JSE-listed Sappi will invest $305-million over a three-year period in certain of its operations in the US and Europe, the company said on Wednesday.
Reporting on its results for the first quarter of the 2017 financial year, it highlighted that it would invest $165-million in upgrading a paper mill in the US and $140-million in a number of projects to support the capacity expansion of specialty packaging paper operations in Europe.
CEO Steve Binnie noted that these investments would maintain the company’s strong momentum and support its growth strategy.
“With demand for specialty packaging grades remaining robust, we will be undertaking a number of significant projects over the next three years to increase our production capacity.”
Sappi will invest in upgrading and enhancing the flexibility of Paper Machine 1 at the Somerset mill, in Maine, in the US, to set a strong platform for growth in paper-based packaging. The overall capacity of the mill will increase by 180 000 t/y and the upgrade is expected to be completed in 2018.
In Europe, Sappi plans to undertake a number of projects that will result in an increase in its specialty packaging paper capacity and capability, as well as support its drive to be the lowest-cost producer of graphic papers.
Its Maastricht mill, in the Netherlands, will be converted to focus predominantly on specialty grades, while the group will also invest in enhancing the specialty paper offering at the Ehingen and Alfeld mills, in Germany.
“Changing the Maastricht Mill is the most important European project that Sappi is working on. It will focus more on specialty packaging, which is one of our major areas of growth into the future, along with specialised cellulose,” Sappi head of group corporate affairs Andre Oberholzer told Engineering News Online.
He added that the projects would allow Sappi to add volume into the growth market and, at the same time, pull back on the graphics paper market, which is not growing anymore.
“We are trying to adjust the volume we put into the market with the demand from the market,” he said.
The Lanaken mill, in Belgium, will progressively transition to coated wood free production over the next three years in line with the expected decline in the coated mechanical market.
Sappi on Wednesday reported a solid first-quarter operating performance, with earnings before interest, taxes, depreciation and amortisation (Ebitda) up 15% year-on-year.
Profit for the period was $90-million, compared with $75-million in the first quarter of 2016, while net debt decreased by $396-million year-on-year to $1.3-million.
Binnie stated that Sappi had, in the quarter under review, achieved higher sales volumes across all major categories and higher dissolving wood pulp (DWP) prices.
It benefited from cost savings initiatives but, this was offset by lower selling prices for graphic paper.
“With DWP markets experiencing strong demand, the specialised cellulose business continued to generate good returns during the quarter, with Ebitda, excluding special items, up 28% on last year,” he said.
Binnie noted that the company’s European business, once again, delivered strong results owing to variable cost control and year-on-year growth of 26% in the specialties categories.
“In the US, we increased sales volumes and gained market share, despite an overall decline in coated paper demand, and our South African business delivered excellent margins owing to higher DWP and paper prices, despite lower containerboard and tissue sales in December as customers worked to reduce inventory stock.”
Binnie said demand for DWP remained favourable and that pricing had recovered during January.
“Therefore, a higher average dollar price is expected in the second quarter of 2017.”
Graphic paper markets continue to be weak in Europe and the US; however, prices have started to stabilise.
Raw material costs have started to rise, particularly for paper pulp, energy and chemicals but Sappi will remain focused on various efficiency and procurement initiatives to mitigate the effect of these increased costs.
Based on current market conditions, in particular the recent strength of the rand, continued strength in dollar pricing for DWP and further weakness in graphic paper demand and pricing in Europe and the US, Sappi expects the group’s operating performance for the second quarter to be broadly in line with that of 2016.
“Further rand strength could result in a weaker performance for the remainder of the year. The board is mindful of uncertainty wrought by global political events.”
Capital expenditure in 2017 is expected to be $350-million as Sappi continues the debottlenecking of DWP production at its Saiccor and Ngodwana Mills, in KwaZuu-Natal, and undertakes the first phases of the speciality packaging investments in Europe.
“We expect to reduce net debt levels further during the course of 2017 and it remains our intention to repay the maturing 2017 bonds from current liquidity sources in order to lower future finance costs.”