Pulp and paper producer Sappi’s earnings before interest, taxes, depreciation and amortisation (Ebitda), excluding special items, have increased 25% to $658-million for the year ended September 30, on the back of a strong fourth quarter.

Special items included a charge of $32-million, comprised mainly of net restructuring charges and loss on disposal of assets across the businesses. This was partially offset by plantation fair value pricing gains of $18-million.

Earnings a share for the year increased to $0.22 from a loss of $0.04 the year before.

Sappi cut its debt by $300-million year-on-year to $1.95-billion.

Net cash generated for the full financial year improved, from the $247-million utilised in the prior year, to $243-million in the year under review, owing chiefly to improved operating cash generation, “excellent” working capital management, reduced capital expenditure (capex) and the R1-billion sale of Usutu Forest Products, in Swaziland.

Commenting on the key financial highlights of the fourth quarter and year, Sappi CEO Steve Binnie said in a statement that the group had made “significant” strides in the execution of its strategy over the year. 

Notable achievements included the reduction of net debt, the improved performance of the European and Southern African paper businesses and the delivery of increased dissolving wood pulp volumes into a growing and high-margin market. 

“Additionally, we disposed of the Nijmegen mill, in the Netherlands, to reduce costs, and sold our Usutu [Forest Products], which were surplus to requirements, to assist with reducing net debt.

“The North American business had a challenging year; however, we can already see advancement in that business and expect further improvement in the year ahead,” he commented.

He added that the first full year of operation at Sappi’s expanded specialised cellulose operations, as well as reduced capex following the completion of the dissolving wood pulp projects, allowed for a focus on cash generation and debt reduction.

The specialised cellulose business had another solid quarter, with higher sales volumes and a weaker exchange rate offsetting the lower average dollar dissolving wood pulp prices, compared with both the prior quarter and prior year.

Strong shipment volumes contributed to an Ebitda, excluding special items, of $77-million.

“Overall, this has been a good year for the Southern African business, with an expanded specialised cellulose business and the restructured paper business consistently delivering enhanced margins. 

“The performance of the Southern African business improved compared [with] the equivalent quarter last year owing to increased sales volumes for dissolving wood pulp, as well as higher average prices for paper and paper packaging,” Binnie noted.

Cost reductions across the group and higher selling prices in some markets contributed to earnings growth, while volumes continued to decline in the graphic paper markets, but at a slower rate than experienced in recent years.

“The European business saw an encouraging improvement in margin in this seasonally better quarter, achieving an Ebitda, excluding special items, margin of more than 10% for the first time since 2012,” Binnie outlined.

In North America, market conditions were “extremely competitive” throughout the year and, as a result, Sappi experienced significant downward pressure on pricing.

OUTLOOK
Based on current market conditions, Sappi believed Ebitda, excluding special items, in the 2015 financial year, would be broadly in line with that of 2014.

The expected improvement in the underlying operational performance of the paper businesses would likely be offset by lower dollar dissolving wood pulp pricing and the impact of the projects at the Gratkorn mill, in Austria, and the Somerset mill, in the US.

“The first-quarter result will be negatively impacted by the Gratkorn upgrade project, resulting in three weeks of downtime for the paper machine. The results will be further impacted by the extended annual maintenance outage and the finalisation of the natural gas conversion project at Somerset.

“We, therefore, expect the group Ebitda, excluding special items, in the first quarter to be similar to that achieved in the equivalent quarter last year, despite the improved underlying performance of the overall business,” Binnie noted.

Sappi expected markets in the year ahead to remain challenging, both for graphic paper, where demand was expected to continue to decline, and for dissolving wood pulp, owing to current pricing pressures.

In the dissolving wood pulp market, however, demand remained “robust”.

“Dollar prices have weakened post the financial year, owing to pressure from lower cotton prices and the continued oversupply of dissolving wood pulp and viscose staple fibre production capacity. 

“The Cloquet mill, in the US, will likely take advantage of its ability to swing between dissolving pulp and hardwood paper pulp production to optimise margins for the US business,” Binnie outlined.

Capex in 2015 was expected to be in line with that of 2014, and would be focused largely on the investments at the Kirkniemi mill, in Finland, and the Gratkorn mill.

“We are considering using our increased cash reserves to repay and refinance a portion of our debt to lower future costs. We typically experience a cash outflow in our first fiscal quarter and this will lead to an increase in net debt as at the end of December.

“Nevertheless, we expect to reduce our net debt further over the course of the year and reduce our financial leverage towards our target of twice net debt to Ebitda,” he concluded.