Sappi Posts Lower 2Q Profit on Weaker Than Expected Market Conditions in Europe

May 9, 2013 - Sappi Limited today announced results for the company's fiscal second quarter.

Summary for the quarter:

  • European business impacted by lower prices and higher pulp costs
  • Specialised Cellulose projects on track, major shuts completed
  • Profit for the period US$7 million (Q2 2012 US$58 million)
  • EPS 1 US cent (Q2 2012 11 US cents)
  • Operating profit excluding special items US$40 million (Q2 2012 US$125 million)
  • Net finance costs US$40 million (Q2 2012 US$51 million)
  • Net debt US$2,152 million (Q2 2012 US$2,133 million)

"The actual performance was weaker than expected however, due to weaker European market conditions and an inability to implement any meaningful coated graphic paper price increases in Europe during the past quarter." – Ralph Boettger, CEO, Sappi.

Commenting on the result, Sappi Chief Executive Officer Ralph Boettger said, "The Specialised Cellulose and North American businesses continue to perform well and the investments in the conversions at the Ngodwana and Cloquet Mills have progressed according to plan. Dissolving wood pulp production is scheduled to start at these two mills during the 3rd quarter. As indicated in the previous quarter, we expected operating profit for the second quarter to be lower than that of the first quarter. The actual performance was weaker than expected however, due to weaker European market conditions and an inability to implement any meaningful coated graphic paper price increases in Europe during the past quarter. This led to a weak overall group performance.

"Looking forward, market conditions for our paper businesses, particularly in Europe are expected to continue to be weaker than previously envisaged. The price increases in Europe, to date, have not been sufficient to restore margins given rising input costs. Despite the interventions and major cost reductions that have taken place, we expect the European business to only achieve a breakeven operating profit excluding special items for the full year. This performance necessitates further action and we are evaluating a number of options that could result in capacity and cost reductions in our European business. Further measures are also being implemented in the Southern African business. The Specialised Cellulose and North American businesses are expected to continue to perform according to plan.

"Notwithstanding the weak European performance, and the impact of the commissioning and start-up of the two major dissolving wood pulp projects, we believe that the group will at worst breakeven at the net profit excluding special items level for the full year. We expect net debt to peak at approximately US$2.4 billion in the third quarter and thereafter to decrease to approximately US$2.2 billion by the end of the financial year.

"Despite the generally tough market conditions and the once-off impact of our major transitionary projects on the current year's performance, our actions and investments will position the group well for improved performance from 2014 onwards."

The quarter under review
Operating profit excluding special items of US$40 million was adversely impacted by the weak performance of the European business. This compares to an operating profit excluding special items of US$125 million in the equivalent quarter last year and US$73 million in the quarter ended December 2012. In the North American business strong paper sales volumes offset weaker paper sales prices as well as the decline in paper pulp sales due to preparations at the Cloquet Mill for the pulp mill conversion from paper pulp to dissolving wood pulp. Coated paper sales volumes increased 6% over the equivalent quarter last year and were 2% higher than the prior quarter; prices were however, lower in a competitive market.

While the Southern African business performed reasonably well, it was as expected, negatively impacted by the planned extended shut at the Ngodwana Mill as a result of the conversion of the pulp mill to dissolving wood pulp as well as the relatively weak local demand for paper products. Special items for the quarter included a plantation price fair value adjustment of US$96 million (R863 million) largely as a result of the revaluation of the softwood plantation assets that previously supplied the Ngodwana softwood pulp line. As a result of the conversion of the pulp mill to hardwood dissolving wood pulp, this softwood resource is now available to sell as saw logs which earn a price premium to pulp logs. Various assets at the Tugela and Stanger Mills were impaired and a charge of US$52 million (R454 million) was booked in the quarter. These charges relate to the ongoing optimisation process in the Southern African paper and paper packaging business.

Dissolving wood pulp sales volumes from the Saiccor Mill remain limited only by our production capacity. Rising NBSK pulp prices, to which our dissolving wood pulp sales are linked, and a weaker Rand exchange rate contributed to the strong performance of Saiccor, which generated R472 million in EBITDA excluding special items and an EBITDA excluding special items margin of 34%.

Market conditions for our graphic paper products remained challenging, particularly in Europe where we experienced further deterioration across all graphic paper grades. Paper volumes and prices in this business were lower, whilst input costs were higher compared to the corresponding quarter last year. We were unable to fully implement the January price increases during the quarter.

Net finance costs for the quarter of US$40 million are US$11 million below that of the equivalent quarter last year as a result of the refinancing of higher cost debt in the past year. Net cash utilised for the quarter was US$99 million, compared to net cash generation of US$91 million in the equivalent quarter last year. This cash utilisation was mainly as a result of lower profits from operations and capital expenditure which increased to US$179 million during the quarter from the US$59 million in the equivalent quarter last year. This increased capital expenditure relates primarily to the strategic investments in expanding our dissolving wood pulp capacity.

Liquidity remains strong with cash on hand of US$398 million and US$509 million available from the undrawn committed revolving credit facilities in Europe and South Africa.

Outlook
Market conditions for our paper businesses, particularly in Europe are expected to be weaker than previously envisaged. Demand and pricing remain under pressure and input costs, particularly pulp, are likely to remain high. The announced January price increases for coated woodfree paper were only marginally successful, and further price increases were announced during the quarter for implementation in April. These increases, to date, have not been sufficient to restore margins given rising input costs. Despite the interventions and major cost reductions that have taken place, we expect the European business to only achieve a breakeven operating profit excluding special items for the full year.

The Ngodwana and Cloquet Mills both successfully completed their major shuts relating to the Specialised Cellulose expansion projects during March and April. Dissolving wood pulp production is expected to commence at both plants before the end of June, with paper pulp being produced for internal use in the interim.

The full results announcement is available at www.sappi.com.

SOURCE: Sappi Limited