Sappi Limited Management Discusses Q3 2013 Results - Earnings Call Transcript

Aug. 2.13 | About: Sappi Ltd. (SPPJY)

Sappi Limited (NYSEMKT:SPP)

Q3 2013 Earnings Call

August 02, 2013 9:00 am ET

Executives

Roeloff Jacobus Boëttgerr - Chief Executive Officer, Executive Director, Member of Group Executive Committee and Member of Social, Ethics, Transformation & Sustainability Committee

Stephen Robert Binnie - Chief Financial Officer and Executive Director

Mark Gardner - Chief Executive Officer, President and Director

Alexander van Coller Thiel - Member of Group Executive Committee and Chief Executive Officer of Sappi Southern Africa

Barry John Wiersum - Chief Executive Officer of Sappi Fine Paper Europe

Maarten Van Hoven - Group Head Legal

Analysts

Caroline Learmonth - Barclays Capital, Research Division

Bill Hoffman - RBC Capital Markets, LLC, Research Division

Lars F. Kjellberg - Crédit Suisse AG, Research Division

Nishal Ramloutan - UBS Investment Bank, Research Division

Brian Morgan - BNP Paribas, Research Division

Sean Ungerer - Avior Research (Pty) Ltd.

Nitin Dias - JP Morgan Chase & Co, Research Division

Operator

Good afternoon, ladies and gentlemen, and welcome to the Sappi Q3 Results Conference. [Operator Instructions] Please also note that this conference is being recorded. I would now like to turn the conference over to Mr. Roeloff Boëttgerr. Please go ahead, sir.

Roeloff Jacobus Boëttgerr

Thank you. Good afternoon, and good morning to all of you, and thank you very much for joining us for our third quarter results presentation. I'd like to draw your attention to Slide 2, the forward-looking statements and Regulation G disclosure requirements.

Moving then on to Slide #4, the financial summary. We're happy that we can announce that we've started up successfully at both our 2 dissolving wood pulp projects. And I'll talk more about that a little bit later. It's been a tough quarter for us with operating profit excluding special items at $8 million and a loss of $42 million versus a $6 million loss the previous year. That loss included a number of once or special items. Loss per share of $0.08. Net finance cost of $42 million compared to $141 million for the equivalent quarter a year ago. But once again, that included once-off items related to a refinancing. The $42 million is much more in line with the previous quarter. Net debt of $2.297 million at a level which we expected, if not slightly lower, given the 2 projects and the capital expenditure related to that.

On Slide 5, the operating profit. The net profit coming down now for 4 quarters in a row. The last 2 quarters, heavily impacted by the -- particularly in South Africa and North America, we started the finalization of the 2 Specialised Cellulose projects, and in Europe, tough market conditions.

Moving on again to net debt on Slide #6. As I've mentioned, the level of the net debt at close to $2.3 billion, pretty much in line with our expectations, if not slightly better, and we believe acceptable, given the 2 projects. We expect net debt towards the end of the year to come down slightly and slightly lower than the end of the previous financial year. And we're still targeting the net debt-to-EBITDA ratio to be between 1.5 and 2 in the short term.

Moving on to Slide #7, dealing with the debt maturity profile. All in all, we are satisfied that our liquidity position and also the debt maturity profile is good and sufficient and with no significant repayments due until 2017.

On Slide #9 now, dealing with the divisional overviews. Margins of all 3 our businesses coming down quite significantly. In North America and South Africa that was expected, once again as a result of the impact of the 2 large projects; but in South Africa and North America, also as a result of market conditions becoming tougher, particularly in South Africa on our Paper business and particularly so for the graphic paper business; in Europe, entirely as a result of very tough market conditions, both in terms of demand and pricing.

Moving then on to Slide #10. The third quarter is a seasonally slower quarter, though it was worse than expected. Industry deliveries were down 8% year-on-year. SFPE was down 6% with firm demand for our specialty paper products, with slightly higher average prices than the quarter ago but down 2% year-on-year. Fixed and variable costs were tightly managed in the quarter, and both were lower on a year-on-year basis. But pulp prices remained high. Our specialty paper conversion project at Alfeld Mill remains very strong, producing during the December quarter. And importantly, this will also lead to a reduction in coated woodfree capacity of 150,000 tons.

