Good day, ladies and gentlemen, and welcome to the Sappi Limited first quarter 2016 results conference. All participants are currently in listen-only mode, and there will be an opportunity for you to ask questions later during the conference. If you should need assistance during the call, please signal an operator by pressing star and then zero. Please also note that this call is being recorded. I would now like to turn the conference over to Mr. Stephen Binnie. Please go ahead, sir.
Thank you. Good morning, good afternoon, everyone. I am joined on the call today by a number of my senior colleagues at Sappi. I am going to be referring to the investor presentation that has been put on the website, and I will try to call out the page numbers as we move through it. I will start on page four, which contains some of the highlights for the quarter. Our profit for the period was $75 million, compared to $24 million in the previous year. Similarly, earnings per share was up from $0.05 to $0.13, a nice growth relative to last year. EBITDA, excluding special items, increased by 21%, from $145 million to $175 million. Then, encouragingly, our net debt continues to come down, and we saw a decrease relative to the same point last year of $306 million, and net debt came in at $1,734 million.
On slide five, you can see the trend with regards to our EBITDA and operating profit, and you can see relative to prior years, this was a very good quarter for us, Q1. You can see the respective sizes in the other quarters. Obviously, Q4 is our biggest quarter, and that will be the same again as we move through this year. On slide six, some of our key ratios. Firstly, net debt to EBITDA. We continue to make very nice progress there. On a 12-month rolling basis, we are now at 2.6 times. You can see that that is down from 3.1 the same time last year. Our interest cover as profits go up and our interest bill comes down showed significant improvement. Then pleasingly, EBITDA margin, EBITDA percentage came in at 13.6%. Nice improvement on last year. And encouragingly, there was improvement across all regions.
On slide seven, EBITDA bridge, comparing 2015 to 2016. On the sales side, a little bit higher volumes coming through. We did have the shut last year in Graaff-Reinet, so we had those additional volumes coming back. Then on pricing, some nice improvements on dissolving pulp and also in our European coated paper business and also packaging in South Africa. Good control on costs. Then on a translation basis, the exchange rates had a negative impact. That resulted in an overall EBITDA of $175 million. On slide eight, the split in the product contributions. On the right-hand side, you can see the split of operating profit, and you can see that specialty cellulose is in the majority. However, on the left-hand side, EBITDA and obviously by implication, cash flow, the paper business continues to be important for us and was 56% relative to specialty sales at 44%.
Both businesses showed nice growth, obviously paper making a strong contribution. Slide nine. We have already briefly talked about the net debt to EBITDA coming down, and you can see how significantly it has come down since early 2014. We would expect that trend to continue as we move through the rest of this financial year. We have that targeted ceiling of two times net debt to EBITDA, and we are making significant progress towards that. On slide 10, our maturity profile for our debt. The big items coming up are in 2017. We have a $400 million bond reaching maturity, and that is something that we will be working on during the course of the year as that date comes closer. In 2018, we have got our securitization facility maturing. We do not anticipate any problems there when we choose to roll that over. Slide 11 has our CapEx.
We like to split that between maintenance and efficiency projects. You can see that the vast majority is on maintenance. The 2016 estimate is broadly in line with what we have seen in 2014 and 2015. The efficiency initiatives are predominantly in South Africa on de-bottlenecking and energy opportunities that we have in South Africa. Turning our attention to our broad product categories, moving to slide 13. We will first talk about the global paper market trends. As we look back over the last year or so, clearly the currency shifts have had a big impact on our business. It certainly benefited our South African business, but in the U.S., it has put pressure on the U.S. business and exports, which were coming out of the U.S., were uncompetitive, and that had impact on volumes.
We continue to see capacity coming out both in Europe and in North America, on coated woodfree and in mechanical paper, and there are further closures that have been earmarked. I expect that will continue. Coated woodfree has been performing probably a little bit better than we expected over the last 12 months. However, mechanical paper has been under significant pressure. We have seen in Europe, selling prices for both coated woodfree and mechanical rising. If you recall, we put through price increases in the middle of last year, and there have been announcements of further rises in the current quarter that we are in. We have been able to benefit from lower input costs, variable costs, oil, energy, oil-based chemicals have all decreased, and we have started to see the prices of paper pulp coming down as well.
