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August : Sappi eyes profitable year-end after stronger-than-expected Q3

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5 August, 2014

Sappi eyes profitable year-end after stronger-than-expected Q3

Steve Binnie

Sappi CEO : Steve Binnie

Pulp and paper manufacturer Sappi was headed for a year of profitability as the stronger-than-expected third quarter delivered improved performance within all its operations, barring North America.

Despite being a traditionally seasonally weaker quarter, the three months to June saw profit for the period rise to $17-million - a jump from the loss of $47-million reported in the corresponding period the year before.

This upward trend was expected to continue into the next quarter and the new financial year, Sappi CEO Steve Binnie, who took the reins from Ralph Boëttger on July 1, told Engineering News Online.

Sappi had, over the past year, implemented a number of initiatives to bring the company back into profitability after falling into the red during the 2013 financial year.

"A lot of great work has been done to take costs out of the business and improve margins," he said.
Sappi on Thursday posted third-quarter basic earnings a share of 3c, a turnaround from the basic loss a share of 9c in the corresponding period the year before, while earnings before interest, tax, depreciation and amortisation, excluding special items, rose to $140-million during the quarter under review, up from $88-million in the corresponding quarter last year.

Sappi's sales remained steady at $1.5-billion for the quarter.

While the Southern African paper business improved on the prior quarter and the European business delivered a "solid quarter" in a "seasonally slow" period, the North American operations remained under extreme pressure.

In South Africa, revenues rose to R3.78-billion during the three months to June 30, up from R3.25-billion in the prior year, while operating profit jumped from R192-million to R653-million in the period under review.

The higher average rand pricing, increased sales of dissolving wood pulp and improved profitability from the paper packaging business all contributed to the improvement.

Meanwhile, in the quarter under review, the European business had lower variable and fixed costs arising from cost-cutting initiatives - the company had shaved between $50-million and $60-million off costs - offsetting weaker graphic paper prices.

Sales from operations reached €543-million, a slight drop from the €574-million reported in the June 2013 quarter; however, a €12-million operating profit was a turnaround from the €12-million operating loss recorded in the corresponding period the year before.

"The stronger-than-expected coated wood free paper market, coupled with excellent ongoing cost control and focus, has led to steady progress in the European business, an important cash contributor to the group," Binnie pointed out.

Further, the Gratkorn and Kirkniemi projects, currently under way, were expected to improve the financial performance of the business.

The upgrade of the Gratkorn mill's pulp production facilities and improvements to its papermaking capabilities, which would be completed in mid-2015, would secure a significantly lower cost base.

A new power plant at the Kirkniemi mill, expected to be operational early in 2016, would improve cost competitiveness and profitability by reducing energy costs and securing energy supply.

The North American business experienced an "extremely difficult" third quarter, with cost and price pressures in graphic paper, inclement weather and some operational challenges widening the operating loss to $9-million, from a loss of $2-million in the third quarter last year. Sales ticked up marginally to $380-million.

However, the graphic paper business was expected to improve, with good volumes and higher pricing going forward.

The price increases for coated wood free web paper implemented during the quarter would "bring some relief to a difficult market" during the fourth quarter.

Sappi would maintain its focus, over the next two years, on achieving cost advantages, working to lower fixed and variable costs, increase cost efficiencies and invest for cost advantages, while optimising and rationalising declining businesses.

Further, the company would deliver growth through moderate investments - injecting smaller amounts of capital into existing areas with strong potential growth, including pulp, speciality grades and packaging papers.
The company had reduced its net cash use from $157-million in the third quarter of 2013, to $44-million in the three months ended June, owing to a cut in capital expenditure (capex) and an improved operating performance.

Capex for the third quarter of the 2014 financial year was $57-million - a decline from the $174-million spent a year ago.

Source : www.engineeringnews.co.za

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