Sappi Ltd (OTCPK:SPPJY) Q3 2022 Earnings Conference Call August 4, 2022 9:00 AM ET
Company Participants
Stephen Binnie – CEO & Executive Director
Glen Pearce – CFO & Executive Director
Michael Haws – President & CEO, Sappi North America
Alex van Coller Thiel – CEO, Sappi Southern Africa
Marco Eikelenboom – CEO, Sappi Europe
Conference Call Participants
Wade Napier – Avior Capital Markets
Andrew Jones – UBS
Brian Morgan – Morgan Stanley
James Twyman – Prescient Securities
Sean Ungerer – Chronux Research
Operator
Good day, ladies and gentlemen, and welcome to Sappi Limited Third Quarter of 2022 Results Conference Call. [Operator Instructions].
I’d like to hand the conference over to Mr. Steve Binnie. Please go ahead.
Stephen Binnie
Thank you, operator. Good day, everybody. Thanks for joining us for the call. As always, I’ll move through the investor presentation calling out the page numbers as I go along, and I’m going to start on page 3, which is the highlights of the quarter. It’s fair to say we are thrilled with the results. It’s another quarter of record profitability of $371 million of EBITDA that was up on the 337 record that we made in the last quarter and well above anything that we’ve ever achieved before and also well above all the analysts’ expectations that we saw that forecast. It was built off of strong global paper markets. We obviously seem demand bounce back nicely. At the same time, obviously some capacity came out of the market, and that enables a situation of tight balance. And because of that, we were able to push through higher selling prices to offset the headwinds of sharply rising costs.
Our variable just incidentally and you probably picked it up from our numbers, but our variable costs were up 26% year on year, so significant headwinds. However, our selling prices up 31% to offset that. Graphics, a record quarter with margins of 22% and then packaging and specialties continues to grow strongly, record profitability and margins further upwards. So really pleased with that with all the investments that we’ve been making in that space. It was obviously a quarter that began with the [indiscernible] that also contained a number of significant annual maintenance shots, our 3 dissolving pulp molds and the Matane high yield pulp mill as well. On top of that, we had renewed logistical challenges, particularly in South Africa post the flood. Perhaps one of the biggest highlights is our reduction in net debt where we’re down now, year on year, over $500 million. So very, very, pleased with that. From a year ago, we were sitting at $2 billion and we’re down to one and a half now, giving us a leverage of 1.4, and I would expect us to continue to reduce debt as we move forward.
Slide 4 just summarizes the EBITDA eighth consecutive quarter of growth from the horrible days of COVID and, as I said, to new record levels and very pleased with that performance. Moving to slide 5, which is a bridge of our earnings to last year. The big story is obvious. Significantly higher costs. You can see the impact of pulp, energy, wood, chemicals across the board delivery costs year on year, but we were able to push through higher selling prices in the paper segments. The pulp, obviously, we had lower volumes in the current quarter, and we’ll probably talk about that a little bit more. Obviously, the shuts and the floods impacting there.
Slide 6 just puts things in perspective on the cost side. I already said earlier year on year costs of 26. This one is indexed off of- we go back to Q1 of 2020 just to really show you how things have moved. And energy has more than doubled, obviously driven in large part by the situation in Ukraine. The natural gas, we have a lot of exposure to, and that has been in particular volatile. But it’s not just that. Obviously, pulp up 41% in that period, big rises in chemical delivery costs. Over this period, variable costs up 39%. So the fact that we’ve been able to achieve this record profitability despite these significantly higher costs is very pleasing and demonstrates that we are able to mitigate what we’ve experienced.
Slide 7 has the product contribution splits, obviously a little bit distorted in the short term now because graphics having such a strong year and pulp obviously with the lower volumes and the shuts coming through in that quarter is disproportionately lowered. But I would expect that to bounce back strongly in the last quarter of the year. Slide 8 is our net leverage and obviously following the profits and the strong focus on cash, a significant reduction. We are now at 1.4. We’ve already shared with you our initial short term target is 1.3 and I’m sure we’re going to get there very soon.
Slide 9, the date maturity profile, nothing in the next few years to be concerned about. The next major refinancing is securitization, but that’s something that we regularly refinance. That’s in 24 and we’ll be confident to do that once again. Slide 10 has our CapEx, it’s unchanged from prior quarters. We’re going to come in just under the $400 million mark, still sticking with that as a guidance for the full year.