Moving on to the North America business on Slide 11. As I said, we successfully completed the Cloquet Specialty Cellulose conversion. And that started producing pulp in June and has reached a ramp-up of nearly full production of high-quality pulp. And the first customer deliveries were shipped during the quarter. The direct impact of the start-up of the Cloquet Mill was $12 million on operating profit. In addition to that, there were indirect costs related to material usage mainly. Coated paper sales volumes were flat year-on-year and prices declined during the quarter. Prices, however, have stabilized and we expect to realize higher prices over the coming months.

Market pulp sales volumes were much lower due to the conversion. And our pulp sales should increase as we now start shipping specialized cellulose to customers. The release business continued to perform well, very much also in the back of the launch of -- and very successful launch, a well-accepted launch of new patterns and the upgrade of a coater in that business.

In our South African business, the Specialised Cellulose business, in particular, obviously Saiccor performed very well despite lower margins with EBITDA margins still around 30%. That business was simply helped by higher NBSK pulp prices and a favorable rand-dollar exchange rate. This market, however, is starting to become under pressure as a result of increased capacity.

The domestic paper business did have a tough quarter, particularly so for office papers and industrial packaging. But on the containerboard segment, we are starting to get indications of a much more firm market, also with increase in demand and pricing. Variable costs, particularly the natural purchased timber and pulp, remained a challenge with the weakened exchange rate. And that put pressure on input costs. We did settle the wage negotiations here in July and reached agreement with labor in terms of increases.

Moving on then to Slide 14, dealing with our strategic focus. I think you're well aware and familiar with the 3 themes of, first of all, focus on the lower-cost Paper business with reasonable margins and strong cash flows; growth in our profitable Specialised Cellulose business and other high-margin businesses, including our specialty paper business; and thirdly, a healthy balance sheet, which leads to a company producing much better results going forward.

Our focus areas in terms of this strategy, as far as the Paper businesses are concerned, and firstly, North America on Slide #15, is to maintain a firm market share in that business and continuously work on further reducing our cost base and improving our efficiencies. And we have continuous strength as we showed during the current year to do just that.

In Europe, we believe the industry dynamics won't improve without intervention. And we have now also said that we will act decisively in that business, which would result in capacity closures and cost reductions over the next 3 years. And those actions are heavily front end-loaded towards the coming year and the year after. That will result in a reduced exposure to a graphics market, just having certainly a lower-cost operation, slightly smaller than what it is today but much more focused with also a smaller product line.

We're also looking forward to an increased specialty paper business in Europe. That business will look much more similar to our North American business going forward once we've implemented these actions. And we believe that from a year or 2 into this, we should get closer to our targeted operating margins of around 5% and EBITDA margins of around 10% on a consistent basis. The cost related to this obviously is very significant but will be spread over the 3 years, as I said, loaded in the first 2 years. But we will be able to fund this all internally without increasing our net debt.

In South Africa, that business remains under cost pressure and weak local markets and more needs to be done to achieve the double-digit operating margin which we're aiming for. And we plan to take further action in this business with announcements that will follow in, most probably, this quarter still in terms of what we'll be doing to further address the underperformance of this business.

In terms of our Specialised Cellulose business, demand for dissolving wood pulp remains strong. We've started up both the new projects and they're ramping up very quickly with Cloquet having ramped up to near full production. We certainly expect this market to be more competitive in the next year or 2 as a result of new entrants and also world economy, which is not as strong as one would want it to be, and therefore, a slight decline in demand as well, although we're well-covered with long-term contracts. The Alfeld conversion, as I've mentioned, is also on track.

In terms of our healthy balance sheet, we expect our net debt now to start going down slowly. This will be impacted by the actions we've taken in our European business and therefore, the rate of decline in debt will be slightly lower. But we're still very much committed to the net debt-to-EBITDA of between 1.5 and 2.

