Good afternoon, ladies and gentlemen, and welcome to the Sappi Limited full year 2015 financial 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 0. Please also note 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 afternoon to everybody. Today on the call, I'm joined by a number of my colleagues, including Glen Pearce, the CFO, Bernd Köstering, the CEO of Europe, Alex Thiel, CEO of South Africa. Mark Gardner, our CEO of North America, is unfortunately traveling at the moment and unable to join us on this call. I'm going to talk through the deck that is on our website. I'll call out the page numbers as we proceed through the deck. Moving to slide four, the highlights for the period. Firstly, on the quarter, earnings per share, excluding special items, was $0.16, up from $0.12 last year. EBITDA, $201 million compared to $200 million last year. Importantly, profit for the period was $83 million. That was a 22% rise from the $68 million that we achieved last year.
In terms of the full year, earnings per share, $0.34 compared to $0.22 last year. EBITDA was $625 million compared to $658 million last year. That shortfall entirely related to the translation of our European results into dollars because of the weaker euro currency. Profit for the period was up 24% to $167 million from $135 million last year. Our net debt continues to come down. We were able to bring it down a further $175 million this year and end the year at $1.771 billion. Moving to slide five, you can see the evolution of our EBITDA and operating profit over the last few years. As is consistent with prior years, Q4 is our strongest quarter. It was once again this year. We were up on last year.
The momentum was good in the quarter. As we move into the new financial year, the momentum is good in the business. On slide six, the EBITDA bridge comparing 2014 Q4 with 2015. As you would imagine, the exchange rates have had a significant impact. This is a dollar bridge, so as we translate our South African rand numbers and our euro numbers into dollars, that has an impact on the group results. On sales revenue, it would clearly have an adverse impact. On costs, we would benefit from that currency shift. In terms of sales volume, pretty good for the quarter. Volumes have been solid both in Europe and in North America. Overall a good quarter. We were able to put through some price increases in Europe. In dissolving pulp, our prices have increased further as the year has progressed.
Good work done on costs also helped further, overall ending the year for the quarter at $201 million of EBITDA. In terms of product contribution split, it is reflected on page seven. This is the last 12 months, you can see that from an EBITDA perspective, paper contributes 55% and specialized cellulose 45%. This is obviously reflective of the cash generation in the respective businesses and demonstrates that paper continues to be very important for us, despite the fact that it may make lower margins than specialized cellulose. Operating profit, specialized cellulose had a very strong year, contributed 65% of the overall operating profit. Moving to slide eight, the evolution of our net debt, you can see that post the acquisitions that we made in dissolving pulp in late 2013, early 2014, our debt peaked, we have seen it come down consistently since then.
We ended the year at 2.8 times net debt to EBITDA, as we look forward to the new financial year, we expect that to come down significantly further towards our overtime target of two times. On slide nine, we have the maturity profile of our debt, you can see that we do not have any material debt maturing in 2016. In 2017, we have the 2017 dollar bonds for $400 million maturing, obviously, over the course of the next 12 to 18 months, we would look to potentially refinance that at a lower cost. On slide 10, the CapEx ended the year around the $250 million mark, predominantly maintenance CapEx. Also some of the efficiency projects that we undertook at Gratkorn, Somerset, and Kirkniemi. Those projects we would look to get payback from as we move forward.
In 2016, we are projecting a similar level of CapEx. Again, maintenance at similar levels. The efficiency projects that we are undertaking this year are predominantly in South Africa, the main one being an investment in the boiler at Ngodwana, which is approximately $50 million. Turning to the divisions, I will start on the paper side of the business, move to slide 12. Firstly, in terms of global market trends on the supply and demand, it is fair to say that the strong dollar has caused significant shifts in the trade flows. You have seen substantial increase in imports coming into the U.S. Our European businesses have benefited from the weaker euro, we were able to export more from the European region. Coated paper capacity continues to come out both in Europe and in North America. With regards to Sappi, we have not had to do that.