Our focus obviously is to maintain our prices increases that we put through with a strong focus on fixed and variable costs, ensuring we are amongst the lowest cost producers. Look at our capacity, try to anticipate demand as we move forward, look for opportunities to reallocate some of our capacity to other growth markets. On slide 14, in Europe, you can see that our margins have been progressively getting better. We have had a good 12 months or so, and the business continues to improve. As I said, we have put through price increases and demand has been fairly stable, particularly in coated woodfree. On the mechanical paper side, we are benefiting from the transfer of the Husum volumes, and at the moment, all our mills are pretty full.
Specialty paper volumes, we saw a little bit of a lull in the late summer months in Europe, but subsequent to that, we've seen demand picking up towards the end of the calendar year and into 2016. A little bit more encouraging, but at the same time, we have seen substantial growth when we compare it to the same period of last year. The fixed costs and variable costs have been tightly managed. We have continued to see higher pulp prices, albeit that I did say earlier that they are coming off a little bit now. At the same time, we've been able to achieve savings in chemical and energy costs. North America on slide 15. As we all know, there was a tough couple of quarters there in 2015 when the dollar strengthened and we lost a little bit of volume in the export market.
At the same time we saw more imports coming in. Subsequent to that, we've seen a little bit of stability coming back in. We have been able to gain some market share, and importantly, we've been able to take out costs out of the business. Prices are down from where they were a year ago, 3%, but we have seen, as I say, some stability coming in and they're flat quarter-on-quarter. Dissolving pulp prices were higher both versus the prior quarter and last year, and I'll talk about that in a little bit more detail now. The release paper business, we've had a couple of tough years in that environment, and it has mainly been driven from the soft markets in China and we're still seeing softness there.
However, elsewhere, we have seen the market stabilizing and at the same time we've been able to put through some price increases. Prices are higher than they were a year ago. Turning to specialty cellulose on slide 16. This is a business where a number of the producers can swing back and forth between kraft pulp for the paper business and dissolving pulp, similar to what we have done at our Cloquet mill. Obviously, as the pricing in the respective markets shift, you do see mills swinging back and forth. The underlying demand trends for dissolving pulp continue to be positive. The pricing is still well above last year. If you look back on pricing over the last 12 months, you saw the first half of 2015 being relatively flat.
We saw a significant rise in the latter half of 2015, and subsequent to that in January, February of this year, coming back a little bit. However, it's still above the levels that we saw a year ago. Because of the shifts in the currency, we have seen input costs declining for producers with non-US dollar cost bases, and obviously, that's our South African mills, and that's strengthened our position in that environment. In China, the fact that the currency has devalued has impacted on dissolving pulp selling prices in that market. Our strategy, obviously, is to maximize our production and manage our capacity, look for debottlenecking opportunities at our mills to boost production, and importantly, maintain a strong relationship with our key customers and their growth plans, and we need to be aligned with that. We continue to look for other adjacent end uses for the pulp as well.
On slide 17, in South Africa, you can see that the margins have been rising now for a couple of years, and the business continues to go from strength to strength. We've been able to get higher selling prices, and at the same time, obviously benefiting from the fact that we have the weaker rand and some of this business is denominated in dollars. Dissolving pulp volumes were lower than last year. On our last call, we talked about the drought in South Africa, and at the time, we estimated that at Saiccor, the impact of that drought would be between $5 million and $10 million. Our estimate came in at $6 million, the final impact. The good news there is that the river next to the mill is now flowing at normalized levels, and the mill is now back to full production.
