Johannesburg, 02 August 2013
Sappi results for 3rd quarter ended June 2013 highlights continued tough market conditions
Summary for the quarter
- 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 Boëttger 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.
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.
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; 3Q13 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 wood 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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