Our mills have been pretty full. As we end the year, our mills are cash positive, the order book is full. Coated wood-free has generally been in line with expectations. Mechanical paper has been under significant pressure. In terms of selling prices, we have seen recent increases in Europe for coated wood-free and mechanical paper, we have recently announced a further price increase to be effective from January. Obviously, time will tell how successful we will be at implementing that. Oil prices have come down, that has lowered chemical-related prices, fuel-related prices. Pulp prices for our European business have been very high, that has been exacerbated by the fact that the euro has been weaker. Wood prices in the U.S. were high throughout the year, we have seen declines in recent weeks. Hopefully, that reduces the pressure as we move forward.
Overall, from a strategy perspective, we will continue to look for opportunities to take price increases when we can. Clearly, we can't rely on that. There's a strong focus on reducing fixed and variable costs across all the regions, and I think they've all done a very good job at being able to do that. We will continue to look for opportunities to convert capacity to other grades where we believe that there is growth and higher margins. Turning to specialized cellulose on slide 13. As you know, there are a number of swing mills out there that do make pulp for the paper industry and dissolving pulp. Quite a significant proportion of those have stayed in hardwood pulp for the paper industry, as those prices have remained high, and that has benefited us.
At the same time, the underlying demand for dissolving pulp continues to be positive, and the long-term outlook is still good. Selling prices have steadily risen throughout 2015. We saw further increases in Q4, and I'm sure you guys watch the spot markets post the year-end, they have increased further. VSF prices have been rising. Cotton prices are relatively stable. They did go down, then they subsequently started rising a little bit. In recent weeks, come back a little bit, but generally stable. However, with oil being down, polyester prices are under pressure. Input costs for the producers who have a non-U.S. dollar cost base have come down, and obviously, Sappi, with the South African mills, have benefited from that. In terms of our strategy, we will continue to manage capacity in the South African environment. There could be opportunities to debottleneck and slowly increase our tonnage.
We continue to work with our key customers to support their growth strategies. We will continue to investigate other end uses and adjacent uses for the dissolving pulp. Turning to the regions, I'll move on to slide 14, we start with Europe. Overall, I think the Europeans have had a good year. The volume declines have slowed somewhat during the last year or so. Coated wood-free has been in line with expectations. We've talked on previous calls about a 2% decline, and that has been the case throughout 2015. Unfortunately, mechanical paper is in a tougher place. For Sappi, just as a reminder, about one-third of the production in the European environment is related to mechanical, two-thirds coated wood-free.
The good news is that operating rates at our mill are high, the order book is good, we were able to put through some price increases. As I said earlier, we have announced further price increases for January. Unfortunately, the pulp prices have risen considerably, that has put pressure on variable costs. Fixed costs have been well managed and are down year-on-year. I think one of the big highlights for the period has been the improvement in profitability for our specialty business, we saw a substantial rise in earnings in that sector of our business. Turning to North America, we know that Q2 and Q3 were tough. Q4 was better. Our order books did fill up, we were in a better position.
At the same time, we were able to take further costs out of the business, I'm pleased to report that the profitability was higher this quarter than the same quarter last year. Nevertheless, the market is still tough because of the weaker dollar, and volume or demand is expected to decline by at least 3% as we move forward. South Africa on slide 16. We had a very strong year in South Africa, firstly, on dissolving pulp. We benefited from the fact that the order book was strong, the dissolving pulp spot prices were rising throughout the year, and that boosted profitability. Obviously, the weaker rand further improved margins. Good work was done on costs, with fixed costs down and variable costs under control, despite the fact that we're in a higher inflationary environment.