Containerboard demand continues to be robust, and we are able to maximize our volumes that we're producing. During the quarter, we finalized the sales of our Cape Kraft Mill and Enstra mills. Turning our attention to the strategy. On Slide 18 is the five pillars. I'm going to talk about each one in turn briefly. Slide 19 is cost advantages. We continue to look for opportunities to improve our cost base and improve efficiencies. We've done a lot of good work across all the regions over the years, and we still think that there are more opportunities to come. We've listed some of the projects we're currently working on. At Saiccor and Tugela, we have projects underway to put in new turbines, and that will lower our cost base. Then we have the big extended shut at Ngodwana this quarter. It commences.
During that period of the extended shut, we are doing some work on the boiler and getting the mill ready for future growth. We have a global procurement initiative underway. We're excited about the opportunities that are out there. It's relatively early days in terms of that project, but we do think there are sizable opportunities. Already at this early stage, we think there are at least $100 million of procurement savings that we can achieve. Across all the mills, there are ongoing continuous improvement projects underway. Again, as I said up front, we do think there are opportunities to take further costs out. Then it's important to note that at Cloquet, that swing capability between dissolving pulp and kraft pulp gives us considerable flexibility. On to slide 20. The next area of our strategy is optimizing the declining businesses.
As you know, over the years, we have closed some unprofitable mills, and at the same time, we've shifted some of our capacity to growing product grades. Some recent examples of the work that we've undertaken. In South Africa, we ceased production of coated paper last year. The Husum volume's coming back to us. Very important for our mechanical paper business because it allows us to fill the mills. Our coated woodfree machines, both in the U.S. and in Europe, we do think there are possibilities in terms of increasing production of niche packaging grades. On to slide 21. We're obviously mindful of the fact that we need to continue to reduce our debt situation, strengthen our balance sheet, but at the same time, make moderate investments in areas where we can improve the business. Again, we've listed some nice projects that we're working on.
In South Africa, I've already talked about the fact that the business is doing extremely well. There will be opportunities to expand our capacity at Ngodwana and Tugela. These are not big investments, but they do allow us to produce more paper for that market. We have the nanocellulose pilot plant. The construction's underway, and we're making nice progress there. In South Africa, there are electricity opportunities at some of our mills, and these are things that we are obviously considering and potentially could deliver nice returns. In dissolving pulp, we do think we can debottleneck further at both Saiccor and Ngodwana and Cloquet to boost our volumes. One of the important strategic priorities for us in South Africa is to continue to secure additional hardwood timber supply, and that's something that we work on an ongoing basis. Turning to slide 22.
I've said it many times, but a very strong focus on cash generation and strengthening the balance sheet. I think we've done a lot of good work, and it will continue to come down. We did sell the mills, Enstra and Cape Kraft. Those were businesses where we didn't have a competitive advantage. We thought it was better to utilize that cash on other initiatives. As the debt comes down further and as our debt gets closer to maturity, we do think that there could be opportunities to pay off some of that debt and refinance and bring down our interest bill even further. Longer term, we need to look at growth areas. From that platform of the stronger balance sheet, we do think that there are opportunities to grow areas of our business. I've talked about specialty packaging a couple of times.
We are looking to reallocate some of our production towards that. We do think that's a growing business. It's a business that generates good margins. We think that there are further opportunities. Lignins and sugars, obviously the by-products coming from the pulp processes, we're exploring opportunities on that front. Longer term, as we work closely with our strategic customers in dissolving pulp, we need to be aligned with their growth plans and we work closely with them. Turning our attention then to our outlook statement, I'm now on slide 25. The specialty cellulose business is benefiting from higher average US dollar prices and the weaker rand-dollar exchange rate.
Spot prices have been under pressure in the last few weeks or so. It's important to note that demand for the product is still strong. Prices, although they have come back a little bit, are still above where we were a year ago. In North America, costs are tightly managed. Variable costs are down and market share is growing. In Europe, we've announced some price increases now for the quarter that we're in. That's work in progress at the moment. Costs are coming down. You can see that in the results that we've produced. As I said earlier, there are opportunities to take further costs out of the business. There's been strong demand for virgin packaging in South Africa, and the exchange rates are helping us there as well.
