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Executives

Steve Binnie - CEO

Glen Pearce - CFO

Berry Wiersum - CEO, Sappi Fine Paper Europe

Mark Gardner - CEO, Sappi Fine Paper North America

Alex Thiel - CEO, Sappi Southern Africa

Analysts

Nishal Ramloutan - UBS

Caroline Learmonth - Barclays Africa

Bill Hoffman - RBC Capital

Sean Ungerer - Avior Capital Markets

Brian Morgan - BNP Paribas

Roger Spitz - Merrill Lynch

Lars Kjellberg - Credit Suisse

Chris Ellis - Babson Capital

Callan Williamson - Efficient Select

Sappi Limited ADR (OTCPK:SPPJY) Q3 2014 Earnings Conference Call July 31, 2014 9:00 AM ET

Steve Binnie

Thank you. Good afternoon, everyone. I’m joined on the call today by a number of executives in our team, including Glen Pearce, our new CFO; and our regional CEOs, Berry Wiersum and Mark Gardner, and Alex Thiel.

I’m going to be talking to the investor presentation that we’ve posted on our website. Firstly, for the quarter three 2014, we are very satisfied with the results. I think we’ve continued the recent trend of year-on-year improvement in quarterly performance, and during the quarter, we were able to complete two major transactions being the Usutu forest in Swaziland and our Nijmegen mill in the Netherlands.

Our Specialized Cellulose business remains sold out, and during the quarter, we were able to turn an earnings per share loss of $0.09 last year into a $0.03 profit -- $0.03 per share profit in the current year. EBITDA, excluding special items, was $140 million, compared with $88 million for the equivalent period last year, and net debt at the end of the quarter was $2,286 million.

Moving to Slide 5, you see our history of our EBITDA and operating profit performance over the last few years by quarter, and I think the important aspects of this slide is that you can see that Q3 is typically a lower quarter slide for us, and that’s as a result of lower demand because of the summer in the northern hemisphere, and it’s typically when we schedule a number of outages at the mill. The other important aspect is to recognize that Q4 is a very important quarter for us, and that’s why we have much higher profitability and we generate significant amounts of cash.

On Slide 6, you can see our product contribution by our two main businesses. Our operating profit for Specialized Cellulose is 80%, so it is a major contributor to profit, Paper being 20%, however, EBITDA, the two businesses are split half-half, and EBITDA, you can see is a proxy for cash generation, so you can see from this, Paper still represents a significant proportion of our business and is strategically very important for us.

On Slide 7, you see the evolution of our net debt. And reflecting back on 2012 and 2013, you can see that’s when we had to fund the two major Specialized Cellulose projects. Those are now behind us. We peaked in Q1 of 2014 and subsequent to that, we’ve seen it come down. We are at $2,286 million at the end of the quarter as I indicated. What I should say is that the proceeds from the Usutu sale, which is just over $90 million, are not in these numbers, so that will bring it down further, below $2.2 billion, and then the cash generation in the last quarter, as I said earlier, it’s a very important quarter for us. With that in mind, we will get very close to the $2 billion mark by the end of the financial year.

Slide 8 has the evolution of our net debt to EBITDA. As a ratio, it’s a very important measure for us, and that same financing for the Specialized Cellulose project is reflected in the red line that you see there, and again it peaked at about 4.5 times in Q1 of 2014. Subsequent to that, we’ve seen significant downward movement in the ratio, and we will continue to see that as we go through Q4. By Q4, we will be close to the 3 times mark. I would like to remind everybody that our long-term target is to get it to 2 times EBITDA.

On Slide 9, we have our CapEx development, and again in 2013 you see the major CapEx for the conversion. 2014, as we’ve indicated, overall, the CapEx will be less than $300 million. Approximately half of that, close to the $150 million mark, relates to maintenance CapEx. The other numbers making up - the biggest proportion of the balance relates to initiatives, cost efficiency initiatives that we have at Gratkorn and Kirkniemi. In addition, as we look forward into 2015, we will strive to keep it below the $300 million mark.

Slide 9 has the maturity profile for our debt, and you can see that in 2014 and 2015, we have no major debt maturing. We do have a small bond maturing in South Africa in 2015, and then in 2016, we have the securitization structure which matures, and for that we are confident that we will able to refinance that.