Slide 11. We like to share this because it’s something that we constantly face as a challenge, the ongoing ocean freight challenges, the reliability levels still low. Prices of containers have come off their highs. So these are market prices, but however, from a Sappi perspective, we have certain fixed prices and all that. So our year on year is still higher than a year ago, albeit that we’re lower than these levels, but it is higher year on year.
Slide 12, the paper pulp prices, interesting to reflect. Obviously, prices were relatively higher at the start. The year you saw a flattening, a little bit of a decline, but in the last couple of quarters renewed upward movement, which obviously affects the costs of our paper business, but other pulp , prices have followed them upwards, including dissolving pulp, high yield pulp. So we do benefit on the other side as well.
Slide 13. I already mentioned that gas has been a major challenge for us, obviously linked to the Ukraine situation and the Russian situation. The graph shows you where it’s come from 30 up to wherever it is today. It’s just under 200, significantly volatile. But as I said, we have been able to mitigate much of that impact through higher selling prices. As you know, we have fixed portion of our exposure here, but there’s renewed volatility and certainly post the quarter in we’ve seen prices such higher. So it is a challenge for the business as we move forward.
Then turning to the segmental, moving through them and firstly on slide 15 is the pulp segment. This is a quarter which, as you know, we did plan all our big shuts. Those went well, but unfortunately, obviously they followed the floods earlier in the quarter. So for a mill lifecycle, which, as you know, is a big plant and having both the shut link to the floods followed by the maintenance shut, clearly that created unstable conditions and made production challenging. And in addition to that, we post the flood ports, took some time to get back to normalized levels of productivity. So once again, there was some delayed shipments at the end of the quarter, and we did announce that 24,000 tons.
In terms of the market itself though, market conditions are good. There is supply side constraints in addition to our flood situation. Obviously, some of our other competitors have had challenges as well, and that’s helped to keep the DP prices high. And at the moment, they’re over $1,200 a ton. We’ll obviously benefit from those higher prices in the fourth quarter that we are in. And as we move into Q1 obviously of next year as well. It’s looking very good.
The packaging and specialties on slide 16, just business doing very well, across the board in all regions, demand is robust. We’ve been able to lift our selling prices to offset costs, margins improving and another record quarter. In terms of volume, actually, we were a little bit of victims of our own success because we went into the quarter with lower inventory because we sold so much earlier in the year and our machines were full, but business in a very good place.
And then slide 17 is the graphics, a remarkable turnaround obviously, boosted by initially a restocking post COVID, but then obviously benefiting from rebound and demand capacity coming out of the marketplace, shortage of paper creating the tight market conditions, which supported selling price increases to offset the higher costs and enabled us to achieve these record profitability.
And then turning to the regions, firstly in Europe, an amazing turnaround, EUR 200 million of EBITDA, substantial improvement. Obviously, facing higher costs across the board, but obviously including energy, we were able to put through higher selling prices to offset those things. Packaging continuing to be strong, enabled the profitability that you see and an EBITDA margin of 21%.
North America have had a number of consecutive great quarters and it’s continued once again, market’s tight. A similar story, able to offset higher costs with selling prices. In addition to that, a lot of great work done on the mix in our packaging business and in graphics. We were able to positively shift to more profitable products for us. The US graphic paper market continues to be tightly supplied, and the region made an also an EBITDA margin of 21%.
And then in South Africa, a difficult quarter, fair to say. Started with the floods. Obviously, that started the quarter and put us on the back- yes, we were able to claim the loss production and lost inventory from insurance, but it does put you on the back foot in terms of stability in these plants. We did have the shut, [indiscernible] which are 2 biggest mills that would’ve impacted on the volumes as well. And like everywhere else, substantial cost inflation. The DP prices, just to remind you, would’ve been lower than the prior quarter because of the lag impact of contractual pricing.
On the paper side, packaging, strong, volumes constrained by low inventory levels, we’re fully sold out. And then there are other paper market segments, all good and favorable there. As I mentioned earlier, volumes impacted by port efficiencies and it took the mill sometime to- sorry, the port sometime to normalize after the flood. We’re also encountering challenges with rail both from [indiscernible] down to Durban and from [indiscernible] to Durban as well. The rail link was washed away with the flood. So we’ve had to transport that product by rail and raw materials coming in- sorry, transport by road.
