Financial summary for the quarter:
-Profit for the period US$75 million (Q1 2015 US$24 million)
-EPS excluding special items 13 US cents (Q1 2015 5 US cents)
-EBITDA excluding special items US$175 million (Q1 2015 US$145 million)
-Net debt US$1,734 million, down US$306 million year-on-year
Commenting on the result, Sappi Chief Executive Officer Steve Binnie said:
“Operating performance in the quarter was strong and substantially above the equivalent quarter last year. The group increased EBITDA excluding special items by 21% to US$175 million, operating profit excluding special items by 51% to US$112 million and profit for the period by 213% to US$75 million.
“The Specialised Cellulose business continued to generate good returns during the quarter, with EBITDA excluding special items of US$74 million despite the impact of a severe drought in South Africa which had a negative impact of US$6 million on these results. US Dollar spot prices for dissolving wood pulp increased for most of the quarter. However, as the quarter ended, lower textile prices and the weaker Chinese RMB placed pressure on our viscose staple fibre customers. The weaker Rand/Dollar exchange rate led to increased Rand prices.
The European business delivered a satisfactory performance, close to the targeted EBITDA excluding special items margin. Price increases in the past year, excellent variable and fixed cost control and the transfer of volumes from Metsä’s Husum Mill all contributed positively to results. Profitability for the North American business was higher than that of the equivalent quarter last year due to a recovery in our coated paper sales volumes, the stabilisation of selling prices and lower variable costs. In addition, the comparative quarter was negatively impacted by an extended annual maintenance shut at our Somerset Mill. Profitability for the paper business in South Africa progressed further in this quarter, notwithstanding the sales of the Cape Kraft and Enstra Mills. Higher selling prices for packaging grades offset raw material cost pressures from the weaker Rand.
We expect the second quarter EBITDA to be in line with the first quarter and slightly ahead of the equivalent quarter last year. The quarter will be impacted by an extended annual maintenance shut at our Ngodwana Mill in South Africa and the annual maintenance stoppage at Saiccor which traditionally occurs in the third quarter. The total scheduled maintenance work in the group will negatively impact the quarter by approximately US$12 million when compared to the equivalent quarter last year.
Based on current market conditions, and assuming current exchange rates, we expect that EBITDA excluding special items in the 2016 financial year will be higher than 2015. As a result of improved operating profits and lower expected finance costs, offset somewhat by increased tax charges, we expect strong growth in our earnings.”
The quarter under review
The performance of the European business improved compared to both the prior quarter as well as that of the equivalent period last year, a quarter which was negatively impacted by €12 million due to the upgrade of the paper machine at Gratkorn. The specialities market experienced a weak period through to November, however orders recovered strongly in the last month and sales volumes for the quarter were nonetheless substantially higher than those of a year ago.
The US coated paper market remained under pressure as a result of the strong US Dollar. This led to a surge in coated paper imports and, more importantly, a large decline in exports. However, our market share gains from other domestic producers led to sales volumes that were higher than in the equivalent quarter last year. Sales prices held, quarter-on-quarter, but were 3% below those of the equivalent quarter last year. The release business continues to be adversely affected by a weak patterned textile market in China. Sales prices improved compared to the equivalent quarter last year due to price increases implemented during 2015.
The Southern African business continued to enhance margins, as a result of higher net selling prices for dissolving wood pulp and paper. Margins were further boosted by the weaker Rand. The improvement in the paper business was due to the realisation of higher local selling prices and, despite pressure on raw material prices from the weaker Rand, a tight control of costs. Demand for containerboard continues to be robust. During the quarter the sales of the Cape Kraft and Enstra Mills were completed.
Net finance costs for the quarter were US$25 million, a reduction from the US$37 million in the equivalent quarter last year. Net debt of US$1,734 million is down substantially from US$2,040 million at the end of the equivalent quarter last year as a result of the strong cash generation in the past financial year and the translation benefit of the weaker Euro on the Euro denominated debt.
Special items for the quarter resulted in a gain of US$11 million and relates principally to a profit on the sale of the Cape Kraft Mill. Earnings per share excluding special items for the quarter were 13 US cents, a substantial improvement over the 5 US cents in the equivalent quarter last year.
During the quarter we announced the retirement of Dr Danie Cronjé as independent Chairman of the board at the end of February 2016. Sir Nigel Rudd, currently the lead independent director, will succeed Dr Cronjé as independent Chairman of the company with effect from 01 March 2016.
The Specialised Cellulose business is benefiting from higher average US Dollar prices for dissolving wood pulp and, for our South African mills, the added benefit of a weaker ZAR/US Dollar exchange rate. US Dollar spot prices for dissolving wood pulp have come under pressure since December 2015 due to lower textile prices and a weaker Chinese currency. Demand remains strong and we remain confident that, at current pricing levels and exchange rates, the outlook for this business is positive.
In North America, graphic paper is performing solidly in a difficult and competitive environment, which is being impacted by the strength of the US Dollar. Variable costs are reducing and sales volumes have improved after a particularly difficult third fiscal quarter in 2015. The European business is improving due to actions we have taken to reduce costs and enhance returns over the past few years. Strong demand for fruit exports, a key market for our packaging products, is supporting South African growth.
Capex in 2016 is expected to be in line with 2015 and is focused largely in energy and debottlenecking projects in South Africa, together with the annual maintenance at the mills.
Depending on market conditions, we are considering utilising some of our cash reserves to repay and refinance a portion of our debt in order to lower future interest costs. We expect to reduce our net debt further over the course of the year and reduce our financial leverage closer to our targeted ceiling of two times net debt to EBITDA.