Overall, we expect Q2 to be broadly in line with the number we saw for Q1 EBITDA. It is important to note that there is the impact of that extended shut at Ngodwana and some other timing differences. Overall, that impact is $12 million, and that is already encompassed in the forecast that we have given you here. Based on current market conditions and assuming current exchange rates, we expect EBITDA for 2016 to be well above 2015. We expect strong growth in our earnings per share, and net debt will come down significantly over the rest of the financial year. Thanks, operator. If we can put it over now for questions.
Thank you very much, sir. Ladies and gentlemen, at this time, if you do wish to ask a question, please press star and then one on your touchtone phone. If you decide to withdraw your question, please press star and then two to remove yourself from the question queue. Our first question is from Bill Hoffmann from RBC Capital. Please go ahead.
Yes. Good day. Just a couple questions on the specialty cellulose business. You talked about spot markets being soft. I just wonder if you can talk about what you are seeing in competitive dynamics. Obviously, there is some companies that are shifting from the specialty acetate grades, which were under pressure into the commodity viscose, and just wondering what the customer impact is as they see some of these spot tonnages coming in.
Yeah, I don't think that is the big pressure point. I think the main driver of the prices coming down in recent times has been the softer commodity markets, polyester, and prices have come back a bit. Gary, I don't know if you want to elaborate any more on that.
Yeah. I think closely linked to the commodity cycle with cottons as well. We don't expect some major changes very similar to last year.
Yeah. To the point that you're raising, there is a bit of a threat from that. That's not the major factor that's been at play.
Okay, thanks. Just with regards to Cloquet, could you just give us some update on how much of that's been running specialty versus paper pulps in the last quarter? Kind of what the plan is for 2016.
Yeah. It's consistent with prior years. It's approximately two-thirds, one-third. Two-thirds dissolving pulp, one-third paper pulp.
Thank you. Just final question. Market conditions in North America in the paper side, just wonder if you could just talk a little bit about it since the Verso bankruptcy. Obviously, it frees them up from a debt standpoint to run a little bit more and be price competitive to fill their mills. Any thoughts on what you're hearing from customers?
I'm going to put you over to Mark to elaborate a little bit further. Clearly we can't say much on Verso.
Yeah, thanks, Steve. The market has been pretty strong in the reels. We had a good quarter in the reels this past quarter. We anticipate that, going forward, we expect a good year.
Great. Thank you for the update. Appreciate it.
Thank you very much. Our next question is from David Rood from Merrill Lynch.
Good afternoon, guys. Could you please perhaps update us on your dissolving wood pulp contracts? We saw relatively high spot prices at the back end of 2015. I'm just trying to get a sense of whether we can still see some of the strength coming through in the current quarter.
Thanks, David. Very simply, as you know, they're referenced to the CCFGroup prices in China. The way that the prices work is that they're typically, we set the price each quarter. It's one month in arrears. The high prices were in the quarter to December. Clearly we will benefit from those higher prices in the current quarter we're in. The lower prices that you're seeing now will impact Q3 and Q4. Again, to stress, where the market is now is still above where it was a year ago. You are still going to see a growth in Q3 relative to what you saw last year.
Okay. Thanks very much. Just my last question, can you give us an update on any potential forestry disposals? Are these still on the cards?
No. What's become clear in terms of our strategic direction as we go forward is that we need all that wood for the growth of our business, that we're not looking to sell any forests at this stage.
Great. That's all. Thank you.
Thank you very much. Our next question is from Nishal Ramloutan from UBS. Please go ahead.
Yes. Hi, Steve and team. Just a couple of things from my side. The first one is, you had a few price initiatives in the market on your paper grades, I think particularly Europe. Can you maybe just comment on that?
Yep. I'll pass on to Barry to elaborate further. Obviously, there's been two broad increases. One last year, we did get some feedback on that, and we were able to achieve some of that. Obviously, the price increase that we've recently announced. Barry, over to you.
