Despite a difficult operating environment, diversified woodfibre company Sappi’s earnings before interest, taxes, depreciation and amortisation (Ebitda) increased by 15% year-on-year and its profit by 29% year-on-year in the quarter ended December 31.
Profitability for the first quarter of the 2019 financial year remained in line with the company’s guidance.
Sappi CEO Steve Binnie on Wednesday attributed the company’s strong first-quarter results to the business’ resilience and the benefits derived from its product portfolio diversification in recent years.
During a conference call on Wednesday, he stated that the company’s strategy to invest in higher-margin growth segments continues to bear fruit, especially considering that overall sales volumes for packaging and specialties increased by 27% year-on-year.
Volumes in Europe increased by 50% year-on-year, following the completion of the Maastricht Mill conversion, in the Netherlands, and the inclusion of the Cham Paper volumes.
The ramp-up of packaging paper production at the Maastricht and Somerset mills post the completion of the conversion projects last year, is expected to result in further sales growth in this segment moving forward.
In North America, sales volumes of existing packaging grades and new paperboard grades helped drive packaging and specialties volumes 68% higher year-on-year, Binnie pointed out.
Meanwhile, in South Africa, he highlighted that packaging volumes had also increased year-on-year, supporting a strong improvement in operating performance for the business.
Input cost pressures on non- or partially integrated mills persisted owing to elevated paper pulp prices, which Binnie said had impacted on margins. These cost pressures and sluggish demand in some market segments were offset by higher sales, higher selling prices and market share gains in other segments, along with good fixed cost control, he explained.
Focusing on his outlook for the full-year, Binnie said that, following the completion of the debottlenecking of the Saiccor and Ngodwana mills in 2018, the company intends to grow its dissolving wood pulp (DWP) volumes through the remainder of the year to meet increased customer demand.
DWP prices in China, however, have come under pressure in the past two months as the lower Chinese viscose staple fibre prices and current weak Chinese paper pulp markets influence DWP pricing, he lamented.
Not all is lost, Binnie believes, considering that demand from Sappi’s customers remains good. The company anticipates that continued high paper pulp prices in the rest of the world will support DWP prices going forward.
Further, market conditions for the various grades of packaging and specialty papers that Sappi produces have diverged in the last few weeks, with containerboard markets in South Africa and a solid paperboard demand in Europe contrasting with some weakness in the release paper and various European speciality grades.
Graphic paper markets in Europe and North America, meanwhile, have been weak in recent months, Binnie said, which has impacted on the market balance, particularly for Europe.
“Further potential industry capacity conversions and closures may happen in the coming periods, however short-term profitability will be negatively impacted if demand continues to be as weak as it has been recently,” he bemoaned.
Capital expenditure for the full-year is expected to be about $590-million as Sappi proceeds with the Saiccor 110 000 t expansion project, completion of the Saiccor woodyard upgrade, conversion of Lanaken PM8 from coated mechanical to woodfree paper production and upgrading the Gratkorn Mill.
Ebitda is expected to be slightly below that of 2018, given current exchange rates, owing to the current weak graphic paper markets and paper pulp prices, which Binnie said remain high in Europe and North America.
The full-year result, however, is expected to be above that of the year before.