Now I want to turn the attention to the divisions, the regional overviews. On Slide 12, we have the evolution of the EBTIDA margins, and North America has been under some recent pressure, and we’ll talk about that in some more detail. At the end of - or in Q3, it was at 2.6%. Europe has made a nice recovery. 2013 was a tough year, but a lot of work has been done on that side and we’re now at 7.2%, and then in South Africa, we continue to show strong margins and we are maintaining that level above 20%.

Taking each the businesses in turn, firstly Europe, overall I think it was a stronger-than-expected quarter. Volumes were down 2% year-on-year, and we saw growth in Specialty Paper volumes. I think the number was about 15%. The one market that is tough is on the coated mechanical market. Demand remains weak both domestically and globally.

Average net sales price in euro terms were lower across all product grades year-on-year, but the encouraging news is that they were flat from the last quarter. So we are seeing a leveling off there. I think a great deal of work has been done on costs in this business, and we’ve seen savings in variable, fixed and logistics costs. And as I mentioned earlier, important that we were able to reach agreement on the disposal of the Nijmegen mill in June. That mill in the short term will continue to manufacture about 52,000 tons of coated wood free. Ultimately, the new owners will be making packaging paper from that mill.

In North America, the graphic paper markets were characterized by the weak pricing during the quarter, our volumes held up pretty well and were flat year-on-year. We are encouraged by the fact that we were able to get a price increase through for web products that was announced in June to take effect from July and appears to have gone through, and we anticipate the benefits of that will start to be felt in Q4.

Our Specialties business in North America is experiencing good growth in Europe, however, we are seeing some weaker Chinese markets in the short term. Variable costs were higher year-on-year as a result of higher wood and purchased pulp costs, but also as a result of some unscheduled outages at both Cloquet and Somerset. There are a number of projects underway to reduce variable costs as we move forward. We were also able to or we announced the restructuring in the business and we reduced our staff count by approximately 50 salaried staff and 60 hourly paid positions. Again those benefits will start to be realized in Q4.

In South Africa, we had another great performance. The business improved compared to the equivalent quarter last year, although it is important that we did have the conversion a year ago. Variable costs particularly for wood and pulp were negatively impacted by the weaker rand, however, a lot of good work has been done on fixed costs, and they were in line with last year following a number of cost containment actions. Average rand sales price for packaging paper and dissolving pulp was higher year-on-year, but was down slightly compared to the prior quarter.

In Specialized Cellulose, we are seeing dissolving wood pulp prices under a little bit of pressure, and we talked about that last quarter, and that’s primarily due to the weaker viscose staple fiber prices and new start-ups in that space. Also, the dissolving wood pulp profitability in North America was negatively impacted by the planned annual maintenance shut at Cloquet as well as higher logistics costs for the Specialized Cellulose and the lower pricing that I talked about earlier. However, it is encouraging to note that we still have strong demand for our products and the mills were fully sold out.

Just turning to our two businesses, we just wanted, at a high level, to talk about some of the key aspects of the businesses, and firstly on the Paper front, supply and demand, as I said earlier, has been -- volumes have actually been stronger than expected, yes, there is some pressure out there, but the volume declines are less than we expected a year ago and less than we had budgeted. We are seeing coated paper capacity shuts from our competitors in Europe, and overall demand remains mixed regionally, but globally flat to slightly down.

On the cost front, we are proactively managing our costs, and I think you can see the benefits of that across all the regions coming through, and encouragingly, as I said firstly on the U.S., we announced a price increase on coated paper, and we’ve done a similar thing in Europe as well. Our strategy here will be to continue to manage or sales mix and our distribution channel, continue to bring down costs further, and importantly we need to manage our capacity in line with our demand expectations.

On Specialized Cellulose, as I said earlier, we have seen new start-ups coming on-board so supply has grown at a faster pace than demand, however, demand is up this year despite the challenges in the marketplace. We’ve seen about 5% growth, and over time, and I think we said this in previous calls, we continue to believe that will be between 6% and 8%. The demand growth has been impacted by the lower textile fiber prices.

