South African paper and pulp producer Sappi’s first-quarter operating performance has delivered few surprises, with results largely in line with expectations and on par with that of the first three months of the prior fiscal period.

The group generated earnings before interest, taxes, depreciation and amortisation (Ebitda), excluding special items, of $145-million – slightly below the $147-million posted in the prior year’s comparable period – while profit for the three months ended December 31 improved to $24-million, from $18-million in the prior comparative quarter.

Earnings a share improved from $0.02 in the first three months of the prior year to $0.05 in the period under review, while net debt retreated by $340-million to end the quarter at $2.04-billion.

Elaborating on the group’s operating performance, CEO Steve Binnie noted during a conference call on Wednesday that the specialised cellulose business continued to generate good returns during the quarter, delivering Ebitda, excluding special items, of $70-million.

“Dollar prices for dissolving wood pulp remain under pressure in all market segments owing to excess market supply, as well as the weak margins in the viscose staple fibre sector, while the decline in cotton and polyester prices and large cotton reserves are compounding the pricing pressures. 

“The weaker rand/dollar exchange rate has, meanwhile, enabled the South African mills to maintain rand pricing, while good variable and fixed cost control across the business is helping to maintain margins,” he outlined.

EURO GAINS
He added that, during the “seasonally slower” quarter, the performance of the European business improved compared with that of the equivalent prior year’s quarter, despite the €12-million cost and lost margin impact of the paper machine upgrade at the Gratkorn mill, in Austria.

The European business also benefited from lower fixed costs after the disposal of the Netherlands-based Nijmegen mill, higher average sales prices for coated woodfree paper, as well as an improved performance from the specialities business at the Alfeld mill, in Germany.

However, the weaker euro negatively affected dollar-denominated variable costs, particularly for paper pulp, compared with 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,” Binnie revealed.

NORTH AMERICA
Meanwhile, profitability for the North American business was similar to that of the equivalent prior year’s quarter, despite a planned extended yearly maintenance shutdown at the Somerset mill, in the US, and a number of completed capital projects.

These negatively impacted the quarter by some $10-million in additional expenses and lost margin compared with the equivalent quarter last year, noted Binnie.

However, the region’s 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, in Minnesota, also enhanced profitability.

“Lower-cost fibre, from 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,” he observed.

SOUTHERN AFRICA
In Southern Africa, Sappi recorded exchange rate gains on export sales and variable cost savings, which drove an improved quarter-on-quarter performance.

“Moreover, as revealed during the last quarter, we are evaluating opportunities to [use] our cash resources to refinance a portion of our debt to lower future interest costs and expect to reduce net debt levels by year-end to below those of the prior year,” Binnie pointed out.

He added that the paper business in South Africa continued to show steady improvement, while the transition from graphic paper grades to packaging paper started during the quarter.

Pricing improved for packaging grades, while sales volumes were flat year-on-year, but lower than the prior quarter, owing to weaker specialities and office paper markets.

HOLDING STEADY
Looking ahead, Binnie believed the company would deliver a full-year operating performance similar to that of the prior fiscal year.

The expected improvement in the group’s paper businesses would likely be offset by lower dollar dissolving wood pulp pricing and the projects at Gratkorn and Somerset mills. 

Graphic paper markets were expected to remain challenging, but appeared to be marginally better than originally expected in 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,” Sappi cautioned.

The dissolving wood pulp market would, meanwhile, remain under further pressure, consistent with downward demand and lower dollar prices for viscose, polyester and cotton.

“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,” Binnie held.

Capital expenditure in 2015 was expected to be below $300-million and would focus largely on the efficiency improvement investments at the Kirkniemi mill, in Finland, and the Gratkorn mill.