And we have announced the potential sale of Usutu Forest, which we've agreed to sell and it's now subject to some special conditions. And that, if successful, will bring in cash of around $100 million depending on exchange rate.

I'll very quickly refer to Slide 16, 17 and 18, showing some photographs of the first pulp shipped to customers from Cloquet and the first bales produced on Slide 17 on Ngodwana. You can see the massive Yankee cylinder being transported to Alfeld Mill in Germany for this conversion to specialized production.

And looking forward then on Slide 19. We believe that Sappi within 3 years will be a well-balanced and robust business, generating good returns for a strong balance sheet. And those include returns, margins and stronger balance sheet will start flowing through from the 2014 financial year and we'll reach our target, we believe, no later than in 3 years. We will achieve this by maintaining and growing our world leadership position as a low-cost dissolving wood pulp producer; growing our higher-margin specialty business in all 3 regions; and to have a smaller, simpler, low-cost graphic business with less exposure to that business going forward.

In that, we considered a number of potential actions to get there. Some of them included industry action which would, in fact, have led to us having most probably a more profitable business but with a larger exposure to coated graphics. And we opted for rather reducing our exposure and having a lower-cost business. And that implementation will start in this year, and we'll make further announcements, as I've said, in that regard.

We will maximize the value from our forestry operations in South Africa, Usutu being one example of what we're doing here. And we have further opportunities in terms of our softwood and hardwood forests. We will retain a very strong emphasis on cash generation and debt reduction.

Moving to our last slide on Slide 21. I don't have to say much more about our European restructuring. These plans are being finalized. There's nothing more we can say about that as a result of our consultation with the union, so we can't give you any further clarification at this point in time in terms of capacities, where it will happen or what the cost would be. In South Africa, the Paper business is expected to see growth in containerboard volumes, although for other grades, there's still some weakness in the market. And we are experiencing cost pressures. We'll address that also starting further during this quarter.

Our newly expanded Specialised Cellulose business remains focused on ramping up and to bring our cost base down. Obviously, with new businesses going to market, you need to stabilize cost to bring that down. Despite weaker operating performance, net debt remains within targeted levels. And at the end, we expect net debt to be slightly lower than at the end of the previous -- end of June 2013.

Given market conditions at the moment in Europe, we expect our business in Europe to post an operating loss in the fourth financial quarter and operating loss for that business for the year as well. And that will result in a small net loss for the group for the financial year. And this may be further impacted by the actions we take in South Africa and Europe in terms of impairments in this quarter.

Thank you. That concludes the presentation. And my team and I would be happy to answer any questions that you might have.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Caroline Learmonth with Absa Capital.

Caroline Learmonth - Barclays Capital, Research Division

Can you comment, please, on covenants and the amount of headroom that you have against your main covenants currently until your debt levels, as you say, are expected to come down? And then just secondly on Europe, you've explained you can't give any details yet about the restructuring. But do you envisage coming back to brief the market in further detail in a couple of months? Or is it a longer process than that?

Roeloff Jacobus Boëttgerr

Caroline, on the European situation, unfortunately, there's no further details. We do expect to come back to the market on a rolling basis going forward as we're ready to announce the steps, and the same is true for South Africa. But certainly, yes, within the next 2 months, the first announcement with regard to both South Africa and Europe, we expect to be able to be in a position to do that. And we will certainly keep the market informed as we go ahead to the best of our ability. At this point in time, we can't say anything more. As to the covenants and headroom, I'm going to ask Steve to answer that question, who's our CFO.

Stephen Robert Binnie

Yes. At the end of the quarter, our headroom under the covenants has narrowed. But bear in mind that we are at the peak of the funding requirements for the chemical service conversions. So as that ramps up production in the new quarters and the new financial year, our headroom starts to increase once again. So we think we've still got adequate headroom and we're not concerned about it at this stage.

Operator

Our next question comes from Bill Hoffman from RBC Capital Markets.

