Sappi said that its first quarter results are in line with expectations and growth projects on track deliver to significant increase in earnings as from end of 2018 financial year.
An additional accounting week occurred last year which increased the comparative period reported EBITDA by US$20 million.
A non-cash income statement charge of US$19 million was taken relating to our deferred tax asset in the Unites States following that country’s lowering of their corporate income tax rate. However, going forward this will be positive and contribute to increased earnings.
Sappi chief executive officer Steve Binnie said: “Our performance for this quarter was in line with our expectations.
“We continue to work hard to mitigate increased input costs and the impact of a stronger Rand/Dollar exchange rate. We will begin to see the benefits of selling price increases during the rest of the financial year.”
The major factors which influenced the first quarter’s results include:
Dissolving wood pulp (DWP) demand remained strong with a healthy EBITDA margin of 31%;
Demand for specialities and packaging papers continued to grow across all regions and all major product segments, only constrained by our current production capacity. EBITDA margins were maintained at 14%;
Printing and writing papers markets were stable in Europe and we implemented higher selling prices to offset the impact from increased raw material costs. In the US, sales volumes were lower due to production challenges and the commencement of project work for the conversion to higher margin growth products at Somerset Mill;
Paper pulp costs continued to rise throughout the quarter; and
A stronger Rand/Dollar exchange rate.
Acquisition of Cham to be concluded by 28 February 2018. Will deliver positive earnings during the current financial year.
Integration of Rockwell Solutions (barrier coating technology) complete.
Projects at Somerset, Maastricht, Alfeld, Lanaken, Ngodwana, Saiccor and Cloquet Mills on track to deliver positive earnings boost as from FY19.
The possible 110,000tpa expansion of Saiccor mill is being brought forward due to increased demand and positive outlook for DWP prices.
The acquisition of the Cham speciality paper business is due to be completed at the end of February 2018. This will significantly strengthen Sappi’s speciality and packaging papers footprint, skills, volumes, product offering, innovation and market presence. The conversions of the paper machines at Maastricht and Somerset will be completed in the second and third quarter respectively and will further add to our coated packaging capabilities.
The debottlenecking projects at Saiccor, Ngodwana and Cloquet Mills will bring an additional 90,000tpa to the market through the end of this financial year. In light of increased demand and the positive outlook for DWP, Binnie confirmed that: “Over and above our debottlenecking projects, we are advancing plans for the possible expansion of Saiccor Mill by a further 110,000tpa.”
Demand for DWP remains good, and our realised US Dollar sales prices will improve in the second quarter as we benefit from the higher average Chinese market prices. While VSF prices currently remain under pressure, recent rises in competing textile prices such as cotton and polyester should provide support to the VSF market, which in turn should support DWP pricing in upcoming quarters.
Graphic paper operating rates remain healthy in Europe as export demand growth helps to offset more moderate demand declines in Western Europe. Coated paper price increases over the past few quarters have allowed margins to remain relatively stable despite continued input cost pressure from purchased paper pulp.
In the United States we will be taking extended downtime on PM1 at Somerset Mill in order to complete the conversion project at the mill. This is expected to have a US$9 million negative impact on EBITDA during our second and third quarters. Coated paper price increases implemented over the past six months will start to be fully realised in the second.
Capital expenditure in 2018 is expected to be approximately US$500 million as we complete the conversions at Maastricht and Somerset Mills, the Saiccor, Ngodwana and Cloquet Mills debottlenecking projects and start the upgrade of the Saiccor Mill woodyard. These projects are focused on higher margin growth segments including dissolving wood pulp and speciality packaging. This will position us for stronger profitability from 2019 onwards.
The group’s second quarter operating performance is expected to be slightly below that of the prior year as the impact of the stronger Rand and lower comparative US$ DWP prices negatively impact the South African operations.