JSE-listed pulp and paper group Sappi’s earnings before interest, taxes, depreciation and amortisation (Ebitda) saw a 6% quarter-on-quarter increase to $221-million for the three months ended September 31.

Commenting on the group’s performance, CEO Steve Binnie said on Thursday that the company’s initiatives to reduce variable costs, in addition to the benefits of lower interest charges, helped mitigate higher paper pulp prices and a stronger rand/dollar exchange rate during the reporting period. 
 
“Capital expenditure in 2018 is expected to increase to $450-million as we continue the conversions in both Europe and North America, complete the Saiccor and Ngodwana debottlenecking and start the upgrade of the Saiccor wood-yard,” he said.

The group’s increase in expansionary capital spending during 2018 is focused on higher margin growth segments, including dissolving wood pulp and specialty packaging.
  
Demand for dissolving  wood pulp (DWP) in the period under review was robust, growing at double-digits throughout the year.

“We shifted more production capacity to specialty packaging during the year. The European business experienced a good final quarter, with expanded sales volumes and price increases helping to counteract the impact of rising paper pulp prices.”

He further noted that Europe’s demand for graphic paper has stabilised somewhat while sales to export markets continue to grow. 

Paper pulp costs have continued to rise after year-end and, without further price adjustments, margins will be put under pressure.  

The packaging paper business in South Africa continued to show lower variable costs, as well as higher sales volumes and prices compared with previous quarters. 

In North America, improved packaging and release paper sales volumes, coupled with lower fixed and variable costs, outweighed lower coated paper sales prices and volumes. 

In the US, closures of competing mills have tightened the supply in a market that otherwise remains difficult.

With further price increases announced and implemented after a long period of declining prices, Sappi says it is more optimistic about the prospects in the forthcoming year.

“Our success in bringing our debt levels to below our targeted leverage ratio of less than two times net debt to Ebitda in the prior year has meant that we could turn our attention to increased investments in growth projects, with the main focus being on conversions of paper machines in Europe and the US to specialty packaging grades, and DWP debottlenecking projects in South Africa,” Binnie said.

Net cash for the quarter was lower than both prior periods, owing to the aforementioned capital expenditure in growth projects, increased cash taxes, the dividend payment and higher working capital. 
 
“Demand for specialty packaging continues to grow, and we require the additional capacity from the conversions of the paper machines at Maastricht and Somerset mills in order to continue to serve this growth. These conversions have commenced and are set to be completed in the second and third fiscal quarters of 2018 respectively,” he said.