Yes. The prices hung on quite well, in fact, throughout the fourth calendar quarter. On the back of still pretty high pulp prices, and on the mechanical coated side, really insufficient margins. There was a further price increase that we announced for quarter one. We saw that go through. It's probably stronger on mechanical coated than it is on woodfree, where the margins were slightly better anyway. It looks as if these price increases are going through at a moderate level.
What was the price increase on coated mechanical?
I can't tell you exactly. It will not be the 5% that we announced. It will get 2%-3%.
Just, coming back to dissolving pulps, where do you see prices ending up by year-end?
Based on the estimates that we've seen out there and our assessment of the business, we broadly estimate that they'll be at similar levels to what we're seeing currently.
Do you mean flat at about $850?
Between $830-$850.
Okay, slight softening. I assume, as you say, higher prices in Q2 and maybe softening then in Q3 and Q4. I'm just curious, with your shutdowns at Saiccor and Ngodwana, why are you doing it in Q2 when you could realize higher prices as opposed to Q3? I know there's other factors obviously going into that.
Nishal, bear in mind that what you're selling in Q2, the shut at Saiccor is later, and you've already produced for earlier in the quarter, so it's not impacting on sales volume for the quarter. Alex, do you want to talk about in Ngodwana?
Maybe just in terms of Ngodwana, the shut is also determined by when is the best time from a climatic condition and when you have your contractors available. This, in terms of reducing the risk on the shut, this is the best time to do it, and we've built some stock to be able to serve the market.
Okay. Thanks, guys.
Thank you very much. Our next question is from Roger Spitz from Merrill Lynch. Please go ahead.
Hi. Thank you. How much of your dissolving wood pulp volumes are currently under contract? I assume virtually all of it. If that's right, when do these contracts next roll?
Yeah. It's over 80%, it's contracted. The way we've constructed it, the big contract with the key customers have staggered maturities, and they're staggered over the next two years. We typically strive to, when we negotiate a component part of a long-term contract, we strive to get it for five years.
Is it fair to say that, we know you have two main customers. Is the contract with each of those two key guys sort of one contract? Or even if it's just one contract, pieces of volumes would come off over time. It's not like customer A, X date in the future, it all comes due.
On an ongoing basis, you have some of the volumes coming off, and then we start to negotiate for the extension of those volumes.
Okay. Regarding North American coated paper market share, which you said you've taken. Can you give a sense of how much you've taken and what was the main driver other than perhaps customers want to do business with people where ultimate ownership was more certain?
Mark, if you want to just say a few words on that, clearly we can't get.
Yeah, we cannot get too specific about that. We've been working very hard on our product quality and designs of our products, the service. Done an awful lot in the last six months to take down our costs, particularly the variable cost side of it, to grow our business. Particularly on the web side of the business, is growing probably more than the sheet side at this point. Really comes down to the basics of good quality product, good service, and being able to meet the needs of the customer.
Thank you. My last question is the $350 million [6.05 %] is callable. Maybe this is not the right market to do anything, but would you look to address that sooner rather than later once the markets return, as I think you've alluded to at least on prior calls? If so, would you look to refi a smaller amount and pay down some absolute debt with some cash?
It's Glen here. It would be determined by market conditions. We are monitoring market conditions closely and seeing if they move in the right directions. The intention would be to refinance it at the right time. Yeah.
Thank you. Thank you very much.
Thank you very much. Our next question is from Lars Kjellberg from Credit Suisse. Please go ahead.
Hi, gentlemen. Just a couple of questions. The Ngodwana extended maintenance, is that any more onerous than normal? Have you sort of rejigged your maintenance schedule to a certain degree, or should we still expect a very heavy maintenance quarter in Q3?
It is longer than normal. We are doing some more work. I talked about earlier about doing some work on the boiler. In terms of the amount of days longer, it's about.
It's normally 30 days. This will be 42 days.
