Good day ladies and gentlemen and welcome to the Sappi Limited First Quarter 20 16 Results Conference. All participants are currently in listen only mode and there will be an opportunity ask questions later Please also note that this call is being recorded. I would now like to turn the conference over to Mr. Steve Binney. Please go ahead, sir.
Thank you. Good morning. Good afternoon, everyone. I'm joined on the call today by a number of my colleagues, senior colleagues at SAPI. I'm going to be referring to the investor presentation that's been put on the website, and I'll try to call out the page numbers as we move through it.
I'll start on page 4, which contains some of the highlights for the quarter. Our profit for the period was $75,000,000 compared to $24,000,000 in the previous year. And similarly, earnings per share was up from USD 0.05 to USD 0.13, a nice growth relative to last year. EBITDA excluding special items, increased by 21% from 145,000,000 to $175,000,000. And then encouragingly, our net debt continues to come down and we saw a decrease relative the same point last year of $306,000,000 and net debt came in at $1734,000,000.
On Slide 5, you can see the trend with regards to our EBITDA and operating profit, and you can see relative prior years. This was a very good quarter for us. Q1, and you can see the respective sizes in the other quarters. Obviously, Q4 is is our biggest quarter and that will be the same again as we move through this year. On slide 6, 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're now at 2.6 times. You can see that that's 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 and 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 7, EBITDA bridge comparing 15 to 16. On the sales side, a little bit of higher volumes coming through. We did have the the shut last year in Gratkorn. So we had those additional volumes coming back. And 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. And then on a translation basis, exchange the exchange rates had a negative impact. And that resulted in an overall EBITDA of $175,000,000. On Slide 8, the split in the product contributions. On the right hand side, you can see the split of operating profit you can see that, specialized cellular 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 specialized sales at 40 4%. And both businesses showed nice growth, but obviously paper making a strong contribution. Slide 9, we've 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 stated ceiling of that targeted ceiling of 2 times net debt to EBITDA and we're making significant progress towards that. On slide 10, our maturity profile for our debt the big items coming up are in 2017, we have 400,000,000 dollars bond reaching maturity. And that's something that we'll be working on during the course of the year as that date comes closer. In 2018, we've got our securitization facility maturing. We don't 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 16, estimate is broadly in line with what we've seen in 2014 2015. It's predominantly the efficiency initiatives are predominantly in South Africa.
On debottlenecking and energy opportunities that we have in South Africa. Turning our attention then to our broad product categories. And moving to slide 13, we'll first talk about the global paper market trends. And 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.
The we continue to see capacity coming out of both in Europe and in North America on coated woodfree and in mechanical paper. And that there are further closures that have been earmarked. I expect that will continue. Coated wood freeze 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're in. We've been able to benefit from lower input costs, variable costs, oil, energy, oil based chemicals have all decreased. And we've started to see the prices of paper pulp coming down as well.
Our focus obviously is is to maintain our prices, increases that we put through with a strong focus on fixed and variable costs ensuring we're amongst the lowest cost producers. And, look at our capacity, try to participate 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've had a good 12 months of all 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 Housum 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. So 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 did see we have continued to see higher pulp prices, albeit that I did say earlier that they are coming off a little bit now. But at the same time, we've been able to achieve savings in chemical and energy costs. North America on slide 15, the, as we all know, there was a tough couple of quarters there in 2015 when the dollar strengthened and lost a little bit of volume in the export market. And 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've 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 the way they were a year ago, 3%, but we have seen, as I say, some stability coming in and they're flat quarter on quarter. Dedolving 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 was 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.
So prices are higher than they were a year ago. Turning to, specialized sales on slide 16. This is a business where a number of the producers can swing back and forth between craft pulp for the paper business and dissolving pulp and similar to what we have done at our Clokaymo. Obviously, as the the pricing in the respective market shift, you do see demand mills swinging back and forth. The underlying demand trends for dissolving pulp continue to be positive.
And 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 twenty fifteen being relatively flat. We saw a significant rise in the latter half of twenty fifteen 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. The shifts, because of the shifts in the currency, we have seen input costs declining for producers with non U.
S. Dollar cost basis. And obviously, that's our South African mills. And that strengthened our position in that environment. The in China, the fact that the currency has devalued 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 that are 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, we saw better 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 week around and some of those businesses denominated in dollars. Dissolving pulp price 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 would be of that drought would be between $5,000,000 $10,000,000. It actually came in, our estimate came in at 1,000,000.
