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Sappi Limited (NYSEMKT:SPP)

Q4 2012 Earnings Call

November 08, 2012 8:00 am ET

Executives

Roeloff Jacobus Boëttgerr - Chief Executive Officer, Executive Director, Member of Group Executive Committee and Member of Sustainability Committee

Stephen Robert Binnie - Cfo and Executive Director

Mark Gardner - Chief Executive Officer, President and Director

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

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

Analysts

Caroline Learmonth - Barclays Capital, Research Division

Campbell Parry - Investec Securities Ltd., Research Division

Bill Hoffman - RBC Capital Markets, LLC, Research Division

Lars F. Kjellberg - Crédit Suisse AG, Research Division

Sean Ungerer - Avior Research (Pty) Ltd.

Nishal Ramloutan - UBS Investment Bank, Research Division

Operator

Good day, and welcome to the Sappi Fourth Quarter and Full Year Results for Financial Year 2012. [Operator Instructions] Please also note that this conference is being recorded. I would now like to hand the conference over to Roeloff Boëttgerr. Please go ahead, sir.

Roeloff Jacobus Boëttgerr

Thank you. A very good morning and good afternoon to you, ladies and gentlemen, and thank you for dialing in to our fourth quarter results call. I'd like to draw your attention to Page #2, the forward-looking statements and Regulation G requirements.

Moving then on to the presentation on Slide #4, the fourth quarter financial summary. Our net profit for the quarter, $107 million versus a loss in the current quarter a year ago, $127 million. And that translates into earnings per share of $0.21 for the quarter. This is $0.24 loss in the previous quarter. Excluding special items, the quarterly earnings per share, $0.11 a share for the quarter versus $0.02 for the equivalent quarter a year ago.

Operating profit excluding special items at $118 million. Strong quarter for us compared both to the previous quarter and that of the current quarter a year ago. Net cash generation was strong at $203 million versus the $279 million in the previous quarter, taking into account the spend on the 2 big capital projects. We believe that was good as well. We've achieved our targeted net debt level a year early at the -- just below $2 billion mark and that was a very important achievement. We now need to keep it at that level.

Moving on to the year's financial summary on Slide #5. Net profit for the year, $104 million versus a big loss in the previous year. Earnings per share, $0.20 versus $0.45 loss in the previous year. And if you exclude special items, the earnings for the year, $0.31 versus $0.17 for the previous year.

The net debt reduction, as I mentioned, to below the $2 billion mark was despite the fact that we saw that increasing the spend on the 2 specialized cellulose projects in Ngodwana and Cloquet, and the fact that trading conditions remained quite tough during the -- particularly from a pulp processing point of view.

As you know, we've refinanced the 2014 bonds earlier during the year. It was a significant reduction in interest costs resulting from that and also an improved maturity profile. I'll talk about that later as well. Both our conversion specialized cellulose projects are well underway. And we've achieved significant cost reductions in both our European and South African businesses.

Moving on to Slide #6, without going to all the numbers there. You see that our sales volume is generally lower year-on-year, for the quarter, slightly up. And sales in dollar terms are down quite significantly on the previous year. The main reasons for the lower sales were the lower pulp prices that we experienced in all our businesses and then very importantly, exchange rate effect on the conversion of our rand and euro sales into dollars.

The operating margin, lower down in the slide, up at 6.3% for the year and 7.4% for the quarter. Moving in the right direction, not yet at levels where we're aiming to be at. We are confident that after 2013, we will be able to get our margins for the group up in the double-digit territory on a consistent basis.

Operating profit excluding special items. The trend on the bar graph on Slide #7 shows you the improving trend, if one excludes particularly the third quarter, moving in the right direction now. And EBITDA, obtained from Slide #8, is following the same direction and trend.

We look at our divisional operating margins on the 10th slide. You see that all our businesses margins improved quite significantly during the fourth quarter. And if you draw a line over the past 3 years, it's moving 3 -- 4 quarters, and 2 years indeed, you will find that the operating profit is now moving in the right direction on average for all our businesses.