Slide 21 is our 4 pillars of our Thrive25 strategy. That’s what we remain focused on. Obviously, there are short term challenges and dynamics, but ultimately we are focused on our longer term targets, which are split across these 4 pillars. Firstly, on operational excellence. Clearly, when costs are rising and selling prices are so good at the moment, it’s important that we maximize production, keep the machines full and look for those cost advantages where we can. A lot of great work done on our safety front. Our numbers are improving across all the regions. So we are very pleased with that as well.
Enhancing trust. I’ve got a slide on in science based targets, but in addition to that, we are in a strong position. Our forestry certification continues to give us a competitive benefit. We’re a level one, triple B, double E level. We are also spending CapEx associated with the science based carbon targets, which amount to about $70 million per annum. We look to grow our business further and look for opportunities. We’ve not spent a lot on [indiscernible] projects that have been completed or close to completion. Firstly, on labels at [indiscernible] machines with ramping up nicely. That business is going from strength to strength.
We’ve put in a new culture at [indiscernible] to give us more enhanced functional paper. That project is completed next month. A nice project that someone said on the PM1 to boost our capacity there by further 30,000 tons. So smaller projects, but all add to profitability moving forward. Obviously, maximizing DP volumes is critical, a little bit challenging because of the floods, but the conversion we completed early in the year went very well, is ramped up as expected. The equipment is behaving as we expected, so absolutely no problems there.
And then ultimately sustaining our financial health. We’ve had strong cash generation. We talked about it that we want to reduce our debt below the 1.3 billion level in the short term. And I’m sure, as I said, we’ll get there soon.
Then turning to slide 23, very excited that our science based targets have been validated and approved. We announced them publicly last week. Our commitment is to 41.5% carbon reduction by 2030. These have been validated, so they are science based. We have a detailed capital plan in place, which is incorporated into our CapEx projections. In addition, with the higher energy prices that are out there and the volatility there, we do think we will get energy cost benefits from those projects as well.
Turning to the outlook, slide 25, and firstly on pulp, pulp markets are expected to remain tight, which will keep DP prices- which should keep DP prices at these elevated levels. Obviously, Sappi benefits because we are a quarter in arrears. So as I said earlier, looking good for Q4 and Q1, and our feelings are that prices are going to remain high for the short term. The profitability of our pulp segment will be significantly higher in Q4 because we’re going to have higher volumes and higher selling prices. So we’re feeling very good about that.
Packaging continues to be robust across all the region, only problem, low inventories, but other than that, all looking good. And then graphics, yes, there are small, early indications of the graphic paper market softening a little bit, but bear in mind, we’ve come from the best conditions in over 20 years. So you can’t expect that to continue forever, but order book remains healthy. The challenge we face is obviously input cost inflation, and it’s mainly in Europe. We are able to offset in North America. Because of the improved outlook for pulp, South Africa looking good as well. But in Europe, we obviously face higher costs. In terms of sales and selling prices and volumes, all looking very, very good in the Q4.
So notwithstanding those cost pressures, we are anticipating another strong quarter and I reiterate it is a strong quarter. It may not be the record that you’ve just seen, but it’s going to be one of the best quarters ever for Sappi. And the only reason we’re calling it down is that costs in Europe are higher. And with gas prices at 200 currently, we have to be cautious about that impact on our business. And it gets more and more difficult to pass on all these higher costs all the time, but the business is looking good and demand is healthy. It’s only because of costs, but it will be a very strong quarter. So operator that’s me going through the presentation. I’m going to hand it back to you for question.
Question-and-Answer Session
Operator
[Operator Instructions]. The first question comes from Wade Napier of Avior Capital Markets.
Wade Napier
Hi, Steve and team. Thanks for the time this afternoon. And I’d just like to say, congratulations, great set of results. Could you just help us with South Africa and the sort of recovery that you would expect there into the future sort of, and maybe if you could just like break that recovery up into like an operational recovery and then potential logistics and infrastructure? I’m just trying to get a sense of what to expect there, because it was a sort of Q3.
And then sort of second question from me is you flagged sort of indicative signs of demand softening across the graphics paper business. Obviously, margins at the moment are exceptionally sort of high. And I’m just wondering how you’re sort of thinking about managing sort of future demand erosion. Are you going to sort of look to reduce prices to support sort of volumes, or are you going to sort of take an approach of keep prices as high as possible to sort of keep profitability exceptionally high? Because I think historically if I sort of look at previous instances of economic downtime for the group, generally a 100,000 tons costs you about $30 million.