On the packaging side, demand for virgin linerboard was strong, we generated good margins, and that business continues to increase profitability. As we got close to the end of the quarter, we announced the sales of the Enstra and Cape Kraft mills. Those are mills that were in the recycled fiber segment. Those are proceeding, and we expect to conclude both of them during this month. Turning our attention to the strategy and moving to slide 17. We've talked about this on previous calls. We have the five pillars of our strategy aiming towards our 2020 vision, I have a slide on each, just highlighting some of the initiatives in the respective areas. Firstly, on slide 18, cost advantages. We have been making investments across all our regions to improve efficiencies. Some of the examples are listed there.
The natural gas conversion project at Somerset, the Kutini Power Plant investment, the Gratkorn investments on the paper machine. All of those will help us as we move forward. At the same time, we look for other opportunities to reduce costs. As part of our CapEx for this year, we're looking to invest in turbines at Saiccor and Tugela Mills in South Africa. We're excited about the procurement project. That's a global initiative leveraging from the global business, we think there's a sizable opportunity there to take further costs out of the business. Turning to slide 19, the rationalizing declining businesses. Obviously, we have to anticipate decline in demand for our traditional graphic paper, we've been doing that over a number of years.
Some recent examples, in South Africa, we have stopped production of coated paper, we have streamlined the product offering within the South African environment. Going forward, we recently announced that the Husum volumes, in terms of an arrangement we had with Metsä, those volumes will no longer be manufactured at that Husum mill. They will now come back to our European business, those will boost the profitability of the mills in the mechanical paper space. On slide 20, as we've been managing our cash flow and cash generation, we've been making smaller, moderate investments to grow the top line, mainly in the South African environment. We did make investments in the specialty packaging in Europe at the Alfeld mill.
More recent examples is upgrades to Tugela and Ngodwana pulp mills. We will continue to look for opportunities to grow virgin packaging in South Africa because it generates very good margins for us. During the 2015 financial year, we announced the investment in the nanocellulose pilot plant in the Netherlands, and we look forward to that progressing as we move into 2016. On page 21, we continue to focus on strengthening the balance sheet. We've made significant strides towards reducing the debt. It ended the year at ZAR 1,771, as I mentioned earlier. I think there's will be opportunities during this year to reduce that substantially further. We've announced the sales of the Enstra and Cape Kraft, which I touched on earlier. As the balance sheet gets stronger, that will enable us to refinance the remaining expensive debt that we have.
We've still got the 2017 bonds and the 2021 bonds, and we will look in time to refinance them at a lower cost. On slide 22. As we look beyond the next year or two, we need to start turning our attention to how we can grow the business. We look for opportunities to expand our specialty packaging offering. We are already doing some work at a number of our mills within the group, the Ehingen mill and the Maastricht mill in Europe. We are looking to change some of that production towards packaging, and similarly at Somerset in the U.S. That is a segment which is a growing segment and can generate good EBITDA margins for us. At the same time, we continue to look for opportunities on the bioproduct side and in areas such as lignins and sugars.
Longer term, obviously, as dissolving wood pulp continues to be strong, we would look to debottleneck the South African business and look for further growth opportunities. Turning to our outlook on, I'll move now to slide 24. We've started the year well, and we're forecasting that for Q1, the EBITDA and earnings per share will be better compared to the prior year, both from an operational performance perspective and the fact that we've got substantially lower interest rate or interest costs. At the moment, we have a headache because of the drought situation in South Africa. It is impacting on production a little bit, mainly at our Saiccor mill in the KwaZulu-Natal area. We have had to slow production a little bit.
We've assessed the situation. Our best estimates as we currently stand is that its impact on EBITDA for the quarter will be somewhere between ZAR 5 million and ZAR 10 million. Nevertheless, despite that, we are still confident that the earnings growth will be higher than last year. Dissolving wood pulp demand is strong and prices, as I said earlier, are higher than last year. Obviously the rand is weaker, which helps us further. Graphic paper markets I've touched on already. It's fair to say they're probably in a better place than we previously had anticipated. We are realistic. We do still expect them to decline, but our order book is full and the mills are cash positive. In North America, the strong US dollar will impact on trade flows. However, again, our order book is relatively full at the moment and we have taken costs out of the business.
