Paper and packaging group Sappi bounced back into the black during the first quarter of the year after earnings were dragged into the red during the 2013 financial year.

The group said on Wednesday that improving profitability at the European and South African paper markets, as well as continuing good performance from the company’s cellulose business had lifted earnings.

Profit for the three months to December rose to $18-million, compared with a profit of $12-million during the corresponding quarter last year and a restated loss of $149-million in the year to September.

Operating profit for the quarter under review increased from $67-million during the first quarter of last year to $70-million in the first quarter of 2014. This compared with the loss of $110-million for the full year to September 2013.

Sappi delivered earnings per share (EPS) of $0.03 for the three months under review, up from the $0.02 EPS reported during the prior year’s first quarter and the loss of 149c reported for the 2013 financial year.

Outgoing Sappi CEO Ralph Boëttger said despite solid first-quarter performance last year, the company’s full-year financial performance in 2013 had been hampered by the final three quarters’ subpar performance.

This was unlikely to be repeated, with the remaining quarters of this year set to deliver improved profitability for Sappi, he averred.

“The past year has reinforced the importance of our strategy to reposition Sappi for growth, higher margins, improved profitability and with less reliance on graphic paper.”

The benefits of Sappi’s strategic decision to invest in and grow its Specialised Cellulose business were starting to emerge, with 286 000 t of dissolving wood pulp sold during the quarter – an increase of 63% compared with the first quarter of last year.

Boëttger noted that the paper producer’s dissolving wood-pulp production and sales volumes were close to full capacity “with excellent quality”.

“The two major dissolving wood-pulp conversion projects are both now contributing to earnings and profitability, while the paper businesses, although dealing with difficult market conditions, continue to generate cash that will enable us to reduce debt,” he noted.

Sappi’s South African paper business returned to profitability, aided by the weaker rand:dollar exchange rate, while the group’s European paper unit reported a small operating profit after three quarters of losses, with a reduction in fixed costs offsetting lower selling prices.

Sappi Specialised Cellulose, in South Africa, had also performed well during the first quarter, following a boost in cellulose sales from the Ngodwana mill, in Mpumalanga, for the first time, the weaker rand:dollar exchange rate and a “gradual improvement” in the paper business.

Sappi expected to see further improvement in the performance of the paper businesses despite Boëttger’s warnings of the paper market remaining tough, with continued cost pressure in a competitive market.

Sappi said plans were in place to return the lagging North American paper business to previous profitability levels, after a difficult quarter, in which volume and price declines in the paper segment and increased variable costs resulted in an operating loss for the first quarter of the year.

Meanwhile, after incurring $575-million in capital expenditure (capex) after commissioning major capital projects during the year to September, Sappi planned to limit capex for the current financial year to less than $300-million.

This, in conjunction with the expected improvement in profitability, would allow Sappi to reduce debt levels to $2-billion by the end of the financial year.

“Net debt of $2.35-billion is up, compared both [with] the prior quarter, [at] $2.2-billion, and the equivalent quarter last year, [at] $2-billion, as a result of the seasonal increase in cash use and the past year’s capital expenditure respectively,” Boëttger said.