So I mean, given the fact that the group did $230 million of EBITDA from the graphics paper business, I think that’s a comfortable sort of, I would be taking downtime instead of giving up pricing. So I’d be interested to hear your thoughts on that.
Stephen Binnie
Okay, thanks. I’ll take each question, but I’ll pass to Alex to talk further about South Africa and then I’ll pass to Marco and Mike just to briefly talk about the impact of demand erosion. Firstly on South Africa, the big recovery is obviously going to come from the fact that DP volumes are going to be substantially higher. And in this quarter, we obviously had the shut, which impacted by approximately 50,000 tons. And then at the same time, we had the floods as well, which the combination of the inventory in the warehouse and the stock production combined, that was a further 50,000 tons.
And then on top of that, you had the logistical challenges at the end of the quarter, 24,000. So you add that all back and the pulp segment should be getting close to 350,000 tons sales per quarter. Obviously, in the quarter that we’ve just done dissolving pulp was only 217. So the significant volume recovery that will come through from that. Then on top of that, the dissolving pulp price that the lag impact of pricing and the Q2 price, which impacted Q3 was lower than Q1, but the Q3 price, which is now going to impact Q4 is substantially higher.
So you you’ve got the combination of significantly higher selling prices and significantly higher volumes. The one headwind we’ve got is obviously costs. Like everywhere else, costs are going up, but that’s more than outweighed by these positive factors. The paper business, Alex, I’ll let you elaborate further, but those are in a good place.
Alex van Coller Thiel
And maybe just to add to that, obviously, the cleanup operations to quite a while just in the quarter, that’s behind us now that this is where [indiscernible]. I think the positives are that we’ve managed to secure extra shipping capacity. So that is going to help us going forward and just considering the supply chain issues. Rail is still a challenge. There’s been significant wash aways, and some of those are only going to be repaired around about April next year, but we are making very good progress in terms of shipment through [indiscernible] as well as an alternative. And that will help us from just to take some pressure off Durban port from our perspective. So I agree with you. I think good upside potential.
Stephen Binnie
Yes. And as I alluded to earlier on the packaging side, demand is strong and we’re only victims of our own success, which is relatively low inventory levels. In terms of your second question, Wade, on graphics, you are right that these are super normal margins and you wouldn’t expect those to carry on forever. When we make selling price increases, we have to anticipate where costs are going to be. And clearly, there’s a lot of volatility, so it’s not an exact science. But you have to err on the side of conservatism as you think about it. For example, natural gas prices in Q3 were EUR 102 per megawatt hour. At the moment, they’re sitting at just under EUR 200. We are estimating a little bit below that, but there is significant volatility. I want to put it in perspective for you because I think it’s important, but every EUR 10 move in megawatt hour for our European business has about a EUR 6 million impact.
So you do the maths. If you think it’s going to be up EUR 60, EUR 70, you’re talking- you multiply that by 6, you’re talking EUR 50 million less or higher costs. And that’s why we called out the, um, the earnings outlook to be below the Q3 earnings. In terms of the trade-off between demand and pricing, we agree with you. We believe that these prices need to be protected because of the uncertainty and the cost. And taking a little bit of downtime is a small price to pay. But I’ll let Marco talk. And then after I’ll turn to Mike and he can just talk a little bit about the North American environment, but Marco in Europe.
Marco Eikelenboom
Yes. Thank you Steve and I think you call it right. The downtime is still rather difficult to predict. We’re currently in a situation that yes, activity is getting somewhat softer, difficult to determine whether there is the summer activity that we’re in right now. There is a, a reversal of the bull weight that we saw where there was very speculative buying in the previous quarter, which is eased down somewhat. And then there’s obviously the fear of a recession that trickles through a little bit. So it’s difficult to estimate what the structural drivers behind the volume demands are right now. And therefore we remain very careful to keep our margins where they are also because of the fact what Steve has said that the cost fluctuations will not get any more predictable and that they might be as volatile as in previous quarters. So we will stay cautious on our pricing strategy and keep our margins as healthy as possible. It is also true to say that the volume-to-price relationship will lead if necessary to taking small downtimes, if possible or if necessary.