It's 12 days longer than normal. We have pulled it forward slightly. A lot of that work was undertaken in Q3 last year. It's now in Q2 of this year.
Okay.
Does that answer your question, Lars?
Yeah, it does. We should expect a slightly lighter Q3 maintenance quarter then, so we can add back some.
Yes. That's right. It's a good question, and Q3 will be stronger because a significant proportion of the shut is in Q2. Correct.
Coming back to the trees. I think it makes a ton of sense to me that you need more trees, but are you planning, rather, to gradually shift those trees next to Ngodwana to hardwoods as opposed to softwoods to facilitate an increased southern wood pulp output? Is that your plan?
Yeah, that's right. There's been work that's been undertaken over a number of years to increase and convert some of our softwood to hardwood. That's an ongoing process. At the same time, and what we were referring to in our presentation, was that we continue to look for other opportunities to increase our supply even further. As the businesses grow, we obviously want to secure more supply. Yeah. I think, just in terms of the expansions that we're looking for in the short term, we virtually have secured supply for that.
Understood. There was one more question I just looked at. Oh, yes. The drought conditions, of course, gave you some incremental costs in the previous quarter. How is that changing going forward? Do you see any impact on the actual forest growth from that drought situation and does it lead to higher wood costs?
Yeah. I'll just talk briefly about Saiccor, then I'll hand it over to Alex to talk about the forestry side. In terms of Saiccor, as we said earlier, the impact was $6 million. The river is now at full flow, and we're getting full production out of the mill. Obviously, we're now in the wet season, so the river levels are higher. One of the things we're undertaking at Saiccor is we're increasing the size of the dam, which is upriver. That's going to be occurring during 2016, and that's going to increase the backup supply we have for the mill. Obviously, the dry months sort of commence here in South Africa, August, September onwards. We are going to be in a better position because of having that dam going forward. Alex, I don't know, you want to talk about the forestry?
Yeah.
In terms of forest loss, it has had an impact, probably about 70,000-100,000 tons. We have taken corrective action. We can procure more wood from the market, and we're actively doing that to compensate for the loss that we've had in the forest. Obviously, by doing that a couple of years, you get the natural growth in the forest to recover. There's no significant cost attached to that third-party procurement of wood?
No. We have been able to secure additional wood at similar prices to what we're buying in the market at the moment.
Very good. Thank you.
Thank you very much. Ladies and gentlemen, a reminder. If you wish to ask a question, please press star and one. Our next question is from Sean Ungerer of Arqaam Capital. Please go ahead.
Good afternoon, gentlemen. Just two questions from our side, please. In terms of Europe, there was a bit of commentary on market share gains. Could you just maybe elaborate a bit more on that, and perhaps if there's any more upside from that point of view? Just secondly, obviously the outlook statement's quite, I'd say, bullish to confident. Where does this sort of tie into the dividend policy going forward? Obviously, you sort of indicated that there is good progress being made to the two times net debt to EBITDA. So I'm sort of thinking from what you're saying, 2017 could be the year that Sappi resumes dividends. Thanks.
Yeah. On the market share side, I'll let Barry elaborate further. We have been able to gain share on the coated woodfree sheet side. Obviously on the mechanical paper side, with the Husum volumes coming out, that has lowered our market share a little bit. Barry, maybe you want to just expand further.
There are two basic areas where we've gained market share. One of them, of course, is specialties, because we added a great deal of capacity at the end of 2013. That's been slowly growing and continuing to grow. That's part of it. The other part is exactly as Steve points out. Following investments into better quality and better service and lower costs. We're doing exactly the same as North America is doing on service and meeting the customer needs. We have a go-to-market strategy, which puts us more closely in touch with the printers, and that is paying dividends.
Yeah. When he says dividends, he doesn't mean dividends for the company.
Good point.
It leads into the second question. As you know, we've set ourselves a target of 2 times, or a ceiling of net debt to the EBITDA of 2 times. Before we declare a dividend, we need to be confident that we can sustain that. You can do the maths in terms of where we think this year will be. We don't anticipate paying a dividend in 2016, and we'll make a call next year when we get there.