Wood prices are coming down. Based on the market conditions and the exchange rates at the moment, we expect that the EBITDA for the full year 2016 will be higher than 2015. With the lower interest costs coming through as well, we would expect strong growth in earnings per share for the full 2016 financial year. CapEx is expected to be in line with 2015, I talked about that on an earlier slide. Also, again, I talked about it, we will continue to utilize our cash reserves to hopefully refinance that remaining higher cost debt that we have out there. Okay. That's the slide I wanted to talk to. Operator, I'm going to put it back to you 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. Again, if you wish to ask a question, please press star and then one. Our first question comes from Roger Spitz from Bank of America. Please go ahead.
Thank you. Good afternoon. Regarding the fiscal 2016 EBITDA guidance up year-over-year, could you say what the main drivers will be? Which businesses or which geographies do you expect that to mainly occur in?
Yep. The largest growth will come from the South African region. Dissolving pulp prices are higher. The rand is obviously weaker. We will benefit from that. Our packaging business in South Africa, the demand is strong, that's another business that does benefit from the currencies as well because it does go into packaging for fruit exports. Within Europe, with the higher prices that we were able to achieve earlier this year, we are hopeful that we can continue to grow on the success that we had last year. Then in North America, remember during this financial year, we did take significant curtailment in production last year, as we look forward to the new financial year, we view that as an opportunity if we can keep the mills full.
Perfect. You mentioned on the introductory remarks that you would look to address certain U.S. bonds over the next 12-18 months. Maybe you said it and I just missed it, I know you want to address both, but were you saying over the next 12-18 months, you want to address first the 6.875% first liens of 2021?
We haven't got any specific plans at this stage. All we wanted to highlight is that with the reduction in our net debt, the opportunity would be there for us to look at that. Glen, maybe you want to expand further? Yes. Our 2021 bonds have a call window that become available in April next year, 2016. Depending on market conditions, we'll be looking to refinance those.
Perfect. Lastly from me, do any of your dissolving wood pulp contracts come up with your two main customers in the near term? If they do you have any expectations of any material changes either in volumes or pricing when they do roll?
Yeah. With our major customers, we have staggered contracts. They do come up periodically. We are confident that we will be able to extend the ones that are maturing, we don't anticipate any major changes to the key terms or the volumes.
Thank you very much.
Thank you, sir. Our next question is from Nishal Ramlootan from UBS. Please go ahead.
Hi, yes. Good day, everyone. I think firstly, well done on a good set of numbers, I think in a very difficult market. Just a couple of questions from my side, if I may. I think the first one is just, you gave an indication of the weaker EUR, how that affected profitability. Can you give me an indication of how much the weaker ZAR actually helped you in your profit improvements? The second one is just on North America. You've done a bit of work in terms of reducing costs there. Do you think that's turned the corner? Q4 obviously was seasonally stronger, but Q1, where if it's weak, do you see that being still profitable or does that go to being loss-making?
I think attached to that, can you maybe give us an indication of the level of imports being seen in North American coated wood-free market? Has that increased and what are you doing there to mitigate that? I think the third thing is just, in Europe, can you just talk about what you're seeing there? I think more in light in terms of you increasing your volumes in a declining market. I think just lastly, at Cloquet, what's going to be the trigger for you to go back to making full dissolving pulp? I think you indicated that you're looking at that, but do you need a 10% increase in prices, for instance, on dissolving pulp to make that worthwhile?
Nishal, there's a number of questions. I will take some of them. I'm going to give the European one to Barry just now. I'll start on the currency and the U.S. questions, and then I'll hand over to Barry on the European question. In terms of the weaker EUR, yes, you're right, we did disclose the numbers. On the ZAR, it is fair to say it had a substantial impact. It's not as easy to measure because obviously within the Sappi Southern Africa business, you measure the profits in ZAR, and then you translate them back to dollars. It was a substantial contribution. The average rate for the year, Glen, was 11.90, was it?
