Commenting on the result, Sappi Chief Executive Officer Steve Binnie said:
“Operating performance in the quarter was in line with expectations and the equivalent quarter last year. The group generated an EBITDA excluding special items of US$145 million, operating profit excluding special items of US$74 million and profit for the period of US$24 million.
“The Specialised Cellulose business continued to generate good returns during the quarter, with EBITDA excluding special items of US$70 million. US Dollar prices for dissolving wood pulp remain under pressure in all market segments due to excess market supply as well as the weak margins in the viscose staple fibre sector. The decline in cotton and polyester prices and large cotton reserves are compounding the pricing pressures. The weaker Rand/Dollar exchange rate has enabled the South African mills to maintain Rand pricing, while good variable and fixed cost control across the business is helping to maintain margins.
“In this seasonally slower quarter, the performance of the European business improved compared to that of the equivalent quarter last year. This was despite the €12 million cost and lost margin impact of the paper machine upgrade at the Gratkorn Mill. The European business benefited from lower fixed costs after the disposal of the Nijmegen Mill, higher average sales prices for coated woodfree paper as well as an improved performance from the specialities business at Alfeld. Profitability for the North American business was similar to that of the equivalent quarter last year despite a planned extended annual maintenance shut at the Somerset Mill and a number of completed capital projects. These negatively impacted the quarter by approximately US$10 million in additional expenses and lost margin compared to the equivalent quarter last year. The Southern African business had an improved performance this past quarter, with exchange rate gains on export sales and variable cost savings contributing positively.
“As discussed when reporting last quarter’s result, we are evaluating opportunities to utilise our cash resources to refinance a portion of our debt in order to lower future interest costs. We expect to reduce net debt levels by year-end to below those of the prior year.
“Currency movements affect margins in our European and Southern African businesses, having both transactional and translational effects. A weaker Euro and Rand in relation to the US Dollar support both local and export pricing for these businesses, historically offsetting any input cost increases as a result of the weaker currency.
“Our outlook for the year, based on current market conditions, is for the operating performance to be broadly similar to 2014. The expected improvement in the paper businesses will be offset by lower US Dollar dissolving wood pulp pricing and the projects at Gratkorn and Somerset Mills. In addition, at current exchange rates the translation of Euro and Rand results to Dollars may be negatively impacted compared to the prior year.”
The quarter under review
In Europe the weaker Euro negatively affected US Dollar denominated variable costs, particularly for paper pulp, compared to the prior quarter. Conversely, paper exports benefited from the weaker Euro and largely offset the effect of the increased pulp costs. The quarter saw a further improvement in the operating and sales performance of the Alfeld speciality mill with a better product mix and average pricing level.
A planned extended annual maintenance shut and the completion of a number of capital projects in the North American business had a significant impact on costs resulting in an operating loss for the quarter. However, the underlying performance, particularly in the coated paper business, improved as a result of higher selling prices. In the current pricing environment, the decision to produce paper pulp for own consumption as well as dissolving wood pulp at the Cloquet pulp mill also enhanced profitability. The release business continues to be adversely affected by weak demand in China.
Pricing in European markets was also negatively impacted by the weaker Euro. Variable costs were generally flat with the prior quarter and lower than last year. Lower cost fibre, from use of own-make Cloquet pulp production, as well as lower starch and latex costs have offset higher wood costs resulting from low inventory levels in the supply chain.
The paper business in South Africa continues to show steady improvement, while the transition from graphic paper grades to packaging paper commenced during the quarter. Pricing improved for packaging grades while sales volumes were flat year-on-year, but lower than the prior quarter due to weaker specialities and office paper markets.
Net finance costs for the quarter were US$37 million, a reduction from the US$48 million in the equivalent quarter last year. Net debt of US$2,040 million is down substantially from US$2,380 million at the end of the restated 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. As previously announced, the net debt increased compared to the US$1,946 million as of the end of the prior quarter as a result of the seasonal increase in cash utilisation.
There were no major special items for the quarter. The net charge of US$5 million includes a self-insured mechanical failure at the Ngodwana mill. Earnings per share for the quarter were 5 US cents, compared with 3 US cents (including a gain of 1 US cent in respect of special items) in the equivalent quarter last year.
Graphic paper markets remain challenging, but appear to be marginally better than originally anticipated, in both Europe and North America. Generally, paper demand has declined at a lower rate and price expectations have been met. Exchange rate volatility may affect selling prices, particularly in Europe.
The dissolving wood pulp market is under further pressure, consistent with pressure on viscose, polyester and cotton. Prices in US Dollars have declined further than expected. The lower prices are likely to be substantially offset by a weaker Rand/Dollar exchange rate and our ability to swing the Cloquet pulp mill between dissolving wood pulp and paper pulp.
Capital expenditure in 2015 is expected to be below US$300 million and will focus largely on the efficiency improvement investments at our Kirkniemi and Gratkorn Mills.