North America, back at above 10% levels despite lower pulp prices. South Africa at 8.8%, way down below where it should be, but an improvement. This is despite the lower pulp prices, but our paper business is not yet achieving the margins which we set out for it to achieve. And once we turn that around, which we think to a large extent will happen and believe in this financial year, margins in the double digits for the South African business. In fact, closer to the 15% is where it should be and where we will be. European margin is above the 5%, and the challenge for us is to continue to ensure that margins do not go below the 5% mark for our European business.

Talking about the European business on Slide 11. Volumes was down 5% year-on-year, but up 6% sequentially in the quarter. The sales volumes for the full year, down as a result of lower demand, particularly in the coated mechanical side of the business, but also due to the closure of the Biberist Mill. Yet despite these lower volumes, all the profitability metrics have improved in the European business. Fixed costs were down 7% year-on-year. And input costs were also lower, notably on the back of pulp. We -- that integrated the market that we were aiming for $100 million per annum cost saving. We've achieved more than EUR 100 million, so we are -- we're very successful in this cost reduction and we'll now need to keep those costs low, but in addition to the actions that we've taken to take further costs out of that business. As a result, as I've said, margins up from 0.5% to 5.4%.

We've recently announced the conversion of our Alfeld Paper Machine 2 to -- from coated woodfree paper to speciality paper, and that will happen in the first quarter of this financial year. Not only does it grow our business in higher margin and higher growth areas of our business, but it effectively also reduces our coated woodfree and lowering our cost base.

Moving on to the North American business on Slide #12. Industry conditions deteriorated during the year, particularly for pulp, which was a tough year for us and the industry from a pricing point of view. And the coated market was also a challenging market business, but despite that, our coated paper business performed exceptionally well in a market where we -- in fact, we're the only producer that produced good results from coated paper. The pulp business, as I mentioned, was impacted by lower prices. I think I said that the Cloquet conversion project continues to be time and on budget. We're looking forward to start production there at the end of our third quarter of this year. Both raw material usage and pricing were favorable for the quarter and year-on-year, 7% down for variable costs.

On Slide 13, some pictures of the progress that we are making with the construction of the Cloquet specialized cellulose business. A very good progress now being made and as I said, we are on time with this project and on budget.

Moving on to our South African business on Slide 14. The specialized cellulose business was impacted in the fourth quarter by the maintenance shut that we moved from quarter 3 into quarter 4 and was also impacted by lower NBSK prices, largely offset by a weaker rand. ZAR 413 million EBITDA from this business, which translated into 30% EBITDA margins despite the movement of the shut. The margin remained very strong for dissolving wood pulp. And I'm also happy to report that the Ngodwana conversion project is also progressing very well.

Our paper and packaging business. Despite the fact that we're not where we want to be in terms of our margins, fixed costs were down 20% year-on-year as we start getting the benefits of the extensive restructuring that took place in that business. It is not the end yet, and we have, post the quarter end, announced the mothballing of Tugela PM4 machine and taken in the numbers of the previous year, ZAR 76 million charge in this regard. This will further assist us in managing capacity, but very importantly, also to reduce our cost base further in the South African paper business.

On Slide 15, some pictures of the construction happening at the Ngodwana site in South Africa, which is progressing well, as I said.

As usual, I'll just deal with a number of strategic focus areas on Slide 17. On the specialized cellulose business, very important first to maintain the excellent production rates and customer service. We achieved record production rates during 2012 for this business and we believe we can do even better going forward into this financial year. Very importantly, if we look at the new capacity that we're adding, over 500,000 tons of dissolving wood pulp capacity at Cloquet and Ngodwana, we have contracted a very significant proportion of this additional capacity at prices which we are satisfied with in a market which is extremely competitive, on contracts that ranges up to 7 years, from 2 to 7 years. I did mention that both contracts may not schedule for the startup in the third quarter of financial year.