11.90, yes.
The average rate for the year was 11.90, which was substantially higher than the previous year. We do think as we move forward into the new financial year with levels at around the 14 mark, that can generate significant amounts of increased EBITDA for us. In terms of the U.S. market, it's still tough. It's still in a tough space, and obviously Q4 was better. It is a seasonally stronger quarter. Look, we're realistic about where that market is, and we're pragmatic. At the moment our order book is pretty full, and we're okay at the moment, but the underlying pressures with the higher imports coming into the country is still there. In terms of the business as a whole, as I said, we've taken out substantial costs. At the same time, we did take, I think it was about 60,000 tons of curtailments during the year.
I want to stress that that is an opportunity as we move forward. You asked about the Cloquet dissolving pulp. Look, Nishal, we're getting close to that breakeven point. We're very close. One of the things I would say is that it is something that we are using to mitigate against the risk for the drought at Saiccor, and we potentially would look to up the production a little bit to help us through that situation. I've talked about it before. Over time, we would want to hopefully maximize the dissolving wood pulp production at that mill. At the moment, it's about two-thirds, one-third. Then I'm going to hand you to Barry just to talk generally about the European environment and then the volumes that you did see.
Yes. Thank you, Steve. As far as European business is concerned, there are really three separate issues. The first one is the export market. This was strong for European producers on the whole during the year, and in the last quarter for us was particularly strong both for wood-free coated and for mechanical coated products. That's one explanation. The second one, of course, is that we grew the specialties business quite strongly during the year with the full deployment of Alfeld PM 2 into the specialty area last year. In the year before, rather, we had made quite a lot of graphic paper on that machine that we stopped doing during the year. The final point is the carousel of Hudsen products
Which during the last quarter starts to move into our earnings. Those three really make up the reasons for the growth. Okay.
Okay. Thank you.
Nishal, I think that we covered all your questions.
Yeah. That's fine. Thanks, guys.
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 Lars Kjellberg from Credit Suisse. Please go ahead.
Thank you. Coming back to what you said, Steve, about the rand. It is very weak. You know what you have, you don't know what you're going to get. You've not, in any shape or form in the past, hedged the transaction exposure. Is that something you're now contemplating to lock in this very good profitability?
Yeah, it's an interesting question. Obviously, with the likelihood of higher interest rates in the U.S. and potentially that weakening the rand further, it's something we have to be very careful of doing. We've been very conservative. We certainly wouldn't want to overhedge the situation. For the Q1 period, we have locked in approximately 40% of the dissolving pulp volumes at taking out foreign currency contracts. We would be very hesitant to go more than that.
Understood. When you're looking at the pricing, obviously European business have suffered from high paper pulp prices. At the same time, softwood prices have been under pressure for most part of the year and coming down ballpark, at least the contract business, to the tune of $100 per ton. What do you purchase mainly in Europe? Is that mainly hardwoods and that's why you're suffering, you haven't had the offset from softwood? Given the size that you have as a purchaser in Europe, what are you now seeing in terms of trends as China seems to be weakening? At least there's some talks about some pressure coming back into the pulp market, downward pressures, that is. How do you view that?
Okay. I'll take that one, Steven. In terms of what we buy, we buy both soft and hardwood. Rather more hardwood than softwood. On the whole, we have seen a significant price increase because hardwood has increased in U.S. dollars as well as the U.S. dollar strengthening against the EUR. That has significantly reduced margins. Price increases on paper tend to lag behind, as you know, I doubt whether we will be able to bridge that gap completely until the January quarter when we do see a price rise coming in. As far as pulp trends are concerned, I believe forecasting that is much like forecasting the results of witchcraft.
I think it's, for us, quite impossible to do, I do believe that when the differential between hard and softwood is as close as it is now, then of course it's possible to change from hardwood to softwood, that might bring some more balance into the market. At the moment, we are finding it very difficult to predict where those prices are going.
