Ladies and gentlemen, good day and welcome to the Sappi Limited Q2 FY 2017 Results Teleconference. All participants will be in the listen only mode. There will be an opportunity for you to ask questions at the end of today's presentation. If you need assistance during the conference, please signal an operator by pressing star then zero. Please note that this call is being recorded. At this time, I'd like to turn the conference over to Steve Binnie. Please go ahead, sir.
Thank you. Good day, everybody. As per prior quarters, I'm going to go through the presentation deck. I will call out each page number as I move through. Starting on page four, the highlights for the quarter. Firstly, EBITDA excluding special items, up nicely from last year's $195 million up to $208 million this year. The profit for the period did come down from $100 to $88. The reason for that was a positive fair value forestry adjustment last year, which clearly is non-operating. That did not recur in the current year. Earnings per share excluding special items, up from $0.16 to $0.17. On the net debt front, we continued to make good progress, down $323 million year-on-year to $1,329 million at the end of March.
Turning to slide five, some of the key financial metrics for us. You can see across the board we've been making significant progress. Perhaps one of the most particularly pleasing results has been the improvement of our return on capital employed. You can see over this period, it's now improved from 13% in 2015 and now above 20% in the current quarter. Turning to slide six, our earnings, EBITDA bridge from last year's quarter to this year. You can see that we were positive on most of the dimensions, particularly on the selling prices. That's on the back of the improved dissolving pulp prices versus a year ago. Those markets have been strong. We managed to make some further savings on costs. You see that flowing through both on variable and fixed.
The negative is the impact of exchange rates. That predominantly relates to the stronger rand versus a year ago. Roughly a year ago, I think it was about 15 to the dollar. It's now in the 13. That's had a significant impact on our numbers. Moving to slide seven. We have the EBITDA across the two segments that we report. You can see consistent with recent quarters on an EBITDA perspective, we are roughly half-half between specialized cellulose and paper. The paper includes both our traditional graphic paper, but it also includes specialities and packaging. Of the 51 percentage points, 13% relates to specialities and packaging. That's a number that we would expect to grow in the quarters as we move forward. Moving to slide eight, the evolution of our net debt. This tells a very nice story.
You can see from the peaks early in 2014, a leverage ratio of 4.6. We're now all the way down to 1.7, and we continue to make progress on that front, and we expect our net debt to decrease further as we move through this financial year. On slide nine, we have our maturity profile for our long-term debt. The key items to talk about here are firstly, the blue bar in 2017 predominantly relates to our $400 million bond, and that was repaid $400 million, which we paid in April. That's no longer there. Perhaps the other one to call out is the $302 million securitization structure, which reaches maturity in 2018. We expect to roll that over in June of this year. That will push out the maturity.
You can see once that's done, we have a very favorable maturity profile and some years before we have any significant debt maturing. To slide 10, our CapEx development this year, $350 million is expected. Some of that's coming through related to the South African debottlenecking projects for dissolving pulp. As we begin our specialty packaging conversions at Maastricht and Somerset. That also rolls into 2018 and some of it into 2019, where we expect the CapEx to be approximately $400 million in each of those years. Moving forward, turning to slide 12. Firstly, the global paper market trends on the supply and demand, we continue to see weakness in graphic paper markets, and clearly that's had a significant impact on pricing over the last year or so and in this quarter. We continue to see closures, perhaps less than prior years.
Specifically in this period, we've seen further announcements of supercalendered closures. We are hopeful that we will see more capacity coming out as we move forward. The specialty side continues to be good, and in the categories that we are in, we see growth between 1% and 5%. Selling prices I've already talked about have been under pressure, but in recent months they have started to stabilize. In fact, in Europe we announced the first round of price increases effective in April and we've seen some of the benefit of that flowing through. You'll have seen that we've recently announced further increases there effective from July. Really those are to offset the higher raw material prices primarily from pulp. Just to remind everybody, Europe is about 55% integrated, we have to buy the rest of the pulp.