Bill Hoffman - RBC Capital Markets, LLC, Research Division

Roeloff, I wonder if you could sort of walk us through Cloquet, where you are today from an operating standpoint. You talked about it coming up to pretty much full capacity. And I know one of the thoughts was as you start to get the product into the market, that you might run wood pulps versus dissolving pulps. So I just wonder where you are and what you're outlook is for running that asset right now. And then I've got another follow-up.

Roeloff Jacobus Boëttgerr

It's a good question. And yes, we're very happy with what's happening there and our ability to swing it. Mark, would you like to go into a bit more detail?

Mark Gardner

Yes. Cloquet has start up right on time, as we had planned, in the month of June. And we've been very pleased with the progress and the technology that we've implemented there. And it does give us quite a bit of flexibility. Our focus is coming up the ramp-up curve as quickly as we can on Specialised Cellulose and getting the product out in the market to the customers that we have. And right now, we're right on that plan, which is -- I'll give you a range. It's between 75% and 90% of the full capacity of the plant currently.

Bill Hoffman - RBC Capital Markets, LLC, Research Division

And that product, is that contracted sales at this point in time? Or is some of it spot? And how does that -- how do you develop that market going forward?

Mark Gardner

Well, we're servicing both current [ph] contracts and spot market and will going forward. And we have very strong relationships with a multitude of customers out there, and we're working with them directly on that.

Roeloff Jacobus Boëttgerr

I think what's important here is that we've been very successful in qualifying, on a very early stage, that product with most of our customers from Cloquet. And then a very important other benefit we now have is not only can we swing between kraft and dissolving wood pulp, but we can decide where to deliver from and which will we deliver it from to which customers to optimize margins but also customer service and economic developments and regulations in the world.

Bill Hoffman - RBC Capital Markets, LLC, Research Division

Great. That's sort of the next question. As you ramp up the other facility in Ngodwana, a similar theory, will they have the same customer effectively in most cases, where you can sort of swap between one asset and the other?

Roeloff Jacobus Boëttgerr

Essentially, yes because we now cover just about the whole market in terms of who we deliver to. And we're developing that further. That was one of our aims, is to further broaden our customer base, but also to play in the spot market. And certainly, yes. And in fact, most of our customers will be receiving product from all 3 mills.

Bill Hoffman - RBC Capital Markets, LLC, Research Division

Okay, terrific. And then just with regards to those markets, the dissolving markets, I mean, obviously, spot prices are weaker right now. I just wonder if you could talk about what the impact that might have on contract negotiations as you look into fiscal 2014?

Roeloff Jacobus Boëttgerr

Well, we have a number of longer-term contracts that's been in place and still run for quite some time, and then there are newer contracts. And obviously, we're looking for additional contracts with a multitude of customers. So we are in a fairly robust, if not very robust position, generally speaking, if you look all over our business. However, markets are under pressure as we expect it to be and will be for the next year or 2 as new capacity is being added and as there's also a little bit of pressure on pricing and demand generally, not only for dissolving wood pulp but also for viscose. And we expected that. We, therefore, all along said that we need to be positioned and ensure that we are the lowest-cost producers in this market. So going forward, yes. Will we escape market development? Obviously and absolutely not. But we're very confident that the mix and even the lower end of our [indiscernible], we'll still be able to produce good margins and returns. And you add to that our ability to also switch between dissolving wood pulp and kraft pulp, that gives us that added flexibility. Alex, is there anything you would like to add to that?

Alexander van Coller Thiel

Nothing.

Bill Hoffman - RBC Capital Markets, LLC, Research Division

If I may, just one last question. With your planned moves in the coated paper business in Europe, do you think you will help or at least move the global coated paper markets into a better balance?

Roeloff Jacobus Boëttgerr

We're just a little bit too small, I think, to move the whole global market. What we certainly expect is that our actions, because we are a large player in Europe, will certainly improve our position and our cost position, in particular. We're driving the cost side of the business. And if you're the lowest-cost producer, you should be able to make reasonable margins, and that's what we're driving. The capacity that we aim to, over a period of time, to take out is significant in our terms. In world terms, it's probably not insignificant but won't be enough to change the whole balance in the world market.

