking about in the areas in the U.S. where you're present, including...

Okay. Okay. Yes, yes. Look, in the areas that we are in, obviously, there are significant imports of coated woodfree sheet coming from Europe. We are one of them, by the way but we're -- there are other players there. And on the West Coast, you get imports from -- mainly from Korea. Mike, I think imports represents about -- is it about 30% to 40%, isn't it, of the overall, if I recall, yes.

Yes. More than that.

Is there any meaningful flow from Mexico or Canada on the coated woodfree side?

No, no. Not on that front, no, no. And then -- yes and then on the SBS board side, you know that some board -- folding boxboard that comes from, I'm not going to name the competitors but there's 1 or 2 boxboard competitors from Europe that also import into the U.S. But Canada, Mexico, no. I think there are other paper categories that do import from Canada but that's not so much in our category.

Okay. That's clear. And the working capital?

Yes. On the working capital, we're expecting a further outflow in the current quarter, quarter 2 and then inflows in quarter 3 and quarter 4.

Okay. Makes sense. Any way to quantify that or hard to estimate at this stage?

It's difficult to give you a quantification over the call. But it's -- we're going to have -- we have an outflow for the current quarter of just short of about -- that was about $130 million. And as I said, we anticipate that's going to increase further in terms of outflows for this quarter 2. And then the majority of that will reverse over quarter 3 and 4. But we'll land up year-on-year with a slight cash outflow on working capital.

And I'm not showing any further questions at time. I'd like to turn the call back to Steve for any closing remarks.

Yes. Thanks, operator. I just want to take the opportunity to thank everybody for joining us on the call and we look forward to discussing our results at the end of Q2. Thank you very much.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.