Clearly the big rise in pulp over the last few months will have an impact on margins. Our strategy will be to look for opportunities to convert to packaging as we anticipate declines in demand for our graphic paper. We've done a good job on the cost, and we'll continue to focus on that front. Slide 13 specifically refers to Europe. The margins have declined because of the lower year-on-year selling prices. I've already said that we've announced some price increases and we're starting to see the benefits of that coming through and the pressure we're going to get from variable costs, the pulp and latex as well. Specialty paper continues to perform very well. We're making good margins and as we complete the conversions that business will grow further.
On slide 14, they actually had a year-on-year improvement in profitability despite the fact that selling prices have been weak, albeit they've stabilized in recent weeks. The variable costs were down year-on-year. We continue to make good progress on the efficiency projects that we have. The region also benefited from the higher dissolving pulp prices and our specialty business, albeit from a relatively low base, is starting to pick up momentum. To slide 15, the global dissolving pulp markets. We've seen strong demand now over the last year and it continued into this quarter. Pricing was good, aligned to the prices for other textile fibers. We believe that demand will grow and continue to grow at about 4% or 5% over the next couple of years.
If we look at the planned new capacity from competitors that's coming on board we think that the demand will be sufficient to meet that new capacity that's coming on board. Subsequent to the quarter end in April, prices have come back a little bit. I want to stress that they are coming off a high base. Overall the dynamics in this market are very good and positive as we move forward. We will continue to look for ways to maintain our low-cost position. In the short term, we've got our debottlenecking projects in South Africa, which can add up to 100,000 in the next couple of years. We obviously need to turn our attention to longer term growth. On to South Africa specifically on slide 16. The margins were very good, obviously on the back of higher dissolving pulp prices.
That offset the impact from the stronger rand that we talked about earlier. The last quarter we talked about some production issues that we had had at Saiccor. We had the shut in March. We believe that those will now be resolved, or they have been resolved as we move forward so we can get back up to maximum production at the mill there. On the containerboard side, volumes are good. Are expected to continue to be positive as we move through the rest of the financial year. Turning our attention to the strategy side. Slide 17 has the various pillars. I'll talk to each of those in the slides ahead. Slide 18, specifically on the costs. You'll have seen in our numbers all the good work that we've been doing over a number of years. We continue to focus on this.
Some of the smaller projects are outlined there. Some turbines at Saiccor and Tugela, the new woodyard at Somerset in the U.S. This is an ongoing process, looking for opportunities. The procurement project that we've talked about in recent quarters is ongoing, on track. We continue to believe that it will deliver at least $100 million by the time it's completed. On slide 19, we've referred to this already. We will look for opportunities to reduce our exposure to graphic paper. We recognize that it's in decline. We have opportunities to convert some of that capacity towards more growth markets, specifically on the specialty packaging. Obviously, we've made the announcements to reduce our exposure at Somerset and Maastricht. Lanarkshire is getting out of lightweight coated as well. All in all, taking that into account, that will reduce our exposure.
I just want to highlight, you would have worked it out from the numbers that I referred to earlier, of our EBITDA now, it's close to a third of our EBITDA now comes from graphic paper, and that will continue to come down as we get closer to our 2020 vision. Slide 20 talks about moderate investments, and you see, again, some of the examples of the work that we've been undertaking, the debottlenecking at Saiccor and Ngodwana to boost our dissolving pulp, the investments in specialty packaging. We think that there are nice opportunities to grow packaging in South Africa, at Ngodwana and Tugela. One of the keys here for us continues to be securing additional hardwood timber supply in. Obviously, that's predominantly for dissolving pulp, but it's also for our business in South Africa overall.
Slide 21 just touches on a point that I referred to earlier, our return on capital employed. You can see from the lows in 2013 of 5%, we continue to make good progress on all the work that we've undertaken. As we move into the next phase of our strategy in terms of growing dissolving pulp and our specialty packaging, clearly this puts us in a better position as we evaluate these projects. The slide 22 is a slide that we've shown before, but I just wanted to recap. It's just a reminder of the two conversions that we referred to. These projects have obviously commenced and are progressing on track so far. To remind you, we're spending $140 million in Europe, and we list the initiatives there, but specifically, it's going to give us more SBB and folding box board.
