Sappi Q3 profits significantly up for 3rd quarter ended June 2016; dissolving wood pulp prices seen remaining at high levels
(Johannesburg, South Africa, August 05, 2016) Highlights for the quarter
–Profit for the period US$32 million (Q3 2015 US$4 million)
–EPS excluding special items 11 US cents (Q3 2015 2 US cents)
–EBITDA excluding special items US$160 million (Q3 2015 US$109 million)
–Net debt US$1,583 million, down US$334 million year-on-year
Commenting on the result, Sappi Chief Executive Officer Steve Binnie said:
“Sappi’s results continue to reflect the positive impact of our strategy to diversify the group’s operations. Operating performance for the quarter improved markedly over the equivalent quarter last year with profit for the period increasing from US$4 million to US$32 million. EBITDA excluding special items saw a 47% increase to US$160 million.” Turning to the fourth quarter, Binnie commented: “Based on current market conditions, and assuming current exchange rates, we expect our fourth quarter EBITDA excluding special items to be approximately in line with that of the solid performance in the equivalent quarter last year. However, a worsening of the drought in South Africa, effects of Brexit and further graphic paper market pressure could negatively impact the expected results.
“Net debt of US$1,583 million is substantially lower than the US$1,917 million at the end of the equivalent quarter last year as a result of strong cash generation and the weakening of the Euro and Rand against the Dollar in the past financial year. We expect to reduce net debt levels during the fourth quarter and improve our financial leverage closer to our target ratio of less than two times net debt to EBITDA.”
The period under review:
Operating profit excluding special items was strong at US$97 million despite the third quarter being seasonally the weakest due to the summer holiday period in the northern hemisphere and the scheduling of annual maintenance work during the period.
Earnings per share excluding special items for the quarter were 11 US cents, a strong improvement over the 2 US cents generated in the equivalent quarter last year. The improvement was attributable mainly to lower variable costs in our graphic paper categories and improved sales prices and Rand weakness in our South African business.
The Specialised Cellulose business delivered strong results during the quarter, with EBITDA excluding special items of US$75 million, a 34% improvement over the equivalent quarter last year. This was due to improved US Dollar pricing for dissolving wood pulp (DWP) and a weaker Rand/Dollar exchange rate. Average US Dollar prices in the quarter were higher than both those of the prior quarter and the equivalent quarter last year due to increases in average Chinese market prices for dissolving wood pulp driven by steady downstream demand for viscose staple fibre (VSF).
Coated graphic paper markets continued to be challenging during the quarter and demand was somewhat weaker than in recent periods. Notwithstanding these challenges, the European business delivered a solid improvement on last year, with good variable and fixed cost control initiatives more than offsetting the effect of declining sales volumes. In addition, a reduction in variable costs and improved sales volumes negated the impact of lower average paper prices for the North American business.
In Europe, sales of our speciality packaging papers grew by 15% year-on-year, continuing to outpace average market growth of 1 to 5% for the products we produce. Average selling prices continued to be stable. In North America, the casting release paper business experienced improved sales volumes compared to the prior year equivalent quarter, with growth in decorative laminate and automotive end use segments.
The paper business in South Africa improved its performance compared to the prior year as a result of higher sales prices and the disposal of the lower margin recycled packaging paper mills which diminished the impact of exchange rate driven variable cost increases. The onset of the citrus picking season improved paper sales volumes compared to the prior quarter.
During the quarter we completed the refinancing of our 2021 bonds. This will result in a reduction in the interest charge of approximately US$8 million per annum going forward. The once-off refinancing costs, including the call premium, of US$23 million were expensed during the quarter.
Net cash generated for the quarter was US$82 million, compared to the US$25 million generated in the equivalent quarter last year. This increase was the result of an improved operating performance and lower working capital, offset somewhat by higher tax. Capital expenditure in the quarter of US$58 million mainly related to maintenance and efficiency improvement projects.
Demand for dissolving wood pulp (DWP) remains favourable and recent improvements in textile fibre prices and VSF operating rates should support DWP prices at current levels for the coming months. Drought conditions persist in South Africa and the possibility that we may have to curtail production at our Saiccor Mill remains should the summer rains arrive later than usual. In order to mitigate this potential impact, we will produce more DWP at our Cloquet Mill, taking advantage of our ability to swing capacity between paper pulp and DWP at that mill.
Graphic paper markets have weakened in Europe and the United States in the past quarter, with both volume and pricing under pressure. Lower raw material costs have enabled us to offset these impacts so far. We will continue to look for opportunities to lower costs and adapt to the market conditions. As is typical in the fourth quarter, orders are expected to be more robust.
Capex expenditure in the last quarter of fiscal 2016 is expected to be approximately US$100 million (US$245 million for the full year) and is focused largely on maintenance, energy and efficiency projects.
To learn more, please visit: www.sappi.com (Source: press release)