Johannesburg, 06 February 2013
Sappi results for 1st quarter in line with expectations.
Financial summary for the quarter
- Profit for the period US$17 million (Q1 2012 US$45 million)
- EPS 3 US cents (Q1 2012 9 US cents)
- Operating profit excluding special items US$73 million (Q1 2012 US$100 million)
- Net finance costs of US$42 million (Q1 2012 US$54 million)
- Net debt US$2,095 million (Q1 2012 US$2,175 million)
Commenting on the result, Sappi Chief Executive Officer Ralph Boettger said:
“2013 is an important transitional year as specialised cellulose capacity is expanded. The group performance for the quarter was impacted by generally lower selling prices for pulp and paper. The North American business performed well as a result of higher coated paper sales volumes despite lower average sales prices. Conversely, we experienced a slightly weaker than expected performance in our Southern African and European businesses. While Europe remains challenging and conditions worsened during the quarter, Sappi’s operating and sales achievements were ahead of the market. Lower pricing across all graphic paper grades led to lower profitability for the European paper business. In South Africa, the impact of lower dissolving pulp prices compared to the equivalent quarter in the prior year combined with the three-week road transport strike negatively affected the result, however volume and pricing momentum picked up towards the end of the quarter."
“This financial year is an important transitional year for the group as we consolidate the three pillars of our strategy, more specifically as we expand our Specialised Cellulose business, continue to optimise our paper businesses and deleverage our balance sheet. The conversion projects at the Ngodwana and the Cloquet Mills are on schedule for start-up in the third quarter of the year."
“Given prevailing market conditions, we expect the second quarter operating profit excluding special items to be below that of the first quarter. This is due in large part to the extended planned maintenance shut at our Ngodwana Mill for the Specialised Cellulose conversion project as well as continued challenging market conditions in particular in the European paper business. "
“We expect the operating profit in the second half of the financial year to be stronger than in the first half.”
The quarter under review
Operating profit excluding special items of US$73 million was in line with our expectations given generally lower selling prices for pulp and paper. This compares to an operating profit excluding special items of US$100 million in the equivalent quarter last year and US$118 million in the quarter ended September 2012.
Our North American coated paper business performed well, with increased coated paper sales volumes partially offset by lower average sales prices which were 3% when compared to the equivalent quarter last year. Release paper sales volumes were markedly higher than in both the equivalent quarter last year, and the prior quarter. Average sales prices, whilst stable compared to the prior quarter were below those of the equivalent quarter last year. The North American business was however negatively impacted by lower pulp prices, which were 5% lower than the equivalent quarter last year, and 3% lower than the prior quarter. Sales volumes were also lower in both comparative periods, partly due to a planned increase in pulp inventories at the Cloquet mill ahead of the conversion to dissolving pulp.
Despite tough market conditions in Europe during the quarter and depressed industry volumes year-on-year, in the case of mechanical coated paper by as much as 7%, the European paper business achieved sales volumes for the quarter equal to the equivalent quarter in the prior year. During the quarter we experienced strong downward pressure on pricing for all graphic paper grades, and average graphic paper sales prices were 2% lower than in the equivalent quarter last year. The coated specialities business continues to perform well, with increased sales volumes and stable to increasing price movements compared with the equivalent quarter last year.
The Southern African business posted similar results to the prior quarter despite the impact of the three-week road transport strike which spilled over into the first quarter. However, compared with the equivalent quarter last year, it was a weaker quarter due to lower sales volumes, lower average prices in the Specialised Cellulose business and higher variable costs. The Specialised Cellulose business generated an EBITDA excluding special items of ZAR351 million, representing an EBITDA excluding special items margin of 28%. The Southern African paper business further improved their performance, compared both to the equivalent quarter last year and the prior quarter. While sales volumes were lower predominantly due to the restructuring of the business and resultant machine closures, sales prices were higher for both local and export sales.
There was a strong focus on cost containment across the group. Variable costs in Europe and North America were 2% and 4% lower respectively, than the equivalent quarter last year. In South Africa the weaker Rand/US Dollar exchange rate put pressure on input costs, particularly purchased wood and pulp.
Our major input costs such as energy, wood and chemicals were generally lower than in the equivalent quarter last year, with the exception of the Southern African business. NBSK pulp prices, to which most of our paper pulp and dissolving pulp sales are linked, increased during the quarter from the recent lows reached at the end of September 2012. Average NBSK prices were essentially flat compared to the prior quarter and were approximately US$90 per ton lower than in the equivalent quarter last year. However, hardwood pulp prices were significantly higher than the equivalent quarter last year, which negatively affected costs in our European operations as they are significant buyers of hardwood pulp.