Operator

Our next question comes from Lars Kjellberg from Credit Suisse.

Lars F. Kjellberg - Crédit Suisse AG, Research Division

I have a couple of questions. I still want to come back to Europe a bit. And I know -- I appreciate you going through your confrontation phase, et cetera. But can you tell us what sort of size? You say you're going to have a smaller business. What does that really imply in terms of change to your capacity base in Europe?

Roeloff Jacobus Boëttgerr

Unfortunately, none, Lars. I think I made it clear that we understand why you want to have this information. And as soon as we're in a position to communicate, we will. But at this point in time, all I can say to you is it is loaded upfront, so we want to take out capacity and cost as soon as we can and aggressively so. But we need to be careful that we do it in a proper manner. And as soon as we can announce more information and share it with you, we certainly will. I do apologize for that.

Lars F. Kjellberg - Crédit Suisse AG, Research Division

I appreciate that. When you say you're going to fund this internally without increasing debt, is the debt situation itself a hindrance to move quicker? Because 3 years is still an awful long time in this market.

Roeloff Jacobus Boëttgerr

That's a very good question. I think it does play a role. Obviously, if we had unlimited balance sheet capacity, you could be more aggressive. On the other hand, opinion is that we also -- or not opinion, we are very cognizant of the fact that many of these assets are well enough. [ph] They're performing poorly, but still producing cash. And you need to be able to take up sufficient over rate to cover the capacity and cash reduction that you're taking out to make sense here. And we also need to be sensitive to the effect on our customers and what happens in the market. We do have considerable flexibility, because what we're planning to do is to do it entirely on our own and bring our cost base down. So if the market does go down faster than we think, then we will fast track that. Barry, would you like to add to that?

Barry John Wiersum

I think you've answered it very well, Roeloff. I have nothing to add.

Lars F. Kjellberg - Crédit Suisse AG, Research Division

Okay. [indiscernible] just a couple of details, I suppose. When you're looking at the start-up cost, you mentioned very clearly that you looked about $12 million in North America. What should we expect, if anything, in the final quarter of the year? And if you can give the same sort of numbers, please, for South Africa and in Ngodwana?

Roeloff Jacobus Boëttgerr

Obviously, we don't make any projections when -- in terms of numbers itself. But there will be little direct or no direct impact of the start-ups in South Africa and North America. That's now -- just about behind us. Small numbers, below $5 million in each area, the impact. What, however, is happening is as we're ramping up, and although, for instance, Cloquet is now very much ramped up to near full production, your costs are still not at the level where we want them. And as you fine tune that, costs will come down. So quarter 4 will not be a good example of what it would be. Going into the new year, costs at both mills will continue to decline as we stabilize those mills and fine tune it. But we're expecting a better performance, obviously, on both our North American business and our South African business in quarter 4 compared to the previous quarter.

Lars F. Kjellberg - Crédit Suisse AG, Research Division

And a final question from me, when you look at your guidance from fiscal Q2, you were talking about, at worst, breakeven in net profit that is now -- obviously it's likely weaker guidance. What has changed? Is that mainly Europe? Or is that anything to do with -- mix the market -- special services in those markets, because you're also getting a tailwind from the rand. So let's just try to figure out what's going on there with the market. [ph]

Roeloff Jacobus Boëttgerr

It's mainly Europe. The European market is substantially weaker than what we expected for longer. So it's mainly driven by Europe. We did not expect Europe to be in an operating loss position in our fourth quarter. They now are. So that's mainly driven by that. Yes, the Specialised Cellulose business is slightly more under pressure now, but it does not affect us that much in that we've got a lot of long-term contracts and it's only now that we're bringing this new capacity to market. So all in all, the difference that we're talking about here is largely as a result of the European market being weaker than what we expected. And I'm not going to question that you know exactly happened to volumes in Europe in particular.

Lars F. Kjellberg - Crédit Suisse AG, Research Division

And is that also behind then your decision to go alone and fixing your own business as opposed to seeking industrial solutions? Is that anything to do with the market is getting worse?