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 were able to maximize our volumes that we're producing. During the quarter, Okay. Turning our attention to the strategy on slide 18 is the 5 pillars and I'm going to talk about each one and turn reflip.
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 opportunity opportunities to come. We've listed some of the projects we're currently working on at Saiccor and Tequila. We have projects underway to put in new turbines, and that will lower our cost base.
And then we have the big, extended shut at Ngodwana, this this quarter, it commences. And 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. And already at this early stage, we think there are at least $100,000,000 procurement savings that we can achieve.
Across all the mills, there are ongoing continuous improvement projects underway. And again, as I said upfront, we do think there are opportunities to take further costs And then it's important to note that it cloaks that swing capability between dissolving pulp and kraft pulp gives us considerable flexibility. Then on to Slide 20. The next area of our strategy is optimizing the declining businesses. You know, over the years, we have closed some unprofitable mills, and at the same time, we're shifting 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 Houston volumes coming back to us, very important for our mechanical paper business. Because it allows us to fill the mills. And then 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. Then 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. And 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. And there will be opportunities to expand our our capacity at Ingridwana and Together, these are not big investments, but they do allow us to produce more, more paper for that market.
We have the Nanacelliros pilot plant. The construction is underway and we're making nice progress there. Then 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.
And then in dissolving pulp, we do think we can debottleneck further at both Saiccor and Inguarana and Plokey to push volumes. And one of the important strategic priorities for us in South Africa is to continue to secure additional hardwood timber supply. And then that's something that we work on 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.
And I think we've done a lot of good work and will continue to come down. You know, we did sell the mills, in strong Capecraft. Those were businesses where we didn't have a competitive advantage. And 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 to pay us some of that debt and refinance and bring down our interest bill even further.
And then longer term, we need to look at growth areas. And 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. And we do think that's a growing business.
It's a business that generates good margins. And we think there are further opportunities. Lignancy and sugars, obviously, the bioproducts coming from the pulp processes, We're exploring opportunities on that front. And then longer term, as we work closely with our long term, 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.
And I'm now on Slide 25, The specialized sales business is benefiting from higher average U. S. Dollar prices and the weaker rand dollar exchange rate. Spot prices have been under pressure in the last few weeks or so. But it's important to note that demand for the product is still strong and 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 and that's work in progress at the moment. Costs are coming down and you can see that in the results that we've produced. And as I said earlier, there are opportunities to take further costs out of the business. There's been strong demand for virgin packaging, virgin packaging in South Africa, and the exchange rates are helping us Q2 to be broadly in line with what the number we saw for Q1 EBITDA it's important to note that there are there is the impact of that extended shut in Guguana and some other timing differences.
Overall that impact is $12,000,000, and that's already encompassed in the forecast that we've We've given you here. Based on current market conditions and assuming current exchange rates, we expect EBITDA for 'sixteen 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 questions.
You. Our first question is from Bill Hoffman from RBC Capital.
Good day. Just a couple of questions on the specialty cellulose business. You talked about spot markets being soft. I just wonder if you can talk what you're seeing in competitive dynamics. I mean, obviously, there's some companies that are shifting from the specialty ass take rates, which are under pressure into commodity viscose and just wondering what the customer impact is as they see some of these spot tonnage coming in?
Yes, I don't think that's the big pressure point. Of I think the main driver of the price is 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. Yes, I think first, you think the commodity cycle with Cotton
as well, but we don't expect some major changes
at least similar to last year. Yes. To the point that you're raising, yes, there is a bit of a threat from that, but that's not the major factor that's been at play.
Okay. Thanks. And then just with regards to cloquet, could you just give us some update on how much of that's been running specialty versus paper bulks in the last quarter and kind of what the plan is for 2016?
Yes, it's consistent with prior years, it's approximately 2 thirds, 1 third, 2 thirds dissolving pulp, 1 third paper pulp.
Thank you. And then just final question. Market conditions in North America and the paper side, just wonder if you just talk a little bit about it, since the Diverso bankruptcy, obviously, to freeze them up to, from a debt point 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, but clearly we can't say much on Verso.