Moving on to Europe, we're working on further improvement on our European cost base. There are now large actions that will be taken, other than the Alfeld conversion during the year, but we do believe that they are further costs that we can take out and we'll do so on a continuous basis. And I think, importantly, and we also mentioned that we have announced price increases for January for coated woodfree paper last Friday in Europe.

Moving on to our North American business. Very important for us to sell all our paper pulp from Cloquet prior to conversion to dissolving wood pulp and we're doing well and progressing very well in that regard. Production efficiencies will be further improved and we need to concentrate to maintain our excellent position in the coated graphic business -- market in that business. Talking about further improvements to the efficiencies in our paper businesses, we've recently made a small investment and doing maintenance shut at Somerset and upgraded the PM3 machinery there, which results in much improved efficiencies and that has gone extremely well when making quality paper as expected from that machine.

Moving on to the South African paper and paper packaging business. We need to generate acceptable returns and we believe that we will start doing so during this year. Tugela remains our main focus but obviously, the Ngodwana Mill, which is also benefiting from the conversion and actions we've taken, they will further contribute to improved profitability from that business.

We've embarked on a major variable cost reduction program in our South African business. It's based on what we call project breaks in Europe, which resulted in EUR 200 million [ph] cost saving in that business and we are rolling that out aggressively in our South African business. Cash generation remains important, not only for this business, but all our businesses.

Our forestry and land optimization and regrowth in our forestry, important to us. We are making progress in that and adding continuously to our forests. We're also continually managing our forests on the basis of preventing any fires. And we've had a very good 3 years behind us, and we'll continue to do as necessary to maintain that record.

As far as our data is concerned, also on Slide 18, we are looking at further sales of non-core, our nonproductive assets to accelerate our cash generation and reduction in debt. And as I mentioned to you, I believe we can keep our debt below the $2 billion mark, despite these investments into the chemical cellulose. On Slide 19, you can see the development of the debt, a very positive thing indeed.

I did mention the debt maturity profile on Slide #20, not only has that much improved with no significant maturity projects until 2017, but a very significant reduction in the cost of funding and refinancing.

The outlook on Page 22. We remain of the opinion that market conditions in general are going to remain challenging for the rest of the financial year and all our plans and assumptions are based on such a scenario. We believe that demand for chemical cellulose will continue to grow and that we're further optimistic about this because most of our capacity is a subject of long-term supply agreements, with very strong customers, as I've mentioned before.

For the first quarter, we expect our operating profit to be weaker, both in the previous quarter as well as the equivalent quarter a year ago, mainly as a result of lower pulp prices, but also the fact that the transport strike in South Africa has had on our business. For the whole year, we expect the modest cash outflow at worse. At best, we'll probably keep a bit in the range where it is today. We are, however, as I said, working on a number of actions to increase cash generation.

We're expecting the startup and commissioning of the Ngodwana and Cloquet dissolving wood pulp lines to have a disrupting impact on our business and will also result in increased variable costs. And the net effect of that is an increase in costs of around $40 million for this particular year. We do, however, as a result of this, expect that our operating profit will be slightly lower than it was in the previous year. But that at the bottom line, on earnings level, we are expecting an improvement and a further improvement on the 2012 results. One of the main reasons for that would be the lower finance costs that we are now having, following the refinancing.

If you ask me, how do we feel about this for the next year in terms of our performance, I think we feel confident that the bottom line will improve and that there is indeed quite a lot of upside to this. Pulp prices have started moving up in the last 2 to 3 weeks and that is good news for us. If that continues to be the case and NBSK prices get closer to $800 a ton, then certainly, there is significant upside for us in our business. Currency also plays a major role. And if the rand against the dollar remains where it is now, there is also further upside to our guidance.