Roeloff Jacobus Boëttgerr

Look, we -- what we've said all along is we're open minded to industry deals. And we need to, obviously, have plans also to look after ourselves, because to make industry deals, you need 2 parties that can agree on something that works for both. What we ended up is concluding that, first of all, we can't sit still until you can make a deal. With the market, it's just deteriorating all at the same time. And you can't guarantee that you will be able to find it a transaction that works. So we're recently pursuing a self-help scenario, where we know we're in control of our own destiny. The other thing that we also got our minds around is if we do a deal, and we increase our exposure to the graphic paper market in Europe, do we prefer that to a decreased exposure? And doing deals could very easily lead to increased exposure. We choose a route and the strategy of a decreased exposure to graphic paper in Europe. Not necessarily Europe, but certainly graphic paper in Europe. We are going to decrease our exposure and become a smaller, but much lower cost and focused operation.

Operator

Our next question comes from Nishal Ramloutan from UBS.

Nishal Ramloutan - UBS Investment Bank, Research Division

Just, I mean, coming again back to Europe. As far as the one thing I was looking at was your coated mech business. And considering that you seem to have not made any progress with an industry solution, you've got much less flexibility and influence in the coated mech industry in Europe. I mean, what's the thinking around that? Is it again restructuring, or is it completely exiting out of that industry? And there's a couple of follow-up question I've got.

Roeloff Jacobus Boëttgerr

We've spent quite a lot of time on expanding just that. We're not happy with the performance of that business, it's mainly market-driven. We're going to take out capacity. We're going to lower our cost, and we're going to end up with a smaller, much more focused and profitable business in Europe. So it's about restructuring, yes. Exiting it -- the only way to exit that business, in our opinion at the moment, is if you give it away and have a massive writeoff. Bear in mind, that business is producing good cash, has been for a long time, and has the ability, in our opinion, to produce reasonable results going forward, but not if we don't take serious action in that business.

Nishal Ramloutan - UBS Investment Bank, Research Division

So the plan is still to remain in coated mech in Europe?

Roeloff Jacobus Boëttgerr

Yes.

Nishal Ramloutan - UBS Investment Bank, Research Division

And then just with -- I mean, with the restructuring, obviously, going to be self-funded and the net debt would obviously be reduced more gradually, I mean, how do you see dividends? I suppose the main question I'm asking is would you look at the complete restructuring of Europe before you even start looking at a dividend payout?

Roeloff Jacobus Boëttgerr

Our answer to that is fairly simple. We'll start taking a dividend the minute we can afford to pay, and we think it makes sense. The sooner the better. But we need to get our business to perform well on a sustainable basis, not before that. Does it make sense for us, in our opinion, to pay a dividend where you can get really a better return by improving your business. Steve, you seem to want to say something as well?

Stephen Robert Binnie

Yes. Just to emphasize that our long-term target is 1.5x to 2x EBITDA for our debt. So it's only when we get into that range, and we are confident that we can keep it there that we would resume a dividend.

Nishal Ramloutan - UBS Investment Bank, Research Division

And, I mean, on your current forecast, when do you see getting net debt below $2 billion, because you have been...

Roeloff Jacobus Boëttgerr

We haven't disclosed that.

Nishal Ramloutan - UBS Investment Bank, Research Division

Okay. And just in terms of price increases, I think the last time we chatted, you were looking at putting through price increases both in Europe and in the U.S. in H2, currently at '13, but it just seems -- you seem to say that prices, you expect that to remain flat. I mean, is it correct to surmise that the price negotiations have fallen through, and there aren't any success with that?

Roeloff Jacobus Boëttgerr

There were slight increases in Europe in this quarter. And if you look at that quarter-on-quarter, they went up slightly, 2%. With markets declining 6% to 8% year-on-year, it's very difficult to get price increases through in Europe. So what we're now doing is we -- obviously, we'll always look at price increases when appropriate. But at this point in time with the month [ph] the way it is in Europe, I think it's just not realistic to think you're going to get a price increase. Now, therefore, our actions to reduce the cost base and be the very lowest cost producer in the areas where we can be and only operate in those areas. In North America, I think, we've said that we are planning small price increases, gradual price increases going forward. So we're extremely realistic in what we think the market would look like.