Great. Thanks, guys.
Thank you very much. Our next question is from Brian Morgan of RMB Morgan Stanley. Please go ahead.
Hi, guys. Good afternoon. Just continuing Lars' line of questioning about Ngodwana and the debottlenecking there. You're taking extended downtime now, an extra 12 days. Is that the full extent of the debottlenecking project that you're going to be undertaking there?
Sorry, Brian. I missed part of your question. Do you mind repeating?
Sorry. Just continuing Lars' question. You're taking extended downtime at Ngodwana, an extra 12 days. You're going to work on the boiler. Is that the full extent of the debottlenecking project that you envisage for that boiler, or is there going to be more down the line?
Yeah, there are other projects down the line. We do think that there are opportunities to nominally increase both on the dissolving pulp side and on the packaging side. That's going to happen over the next couple of years. As we go forward, we'll keep you updated on those future projects.
Okay. This is quite a few years off then?
No. Look, it's an ongoing process. There are opportunities. These are not going forward. They're not large investments, but it's on an ongoing basis.
The major shutters this year.
Yes
That sets us up to now actually increase capacity.
Yes
The future year outages will not be 42 days.
Sure.
It will go back up to 30 days.
Yes.
Okay. Right. What would you say the net incremental boiler capacity would be as a result of the shutters here?
30 to 600.
We could probably add between, or we're looking at adding between Saiccor and Ngodwana about 10% to our current capacity in the short term.
In the short term. Okay, that's perfect. That's great. Thank you.
Thank you very much. Our next question is from Andrea Creedy from BNP Paribas. Please go ahead.
Thanks for taking my question. Just a quick point on your financial policy. Just in terms of wording, I think always read that basically you're targeting a reduction of net leverage towards 2x as target. Now, I think on the presentation slide, I can see you're talking about ceiling of 2x. How shall we understand basically your financial policy as we come closer to these 2x? Is it to remain permanently below 2x through cycle? Do you have a rating target potentially associated with that? Thank you.
Yeah. That is a ceiling for us going forward. I do anticipate that it could go down further beyond that point. Clearly, we make specific reference to the 2x because we get a lot of questions about dividends, and I would want to be below that level before we start paying dividends. That's the importance of that point. Clearly, with the amount of cash that we are generating, it's likely that our debt will come down further beyond that.
Okay. Basically, below 2x through the cycle is roughly the type of your financial policy.
Yeah.
Thank you.
Thank you very much. Ladies and gentlemen, again, a reminder, if you wish to ask a question, please press star and one. Our next question is from Rebecca Clements from Blue Mountain Capital. Please go ahead.
Hi, guys. Three questions from me. The first is, do you have an outlook on pulp prices, specifically for your European business? Are you concerned at all that given the possible pressure there, that it will make it more difficult for you to keep your prices up or stable on the coated woodfree side? That's my first question.
Yeah, look, obviously, we're starting to see prices coming down. Barry, do you want to talk on a little bit more pricing?
Pulp has been high compared to historical levels. The moderation that's going on now is pretty minor in terms of pulp prices. We don't expect pulp prices to collapse in any way or form for paper pulp business, guessing what they're going to do is not for us. At this moment in time, the price increases are justified through the fact that capacities are pretty well filled at the moment, ours certainly, and that raw material prices, pulp prices, continue to be high.
Okay. I guess that kind of answers my second question. I was curious if you thought that there would need to be more closures, perhaps not this year, but say in 2017.
Yeah, look, at the moment in the market, the industry operating rates are all pretty high at the moment. There is obviously capacity closures that have already been announced, demand is reasonably strong. At Sappi, our mills are full.
Okay. Lastly, do you have any planned conversions at all for machines in Europe?
There's no broad plans to change machines at this stage. There are pockets of opportunity to reallocate some of the production we've been doing it at Maastricht Mill, at Ehingen Mill. We'll continue to look for those opportunities, there's no major conversion planned at this stage. We will continue to evaluate.