In summary and conclusion, we believe that the actions that we've taken, both tactically and strategically, over the last 2 years are now really resulting in improved performance, both from a cash as well as a profitability point of view, and that we are getting momentum and traction with these actions. 2013 is a transitional year for us as we guided. But as from 2014 on, we -- all our specialized cellulose business will be in full production. We all felt that conversion will be behind us, and the further actions to improve our paper businesses will also be in place. We believe that the profitability growth will accelerate significantly, that our cash generation will also accelerate and debt will then come down quite rapidly as we do not foresee any major CapEx in 2014 and '15 at this point in time.

I thank you for listening to me and I'm, together with my colleagues, very happy to answer any questions that you might have to the best of our ability.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Caroline Learmonth of ABSA Capital.

Caroline Learmonth - Barclays Capital, Research Division

Two questions, please. Can you comment around the businesses or parts of businesses that you would consider non-core when you're talking about potential disposals? And then just secondly, you've given quite a bit of detail around what you think the outlook looks like going forward for the group. Can you just talk a little bit more about the South African business and how you see that profitability progressing over the courses of the next 18 months or so?

Roeloff Jacobus Boëttgerr

Good afternoon, Caroline, with pleasure. We don't have any major non-core businesses, when I talk about, that has more assets. And it relates very often to properties that we've been holding for a long time. The Chinese -- taking the Chinese joint venture was a good example of our coated [indiscernible] business. And I did not point that out in my presentation but we achieved that debt reduction through the sale of non-core assets without receiving -- having received the proceeds or the sale of the Chinese joint venture, which we did receive yesterday. And that's a good example of the type of assets I'm talking about. They know particular business units which we, at this point in time, are considering disposing of. There would be assets and properties. Moving on to the outlook, particularly for the South African business, it reminds me, to a certain extent, 2 stories. The outlook for the specialized cellulose business remains very good indeed. Pulp prices are moving up. We're adding a lot of capacity to that business, but the vast majority of that is the subject of long-term contracts. Now obviously, as that market could become more difficult if we find that there's a big slowdown in world economic activity, we don't expect that at this point in time. Currency can go anywhere, it could be on our side or not. We don't expect a movement against us to be highly likely. Talking about our paper businesses, we are -- think reasonably, optimistic, more so than we have been for quite some time in our ability to produce much more reasonable results in that business going forward. And [indiscernible] is a result of the major cost saving, restructuring and focusing on making only those products that we can profitably deliver to our customers. The further action at Tugela, in our opinion, will play an important role. Obviously, a weaker currency does help us, there's no doubt about it. That makes imports less competitive and gives us a little bit of leeway in the South African business. We're not expecting any sparks or a big uptick in activity in the modern South Africa. It's going to be a tough market. But I think we're much better positioned to deal with a tough environment, given the actions that we've taken in our business.

Operator

Our next question comes from Campbell Parry of Investec Securities.

Campbell Parry - Investec Securities Ltd., Research Division

Just 2 things. First, on your dividend policy, we keep coming back to this. But perhaps I'll ask it from a slightly different angle. I mean, assuming you get to the end, you commission a new capacity in the second quarter of 2013 or by the third quarter of 2013, and you see yourself in a very cash flush position or a certainly much better cash position at the end of the year. What level of earnings would you consider paying a dividend? Or is that decision solely in the hands of the board right now? And then secondly, I think I asked this question last quarter. The conversion of Cloquet has been associated with some of your existing pulp customers starting to look elsewhere for their current pulp supplies, well ahead of your conversion to dissolving pulp. Has that continued in this quarter or have you managed to stop that trend for now?

Roeloff Jacobus Boëttgerr

Just talking about the dividends and then I would ask Mark Gardner to come back to you and, Steve, you can add to this as well. Obviously, the decision of paying a dividend or not is on the hands of the board. Ultimately, they decide that. But we as management will make our recommendations to the board. The guidance that we've given is that we would be extremely disappointed if we can't pay dividends from 2014 onwards. Is there any possibility for us to pay a dividend prior to that? I think a lot of that will be determined by how we perform during 2013. If market conditions actually turn out to be better than what we expect, and we do see the upside in pulp prices and the currency remains in our favor and we do bring these 2 projects to the market on time and we have a good ramp-up. And we also -- possible to further reduce our debt through other asset sales. Then, I think, and I know in fact, that we will be in a position to afford a dividend, that we'll be in a position where all our covenants and restrictions that we might have and have from the financing will not prevent us from paying a dividend. And that indeed our cash will allow us to do it. What we will need to do is to determine, are we happy that the outlook going forward is sufficient for us to be confident enough that we can maintain the dividend going forward? Because once we start paying dividends, we want to be reliable and predictable, but I don't think it's out of the question. Steve, I don't know if you want to add to it.