Operator

Our next question comes from Brian Morgan from BNP Paribas.

Brian Morgan - BNP Paribas, Research Division

Just two questions from my side. The first is in February there was an announcement out of China that there was -- that they were doing an anti-dumping investigation on dissolving wood pulp. And have you heard anything since then? Do you think this would impact any of your businesses? That's the first question.

Roeloff Jacobus Boëttgerr

Certainly, if it happens, it will impact on the business. I think Sappi is in a fairly good position there in that we have mills in South Africa and North America and we can cross-sell, and we can talk to our customers, and we certainly will be doing that. In terms of whether it will happen or not -- Maarten is sitting here. He is, of course, our legal side of the business. Maarten, any new news?

Maarten Van Hoven

Nothing new, Roeloff. The investigation generally tracks on for about a year. The investigation was launched early this year in February, so we're waiting to hear from the [indiscernible] professionals.

Brian Morgan - BNP Paribas, Research Division

Maybe just following up on that. It will, obviously, affect Cloquet the most. Would you be able to swing Cloquet deliveries into Europe and unaffected regions?

Roeloff Jacobus Boëttgerr

Very much so, one can do that. And the other thing we can also do is really make [ph] the swing to grass pulp.

Brian Morgan - BNP Paribas, Research Division

Okay. Would it affect higher offer or not so much?

Roeloff Jacobus Boëttgerr

Will it affect?

Brian Morgan - BNP Paribas, Research Division

An higher offer pulp?

Roeloff Jacobus Boëttgerr

No.

Brian Morgan - BNP Paribas, Research Division

Not. Okay. And then the second question is just referring to, sorry, again, on the European restructuring, you said that you'd need to take up cost because these operations are cash generative. Where in your organization in terms of overheads do you see sort of lowering-hanging fruits in terms of costs that you could extract?

Roeloff Jacobus Boëttgerr

I say that there's lower-hanging fruit -- Barry will kill me, because he's been working on this for the last 3 years. There's no low-hanging fruit in this business. We've been at costs for years. And I think, it's clearly efficient as we run. What we're looking at is if you take out high-cost capacity, then you have to take out also an appropriate demand of overhead that goes along with it. Otherwise, all you do is actually making a smaller business with less cash generation without improving your margin. So this -- the fact that these actions that we plan to implement of low strategic nature and will have a big difference in what Sappi looks like in Europe in time to come. We will be a much leaner, focused organization that low down the cost curve and that can make money in a market, which we expect to continue to decline.

Operator

Our next question comes from Sean Ungerer from Avior.

Sean Ungerer - Avior Research (Pty) Ltd.

Roeloff, just first beginning with the targeted return in 3 years time. Firstly, what is that going to be based on? Will it still be operating probably excluding special items? And, secondly, can you give us some sort of ballpark guidance as to what that is going to be?

Roeloff Jacobus Boëttgerr

Sean, there's a number of items, and they're all in our annual report and they remain the same. It's just that we have been slower to get there. So yes, operating profit, excluding special items, is one that we're targeting. We're also looking at our EBITDA margins and then return on assets employed. The other very important one is the one that Steve has mentioned, net debt to EBITDA. And when I say in 3 years, that's the absolute latest that we want to achieve that. Depending on what happens in markets, that could be achieved, I think, a year earlier.

Sean Ungerer - Avior Research (Pty) Ltd.

And then just, secondly, in terms of North America, the quantum of the possible price increases to be affected? And secondly, the -- I mean, are you quite confident that's going to go through? I mean, NewPage, they have been producing this year, but they efficiently did come out of bankruptcy, so you could see a bit of order flow go back there. What is your sort of view on that?

Roeloff Jacobus Boëttgerr

Mark, do you want to answer that one? You're closer to it.