On the cost and prices, I’ve already said that dissolving prices in the short term will - short-to-medium term will remain under pressure, and it’s important that in an environment like that, our mills are producing, are amongst the lowest cost producers and our 1.3 million tons are certainly in that category. The rand, the weakness, the short-term weakness in the rand is also giving us some support for our margins. Our strategy will be to continue to work with the key customers, focusing on quality, customization, and supporting our common growth aspirations. Even in this business, we continue to focus on costs and ensuring that we are at the bottom end of the cost curve, and we will continue to investigate further opportunities for growth going forward.

Our strategic focus, and I am now on Slide 20, with me taking over from Ralph, I had worked with Ralph for some time, and we don’t anticipate any radical change in direction over the next few years. Our priorities will be -- remain the same and that’s going to be to achieve cost advantages, rationalize declining businesses in line with our anticipation of demand, and we will make moderate investments. The important aspect is to strengthen our balance sheet and reduce our net debt position.

On Slide 21, the next slide, I just go into a little bit more detail on these issues. Firstly, on cost savings, we will work to lower fixed and variable costs, increase cost efficiencies, and invest for cost advantages. And there’s some examples of this on the page. Firstly in North America, we’ve seen the workforce reduction that we have announced. We have the gas conversion of the Somerset boiler, which has come online. The benefits will start to be realized as we go forward, and in North America, we will look for other opportunities for variable cost improvement. The one example is the lime kiln, converting that to gas also at Somerset.

In Europe, we’ve got the investment in the Kirkniemi power plant, which will push the cost efficiency there, and a number of other variable and fixed cost saving project initiatives, and we’ve seen the benefits of that in the numbers that we’ve already reported.

In South Africa, we will continue to focus on product optimization and a number of fixed cost saving projects and again we’ve seen the benefit of that flowing into the numbers.

At the Group level, we think there are opportunities there from a procurement, supply chain, and shared services aspect. The next aspect that we focus on is the optimization and rationalization of the declining businesses. We do recognize that there is a decrease in demand for graphic paper. We manage our capacities to strengthen our leadership position in these markets, and we realize their strategic importance. The important aspect here is to maximize the cash flow generation from the businesses.

In Europe, with that in mind, and we’ve talked about this in the past, we will continue to focus on our self-help approach to managing those volume declines, and I think the Nijmegen sell was part of that strategy. Another example of that is the investment in the Gratkorn paper machine and pulp plant that we’ve recently announced. In South Africa, I’ve mentioned it already, but we continue to optimize the product offering and efficiency.

In the short term, as I said, we will continue to focus on strengthening our balance sheet, with that in mind, we will continue to make smaller investments in the existing areas where we think there is potential, including pulp specialty grades and packaging papers, and some recent examples of that have been the - is the Alfeld investment into specialty paper, and the South African packaging business, which is doing very well.

Moving on to strengthening the balance sheet, over the next two years, we will continue to focus on having a cleaner, stronger balance sheet so that we can accelerate our growth in adjacent businesses where we have the expertise. Examples of that is the sale of the Usutu forest for 1 billion rand that I mentioned, and then also at the end of last quarter, we talked about some excess softwood plantations in Mpumalanga, which will generate about 700 million rand of proceeds. We anticipate that that will hopefully be concluded early in the new financial year.

At the Group level, we continue to work on working capital optimization and we have a commitment to containing our CapEx below the $300 million mark through to 2016. And on the debt side, from 2017 onwards, we start to see the maturity of the bonds, and we will continue to think about how we go through that debt refinancing process.

Moving to the outlook on Slide 26, we’ve made steady progress in improving the European business, an important cash contributor to the Group. The capital projects at Gratkorn and Kirkniemi are underway, allowing us to make further headway in improving the financial performance of the business.

The North American business has experienced extremely difficult year with cost and price pressures in graphic paper, inclement weather, and some operational challenges, however, there are early signs that the graphic paper business will see improved returns with good volumes and higher pricing going forward. Management focus on costs and operations will further aid that improvement. The South African paper packaging business continues to benefit from healthy demand particularly due to a good fruit export season.

Due to the competitive nature of the dissolving wood pulp market and the weak viscose staple fiber pricing, we are experiencing continued pressure on our prices, however, demand remains strong and our mills are essentially sold out for the remainder of the year.