Understood. Coming into the Southern market, just to talk about China a bit again. Most things, pretty much anything that goes into China at this moment seems to be rather weak. You're seeing a very strong price recovery in dissolving wood pulp. You mentioned polyester, of course, coming down. How should we view this? Is this a sustainable price change? Let's assume that hardwood prices were to come down a bit. Is there a meaningful swing capacity that could sort of take off that momentum that you had in dissolving prices since March? The second component, I wasn't quite clear what you said, Steve, when you said you don't expect any meaningful changes to the contract structures. I'm sure that doesn't talk about prices well, given the fact that you've seen spot prices coming up so much.
Just to clarify, do you not expect contract prices to go up? Is that what you said?
No. It's in terms of the same contract. It's obviously linked to spot prices in the Chinese market, the CCF prices. What I'm saying is that formula will continue to be applicable. Obviously, as prices rise or drop, I suppose, our prices to our customers will follow that.
Okay.
Does that make sense?
Yeah. No. Perfect.
Yep. In terms of the You talked about the factors influencing the pricing for dissolving pulp. Clearly, the possibility of hardwood pulp manufacturers swinging back to dissolving pulp is always a risk, and it is always there. Obviously we would do that at Cloquet as well, as I talked about earlier. What I would stress is at the moment, the viscose staple fiber prices have been good, and those have boosted the margins of the VSF manufacturers, and that's allowed dissolving pulp prices to rise. Could the price be under pressure as we move forward? The risk is always there. However, the underlying demand for dissolving pulp is still positive, and prices in the spot market are now $100 higher than they were in December. Yes, maybe could it come back a little bit? Possibly. The underlying demand is good at the moment.
Pricing pressure is moving in the right direction, and obviously with the weaker rand, that strengthens our position. We are positive relative to where we've come out of 2015.
Understood. A final question, Mark isn't there, but maybe Steve, you can help me anyways. The U.S. side of the equation, obviously you saw some pricing pressure around the midpoint of the year. You just come out of a strong season with typical season stronger demand, and imports keep on coming and the dollar again has really strengthened, I guess. Could you see scenario now where the U.S. prices take another leg down? The utilization rates are well down on what they were a year ago, of course, right? From a combination of lower demand domestically and a surge in imports. Are you seeing any incremental pressure in the U.S. pricing at this moment?
Yes. Bear in mind, remember there were two price increases that went through in the U.S. Demand started to come under significant pressure. We saw the dollar strengthen, we saw more imports coming in. Interestingly, low prices have come back a little bit. They're still higher than they were a year ago. Your question, could pricing come under further pressure? I suppose with demand being weak the way it is and the threat of imports coming into the country, there could be a risk of lower prices. What we have seen over the last few weeks is things have stabilized a little bit and as I said, the order book has been relatively full. We've been able to gain market share amongst the domestic producers, which has enabled us to keep the mills full.
All of that combined with the fact that we've been taking costs out of the business, we have the payback from the Somerset investment that we made, and the fact that in our base we have 60,000 tons of curtailment. All of that combined gives me reason to believe that we can have a better year this year.
Perfect. Just to be clear, though, you haven't seen any pricing pressure. That's really what you said, yeah?
No. As I said, it has come back a little bit, but it's still higher than it was a year ago.
I'll take it there. Thank you.
The reason I say that is because we put through two price increases, remember? We put through one in July of last year and then one in January of this year. It's came back a little bit.
Sure. Thank you.
Thank you very much. Our next question is from Brian Morgan from RMB Morgan Stanley. Please go ahead.
James, good afternoon. Could you chat a little bit about the release liner business in the U.S.? I understand it historically was a fairly large earnings contributor to the U.S. business and it's turned on in the last couple of months. Can you chat a bit about how that's progressed and where we were a year ago versus where we are today?
