A stronger dollar, which adversely impacted the cost of raw materials in Europe; additional pulp purchases during the upgrade of the recovery boiler at the Gratkorn mill, in Austria; a declining graphic paper market; and lower coated paper sales volumes and lower margins for the release paper business in the US, contributed to pulp and paper producer Sappi posting lower earnings for the three months ended June 30.
The group reported earnings before interest, taxes, depreciation and amortisation (Ebitda) of $109-million for the seasonally weak third quarter of the year – a $31-million drop from the Ebitda recorded in the third quarter of the prior year.

Sappi’s net profit for the period under review was $4-million, compared with $17-million in the third quarter of the prior year, while earnings a share were flat at $0.02.

Speaking to Engineering News Online, CEO Steve Binnie explained that the group had to, owing to the shift in volume in North America, take some curtailments. “Our immediate priority is to get the mills to full production and to sell off all those volumes.”

He added that the company expected price pressures to continue in the short term.

“If I go back a year, we put through two price increases – in July 2014 and January this year. We’ve had to give back a little bit of that price increase, which was still above a year ago, but it has come down substantially.

“Interestingly, Europe is actually doing a little bit better at the moment; both prices and volumes were up from a year ago. Our headache here is that the input costs for the business is dollar-denominated, so it put some pressure on cost,” Binnie pointed out.

Sales in Europe fell from €590-million in the second quarter of this year to €567-million in the third quarter; however, the third-quarter sales were higher than the €543-million recorded for the third quarter of last year.

Meanwhile, the Southern African business achieved higher average prices and volumes of R4-billion, compared with the equivalent quarter last year and the second quarter of this year, which saw sales of R3.8-billion respectively.

Operating profit was, however, negatively impacted by R204-million as a result of the planned yearly maintenance shuts at the Ngodwana and Saiccor mills.

“The weaker rand/dollar exchange rate has improved demand for our virgin fibre paper packaging, while the slow domestic growth and an oversupplied recycled-based packaging paper market has placed pressure on sales of recycled containerboard,” the group said in a statement.

Dissolving wood pulp pricing also continued to be supported by the weaker rand/dollar exchange rate, as well as higher dollar pricing in China.

“Post quarter-end, we announced the sales of our Enstra mill’s recycled packaging paper business and Cape Kraft paper mill. This is in line with our strategic focus on the virgin fibre packaging business in South Africa,” the group said.

This division continued to show good demand growth; however, newsprint and recycled packaging paper demand were flat.

Sappi’s specialised cellulose business, meanwhile, continued to generate solid returns during the quarter, with Ebitda of $56-million. The planned yearly maintenance shuts at Saiccor and Ngodwana reduced margins relative to the prior quarter.

Net cash generation for the quarter was $25-million, compared with $44-million net cash used in the equivalent quarter last year. The improvement in cash generation was primarily the result of lower working capital and interest costs during the quarter.

Further, the group invested $49-million in capital expenditure (capex) for the quarter, mainly related to maintenance and efficiency improvement projects.
Sappi expected to spend a further $80-million in capex in the fourth quarter of the year, to take capex for the full-year to $245-million.

Its net debt of $1.92-billion was flat compared with the prior quarter and $369-million below that of the equivalent quarter last year, as a result of cash generation from operations, debt repayments and favourable exchange rates on the translation of its debt.

Cash resources were used in the quarter to repay a maturing R450-million bond in South Africa, while the maturity of the €330-million international securitisation facility was extended to 2018.

Liquidity comprised cash-on-hand of $351-million and $490-million from the committed revolving credit facilities in South Africa and Europe.

“The speciality paper business continued to grow sales volumes, compared with both the prior quarter and the equivalent quarter last year, and we are pursuing further growth opportunities in this market at our Maastricht and Ehingen mills,” the group said.