CapEx for the full year is expected to remain below $300 million, and with the proceeds of the Usutu sale and the positive cash impression expected in the fourth quarter, we anticipate net debt to end the year close to $2 billion. The fourth quarter is seasonally a strong quarter and we believe that the result for the quarter will continue the trend of improved year-on-year quarterly performance, which we’ve experienced throughout 2014.

Okay, so that’s me gone through the slides, we’re now going to hand it over to questions to you guys.

Question-and-Answer Session

Operator

Thank you very much. (Operator Instructions) Our first question comes from Nishal Ramloutan from UBS. Please go ahead.

Nishal Ramloutan - UBS

Just a couple of things from my side. Firstly, in Europe, further cost savings have come through, so well done on that. But can you maybe just give us a gauge of how much of savings have you managed to remove from the European division so far and how much more we can expect? And then secondly, just on North America, I think previously when Ralph was there, he was sort of talking about getting this to a 10% margin business. What's the current expectations out of North America? Is the current target much lower than that, what can we expect going forward? I think thirdly, just when you talk about growth, about -- in SA packaging, is there any specific projects or specific initiatives that you have there to grow SA packaging? I think just lastly, in terms of coated mechanical in Europe, as you say, the market still looks quite depressed, prices coming off, demand still declining, but you haven't really reduced exposure to that grade. Are there any plans to actually do that?

Steve Binnie

Okay, I will give some brief answers to your questions, and I’m going to hand you to the respective regional CEOs. Firstly on European cost savings, if you look at all the initiatives that we’ve undertaken in the current financial year, that adds up to about $50 million to $60 million benefit that we’ve been able to achieve. I’ll let Berry talk about that in a little bit more detail. Just on the second question on -- in fact Berry, why don’t I hand it over to you on that?

Berry Wiersum

Yes. It’s about €50 million or €60 million in fact. It’s split equally more or less between fixed and variable costs. Big projects, which we have carried out on variable costs over the last year, is scheduled to save around about €60 million for the year, eventually the run rate. So the effect of that for the coming period will be higher, and in the fixed costs reduction, that excludes at this moment in time, the Nijmegen reduction will only see that coming in from quarter four, our fiscal quarter.

Steve Binnie

Okay. Thanks, Berry. Then on the second question about the North American margins, our long-term targets are still at the 10%, they haven’t changed. Obviously, there had been short-term pressures in that market over the course of the year, however, there are a number of initiatives underway to improve the margin going forward. Obviously, we’ve announced the recent price increase and the cost-cutting initiatives, Mark, anything you want to add to that?

Mark Gardner

Thanks, Steve. The only thing I would add is that we do have a lot of cost side opportunities that we’re working on which will bring the margin up despite what the pricing in the markets do, but we do feel very good about the coated wood price that we announced, that seems to be growing through very nicely and we continue to really focus on the mix of our products and who we sell them to.

Steve Binnie

Thanks, Mark. The third question related to the SA packaging business and the initiatives that we have underway, this is a business that we feel very good about and we are investing money and I will let Alex go into more detail there.

Alex Thiel

Thanks, Steve. We’re focusing on three areas. The first one is increasing our pulping capacity both at Tugela and Ngodwana mill. Second one is virgin linerboard, which is very, very strong. We see about 10% increase in the market, and we are doing some expansions to satisfy that demand. And the third one, which I’m very excited about, is lightweight packaging where we are in a position, we will bring that product to the market, the lowest grammage packaging grade in the country. We will be supplying that. No one else will be getting that low.

Steve Binnie

Thanks, Alex. And then, Nishal, your final question related to the coated mechanical market in Europe, there are no current plans underway to reduce our capacity there, but again I would like Berry just go into a little bit more detail.

Berry Wiersum

Yes, of course. Thanks, Steve. The Nijmegen disposal in fact is effectively a mechanical coated capacity reduction because we are carouseling the wood free coated reels from Nijmegen to the two other reels mills, Lanaken and Kirkniemi, and as a result, we will be reducing our dependence substantially by in fact 200,000 tons on mechanical coated reels.

Steve Binnie

Thanks, Berry.

Nishal Ramloutan - UBS

Thank you.

Operator

Our next question comes from Caroline Learmonth of Barclays Africa. Please go ahead.