Yes. That business has been under pressure. It is exposed to China. It is not a large business, it is not a large contributor, but on a relative basis, compared to 18 months, two years ago, it is probably making about $8 million-$10 million less EBITDA than it did then.
Okay. That is great. That is annualized, right?
Sorry?
That is annualized.
That is an annualized figure. Bear in mind, relative to the other larger businesses, it is relatively small, but its impact year-on-year was about $8 million-$10 million.
Okay. That's great. Thank you. Can we just chat about your accelerated outlook? You talk about looking at two mills in Europe and looking at packaging. If you could just share your thought process with us. There's a lot of printing and writing capacity in Europe that's converting to packaging grades right now. Are you not concerned that you're just following that trend and potentially driving down margins in that grade?
Firstly, let me just stress that we're not talking about committing large amounts of capital to these projects. These are opportunistic, and they allow us to reallocate some of our production to the higher margin segment. What I'll do is I'm going to hand over to Barry to talk about some of the specifics on that front. Barry, over to you. Yeah.
Thanks. We're talking about two mills in particular. One is Maastricht, where we have developed a folding boxboard grade, which we have done with minimal capital cost to the machine. It's really a question of looking at markets which are very close or adjacent to markets we are already serving. We already serve the perfume boxboard with ISPB grades. This is right beside it, so we know the customers, we know the kind of need they have.
Therefore, we're able to make a product that fits that. We do it on a relatively small scale. We build slowly. It's not that we are replacing the whole of that capacity with this new grade in short term. We've done a rather similar thing in Ehingen where we're making a white top liner, which goes into lighter laminate and boxes, which require extremely good printing and a very smooth surface. There again, it's a product we had already developed in Alfeld. We were already in the market, and we're just growing it. We're talking 10 or 20,000 tons here. You're not talking about enormous amounts. It gets us into the market and slowly allows us to grow, and it takes some of the pressure for searching for volumes in graphics out of those mills.
Okay. That's great. That's awesome. Thank you. Then, just finally on Saiccor with the drought. Has the drought already started to impact production levels at Saiccor, or is it something that you're flagging as potential?
There has been some impact already. I'm going to hand over to Alex now just to go into a little bit more detail. We have had some impact on production, but the estimate that I've given you is our conservative best estimate. Alex, maybe you just want to expand further.
Thanks, Steve. Earlier in the month, we shut down one of the lines for maintenance. We've just delayed bringing that back up, so it's been a little bit slower. Our estimate is that there will be, as Steve said, about a ZAR 5 million-ZAR 10 million impact. We are running at two-thirds capacity. There are fairly good rains forecast for the short term. We are fairly confident that we'll get back up to full production in the next couple of weeks. We also do have a benefit that has been in Ngodwana. We are able to improve production just based on efficiencies and how well the mills are running, and that is compensating somewhat.
Okay, that's awesome. Thank you.
Thank you very much. Our next question is from Sean Ungerer from Avior Research. Please go ahead.
Good afternoon, everybody. Just a couple of questions. In terms of the sort of outlook for grade declines in coated wood-free and coated mechanical, obviously, it surprised to the upside this year. We've been talking a lot about downside risk in terms of pricing. Perhaps you could comment a little bit about upside risk in terms of volume outlook for the next two years, specifically on the coated wood-free. Then just on that, the grade decline, I think in FY 2017 is quite big relative to the last two years. Does that sort of imply that you'd be considering a closure or sort of change in strategy on further production, maybe in FY 2018? Then just linked to that, obviously the de-gearing profile is quite nice. Where are you guys sort of thinking about dividends? I know that was sort of mentioned a couple of quarters ago.
Just how that sort of ties into that. Then could you comment a little bit on the contribution from specialty packaging in Europe? You obviously said that the volume growth and pricing has been quite favorable. Just so we could get a bit of feel on that. Thanks.
