Sappi 3rd Quarter Profit Dips on Planned Production Downtime
Aug. 4, 2011 - Sappi today reported results for its fiscal third quarter ending June 2011.
- Operating profit excluding special items US$60 million; Q3 2010 US$75 million
- General economic uncertainty, particularly in Europe
- North American and chemical cellulose businesses continue to perform strongly
- Planned annual maintenance shuts at major pulp mills
- High input costs only partly offset by higher prices
- Loss per share excluding special items and once off debt restructuring costs 4 US cents; Q3 2010 EPS excluding special items 2 US cents
Commenting on the results, Sappi chief executive Ralph Boettger said:
"Operating profit for the quarter was impacted as expected by planned annual maintenance shuts at a number of our major pulp mills and seasonal factors. In addition, weaker than expected demand for coated woodfree paper in Europe resulting from continuing uncertainty in economic conditions unfavourably affected operating profit. For the nine months operating profit excluding special items was more than 50% higher than the equivalent period last year.
"Sales for the quarter were US$1.8 billion, an increase of 12% in US dollar terms compared to the third quarter last year and at a similar level to the quarter ended March. Average prices realised in US Dollar terms were 16% higher than a year ago. Excluding the effect of translation from Euro and Rand to a relatively weaker US Dollar, average prices in local currencies increased 5%.
"High input costs remained a challenge in each of our businesses and are reflected in an increase in variable costs per ton of 18%. In local currency terms variable costs per ton increased 6% compared to the equivalent quarter last year. In order to reduce the impact of high raw material prices we continue to seek innovations with regard to the sourcing and the use of raw materials.
"Operating profit excluding special items for the quarter was US$60 million compared to US$75 million in the equivalent quarter last year. Special items of US$6 million for the quarter included a plantation fair value adjustment and Black Economic Empowerment charges.
"Net finance costs for the quarter include breakage costs and the accelerated amortisation of fees of US$43 million in connection with the debt restructuring completed during the quarter in order to extend debt maturities and reduce future finance costs. We expect quarterly net finance costs of approximately US$60 million after the refinancing. Cash generated from operations for the quarter was US$148 million, compared to US$188 million in the equivalent quarter last year. Capital expenditure was US$69 million for the quarter and US$161 million year-to-date. We expect the full year capital expenditure to be less than US$250 million. Net debt increased to US$2.47 billion as a result of net cash utilised in the quarter of US$20 million, the cash effects of financing activities and a currency movement and fair value impact of US$43 million, compared to March 2011. Liquidity remained strong with cash on hand of US$362 million and the undrawn committed revolving credit facility of euro 350 million (US$508 million), at quarter end.
"The loss per share for the quarter was 13 US cents (including a loss of 9 US cents in respect of special items and once-off debt restructuring costs) compared to earnings of 12 US cents (including a gain of 10 US cents in respect of special items).
"Plans to restructure the paper and packaging business of Sappi Southern Africa in order to improve profitability, in conjunction with the approximately US$340 million conversion of the Ngodwana pulp mill to chemical cellulose production are progressing. We expect to announce details of the restructuring plans before the end of the calendar year."
Looking forward, Boettger commented:
"Market conditions remain challenging and uncertain, particularly in Europe. Nevertheless we are entering the typically busiest period for coated paper. Order inflows in North America remain firm and in Europe we are expecting some improvement from the levels of the previous quarter.
"We expect that the realisation of the benefits of our cost and capacity management activities in Europe will commence in the fourth financial quarter. Coated paper production at Biberist Mill in Switzerland ceased during July. Going forward, we expect savings of US$50 million per annum as a result of the closure. In addition, as previously announced, we will start to benefit from a further US$50 million per annum in fixed and variable cost saving measures towards the end of the fourth quarter.
"Raw material input costs have continued to rise, in line with other commodity prices. Pulp prices remain high but there have been reductions in some regions from the peaks reached during the previous quarter. High pulp prices are favourable for our North American and Southern African businesses, which are net sellers of pulp, but unfavourable for our European business, which is a net buyer of pulp.
"Our Southern African business has a strong order book for chemical cellulose and expects an improvement in demand for packaging paper in the domestic market. The domestic market, particularly for printing and writing paper remains highly competitive as a result of the strong Rand relative to the US Dollar, which has led to increased competition from imports. The business' performance for the quarter will be significantly impacted by the industry-wide strike of about 3 weeks in July over wage negotiations.
"We expect considerable improvement in operating profit (excluding special items) during our fourth financial quarter compared to the third financial quarter; however, it is likely to be well short of the level achieved in the equivalent quarter last year. Nevertheless, we expect a much improved operating profit (excluding special items) for the full year, compared to the 2010 financial year. We anticipate strong net cash generation in our fourth quarter and positive cash generation for the full year."
SOURCE: Sappi Limited