Steve. The market has been pretty strong in the reels and we had a good quarter in the reels. This past quarter and 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 Ruh 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. And 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, the reference to the CCF prices in China. And the way that the prices work is that they're typically we set the price each quarter. So it's 1 month in arrears. So the high prices were in the quarter to December.
So clearly, we will it from those higher prices in the current quarter we're in. The lower prices that you're seeing now will impact Q3 and Q4. But again to stress, where the market is now is still above where it was a year ago. So you are still going to see a growth in Q3 relative to what you saw last year.
Okay. Thanks very much. And 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 all that would for our the growth of our business so that we're not looking to sell any forest at this stage.
Thank you very much. Our next question is from Nishan Ramlietan from UBS. Please go ahead.
Yes, hi, Stephen and team. Just a couple of things from my side. So 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?
Yes. I'll pass on to Barry to elaborate further, but obviously, there's been 2 broad increases: one last year. And we did give some feedback on that and we were able to achieve some of that. And then obviously the price increase that we've recently announced very, very over to you Yes, there was some the prices hang on quite well, in fact, throughout the 4th calendar quarter. And on the back of still pretty high pulp prices, and on the mechanical COVID side, really insufficient margins,
there was a further price increase that we announced for quarter 1. And we saw that go through. It's probably stronger on mechanical code initiatives on good free, where the margins were slightly better anyway. But 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, but it will be in the it will not be the 5% that we announced, but it will get 2% to 3%.
Okay. And then just, I mean, coming back to dissolving So where do you see prices ending up by yearend?
Based on the estimates that we've seen out there and our assessment of the business, we broadly estimate that there'll be similar levels to what we're seeing currently.
So do you mean flat to about 850?
Yes. Between 8:30 to 8:50.
Okay. So slight softening. I mean, just so I assume as you say higher prices in Q2 and maybe softening then in Q3 and Q4. So I'm just curious with your shutdowns at Saikon and Gudwana, 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.
Yes, but, Nishal, bear in mind that what you're selling in Q2 the shuttered side cost 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 Guidwana? Yes, maybe just in terms
of in Guidwana, the shutters determined by when is the best time from a climatic condition and when you have your contractors available. So this in terms of reducing or the risk on the shut, this is the best time do it. And we put some stock to be able to serve the market.
Thank you very much. Our next question is from Roger Spitz from Merrill Lynch.
How much of your dissolving wood pulp volumes are currently under contract? I assume virtually all of it So if that's right, what are these contracts next roll?
Yes, it's over 80% is contracted. The way we've constructed it, with the big contracts with the key customers have staggered maturities and they're staggered over the next 2 years. We typically strive to, when we negotiate a component part of a long term contract, we strive to get it 5 years.
And is this fair to say that, I mean, we know you have 2 main main customers. Is the contract with each of those 2 key guys sort of one contract or even if it's even as just one contract, volumes, pieces of volumes would come off over time. It's not like customer ex date in the future, it all comes due?
On an ongoing basis, you had some of volumes coming off and then we start to negotiate for the extension of those volumes.
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 who were ultimate ownership was more certain?
If you want to just say a few words on that, but clearly we can't get too
specific about that. But we are We've been working very hard on our product quality and designs of our products, the service done an awful lot in the last 6 months to take down our costs, particularly the variable cost side of it, to grow our business, particularly on the website of the business is growing probably more than the sheet side at this point. And really comes down to the basics of good good quality product, good service and being able to meet the needs of the customer.
Thank you. My last question is the $350,000,000 605 ACE is callable, maybe 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? And if so, would you look to refi a smaller amount and pay down some absolute debt with some cash?
It's Glenn. We would be determined by market conditions. So we are monitoring market conditions closely and seeing if they move in the right directions. And the intention would be to refinance it. That's the right time.
Thank you very much.
Thank you very much. Our next question is from Darsh Gilbert from Credit Suisse. Please go ahead.
Hi, gentlemen. Just a couple of questions, Pete. The end we want to extended maintenance. Is that any more onerous than normal and have you sort of deject your maintenance schedule to a certain degree? Or should we still expect a very heavy maintenance quarter in Q3?
It is longer than normal. And We are doing some more work. I talked about earlier about doing some work on the boiler. I'm just trying to, in terms of the amount of days longer, it's about
it's only 30 days, it's about 42 days.
It's 12 days longer than normal. And we have pulled it forward slightly. A lot of that work was undertaken in Q3 last year and it's now in Q2 of this year. Does that answer your question, Mo?