At Somerset, the $165 million conversion at Somerset will again give us exposure to more of the packaging grades as well and give us a ramp-up to 350,000 tons. Slide 23. We've done a lot of good work on the balance sheet, as you saw from earlier slides, that will continue to progress. We refinance those bonds, that will lower our interest bill going forward by another $21 million. We continue to look for ways to optimize our working capital. On slide 24, as the balance sheet improves, we look for opportunities to boost our growth in adjacent businesses. Obviously, specialty packaging we've referred to a few times, and we do think that there are opportunities. On the dissolving pulp, we want to continue to grow.
We talk about the 100,000 short term, but we do think in the period to 2020, we are targeting growth of about 300,000 tons, and that's what we're working on at the moment. At the same time, on the byproducts, as you know, we've commenced some pilot plants there and those are exploratory in nature, but in time they could be quite lucrative. Turning to the outlook statement on slide 26. I've already mentioned it, but dissolving pulp prices have come under pressure in recent weeks. Overall, the market looks favorable and demand is strong. The short to medium term, as we look out two or three years, we are very positive about the prospects. The graphic paper markets continue to be weak. Obviously exacerbated by the higher input costs. We are offsetting that, in Europe anyway, by the price increases that we've announced.
We will look for ways to accelerate the growth in specialty packaging and the conversion projects are underway. The rand volatility obviously is a headache, and the fact that it's higher year-over-year. Even at these levels, we remain very competitive in global markets. Based on the fact that the rand is stronger, we think that the earnings for Q3 might be slightly lower than they were a year ago. However, the full year for 2017 will be better than 2016. That's me gone through all the slides, operator, I'll put it back to you for questions.
Thank you, sir. Ladies and gentlemen, at this time, if you would like to ask a question, please press star then one. To ask a question, please press star then one. Our first question comes from Brian Morgan of RMB Morgan Stanley. Please go ahead.
Hi, guys. Thanks very much for the call. Two questions from my side. We saw an announcement from Fortress Paper about a month or two ago that they had successfully appealed the anti-dumping duties that the Chinese put against Canada to the WTO. Just wondering what the status is for you guys with Cloquet, if you've seen something similar on your side.
No, we haven't challenged that specifically. Mark, do you want to comment on that?
No, Steve, other than what you just said, we haven't challenged it specifically yet, nor have we seen or heard of any challenges from the U.S. producers yet. It does raise questions because of the way Fortress won their complaint, it puts that question, the whole process, I believe, from what I've read.
Perhaps just to add, Brian, from a Sappi perspective, the fact that Fortress can get into those markets should not have a significant impact on our business because we're relatively lowly exposed to the Chinese market. In time, obviously, we're hoping it creates opportunities for us.
Okay, cool. Just talking about dissolving pulp supply and demand, and you said that there's not a lot of capacity coming on in 2017, 2018, which is great. Can you chat to us a little bit about longer term supply demand fundamentals? You talk in your release about a 4% demand growth rate going forward. Can you chat to us a little bit about supply and supply risks and how you see that unfolding over the next couple of years?
As we look out over the next few years, we think the dynamics are favorable. If we look at, and we extrapolate the 4% or 5% growth out, and we look at all the anticipated demand that's likely to come on board from competitors, we think the operating rates will remain favorable, which will be good for pricing in the market. We don't think there's significant risk associated with additional new capacity coming on board.
Okay. It's just the reason I ask is, Fibria was talking in their conference call about converting one of their lines to dissolving pulp quite recently. That sort of stuff can come on pretty quickly, can't it?
No, sure. Look, that's the first time they've mentioned that. Specifically, the comment that you're referring to was quite speculative in nature, saying that they may look at it. If I'm correct, they only referred to 200,000 tons.
Yeah, that's right.
We don't think that's a material risk.
Okay, cool. That's great. Thank you.
Ladies and gentlemen, a reminder, to ask a question, please press star then one. To ask a question, please press star then one. We will pause to see if there are any further questions. A final reminder, to ask a question, please press star then one.
Okay, operator, if there's no more questions. Are there more questions? No?
No. No further questions, Mr. Binnie.
Okay. Look, if there's no more questions, we'll view that as positive. I want to thank everybody for joining us today, and we look forward to discussing our next set of results at the end of Q3. Thank you very much.
Thank you. On behalf of Sappi, that concludes today's call. Thank you for joining us. You may now disconnect your lines.