Stephen Robert Binnie

Yes, that's right, Roeloff. Just to add to your comments. Obviously, as we get closer to the end of the financial year, we will have seen -- we'll be at the end of the chemical cellulose conversions, we will have seen how the market has unfolded over the course of the year. So we'll be in a better position to make that judgment. We've set ourselves a target of 2014 and nevertheless, there's a possibility, if factors work in our favor, that we could possibly do it sooner.

Roeloff Jacobus Boëttgerr

I think I'll just need to add, that [ph] in the longterm sense we could start talking about bringing forward our targets, in terms of paying dividends and we're excited about it. We're also totally committed to further reduce our debt. Now we've reached this $2 billion mark, what we now want to get as our next target next year, our net debt to EBITDA in a range between 1.5% and 2%. The 2 things we need to do to get there, is to reduce debt and improve profitability, we're working on both, not just on the pulp issue at Cloquet.

Mark Gardner

Okay. Thank you, Roeloff. As the project gets nearer and nearer, we continue to work with our customers and we've had good progress in maintaining our relationships with some of our long-term contract customers of our pulp out of Cloquet. But we're also -- and this is all built into our planning. We have more pulp moving into spot markets at times and that's all part of the transition plan that we have in place. We're comfortable with it, where that's going and how it's looking so far.

Operator

Our next question comes from Bill Hoffman of RBC Capital.

Bill Hoffman - RBC Capital Markets, LLC, Research Division

I wonder if you could talk a little bit about just sort of the coated paper market, both North America and Europe. There's obviously some price increases going through in the coated groundwood side, but there's also capacity coming in that market. Wondering how that -- do you think that's going to impact you on the coated woodfree side? And then, same thing in the European business, you seem to have balanced the markets reasonably well in the current quarter. But just looking forward, what your expectations for demand and market balance are?

Roeloff Jacobus Boëttgerr

I'm going to ask Barry, yes, the COO of Sappi Fine Paper Europe, to answer the question regarding Europe and then Mark again, if you don't mind, in North America. Barry?

Barry John Wiersum

Thank you, Roeloff. And I would say that the weakness in mechanical coated papers is a little bit more in the last few months than we had expected. But that follows the previous year when the mechanical coated market was considerably stronger than we had expected. So these things tend to equal out a bit. There is an underlying reduction of around about 3%, 3.5% in both coated woodfree and coated mechanical, which has been going on for some years. We expect that to go on next year as well, but we have balanced our capacities sufficiently to be able to take account of that. And of course, in the conversion of Alfeld in September of 2013, we will be removing another 150,000 tons of graphics capacity and replacing it with speciality capacity, so that we will, in our coated woodfree side, at any rate, escape that. The kind of the mechanical part is also a much wider market. It's a real global market and then you have to look much more at how magazines are doing. And we've been picking up information that particularly high-quality magazines, consumer magazines, continue to be paper. Well over 80% of the revenues for those publishers are coming from paper and that's stable, and they're not shrinking that much. So from that perspective, as long as you're right on the top -- in the top end of the market, and we are, fortunately, then we are relatively protected.

Mark Gardner

Okay. Thank you, Roeloff. In North America, we're in the seasonally busy period of the year. We see this every year in our -- at the end of our year, our Q4 going into our Q1. We're staying very focused on our customers and our products and quite comfortable with the focus that we have going on in our coated business and looking forward, kind of like what Barry just said, looking forward to the longer term trend. We still expect to see a slight erosion further in demand for overall coated paper. Of course, we're in the coated woodfree section of higher basis weights and higher quality products and our customer base is a little bit more stable and maybe a little bit more predictable in some cases than some of the seasonality that goes on with the lower basis weights in the groundwood.