Yes, it does. So we should take a slightly lighter Q3 maintenance quarter then. So we can add back some. Yes. Yes.
That's right. It's a good question. And Q3 will be stronger because, because most of the or a significant proportion of the shut is in Q2. Correct. Okay.
Coming back to the trees, I mean, you I think, it makes a ton of sense to me that you need more trees, but Can you sort of are you planning rather to gradually shift those trees and Sanguwana to hardwood as opposed to softwoods to facilitate a increased sort of wood pulp output.
Is that your plan?
Yes, that's right. I mean, 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 and, but at the same time, what we were referring to in our presentation was that we continue to look for other opportunities to increase our supply even further. As that as the businesses grow, we obviously want to secure more supply.
And 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. That's one more question. Just let me know, yes. The tariff conditions, of course, in gave you some incremental costs in the previous quarter. So how is that changing going forward?
And do you see any impact on the actual forest growth from that drug situation. And that's kind of lead to high wood cost.
I'll just talk briefly about Saiccor and then I'll hand it over to Alex to talk about the forestry side. In terms of Cycor, as we said earlier, the impact was $6,000,000. The river is now at full floor 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 is at side core is to, we're increasing the size of the dam, which is upriver.
And 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, but we 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 forestry.
Yes, in terms of forest laws, it has had an impact, probably about 70,000 to 100,000 tons. What we have taken corrective action, we can procure more wood from the market and we actually, we're actively doing that to compensate for loss that we've had in the forest. And obviously, by doing that a couple of years, you get the natural growth in the forest to recover.
Are there still significant costs attached to that third party procurement of wood?
No. We have been able to secure additional would add similar prices to what we're buying in the market at the moment.
Thank you very Our next question is from Sean Angraff from Buckingham Capital. Please go ahead.
Good afternoon, gentlemen. Just two questions from us 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.
And then just secondly, I mean, obviously the outlook statement is quite I'd say, bullish to confident. I mean, 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 2 times net debt to EBITDA. So I'm sort of thinking from what you're saying 2017 could be the year that sapi resumes dividends.
Yes. On the market share side, I'll let Barry elaborate further. But, we have been able to gain share on the coated wood free sheet side. Obviously, on the mechanical paper side, with the Houston volumes coming out, that has lowered our market share a little bit, but Barry, maybe you want to just spend further?
There are two basic areas where we've gained market share. One of them, of course, is specialty because we added a
great deal of capacity at the
end of 2013 and that's been slowly growing and continuing to grow. So that's positive. The other part is Zachael, 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. And when he said dividends, he doesn't mean dividends for the company. So that leads into the second question. Yeah, as you know, we've set ourselves a target of two times or a ceiling of net debt to EBITDA of 2 times. Before we declare a dividend, we need to be confident that we can sustain that.
You can do the math in terms of where we think this year will be, but, we don't anticipate paying a dividend in 2016 and we'll make a call next year when we get done.
Great. Thanks guys.
Thank you very much. Our next question is from Brian Molchan from RMB Sandy. Please go ahead.
Hi, guys. Good afternoon. Just continuing Lars's line of questioning about some good run and the debottlenecking there. So It's actually extended downtime now, extra 12 days. Is that the full extent of the debottlenecking project that you're going to be taking there?
Sorry, Brian, a missed party. Do you mind repeating?
Sorry. So just continuing last question, right? So are you taking extended downtime within Goodwana, extra 12 days? You're going to work on the boiler. Is that the full extent of the debottlenecking project that you did that you envisage for that, for that boiler or, is there going to be more down the line?
Yes, there are other projects down the line. We do think that there are opportunities to, nominally decrease both on the dissolving pulp side and on the packaging side. And that's going to happen over the next, couple of years. And we'll as we go forward, we'll keep you updated on those future projects. No, look, it's an ongoing process that 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, but it sets us up to now actually increase capacity and this future year outages will not be 42 days or back at the it does.
Yes. Okay, right. What would you say the net incremental boiler capacity would be as a result of the shaft this year?
We could probably add between or we're looking at adding between cyclone and Gatwana about 10% to our current capacity in the short term.
The short term. Okay, that's perfect. That's great. Thank you.
Thank you very much. Our next question is from Andrea Creddy from BNP Paribas. Please go ahead.
