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May 10, 2012

Sappi’s SA paper division still underperforming

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Paper and packaging group Sappi said on Thursday that, while its chemical cellulose business continued to perform strongly during the second quarter of 2012, its paper division underperformed on the back of a competitive environment in terms of price, costs and volumes.

However, Sappi CEO Ralph Boëttger said the current restructuring of the paper and packaging operations were on track, the benefits of which would show during the third quarter of 2012.

The restructuring, which aimed to improve profitability, streamline sales and marketing and deal with the tough market conditions that resulted in poor performance over the past three years, included the closure of the pulp mill at Enstra mill, the kraft pulp mill at Tugela mill and a 10 000 t kraft paper machine at Tugela mill.

It would also result in the loss of about 800 jobs, some of which would be through voluntary retrenchments or retirements.

However, Boëttger was optimistic about the improving chemical cellulose division, which he hoped could potentially create more jobs.

The cellulose division, which accounted for most of the operating profit in Southern Africa, generated R385-million in earnings before interest, taxes, depreciation and amortisation – a margin of about 30%.

Sappi currently supplied between 15% and 20% of the market demand from its KwaZulu-Natal Saiccor plant. It reported that the $240-million expansion of its Ngodwana mill, in Mpumalanga, and the $170-million conversion of the Cloquet mill, in Minnesota, US, were on track to start during the third quarter of 2013. The two mills would increase the group’s cellulose capacity to over 1.3-million tons a year.

Meanwhile, Sappi reported that the group operating profit for the second quarter increased quarter-on-quarter to $125-million, from $100-million in the first quarter.

The company’s Southern African operations held a steady operating profit of $53-million, while Europe generated $49-million and North America reached $24-million, compared with the first-quarter performance of $29-million and $10-million respectively.

“The improving trend in operating performance continued in the quarter, with the European and North American businesses in particular showing good improvement,” he said.

This followed a “relentless” focus on cost reduction, as market conditions for coated paper have been weaker than the in corresponding quarter of the prior year, enabling margins to be maintained or widened, particularly in Europe.

The group achieved a profit of $58-million, up year-on-year from a loss of $74-million in the second quarter of 2011. Earnings a share increased to 11c for the March quarter, compared with 7c earned during the first quarter, and the loss of 14c recorded during the corresponding quarter the year before.

“We are confident that the actions we have taken and that we continue to take will lead to a sustainable and continuous improvement in performance going forward,” said Boëttger.

However, he warned that the third quarter was “historically and seasonally the weakest” quarter, and would be further impacted by planned yearly maintenance closures at its mills.

Edited by: Mariaan Webb
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