Bill Hoffman - RBC Capital Markets, LLC, Research Division

That's good color. And just one other question, more on the chemical cellulose side. You mentioned that the contract base, has that shifted much? I think you have said before you were in sort of the mid-60% range of contracting the future sales out of the capacity expansions. Can you just talk a little bit about where you are today and what your ultimate target might be?

Roeloff Jacobus Boëttgerr

Yes, we've got to be careful here not to give too much information careful here, because it does affect us the way in which we deal with our customers as well. But we've made progress from -- since we spoke to you last, most definitely, a higher proportion of our capacity is now contracted. And if you ask me, are we concerned at all about our capacity versus demand, not whatsoever.

Operator

Our next question comes from Lars Kjellberg of Crédit Suisse.

Lars F. Kjellberg - Crédit Suisse AG, Research Division

A couple of questions. Coming back to your sort of guidance when it comes to start-up costs. If I don't remember wrongly, you've previously said you don't really expect a tremendous amount of impact, now you're talking about $40 million. Could you bring us through a bit more detail with that $40 million is? And also if there's an element of offsetting our maintenance costs that were actually, in reality, lessen that number?

Roeloff Jacobus Boëttgerr

No. I think Lars, let's first deal with the impact of the chemical cellulose conversion project on our costs. And Steve has done an detailed analysis together with our North American and South African colleagues in terms of where this come from. On the maintenance side, I'll need to ask you to repeat what you've just said because none of us really understand what you mean. But let's sort of deal with the impact of these conversions.

Unknown Executive

Yes, thanks, Roeloff. If you look at the 2 conversions, firstly, in -- for both of them, we have a longer shut down period, longer than the normal annual maintenance. So those additional days cost us -- this additional cost that comes through this because you have fixed cost coming through. And then on the North American business, because we now have to purchase pulp, wood pulp from the outside because we're no longer producing that, there's additional costs associated with the purchase of the would pulp. And it's a combination of those factors that give you -- get you to the $40 million.

Roeloff Jacobus Boëttgerr

Also, for additional $40 million cost, which will not reoccur going forward. Just that, if you wouldn't mind, Lars, just repeat your question with regard to maintenance?

Lars F. Kjellberg - Crédit Suisse AG, Research Division

Yes, first of all, 2 things. The North American pulp purchases obviously, that will stay with the group, so that's not a one-off effect. That w be obviously a structural change in the business. Obviously, you will get revenue further on, but that [indiscernible] something that will continue. The other thing though, when you talk about a longer-than-normal shutdown, what my point was referencing, I suppose you will do maintenance on the machines after down. You're not going to have a longer-than-normal shutdown and then on top of that, the maintenance in a different quarter?

Roeloff Jacobus Boëttgerr

Absolutely, you are 100% correct. And I think that just coming back to the $40 million, we're talking about the additional amount of pulp that we have to buy, and while we're not producing chemical cellulose and we're buying in paper pulp. So that adds to the $40 million. The $40 million does not include the additional ongoing costs that you will have buying in paper pulp for Cloquet, but you're 100% correct to point that out, Lars.

Lars F. Kjellberg - Crédit Suisse AG, Research Division

Okay. And then coming back to your targets. I mean, you have 6.3% margins now for the group, 10% sustainable. That's a huge leap and at the same time, you're saying, we're not really planning any major structural changes in the European business, U.S. is sort of fixed and kind of extremely well performing. So how do we get up 400 basis points on a sustainable basis?