Okay. That's a few questions. Let me take each one in turn. In terms of upside to coated wood-free, yes, that has happened over the last year, I've already talked about the fact that our mills are fairly full. What that means is that our mills are all cash positive. They are full, as I indicated, we are not anticipating any closures from those in the foreseeable future. Obviously, we watch that on an ongoing basis. With demand where it is at the moment, there will be no need to take capacity out. On a pricing front, Barry's talked about it already, I've mentioned that we are hopeful that we can get that through in January. If it does, then obviously that helps offset the higher pulp costs that we've talked about.
On the de-gearing, I don't recall talking about it a couple of quarters back. What we've consistently said is that we want to bring the gearing down to 2x EBITDA. Based on our outlook for 2016, we should take a big step towards that during this financial year. We don't anticipate paying a dividend during the 2016 financial year. In terms of specialty packaging in Europe, there has been a good turnaround. We don't disclose that as a separate segment, but the increase relative to the prior year has been ZAR 15 million plus.
Okay, thanks.
Thanks, Alex. Thank you very much. Our next question is from Bob Hoffman from RBC Capital. Please go ahead.
Yeah, thanks. Just two quick ones. One, you talked about the 60,000 tons of downtime Somerset, but also potential projects for specialty papers there. Could you just give us a little more detail on the thoughts with that and timing?
Yeah. Again, it's similar to what Barry talked about. We're not talking large volumes, but again, it enables you to fill the machines. We already make certain grades of packaging at that mill, but relative to the overall size of Somerset, it is relatively small. We're not anticipating a major investment in the short term.
Okay, thanks. With regards to Cloquet, you also mentioned that potentially using production there to supplement some of the outages down in South Africa. What do you think the cost impact would that be? Because you said it's currently, you're not quite to the profitable price yet.
Yeah. As I said to you, the breakeven point now is very close.
Right.
It's a marginal impact. In fact, it's part of the $5 million-$10 million that I talked about. That is part of that number.
Okay. Thank you. Just last question, these two mills that you indicated for sale, what are the proceeds from that, and what do you expect to use it for?
That was ZAR 600 million. What's that? It's about $50 million, getting less by the minute, maybe $45, we would expect to reduce debt further with those proceeds.
Great. Thank you.
Thank you very much. Ladies and gentlemen, a final reminder, if you wish to ask a question, please press star and then one. Our next question is from Wade Napier from Avior Capital.
Thank you. Just three questions for me. This year you've decreased your CapEx guidance from about just below $300 million to now $250 million. What would you guide net debt production to be going into 2016? Previously, I recall you were talking about $150 million per annum. Does that remain unchanged or will that increase now? Second question will be, with anti-dumping duties in the U.S. for uncoated wood-free paper, is there potential to maybe turn off a coater in one of your North American mills and target the uncoated market as opposed to coated markets? My third question would be around the $50 million Saiccor recovery boiler investment you mentioned. What is the timing of that coming online, and what is the returns on that project? Thank you.
Okay. I'm going to take each question in turn. The CapEx, as I indicated, we estimate $250 for this year. Our estimate for net debt reduction over the course of this year is at least $150 million. We start the year at $1,771, you minus the $150, we're getting close to $1,600. In terms of the coaters in the U.S., I would stress that we continue to be open-minded about our U.S. operations. As things currently stand, our order book is full, and we would expect to continue on the coated front. On the boiler, it's not Saiccor, it's Ngodwana. It's not a new boiler, it's fixing up the old one, which is due. It's reached the end of its life, and it's something that we have to do to go forward.
Its timing is during the course of this financial year, and as I indicated, it's about just over ZAR 500 million investment.
Thank you.
Thank you very much. Gentlemen, we have no further questions. Do you have any closing comments?
No, I just want to thank everybody for joining us, and we look forward to chatting at the end of Q1. Thank you.
Thank you very much, sir. Ladies and gentlemen, on behalf of Sappi Limited, that concludes today's conference. Thank you for joining us, and you may now disconnect your lines.