Paper and pulp giant expects big earnings boost in late 2018

21 February 2018 | Web Article Number: ME20188761

Forestry, Pulp & Paper

SAPPI has reported first-quarter results in line with expectations and says growth projects are on track to deliver a significant increase in earnings from the end of the 2018 financial year.

Earnings before interest, tax, depreciation and amortisation (ebitda) were $172 million, down from $181 million in the first quarter of 2017. Profit for the period to December fell to $63 million from $90 milion in the earlier period. This meant earnings per share of $0.14, excluding special items, fell from 16c in the same quarter previously.

Net debt went up to $1.35 billion from $1.34 billion last year.

Sappi, a maker of fine paper, packaging and dissolving wood pulp, also known as specialised cellulose, said there was an additional accounting week in 2017, which increased the ebitda

The group also reported a noncash income statement charge of $19 million relating to its deferred tax asset in the US following that country’s lowering of its corporate income tax rate. It believes, however, that this will be positive going forward and contribute to increased earnings.

Commenting on the result, Sappi Chief Executive Officer Steve Binnie said: “Our performance for this quarter was in line with our expectations. We continue to work hard to mitigate increased input costs and the impact of a stronger Rand/Dollar exchange rate. We will begin to see the benefits of selling price increases during the rest of the financial year.”

According to Sappi, the major factors which influenced the first quarter’s results include:

  • Dissolving wood pulp (DWP) demand remained strong with a healthy EBITDA margin of 31%
  • Demand for specialities and packaging papers continued to grow across all regions and all major product segments, only constrained by our current production capacity. EBITDA margins were maintained at 14%
  • Printing and writing papers markets were stable in Europe and we implemented higher selling prices to offset the impact from increased raw material costs. In the US, sales volumes were lower due to production challenges and the commencement of project work for the conversion to higher margin growth products at Somerset Mill
  • Paper pulp costs continued to rise throughout the quarter; and
  • A stronger Rand/Dollar exchange rate.

Commenting on investments to enhance the competitive advantage and increase speciality packaging and DWP capacity, Binnie said: “I am very excited about the prospects for dissolving pulp over the next few years. It is also clear that speciality and packaging paper demand continues to grow as the push to encourage the use of paper-based packaging over plastic gathers momentum.” 

The acquisition of the Cham speciality paper business is due to be completed at the end of February 2018. This will significantly strengthen Sappi’s speciality and packaging papers footprint, skills, volumes, product offering, innovation and market presence. The conversions of the paper machines at Maastricht and Somerset will be completed in the second and third quarter respectively and will further add to our coated packaging capabilities.

The debottlenecking projects at Saiccor, Ngodwana and Cloquet Mills will bring an additional 90,000tpa to the market through the end of this financial year. In light of increased demand and the positive outlook for DWP, Binnie confirmed that: “Over and above our debottlenecking projects, we are advancing plans for the possible expansion of Saiccor Mill by a further 110,000tpa.”

According to Sappi, demand for DWP remains good, and it predicts that its realised US Dollar sales prices will improve in the second quarter as it benefits from the higher average Chinese market prices.

“While VSF prices currently remain under pressure, recent rises in competing textile prices such as cotton and polyester should provide support to the VSF market, which in turn should support DWP pricing in upcoming quarters,” the company said in a statement.

Graphic paper operating rates remain healthy in Europe as export demand growth helps to offset more moderate demand declines in Western Europe. Coated paper price increases over the past few quarters have allowed margins to remain relatively stable despite continued input cost pressure from purchased paper pulp.

“In the United States we will be taking extended downtime on PM1 at Somerset Mill in order to complete the conversion project at the mill. This is expected to have a US$9 million negative impact on EBITDA during our second and third quarters. Coated paper price increases implemented over the past six months will start to be fully realised in the second.

“Capital expenditure in 2018 is expected to be approximately US$500 million as we complete the conversions at Maastricht and Somerset Mills, the Saiccor, Ngodwana and Cloquet Mills debottlenecking projects and start the upgrade of the Saiccor Mill woodyard. These projects are focused on higher margin growth segments including dissolving wood pulp and speciality packaging. This will position us for stronger profitability from 2019 onwards,” the company said.

The group’s second quarter operating performance is expected to be slightly below that of the prior year as the impact of the stronger Rand and lower comparative US$ DWP prices negatively impact the South African operations.

 

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