Caroline Learmonth - Barclays Africa

Thank you. First of all, on dissolving pulp, just to confirm then, so the short-term outlook is subdued and you expect prices to continue to drift down in the short term? Secondly, European price increases which you've announced, if those are successful, prices will still be down year-on-year, is that correct? And then thirdly, you mentioned your projects at Kirkniemi and Gratkorn and the potential positive financial effect from those over the next year or so. Can you just describe or explain exactly what those projects are and how they will positively impact the European financials, and in particular, your expectation in terms of European cost inflation over the next couple of years, the European business cost inflation? And fourthly, Cloquet, given what's happened, do you still think or do you still believe it was a good idea to convert the Cloquet mill to dissolving pulp? And that's it for now. Thank you.

Steve Binnie

Okay. On your first question about dissolving pulp prices, as you know, the numbers, the average price for the quarter was just below the $850 mark. We are seeing short-term pressure on those prices, however despite that challenge, we’ve been able to keep the margins at 27%.

If you recall from previous discussions and previous results calls, we always said that this market would get between 25% to 30%. So I don’t think there is any surprises in those numbers, and they are in line with our expectation. There will be short-term pressures in that market, but long-term the growth fundamentals are very good, and we think it’s a very good business to be in and we are committed to that business.

And that probably gets you to your last question about Cloquet, yes, we do think it was a good idea to do that in the long term. The demand fundamentals are very strong, and we firmly believe that it’s the right thing to do. We have some very key customers in that market space and we partner them as they go larger and we want to be there with them as they get larger.

On question to your European price increases, yes, they are down year-on-year, but they are going to be rising on a quarterly basis. So that is an encouraging aspect and it will improve the quarterly profit as we move forward. Your third question related to Kirkniemi and Gratkorn and you extended that to talk about cost inflation and Berry I’m going to hand that over to you just to go into a little more detail on those two projects.

Berry Wiersum

Okay. Thank you, Steve. In terms of Kirkniemi, it is a new energy system, which will make us independent of gas. That will save us between €10 million and €20 million per year. So that will have a very considerable effect on the overall cost of Kirkniemi.

As far as Gratkorn is concerned, the two projects going on there, one of them is a replacement of a refurbishment of the recovery boiler, and that needs to be done, it’s a 40-year boiler so it is a necessary piece of work that just has to be done. It does not have a significant improvement in the profitability, but we are also rebuilding PM11, and PM11 will have a wider range grammage range and a slightly improved quality, and that will enable us to be the lowest cost producer of all the grammages for wood free coated sheets across the business. As far as cost inflation is concerned, we don’t expect much inflation in cost.

Steve Binnie

Thanks, Berry.

Operator

Our next question comes from Bill Hoffman of RBC Capital. Please go ahead.

Bill Hoffman - RBC Capital

Thank you. Just a little bit further on Cloquet, as you were talking about before, can you just give us an indication of how much of that you're running on specialty cellulose versus other pulps at this point in time?

Steve Binnie

At this point in time, we are fully on dissolving pulp.

Bill Hoffman - RBC Capital

Okay. And then, just with regards to the global market and the dissolving pulp, I just wonder if you could just talk a little bit about the trade duties and what, if any, you're seeing the shifts in trade flows in that market right now?

Steve Binnie

To be honest, I don’t think those duties have had a major impact on the actual trade flows themselves. Obviously, we sell into China and we continue to do so, but I don’t think it’s had an impact on pricing in China.

Bill Hoffman - RBC Capital

Okay. And then, as you look into 2015, do you see any of your contracted business today at risk, the contracts that roll? And would you expect to see that contract pricing in the next year to be coming down much more where you see it in spot markets today?

Steve Binnie

Yeah. Look at the end of the day, our prices will follow market prices. That is very clear. So we continue to value our long-term relationships with our large key strategy customers, so we will strive to maintain our volumes with those. Obviously, you have some smaller customers that you have a little bit more flexibility on, and if it makes sense to switch to Kraft pulp for those smaller volumes, we will do that, but we will evaluate that at the time based on where the respective pulp prices are.

Bill Hoffman - RBC Capital

Thank you. And then, just one question for Mark. In the U.S. markets, you talked about this coated free price increase. I'm just curious on why you think markets are as firm as they are in coated free, just given the broader picture of the weakness in coated markets.