Okay. Thank you.
Thank you very much. Our next question is from Chris Ellis from Babson Capital. Please go ahead.
Hi there. I missed what you said on European price increases. Did you say that you were expecting +2% to 3% in mechanical? What were you expecting in woodfree? I think you said it was harder to implement at the moment than in mechanical. The second question is, European volumes were up 8% year-over-year. How much of that is market share driven, and is any of that just sort of improvement within the market? Can you just break that down, that 8%? That'd be helpful. Thank you.
I'll take the second question, and then I'll go back to Barry on the pricing of coated woodfree on the first question. On the second question, you have to bear in mind that last year Q1, we had the Gratkorn shut. Although our volumes are up by the percentages that you indicated, quite a large proportion of that is because of the Gratkorn shut. Nevertheless, we did gain market share, as Barry has indicated. Our underlying trend is better. For Q1, the market was down about 1%. We were a couple of percentage points ahead of that.
Barry on woodfree.
Woodfree coated reels prices have gone up, probably the strongest price rise, followed by uncoated woodfree sheets. That is because capacities are very full in that area. Prices have moved higher. Woodfree coated sheets are going up roughly the same as mechanical, between 2% and 4%.
Does that answer your questions, Chris?
Yes, it does. I just wanted to confirm that's plus 2%-4% on coated sheets and slightly higher on coated and uncoated reels.
Yes.
Because the line's not great.
Yes, that's correct.
Perfect. Thank you.
Thank you very much. Our final question is from Bartosz Pastwa from Schroders. Please go ahead.
Hi. Most questions were answered. If you can just comment a bit more on capacity in the industry, both in paper and pulp. What are you seeing there? What's your expectation for the additions in this fiscal year, please?
From the industry as a whole? Was it dissolving pulp and paper?
Please, yes.
Yeah. I'll take dissolving pulp first and maybe Gary can talk further after me and then we'll come back on the paper side. In terms of dissolving pulp, you saw a lot of capacity came on board a couple of years back, but there hasn't been any new big plants that have come on. There has been additional volumes, but it's certainly not to the same extent that we saw a couple of years back. Gary, I don't know if you want to expand on that.
No, I think that's a fair comment. Most of the capacity that's come on, there's some new capacity in China that's come on. The current other capacity is swing capacity.
Yeah. Obviously, quite a bit of the capacity that does come onto the market is swing capacity. A number of those producers continue to make pulp for the paper business. Barry, do you want to just talk about capacity in Europe?
Well, capacities in Europe have obviously come down quite sharply over the last two or three years, both in mechanical and wood-free coated. There are some more capacities due to slow down, and the effects of those slowdowns will be felt throughout the year. I don't see any large major moves. There are some uncertainties. There's obviously one or two mills which have closed, but it is not yet certain whether they will come out of closure and restart. I don't expect any further significant change.
Yeah, that's right.
It comes back to the point that we made earlier, that everybody's mills on the coated woodfree side are pretty full at the moment. Mark, anything you want to add on the U.S. capacities coming out?
Well, I would agree with the comment that was just made on the coated woodfree, that market's strong. There has been capacities that's come out recently in the last year. Coated groundwood is where the challenge has been. It's hard to predict what will happen going forward.
Yeah.
To recap, you're basically saying no capacity changes either way in either of the products for this year. Is that correct or no?
No. Capacity has come out, both in Europe and-
I mean, going forward for this year, I know it's come out in the past, but sort of what you're seeing for this year, sort of in terms of what you know.
Well, we don't have any planned closures, and we can't really comment and speculate on some of our big competitors.
Okay. Thank you.
Thank you very much. Gentlemen, we have no further questions.
Great. Thank you everybody for joining us, and we look forward to discussing, at the end of Q2. Thank you.
Thank you very much, sir. Ladies and gentlemen, on behalf of Sappi Limited, that concludes this conference. Thank you for joining us and you may now disconnect your lines.