Mark Gardner

Yes. Thank you, Roeloff. We have been able to get some price increases through, particularly on the sheet side our business. And then on the web side, we expect a little bit more pricing to come through over the next quarter. But our focus, like Roeloff's been talking, about was Europe. We're very much focused on cost side of the business and remaining very competitive in the market with high-quality products, which has kept our mills running at the levels that we're looking for.

Sean Ungerer - Avior Research (Pty) Ltd.

And just, lastly, in terms of wage negotiations, is that -- was that quite smooth? And are you able to provide any guidance as to what the end number was there?

Roeloff Jacobus Boëttgerr

Yes. It's smooth. Actually, Alex is looking at me here. It's never easy. Alex?

Alexander van Coller Thiel

Yes. I think relatively smooth. We've been spending a lot of time in terms of building a relationship and actually looking to the longer term. And I think we're getting there quite well, making a lot of growth. In terms of the final settlement around about 7.6%.

Operator

Our next question comes from Nitin Dias from JP Morgan.

Nitin Dias - JP Morgan Chase & Co, Research Division

I have 2 questions. The first one is on the restructuring. And again, I don't intend to ask you about the detail, but, I guess, when you're talking about restructuring, it will benefit yourselves and the industry, as well. I mean, I guess are you trying to do anything, which will, I guess, limit the benefit to you without, I guess, other players in the industry free riding on those initiatives? Or is that something which can't be helped -- it will always help the industry?

Roeloff Jacobus Boëttgerr

We're focusing on our business only. Obviously, if you do certain things and that benefits the industry, we follow [ph] the industry. You have to look only at your business. There's no way, I think, that you can do a significant restructuring and think it's not going to have an effect, good or bad, on your competitors.

Nitin Dias - JP Morgan Chase & Co, Research Division

Understood. The second question was what do you think is the overcapacity in the quarter, free sheet space in Europe? Or is that about 10%? Or is it much more than that?

Roeloff Jacobus Boëttgerr

Actually difficult to say. One month, you think it's one number and another, but it's significant. Barry, would you like to add to that? I mean, you live in that world every day.

Barry John Wiersum

I think, what's important, just going back to your first question is that Sappi is extremely good at carouseling business from one mill to another. We have a very strong customer service reputation. And as a result, we tend to retain business, even when we close mills and move that business from one mill to another. As far as the over capacity is concerned, it's very seasonally dependent. Right now, it's big because you have a summer slowdown. I would put the overcapacity at several midsized machines.

Nitin Dias - JP Morgan Chase & Co, Research Division

Understood. That's helpful. And the last question was you did refer to, I guess, consolidation. Did you say that you don't want to participate in consolidation, because you don't want to expose -- increase your exposure to graphic free sheet or graphic paper in Europe? You also mentioned that there is, I guess, a difference of opinion in valuations, given the challenges of the industry. Is that also one of the reasons? Or is it the primary reason that you don't want to increase exposure to graphic paper in Europe?

Roeloff Jacobus Boëttgerr

I never said that we do not want to participate. In fact, we remain open to participation, there's no doubt about that. What I did say is we preferred not and, in fact, feel strong about not increasing our exposure, but rather to decrease our exposure to coated graphic or graphic paper, per se. And what I also said is in order for a transaction to work, it needs to work for both parties. And that's not only in terms of valuation, but a number of other considerations.

Nitin Dias - JP Morgan Chase & Co, Research Division

And what about consolidation in the U.S.? Is that something which interests you? Obviously, the U.S. is a much more healthier market than Europe. So would you want to -- can you comment on that, please?

Roeloff Jacobus Boëttgerr

Consolidation is always a very good thing. If you're sitting with 2 coated graphic mills only then -- and they're some of the lowest cost and most profitable, then you look at consolidation in a very different way.

Nitin Dias - JP Morgan Chase & Co, Research Division

In the sense that -- are you saying that you're most likely a seller than the buyer, given that you have a small exposure?

Roeloff Jacobus Boëttgerr

I'd say any of the 2.

I think that concludes our call. Thank you very much to all of you.

Operator

Thank you very much, sir. Ladies and gentlemen, on behalf of Sappi, that concludes today's conference. Thank you for joining us. And you may now disconnect your lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!