Stephen Binnie
Having said that we’re not anticipating in the very near future, any material downtime. It’s just, as we think about the trade-offs, we’re still very confident about the outlook for Q4 top line. Mike, maybe you just want to talk about that trade-off in your environment.
Michael Haws
Thanks, Steve. To be honest, the demand in North America on the graphic side is still fairly strong. Clearly, we’re having a bit of a margin squeeze as raw material prices in North America have been increasing as a result of inflation in some of the energy costs here. The nice thing in North America is we’ve balanced up our mix between pulp, packaging and graphics, where we’re not as dependent on the graphics business as a whole for the earnings in North America. So we’ve got a very balanced portfolio now. We do see a little bit of margin squeeze, but with demands still strong, our challenges is the price to driving our customers to other mediums. So that’s clearly something that we focus on.
Stephen Binnie
Thanks Mike. Wade, Thank you.
Wade Napier
Sorry, can I just make a quick follow-up on the sensitivity, the EUR 10 per megawatt hour sensitivity for EUR 6 million. Is that on an annualized basis or a quarterly basis?
Stephen Binnie
That was quarterly.
Wade Napier
That’s quarterly. Okay, perfect.
Operator
[Operator Instructions]. The next question comes from Andrew Jones of UBS.
Andrew Jones
I just have a few questions on the cost pressure going into 3Q. If you could just talk a little bit about within the different divisions, different product divisions, could you talk about how you were seeing broad sort of cost split of a wild swings we’ve seen so far in the quarters just gone? And just talk to us some of the moving parts aside from obviously gas that we’re aware of. What sort of inflation are you looking at going into the fourth quarter of the year on each of those big buckets of the cost split?
Stephen Binnie
Okay, thanks. Looking across the broad buckets, the biggest rise we are seeing is in energy, which we spent a lot of time talking about. But it’s not only an energy, right? For the paper businesses, pulp has continued to rise, particularly in Europe, because that’s where we buy more from external sources. And then chemicals delivery costs freight. It’s really broad based. So we are expecting all in, another significant rise, but I was describing to you is that certainly in North America and South Africa with the recovery in the top line in South Africa, we will be able to mitigate those impacts. Europe, a little bit more challenging because we are more exposed to the energy and pulp rises. So that’s why we called out the outlook statement to be down on Q3.
Andrew Jones
Okay. That’s clear. And to follow up just on the [indiscernible] around volumes, I mean, you mentioned DWP, you were talking about maybe like around 350 for sales volume in 4Q, if you sort of strip out the one option of 3Q. But on the packaging side and you’re assuming that you don’t have any major shutdowns, given margins are still pretty good in paper, what sort of volumes are you thinking about in those 2 divisions in 4Q?
Stephen Binnie
So we’re not going to give specific numbers, but what I would say broadly is that we are feeling comfortable about demand. We’re feeling comfortable about being able to sell our product and volumes should be no less than Q3 in those segments.
Operator
The next question comes from Brian Morgan of Morgan Stanley.
Brian Morgan
Steve, your stocks trading on fraction of the multiple of the European peer group. Have you given any thought to redomiciling at all?
Stephen Binnie
To do doing what?
Brian Morgan
Redomiciling.
Stephen Binnie
Brian, you’re trying to catch me. Yes, look, you know that there’s certain reserve bank restrictions and so on and so forth. We are committed to South Africa. We don’t watch the daily moves in the share price. We are focused on our longer term strategy and delivering value for shareholders that way. It would be very difficult for us in the short term to move our listing elsewhere.
Brian Morgan
Okay. Can I ask on gas? You’ve spoken in the past about having gas hedges in place, but those are fixed price contracts. Are they not?
Stephen Binnie
Well, some of them — we’ve talked about it in the past about 60%, next year, I think 55%. Yes.
Brian Morgan
Could you talk to us a little bit about what emergency energy plan in Germany, the various stages affects those contracts?
Stephen Binnie
Well, look, there’s a lot of speculation about that. Those are not certain. It’s not clear whether they would impact on fixed price contract, whether it was a levy on top of the current fixed price, or there was to be rationing. It’s not clear. I guess your question is what will we do? And my argument back on that would be if there was to be a levy on fixed price contract, that would be applicable to everybody. And so it would be equally impactful. I’ve given you the maths behind it. We’ve proven that we’ve been able to be resilient with substantially higher costs. Nobody knows whether there will be a levy or not. It’s all speculation. Clearly, it would not be good for our business. If that’s what you’re asking, that would not be good, but it would not be good for Germany as a country.