Just a quick point on your financial policy, just in terms of wording, I think always read that basically you targeting reduction of net leverage towards two times of target And I think on the presentation slides, you can see, you're talking about ceiling of two times. So how shall I, shall we understand basically your financial policy as we come closer to these two times, is it to remain permanently below two times through cycle? And do you have a rating target potentially associated with that?
Yeah, that is a ceiling for us going forward. So I do anticipate that it could go down further. Beyond that point. Clearly, we make specific reference to the two times because we get a lot of questions about, dividends. And I would want to be below level before we start rating, it's likely that our debt will come down further beyond that.
Okay. But basically below 2 times for the cycle is roughly the type of, I mean, your financial policy?
Our next question is from Clements from Blue Mountain Capital. Please go ahead.
Three questions from me. The first is, do you have an outlook on pulp prices, specifically for your European business? And 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 wood tree side? That's my first question.
Yes. Look, obviously, we started to see prices coming down. Barry, do you want to talk in a little bit more pricing?
Pump has been high compared to historical levels. So 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 for paper pulp business, but guessing what they're going to do is, it's not for us. 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's raw material prices pulp prices continue to be high.
Okay. And I guess 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, Yes,
look, at the moment in the market, the industry operating rates are all pretty high at the moment. The capacity closures that have already been announced. But demand is be strong. And you know, at sappy, our mills are full.
Okay. Okay. And then 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 at at Maastricht Mill, at ingham Mill. And we'll continue to look for those opportunities, but there's no major conversion planned at this stage, but we will continue to evaluate.
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 plus 2% to 3% in mechanical and what would you expect in Woodfry. I think you said it was harder to implement at the moment than in mechanical. And the second question is European volumes were up 8% year on 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, I think that'd be helpful.
Thank you.
I'll take the second question and then I'll go back to Barry on the 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. So, although our demand is up or our volumes are up by the percentages that you indicated, quite a large proportion of that is because of the Gratkorn shut. And nevertheless, we did gain market share as Barry has indicated. So our underlying trend has better.
For Q1, the market was down about 1%. We were couple of percentage points ahead of that. Barry, on my first
one.
What's the case
of real's prices have gone up probably the strongest price rise, followed by uncoated free sheets. And that is because capacities are very full in that area. So prices include harder, but if we credit sheets are going up roughly the same as the capital, so between 2% 4%.
Does that answer your questions, Chris?
Yes, it does. I just wanted
to confirm that it's plus 2% to 4% on coated sheets and slightly higher on coated and uncoated reels?
[SPEAKER UNIDENTIFIED
COMPANY REPRESENTATIVE:] Yes, that's
correct. Perfect. Thank you.
Thank you very much. Our final question is from Batet Pashtois from Schroeder. Please go ahead.
Hi. Most questions were answered, but if you can just comment a bit more on capacity City and industry, both in paper and pulp, what you're seeing there once you're able to expectation for the additions in this fiscal year, please?
From the industry as a whole, with dissolving pulp and paper.
Please, yes.
I'll take dissolving pulp first and maybe Gary can talk further after me. And then we'll come back to on the paper side. Terms of dissolving pulp, you saw a lot of capacity came onboard 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 the big comment, most of the capacity that's come on there's some new capacity in China that's come on, but the current other capacity is swing capacity.
Obviously, quite a bit of the capacity that does come on the onto the market is swing capacity. So and a number of those producers continue to make pulp for the paper business. And then Barry, do you want to just talk about capacity in Europe? Well, capacities in Europe have obviously come down quite sharply over
the last 2 or 3 years. Both in mechanical and wood free coatings. There are some more capacities due to a slowdown. And the effects of those slowdowns will be felt throughout the year. But I don't see any any large major moves.
There are some uncertainties. There's obviously 1 or 2 mills which have closed, but it is not yet certain whether they will come out of closure and restarts. I don't expect any further significant change.
Yes, that's right. And 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. And Mark, anything you want on the U. S. Capacity is coming up?
Well, I would agree with the comment that I just made on the coated woodfree. That market 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.
So it's a recap. You're basically saying no capacity it changes either way in either of the products for this year. Is that correct or?
No, no, no, capacity has come out, both in I mean
going forward for this year. And 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.
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. Ladies and gentlemen, on behalf of Limited. That concludes this conference. Thank you for joining us and you may now disconnect your lines.