Pulp and paper producer Sappi has increased its net profit for the three months to March 31, by 75% to $56-million, compared with the profit of $32-million recorded in the March 2014 quarter.

CEO Steve Binnie on Thursday said this was in line with the company’s expectations.

Earnings before interest, taxes, depreciation and amortisation (Ebitda), excluding special items, of $170-million, were slightly lower than the Ebitda recorded in the second quarter of the prior financial year.

Sappi’s operating profit, excluding special items, for the quarter was $104-million, up from $95-million in the March 2014 quarter and $74-million in the December 2014 quarter, which Binnie said indicated a “pleasant progression”.

Earnings a share for the quarter increased to $0.11, compared with $0.06 in the March 2014 quarter.

“During the quarter, Sappi achieved a significant refinancing and repaid its 2018 and 2019 bonds through the issue of a new €450-million seven-year bond, with a coupon of 3.375% and from the European revolving credit facility, which was renewed and increased to €465-million from €350-million,” said Binnie.

Sappi reduced its net debt to $1.92-billion, compared with $2.25-billion in the March 2014 quarter, as a result of cash generated from operational activities, lower working capital and a favourable exchange rate on the translation of the group’s debt.

The specialised cellulose business continued to generate solid returns during the quarter under review with an Ebitda, excluding special items, of $65-million.

The dollar prices for dissolving wood pulp declined compared with the prior quarter owing to excess market supply, as well as low prices and margins in the viscose staple fibre sector.

However, the weaker rand/dollar exchange rate enabled the South African mills to maintain rand pricing and margins and offset any impact on the lower dollar pricing.

The South African paper business continued to progress with higher volumes, pricing and lower logistics and fixed costs, which offset any increases in variable costs experienced by Sappi owing to the weaker rand.

The North American business returned to profitability following the extended outage at the Somerset mill, in Maine, in the US. The business also benefited from higher coated prices, an improved coatings sales mix and lower variable costs.

The European business increased its profitability, but its performance was adversely impacted by higher raw material costs owing to the weaker euro/dollar exchange rate and particularly weak demand in January. Export paper prices benefited from the weaker euro.

Net cash generation for the quarter of $82-million was lower than the $132-million recorded in the March 2014 quarter, owing to lower working capital inflows as a result of inventory increases during the period. 

In the quarter under review, Sappi spent $46-million in capital expenditure (capex), mainly related to maintenance and efficiency projects.

Special items for the quarter included a gain of $57-million resulting from the transfer of the Sappi Dutch pension fund to a general fund and a positive plantation fair value pricing adjustment of $18-million for the South African plantations. 

These benefits were offset by one-off finance charges of $63-million relating to the refinancing of the 2018 and 2019 bonds. The finance charges included breakage fees, accelerated amortisation of costs and unwinding of an interest rate swap. The cash impact of the refinancing was a negative $53-million.

OUTLOOK
Graphic paper markets, particularly for coated mechanical, remained difficult, said Binnie, adding that continued cost pressure from higher paper pulp and wood prices were placing margins under pressure.

However, lower oil and energy costs were providing some relief. Coated wood-free paper price increases in the US market had widened the gap with European pricing levels; but no significant increase in imports into the US market had been experienced to date.

Textile prices, particularly for cotton and viscose, seemed to have stabilised over the past few months, after a long period of decline and dissolving pulp prices followed a similar trend.

“We remain well positioned to meet the changing market needs. The weaker rand/dollar exchange rate will support the profitability of this business. Capex in 2015 is expected to be about $280-million and is focussed largely on maintenance projects and efficiency improvement investments at our Kirkniemi and Gratkorn mills in Finland and Austria respectively,” said Binnie.

Sappi estimated that, post the refinancing of its 2018 and 2019 bonds, the reduction in debt and currency movements, the group’s net finance costs would be about $110-million a year. 

At current exchange rates, Sappi expected to further reduce its net debt by year-end.

The third quarter was seasonally weaker in both North America and Europe. The pulp mill upgrade at Gratkorn and regular yearly maintenance shuts in all three regions would negatively impact the third-quarter results by about $21-million compared with the June 2014 quarter.

“We expect operating performance for the year will be broadly similar to 2014 despite a significant number of one-off impacts from various capital projects. The current exchange rate, and the translation of euro and rand results to dollars may have an impact on group results; nevertheless, our earnings a share, excluding special items, are expected to be substantially better than the prior year,” concluded Binnie.