Mark Gardner

We have a very strong demand we are seeing, however, it’s seasonal. We are -- I think also the products that we offer and the quality that we have sometimes gives us an opportunity to get a little bit more price in the marketplace because the products are a little bit unique and they certainly are driving product demand that we see, so we’ve been able to keep our machines fairly full and been able to on that demand get the price.

Operator

Our next question comes from Sean Ungerer of Avior Capital Markets. Please go ahead.

Sean Ungerer - Avior Capital Markets

Good afternoon, everyone. Just a couple of ones. In terms of your CapEx profile post-2016, you've indicated up until then you're looking at roughly $300 million a year and roughly $200 million stay in business of that, how are you sort of thinking about the post-2016? And then, just linked to that, is dividend still hardly depend on reaching a net debt to EBITDA target of two times? And then, just in terms of possible refinancing of debt in the next sort of two years, are you able to sort of quantify the savings from that? And then, just lastly in terms of the SA business, you sort of read through from the results seems to be a little bit less upbeat than previously, would the linking to CapEx, would you still be possibly looking at additions to Ngodwana maybe three, four years out? Thanks.

Steve Binnie

In terms of the first question, the CapEx profile beyond 2016, it’s very early to say. Our priorities in the short-term are to get our debt levels down to 2 times EBITDA as I indicated. Over the next couple of years, we need to go through that process and evaluate what opportunities are out there and then size them and see whether it’s the best use for our capital, so we haven’t concluded that. We will evaluate those opportunities.

But the one thing I would stress to everybody is that there will be a commitment to maintaining our debt levels at close to the two mark. So I don’t think there will be significant CapEx. On the dividend front, we are now going to resume dividend, so we are satisfied that our debt levels are at levels that can strengthen our balance sheet, and that we are confident that we can do that on a sustainable basis. So we are not anticipating paying dividends in the very near future. On the refinancing of debt, I’m going to hand you to Glen Pearce, our CFO.

Glen Pearce

Yes, good afternoon. Just as far as the debt is concerned, we have South African debt that is maturing in April 2015. That is approximately $75 million and we will be paying that with available cash reserves, and then we have some call windows that are coming available on our 2018 and our 2019 bonds, and we’ll evaluate that as we’ll get closer to the time and see what our cash reserves are and what the options are in light of the market conditions are for interest rates.

Steve Binnie

Thanks, Glenn. Your last question related to the Specialized Cellulose business and how it’s performing and whether it’s better or less worse than we previously indicated. I think if you go back as far as a year ago when Ralph was on these calls, we, at that time, indicated that the margins, we felt margins were going to be between 25% to 30% this year, and so what has happened is very much in line with what we expected. So there is no surprises for us.

If you look at the capacity that came on board over the last couple of years, we always knew this is going to happen. In the short term, you are going to continue with those short-term challenges, but as I said earlier, the market fundamentals on the demand side are very strong long term, so strategically it’s a very important business for us and we are very satisfied with how the way things are unfolding.

Operator

Our next question comes from Brian Morgan of BNP Paribas. Please go ahead.

Brian Morgan - BNP Paribas

Good afternoon. I don't know if I'm going a little bit crazy here, but perhaps you can guide me a little bit on the net debt levels. You're a smidge under $2.3 billion at the moment. You're expecting proceeds from Usutu of $100 million. Then there's $100 million of CapEx. And you're targeting net debt by the end of the quarter of just over or close to $2 billion. So it looks like quite a lot of operating cash flow in the fourth quarter, quite a lot higher than your run rate at the moment. Are you expecting an inventory reversal or how does that look?

Steve Binnie

Look, what I would say to you is, without going into too specifics on the numbers, if you look at Q4 last year, and the cash generation last year in Q4, it was over $100 million. And we’re having a better year this year than last year. So, if you do the math on that. We are a seasonal business. We do reduce working capital linked to that seasonality in Q4.

Brian Morgan - BNP Paribas

Okay. And then the next question, if I may, just on the headline earnings recon, there's a $27 million loss on disposal of assets and businesses, but I don't see that in special items. Could you just give me an idea of the flow there and where it comes in and where it goes out?