Roeloff Jacobus Boëttgerr

I think that's fairly easily explainable. We're not saying that we're not wanting to -- not going to further improve the European business. It's performing reasonably well, but it can perform even better than that. And I think the Alfeld conversion, once it's up and running, plus the further additional cost savings that we'll get, will certainly help the European business. But we've also been doing long enough business in Europe to know that it's a tough market. And then, realistically, in coated graphic paper, we're probably not going to see margins much higher than 7%, but we are also not lower than the 5% in a cycle. Once things are settling and the world economy is pumping again, it could be better, obviously. But our assumption to get to the double-digit numbers for Sappi as a group as based on European margins around the 5%, 5.5%. Moving on to the North American business, that is now in double-digit territory, but those margins should further improve. We achieved this margin in North America despite the fact that they have very low pulp prices. But the Cloquet specialized cellulose business will most certainly boost margins. Margins in that business is just significantly higher than what they are in our other businesses. And then very significantly, looking at our South African business, we will add high-margin business through the Ngodwana conversion, an additional 200,000 tons, compared to the pulp that we previously sold out of that mill, which achieved margins less than half of what we were getting from dissolving wood pulp. And in addition to that, we're putting in a lot of work in our South African paper business. That business used to make margins of 10% to 15%. And we will get that back certainly from 2014 onwards above the 10% mark, if not before that. If you add all of that, then you'll easily get to that 400 basis points that we are talking about. These are tough targets we set ourselves, but we are convinced and much more confident of achieving these targets because we're getting traction with these actions that we've implemented and it's based on significant intervention and significant investment.

Lars F. Kjellberg - Crédit Suisse AG, Research Division

Fine. One final question, you spent some -- quite some time on dividends. Wouldn't you put that as a comparatively low priority at this stage? Wouldn't debt paydown be much more a prudent thing to do than -- before you actually get the other thing operational, you start to talk about a potential 2013 dividend already?

Roeloff Jacobus Boëttgerr

I don't think -- we're not saying that we are going to pay dividend at 2013. The question was directly posed to us. Is there any possibility of a dividend in 2013? Our target was to get to a stage where we can comfortably pay dividends from 2014 onwards. And certainly, the priorities for us at Sappi at the moment is to ensure that we get our profitability to a level where it should be, concentrate on these 2 projects, plus the Alfeld project, to bring them into production and ramp up production to full capacity as soon as we possibly can and very importantly, not to let go on very aggressively targeting a reduction in our debt. And to achieve the target of EBITDA, net debt to EBITDA of between 1.5% and 2%. If we can do all of that and at the same time pay a dividend without having a negative impact on achieving those targets, only then will we consider it. So it is not, at this point in time, for 2013, a priority. It will be, I think, very positive and nice if we could, but dividend follows achievement of the other issues, not the other way around.

Operator

Our next question comes from Sean Ungerer of Avior Research.

Sean Ungerer - Avior Research (Pty) Ltd.

Just 2 questions. First, with the coated woodfree price increases. Have those been successful passed on or is it still in the process of negotiations? And then secondly, for the $40 million extra cost, does that take into account lost pulp sales? Sorry I wasn't really a 100% sure, so I'm not sure if it is included.

Roeloff Jacobus Boëttgerr

Just on the $40 million, yes, it does. And just to explain that again, there's a period where we're not going to make paper pulp nor chemical cellulose. And they -- the cost is going to be higher than -- or the revenue less and the impact in your profit higher than once you start producing the chemical cellulose again. It does take that into account, yes. On the pulp, the paper price increases in Europe, it's been announced only on Friday. The effectiveness of that, we will see from January onwards, but I think we've learned that we don't like -- we don't think it's good to announce prices if you're not pretty confident that you'll be successful to some extent. Barry, would you like to comment on that?

Barry John Wiersum

Yes, it's very right. This particular price increase is also very much in support of a need by the merchants to restore their own margins. They've been under very heavy pressure. And we just remember that prices in Europe are still in global terms, very low, particularly in Germany. So it's, from an extent, it's a catch-up exercise going on. My own level of confidence on this one is rather high, I must say, listening to what's going on in the market.

Operator

Our next question comes from Magesh Gheti [ph] of Blue Bay.