We would have to manage that situation. There’s certain things we can control and there’s certain things we can’t. We’ve done a great job at mitigating that impact. We’ve been forward thinking. We’ve put through fixed price contracts as best we can to mitigate that impact. But if there was to be force majeure over and above that, then we would have to react to that situation, but that would be a disaster scenario, obviously on the part of the energy providers. At the moment, it’s pure speculation. So I don’t know what more to say.
Operator
The next question comes from James Twyman of Prescient Securities.
James Twyman
Yes, fantastic set of results. I’ve got a few questions. Firstly, on coated paper in Europe, understand you’ve got a price rise, another price rise attempt underway. Could you sort of articulate more on that in terms of sort of scale and whether it’s just coated fine or includes magazine and speciality, and obviously how likely what you think you can be successful there? And then on gas prices, how much of your gas costs are sort of monthly spot prices, would you say? And also what would you say was the hedging gain that you achieved in the quarter? And I asked that just because some other paper companies have said how much their sort of exceptional gain they’ve been getting from that is.
Stephen Binnie
Yes. Okay. On the price increases, I’ll let Marco elaborate further, but obviously it’s an anticipation of the higher mainly gas prices, which has been much of this conversation today. It’s just been announced and obviously, the team are working on it. We’ve been able to put through selling price increases in the past. If we can be successful here, this will clearly mitigate a lot of what we’ve talked about. But in terms of confidence of being able to push it through, Marco, you want to comment?
Marco Eikelenboom
Yes, thanks, Steve. And you’re right. We are confident that we have the right pricing strategy, which means a good balance between covering our costs, but also keeping our customer’s interest very high. What we don’t want to do is put additional pressure on the value chain. So what we’ve done is we put out other price increases from mid-September, which therefore will have only a minor effect on quarter 4. It’s dependent on graphics and specialties. It’s between 8% and 10% for coated wood free and uncoated and paper boards and around 18% for specialty grades, slightly dependent on the product and the mills that are producing that. But in terms of our general pricing strategy, we’re confident, but then it depends on the dynamics as well, how far we can drive them.
Stephen Binnie
Thanks, Marco. On the second question, James, it’s not that we quantify gain. The way we think about it is obviously we’ve fixed the price at a point in time. And clearly, we fixed these when prices were well below a hundred. I’ve quantified for you the impact of every EUR 10 movement in megawatt hour. As I said to you, the spot prices in the quarter that we just reported were just over a EUR 100. 2 thirds of our exposure was hedged at a significantly lower price than the EUR 103. Now, if prices were to stay where they are today, then I’ve given you the maths. Obviously, on the fixed contracts, that would be a similar price level. So you would only be exposed on one third. Clearly, if there was the levy that Brian’s question alluded to, then it would be on the full volume. Does that make sense?
James Twyman
Yes. So your costs you’re talking about the fact that you are exposed to 1/3, because 2/3 is hedged.
Stephen Binnie
That’s correct. So the numbers that I gave you were the impact of every EUR 10 increase on top of that per quarter, the EUR 6 million that I referred to. This is hypothetical because the prices move every day, but the average price in the quarter that we’ve just gone in was 102, 103. If it was to be 150 in this quarter, it would be 5 times 6, it would be a EUR 30 million impact on our numbers. Does that make sense?
James Twyman
It does. Could I do a little cheeky follow-up?
Stephen Binnie
Yes.
James Twyman
In terms of your guidance for Q4, clearly South Africa is going to be a lot stronger in a pricing perspective and a volume perspective. The US is normally quite a bit stronger as well from a seasonal perspective. It seems as though the European business therefore has to be very substantially weaker. And I know you’ve mentioned cost, but it does seem extreme for you to be making less money next quarter than this quarter.
Stephen Binnie
James, today’s gas prices are 190. 9 times 6 is 54. I don’t know what more I can say than that. That’s where prices are today. We’re obviously putting through selling price increases that will hopefully mitigate it, but it does put it in perspective, doesn’t it?
James Twyman
No, absolutely. Absolutely.
Operator
[Operator Instructions]. The next question comes from Sean Ungerer of Chronux Research.
