Sappi 3rd Quarter Operating Profit Falls on Seasonal Weakness, Pulp Mill Downtime

Aug. 2, 2013 - Sappi Limited provided the following summary for its 3rd fiscal quarter ended June 2013:

  • Successful start-up of both dissolving wood pulp projects
  • Operating profit excluding special items US$8 million (Q3 2012 US$60 million)
  • Loss for the period US$42 million (Q3 2012 US$106 million loss)
  • Loss per share 8 US cents (Q3 2012 loss of 20 US cents)
  • Net finance costs US$42 million (Q3 2012 US$141 million)
  • Net debt US$2,297 million (Q3 2012 US$2,213 million)

Commenting on the result, Sappi Chief Executive Officer Ralph Boettger said: "The third financial quarter is seasonally our weakest, due to typically lower demand in Europe and North America and the scheduling of planned annual maintenance shuts at most of our major pulp mills.

"In this transitional year, the quarter was also impacted by the extended shuts at both the Cloquet and Ngodwana Mills as they completed the capital projects to convert existing paper pulp lines to dissolving wood pulp.

"In addition, market conditions, particularly in our European paper business, deteriorated further during the quarter. These factors combined to reduce group operating profit excluding special items for the period to US$8 million from US$40 million in the prior quarter and US$60 million for the equivalent quarter last year.

"The third-quarter results were also impacted by special items including a charge of US$11 million related to plantation price fair value adjustment and a charge of US$4 million due to plantation fire damage in South Africa.

Both the dissolving wood pulp projects at the Ngodwana and Cloquet pulp mills have now started production. The Cloquet Mill produced the first bales of dissolving wood pulp in early June, and the ramp-up has progressed according to schedule with production and quality targets having been met. The Ngodwana Mill started up in late July, a few weeks later than scheduled, and we expect this mill to ramp-up to full production over the coming months.

The past quarter saw a further deterioration in European paper industry conditions, exacerbating an already weak market, and demand is expected to remain subdued. Input costs, particularly pulp, remain high and we do not expect to see any price increases in our major paper grades in the coming quarter.

Plans are being finalised that will result in significant capacity closure, lower costs and improved operating margins in Europe. We envisage these actions will occur over a three-year period and that any cash costs will be self-funded. The benefits of these actions will begin to flow in the 2014 financial year.

We expect our European business to make an operating loss in the fourth financial quarter which will result in the group making a small net loss for the financial year. Our full year results may be impacted by the aforementioned strategic initiatives and, any asset impairments and restructuring costs that may arise.

Debt remains within the levels previously indicated despite the weaker operating performance. We expect debt levels to peak during the fourth quarter as the final outlays for the dissolving wood pulp projects occur and to end the quarter slightly lower than that reported for the third quarter. Our medium-term leverage target remains between 1.5 and 2 times net debt to EBITDA.

THE QUARTER UNDER REVIEW

This seasonally slow quarter saw a significant decline in demand for our major paper grades, with total European industry deliveries of coated woodfree and coated mechanical paper down 8% year-on-year for the quarter. Our total sales volumes were 6% below that of the equivalent quarter last year despite good growth in specialities volumes. Average prices realised were slightly higher than in the previous quarter, as a result of marginal price increases for coated woodfree paper, but remain on average below those of the equivalent quarter in the prior year.

In the North American business, operating profit for the current quarter was negatively impacted by an estimated US$12 million due to 22 days of incremental downtime taken for the Cloquet pulp mill conversion project and related ramp-up of operations. Coated paper sales volumes were essentially flat year-on-year; however the average net sales price per ton was 4% lower than in the prior year due to a competitive local market and increased import pressure. Prices appeared to have stabilised during the quarter and we expect to realise some price increases on economy sheets and web products over the coming months. The release business continues to perform well and sales volumes were up 11% compared to last year driven by improved demand and the success of our key new patterns.

In the Southern African business, the domestic paper packaging and office paper markets were weak during the quarter; although, towards the end of the quarter and to date, there have been encouraging indications in the containerboard segment of a possible improvement in volumes. The estimated adverse operating profit impact of the conversion to produce dissolving wood pulp at the Ngodwana Mill and the extended pulp mill downtime was approximately ZAR78 million during the quarter. The Specialised Cellulose business had another good quarter, generating ZAR463 million in EBITDA excluding special items at an EBITDA excluding special items margin of 30%. Sales volumes for the quarter were 183,000 tons, similar to the prior quarter and 8% lower than the equivalent quarter last year due to the timing of shipments. During the quarter, the planned annual maintenance shut of one of the pulp lines at Saiccor Mill took place. We are pleased that we were able to reach an agreement with labour on wage increases for the forthcoming year.

Net finance costs for the quarter of US$42 million were in line with those of the prior quarter. The comparative Q3 2012 net finance costs of US$141 million included the once-off charges of US$89 million related to the bond refinancing during that quarter.

Net cash utilised for the quarter was US$157 million, compared to net cash utilisation of US$56 million in the equivalent quarter last year. This cash utilisation was mainly as a result of capital expenditure of US$174 million which related primarily to the strategic investments in expanding our dissolving wood pulp capacity and lower profits from operations. We expect that capital expenditure for the full year will not exceed US$600 million.

Liquidity remains strong with cash on hand of US$236 million and US$561 million available from the undrawn committed revolving credit facilities in Europe and South Africa. We have sufficient liquidity to complete the spending on the various capital projects. During the quarter, the 330 million international securitisation programme was renewed and the facility maturity date extended to 2016.

OUTLOOK

The South African paper business expects to see growth in containerboard volumes, although demand continues to be weak in other grades. Cost pressures and weak demand have resulted in further actions to improve the profitability being implemented.

The North American paper business is positioned to perform well in an increasingly competitive market and we expect to realise some price increases on economy sheets and web products over the coming months.

Our expanded global Specialised Cellulose business is focussed on selling the increasing dissolving wood pulp volumes, as the mills continue on their start-up curves, and cementing our position as the leading producer in this market. Dissolving wood pulp prices are under pressure in this competitive market, and could have an impact on margins going forward.

The coated woodfree paper machine conversion project at Alfeld Mill, which will increase our speciality paper production, remains on track for start-up during the first financial quarter of 2014.

Sappi is a global company focused on providing dissolving wood pulp, paper pulp and paper based solutions to our direct and indirect customer base across more than 100 countries. For more information visit: www.sappi.com.

SOURCE: Sappi Limited