Unknown Analyst

Apologies if you already addressed this question. But just in terms of your outlook, you were quite negative in terms of pulp prices and you mentioned that you're sort of being on average lower next year. In light of what you've said on the call today about -- you've seen of eucalyptus pulp prices going up lately and you've seen some capacity closures in Brazil, are you still of the same opinion, are you still negative about pulp next year? And what's driving that? Is it just the recession in Europe, overcapacity? Can you just give us a bit more color?

Roeloff Jacobus Boëttgerr

I don't think -- we didn't think we were negative to be honest. I think we thought we were slightly cautious. When we say that the global economy is not in great shape yet, we don't expect any further deterioration. And based on pulp prices that will be lower, our operating profit will be slightly lower than last year as a result of that, plus this $40 million once-off cost. But then our net profit would, despite that, improve. We have alluded...

Unknown Analyst

What's your view?

Roeloff Jacobus Boëttgerr

Our view at the moment is that pulp prices indeed seems to be moving up and that's why I mentioned that we think there's quite a lot of upside to the guidance we've given you, if that trend continues. And the indications for the moment are pulp prices are moving up, yes.

Unknown Analyst

Right. But I mean, there's a lot of capacity that was going to come online in Brazil next year, El Dorado, for example. I mean, once that capacity comes online, do you think pulp prices will stay where they are?

Roeloff Jacobus Boëttgerr

Well, that's hardwood pulp and our cellulose, which is the one that affects us, mostly as in this case, softwood draft pulp. So with that have a positive effect, no.

Unknown Analyst

All right. And then the softwood capacity that's coming online, I think [indiscernible] bringing in some online? I mean, are you concerned at all with the capacity additions or are you fairly comfortable? Just being [indiscernible] trying to get back...

Roeloff Jacobus Boëttgerr

Fairly comfortable. From a capacity point of view, no, that does not concern us. I think it's more a demand issue and that appears to be improving.

Operator

[Operator Instructions] Our next question comes from Nishal Ramloutan of UBS.

Nishal Ramloutan - UBS Investment Bank, Research Division

Just 2 things. Maybe just on the price initiative, can you give us an indication of what the size price initiative increases you're looking for in the European market? And then secondly, just in the South African business, when you talk about bringing those initiatives to reduce costs that you implemented in Europe into South Africa, does that -- is that included in that initial $30 million target for cost savings in South Africa? And just on that as well, how much of the $30 million have you already seen into the cost savings?

Roeloff Jacobus Boëttgerr

I think, Alex Thiel, the South African CEO, is also on the line. Alex, would you like to answer that and then back to Barry for the price increase?

Alexander van Coller Thiel

Yes. If we start with the $30 million, we've roughly achieved $20 million of that already. And you need to keep in mind that the demand situation in the last year was not great. So even though we've received -- we've reduced costs significantly, we're still struggling [ph] in terms of achieving volumes. And we -- as bringing the European initiative into South Africa, that is not included in the $30 million, that's over and above. And I think we have good opportunities there, both from taking the lessons from Europe, but also just looking at variable costs in particular is really not being the focus in South Africa. So there are opportunities.

Roeloff Jacobus Boëttgerr

I think I need to add that Alex was very, very much part of the European project at that time working with Barry Wiersum in a project that resulted in EUR 100 million of cost savings. So Alex is well versed in this and he's bringing that knowledge to work for us also in the South African business. With that over to you, Barry, on the price increase?

Barry John Wiersum

Yes. Rapidly. We don't have a one-size-fits-all pricing policy in terms of increases, so we tend to tailor it towards individual markets because pricing is local. But I would expect that the upper end of the range will be about 7%, in the average, around 5%.

Roeloff Jacobus Boëttgerr

Thank you, Barry. I think -- thank you very much for your questions. I think that brings us to the end of this call. We thank you.

Operator

On behalf of Sappi, that concludes this conference. Thank you for joining us. You may now disconnect your lines.

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