Sappi continues to benefit from the refinancing of debt which was completed over the past year as well as the reduction in gross debt. This has lowered the group’s finance costs from US$54 million to US$42 million when compared to the equivalent quarter last year.
Earnings per share for the quarter was 3 US cents (including a charge of 1 US cent in respect of special items) compared with 9 US cents (including a gain of 2 US cents in respect of special items) in the equivalent quarter last year.
Net cash utilised for the quarter was US$102 million, an improvement from the same quarter last year. Capital expenditure in the quarter increased to US$97 million compared to US$75 million a year ago, reflecting the continued expenditure on the dissolving pulp projects.
Net debt of US$2,095 million is down from US$2,175 million in December 2011, but up from US$1,979 million in the quarter ended September 2012 as a result of the seasonal increase in cash utilisation.
Liquidity remains strong with cash on hand of US$504 million and the €350 million (US$463 million) available from the undrawn committed revolving credit facility at quarter end.
Financial year 2013 is an important transitional year for the group as we expand our Specialised Cellulose business and continue to optimise our paper businesses.
Market conditions for the paper business, particularly in Europe, are expected to remain challenging for the remainder of the fiscal year, particularly with regards to pricing and input costs. Pulp prices, a major input cost for our European business in particular, have increased since the end of the quarter. Conversely, paper pulp and dissolving pulp sales from our North American and Southern African operations should benefit from these higher pulp prices. Overall the group benefits from higher pulp prices as a result of the higher margins in the North American and Southern African businesses.
Price increases were announced for coated woodfree paper in Europe effective from 1 January 2013. The impact of these increases is expected to gradually come though over the coming months and be fully in place during the course of the third financial quarter. Prices for coated mechanical paper decreased in January, and are unlikely to recover before July.
The Specialised Cellulose business continues to sell all available production volumes. The Specialised Cellulose expansion projects at both the Ngodwana and Cloquet mills proceed on schedule for start-up in the third financial quarter. The Ngodwana mill will take an extended planned annual maintenance shut during the second financial quarter due to the conversion project. We expect that this will negatively impact the quarter operating profit by approximately US$ 20 million.
As previously indicated, as a result of the capex spend on the dissolving pulp projects we expect net debt to increase from the September 2012 level during the 2013 fiscal year, and to reduce again post the completion of the projects.
Given prevailing market conditions, we expect the second quarter operating profit excluding special items to be below that of the first quarter for the reasons described above. However, we expect the operating profit in the second half of the financial year to be stronger than in the first half.
The full results announcement is available at www.sappi.com
There will be a conference call to which investors are invited. Full details are available at www.sappi.com using the links Investors; Investor Calendar; 1Q13 Financial Results
Certain statements in this release that are neither reported financial results nor other historical information, are forward-looking statements, including but not limited to statements that are predictions of or indicate future earnings, savings, synergies, events, trends, plans or objectives.
The words “believe”, “anticipate”, “expect”, “intend”, “estimate”, “plan”, “assume”, “positioned”, “will”, “may”, “should”, “risk” and other similar expressions, which are predictions of or indicate future events and future trends, which do not relate to historical matters, identify forward-looking statements. You should not rely on forward-looking statements because they involve known and unknown risks, uncertainties and other factors which are in some cases beyond our control and may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements (and from past results, performance or achievements). Certain factors that may cause such differences include but are not limited to:
- the highly cyclical nature of the pulp and paper industry (and the factors that contribute to such cyclicality, such as levels of demand, production capacity, production, input costs including raw material, energy and employee costs, and pricing);
- the impact on our business of the global economic downturn;
- unanticipated production disruptions (including as a result of planned or unexpected power outages);
- changes in environmental, tax and other laws and regulations;
- adverse changes in the markets for our products;
- the emergence of new technologies and changes in consumer trends including increased preferences for digital media;
- consequences of our leverage, including as a result of adverse changes in credit markets that affect our ability to raise capital when needed;
- adverse changes in the political situation and economy in the countries in which we operate or the effect of governmental efforts to address present or future economic or social problems;
- the impact of restructurings, investments, acquisitions, dispositions and other strategic initiatives (including related financing), any delays, unexpected costs or other problems experienced in connection with dispositions or with integrating acquisitions or implementing restructuring or strategic initiatives (including our announced dissolving pulp conversion projects), and achieving expected savings and synergies; and
- currency fluctuations.
We undertake no obligation to publicly update or revise any of these forward looking statements, whether to reflect new information or future events or circumstances or otherwise.
on behalf of Sappi Limited
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André F Oberholzer
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Group Head Investor Relations and Sustainability
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