Steve Binnie

Yeah. What happened is, we made a provision for the closure of the Nijmegen mill last year, and you recall that was in the accounts. Obviously, subsequent to that, we disposed of the Nijmegen mill, and the rules and you know there is some strange rules attached to headline earnings. The rules to headline earnings state that any gain or loss on sale of assets is an adjustment, but the release of the provision that we made last year is not an adjustment, so you’re seeing the one side of it and not the other whereas in our special items they’ve been netted off.

Operator

Our next question comes from Roger Spitz of Merrill Lynch. Please go ahead.

Roger Spitz - Merrill Lynch

Thanks very much. At Cloquet, did they have unplanned outages as well as a plant maintenance outage in fiscal Q3?

Steve Binnie

I’m going to hand this question to Mark, Mark, the question was about the unplanned outages at Cloquet.

Mark Gardner

Yes. We did have our annual outage and that was a planned outage that went very well, but soon after starting up from the planned outage, we did experience a process upset that did take us down for a couple of days. We quickly got that behind us and we’ve been running very well since.

Roger Spitz - Merrill Lynch

Can you say what the EBITDA impact of the planned and unplanned outages at Cloquet were that impacted fiscal Q3?

Steve Binnie

It was about $10 million.

Roger Spitz - Merrill Lynch

Okay. And I don't know for all of North America, but $10 million does help, if you could do an EBITDA bridge from North American EBITDA to fiscal Q3, either sequentially or year-over-year, although I think a $10 million takes care of most of that. Is that correct?

Steve Binnie

Yeah. That’s a big part of it, correct and obviously, as we indicated earlier, prices are down. Volumes were fine, but there was a little bit of pricing drop and then if you take into account the shuts as well, that will give you the bridge.

Roger Spitz - Merrill Lynch

Okay. Perfect. And lastly, looking at Southern Africa EBITDA, it looks like you went in fiscal Q1 $75 million, then Q2 $83 million, then Q3 $77 million. Was the $83 million sort of unnaturally high and we should be thinking in the mid-to-high 70s as a run rate or how should we think about that?

Steve Binnie

Yeah. Look the one thing in Q3 is that our paper mill in Ngodwana had its annual scheduled shut, so that’s why Q3 would be lower.

Operator

(Operator Instructions) Our next question comes from Lars Kjellberg of Credit Suisse. Please go ahead.

Lars Kjellberg - Credit Suisse

Hi. Good afternoon. Just a couple of follow-up questions. Berry, if we start with the European paper prices, it seems to me, just judging from RISI data, that coated paper prices, certainly in reels, have been continuously been eroding through July. What is the fundamental backdrop to support a price increase now, and especially with a backdrop of falling pulp prices? That's one question. The other one that surprised me a bit on the European side, I suppose, in the fiscal Q3, is the lack of carry-through from much lower energy costs, especially natural gas, and lower hardwood pulp prices, if you want to comment on that. And then, thirdly, just picked up the other day an article talking about potential drought situation impacting Saiccor. If you can give any clarity on that, what is going on there with water, potential water shortages?

Steve Binnie

Okay, thanks. Berry, I’m going to hand over the first two questions to you, the first one was on the reels and the price increase, and then the second on the energy hardwood pulp cost.

Berry Wiersum

Yes. Thanks, Steve. You see some summer rebating going on in the reels business, but it’s not very expensive, we’re talking about kind of €10 per ton or something, and in fact if you then trace it back to the previous months going back to sort of October of last year, the difference is within €15 for the whole year, so really including July. So there is not much difference.

The backbone for increasing prices is two-fold, first of all, there is a -- the market is slightly better than expected both for wood free coated reels and for wood free coated sheets, it’s declining somewhat, that’s a very small decline compared to last year, considerably smaller than expected, and there has been quite a bit of capacity taken out. So there is a slightly tighter feel for the market.

The second thing, which is important, is that there are -- the prices have reached a stage where the level of pain is just too high. It hits both the merchants and the paper producers, so there is a far greater determination now to see a price rise that you feel generally in the market. So it has a far better chance than it had a year ago, however, it’s still early days, we’re now in the end of July and the price rise has been scheduled to start before September. So you really need to see how the market behaves into September before we are certain, but we’re giving at a reasonable price, a reasonable chance.