Sean Ungerer
Thanks for time. And just in terms of my first question, if I look at your commentary around running low on certain inventories, could you sort of unpack that in terms of how we should think about working capital evolution in Q4? And then secondly, the comment around some sort of softening filtering through on the graphic paper side, can you just finish that out a little bit more? Sorry if I didn’t hear it earlier [indiscernible] and then I’ve got a followup one after that. Thanks.
Stephen Binnie
Okay. I’ll let Glen handle the working capital question. Just to finish the conversation on graphic paper. There was a question earlier about volumes for graphic paper for Q4. And what I was saying is that we’re still confident in our volumes. So although it’s a softening, everything becomes relative, right? It’s a softening from the best conditions in 20 years, it’s still good. It’s just not the best it was in 20 years. So we’re still confident in volumes.
We’re still confident in terms of top line numbers for Q4. Clearly, as you think forward to the 2023 financial year, can you maintain record profitability? Nobody’s saying we will, because there is an anticipated global economic slowdown. So we all have to be realistic, but we can still have a very good quarter and we can have a very good year next year, just not a record year. So it’s not that markets are weak, it’s just that they’re, relatively speaking, slightly softer.
Sean Ungerer
Sorry, Steve, just to finish that comment specifically out. So I mean, how you actually tend to be seeing that coming through. So are you starting to see orders slow down or you starting see canceled orders coming through? Is it more coated wood free? Is it more coated mechanical? I’m just trying get color around that.
Stephen Binnie
It’s not North America. Mike touched on that. It’s more in Europe. Remember, our order book was getting longer and longer. And then we had to curtail the order book, and because we were so full- our order book is still relatively full. It’s just not as long as it was. It’s across all the graphics categories in Europe. So it’s coated wood free and mechanical. I want to emphasize, it’s not cause for concern. The, the reason we are calling out a lower EBITDA is not because of top line demand and sales, it’s because- it’s all on cost, Sean.
Sean Ungerer
Got you.
Stephen Binnie
Glen, on working capital.
Glen Pearce
Hi Sean. Yes, quarter 4 is usually our cash inflow quarter. And historically, we see a reduction in our working capital movement from quarter 3 into quarter 4. This quarter we anticipated to be no different to what has historically happened. We expect stocks to go down, and overall, our working capital at end of quarter 3 when we measure it as a percentage of net sales was just under 11%. We expect that to move down to about 10% by the end of the year.
Sean Ungerer
Okay, excellent. And then just Steve, so just the follow-up and just to make sure that I heard correctly earlier. When you sort of gave the run rate for DP volumes per quarter of 350, was that DP and pulp or just DP?
Stephen Binnie
That’s just DP.
Sean Ungerer
Okay, cool. I don’t want to take it as guidance, but do you think that’s a realistic number to print in Q4 at this stage, obviously assuming no [indiscernible] logistics, et cetera?
Stephen Binnie
The one risk factor I would call out is logistics, Shawn. Could there be spillover? We are trying to secure more and more [indiscernible]. Alex talked about it earlier. And as we’ve talked about in the past, we don’t lose the pricing on that. It would just be a spillover into Q1. But in terms of everything else, all favorable. The headwind or the big headwind we face is higher cost, just like everywhere else. So the entire cost across dissolving pulp has moved up considerably.
Sean Ungerer
Because just on a rough coated, I mean, if I look at- if you do a run rate to, say, [indiscernible] DP for the quarter, you’ve got a higher price filtering through. Incrementally, you should have a Delta of, I don’t know, at least $70 million odd of DWP EBITDA coming through into Q4. And then if you sort of look at the read through on spot energy prices, even if you call it $60 million Delta for the quarter, I think there’s obviously cross pressures filtering through somewhere else to sort of link it back to your guidance.
Stephen Binnie
Sean, it’s not just energy in Europe. Pulp prices are up, freight prices are up. I just gave you the gas number.
Operator
[Operator Instructions].
Stephen Binnie
Operator, if there’s no more question — is there another question operator?
Operator
No, sir. I was just going to advise you that we have no further question on the lines. Can I hand it back for closing comments?
Stephen Binnie
Great. Thanks, operator. Thank you everybody for joining us today. And we look forward to discussing our year-end results in 3 months’ time. Thank you, bye, bye.
Operator
Thank you. Ladies and gentlmen, that concludes today’s event. Thank you for joining us. You may now disconnect your lines.
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