In terms of energy cost, yes, it did go down somewhat. Pulp prices have gone down, but it’s not that much. It’s not a -- there is not a significant, it’s not like a sort of €50 per ton drop in the hardwood prices. They are going down kind of $5 to $10 per ton a month over the last three or four months. So we are seeing that affect, that certainly coming in.

On the other hand, softwood pulp prices are not moving, if anything, they are moving up because the dollar is moving up somewhat. So over the last few weeks, we’ve seen the dollar rise somewhat. But in terms of energy, yes, we do see that coming through in our variable costs.

Lars Kjellberg - Credit Suisse

Can you inform us, what's your split between hard and softwood pulping purchases in Europe?

Steve Binnie

The hardwood, it would be about 60% hardwood.

Lars Kjellberg - Credit Suisse

60? Okay.

Steve Binnie

Yes. Okay. Last, your other question on the drought down at Saiccor, every year in South Africa during the winter months, those are the dry months in South Africa, so the river next to Saiccor, the levels do go down every year, and it’s a risk that we are aware of, and we’ve always managed to get through it.

I think obviously this is a particularly dry season, but what I should point out is that we don’t anticipate any immediate threat to production. In addition, we have contingency measures in place, there is actually - we have a dam there at the river and we have a backup supply and in addition to that, we can source water from the municipality. So we are certainly not in crisis mode despite that article that came out. It is a risk, it’s always there, but there is no immediate threat to production, I can assure you.

Operator

Our next question comes from Chris Ellis of Babson Capital. Please go ahead.

Chris Ellis - Babson Capital

Hi, guys. Just a couple of follow-up questions on European coated wood free. Appreciate it's still a few months away, but how -- what's the customers' reaction been to the announced price increases? And given the amount of cost savings we've taken out of the business, where do you think you are relative to other players from a cost curve perspective? And then, we've seen in the news recently that Virgo, the Italian players, announced that they were in a distressed position, looking for strategic partners, potentially. Is this something you've looked that, whether that would be on a total basis or on a particular asset basis? Thank you.

Steve Binnie

I’m going to hand the first question to Berry, but before I do that, just on the second and third ones. We continue to focus on our mills where we are at the low end of the cost causes, and obviously at Gratkorn and Kirkniemi in their respective coated wood free and mechanical paper space where we are making our large investments. So I don’t think there has been any major shift on a relative basis, but from our point of view, we will continue to invest in our key strategic mills.

On the Virgo front, that’s not something that we are looking at. Obviously, they’ve announced that they are looking at other options, but that’s not something that we are involved with. Berry on the first question, do you want to talk about the customer reaction to that price increase?

Berry Wiersum

Yes. Very briefly. It is early days yet. But what we’ve seen so far, particularly from the merchant side is that they are all out with their own announcements of price increases, they believe in it. From the printers’ side, it’s early days yet. They are all on holiday at the moment. I think we will not see very much reaction from that until the second half of August.

Operator

(Operator Instructions) Our next question comes from Callan Williamson from Efficient Select. Please go ahead.

Callan Williamson - Efficient Select

Hi, guys. Just a quick question with regards to the dissolving wood pulp market. You speak a lot about the market fundamentals intact. If we can -- if we understand it, the demand long term is between 6% to 8% according to your estimates. Can we just talk a bit about the structure of the supply side? And here I'm looking at how fragmented is the supply and what is the marginal cost to produce an equivalent product, just to get a sense of how rationally the supply will act given, as you said, there's been quite a lot of new capacity coming on board?

Steve Binnie

Okay, thanks. Berry, I’m going to put this question to you just to very briefly give a broad overview on the supply side.

Berry Wiersum

Yeah. I think on the supply side, as you know, there’s a split between various geographics. We actually do publish cost base curve for various suppliers. We are supplying at a global basis, not impacted by some of the other issues that various other countries do have. So from a growth point of view, that 68% I think remained strong. We have -- we are looking at what customers are doing as part of the textile industry. Cotton is of course is one of the key components to that, but the fundamentals going forward on textile and BSF remain very positive.

Operator

Gentlemen, we have no further questions. Do you have any closing comments?

Steve Binnie

I just want to thank everyone for joining us, and I look forward to chatting at the end of Q4 after hopefully a good quarter. So thank you very much.

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