Diversification pays off for paper and pulp heavyweight

20 February 2019 | Web Article Number: ME201913589

Commerce & Trade
Forestry, Pulp & Paper
Import / Export
Packaging

IN a difficult operating climate, the resilience of Sappi’s, business and the benefits from the diversification of its product portfolio in recent years have paid off.

That was the message from Chief Executive Officer Steve Binnie, commenting on the paper and pulp multi-national’s recently released financial results.

The company reported earnings before interest, tax, depreciation and amortisation of $197 million (R2.7 billion) excluding special items for the quarter ended December, compared with $172 million during the same period in 2017.

Earnings per share were slightly up at 16 US cents from 14 cents, while profit rose to $81 million compared with $63 millionj during the same quarter the previous year.

“In a difficult operating climate, the resilience of the business and the benefits from the diversification of the product portfolio in recent years were emphasised during the quarter. Profitability was in line with our guidance at the end of the 2018 financial year,” Binnie said.

“EBITDA excluding special items increased by 15% and profit increased by 29% from a year ago. We continue to work hard to mitigate increased input costs and weaker global graphic paper markets. The dissolving wood pulp business continued to enjoy stable pricing and healthy customer demand.”

Binnie added that “Our strategy to invest in higher margin growth segments continues to bear fruit. Overall sales volumes for packaging and specialities increased by 27% year-on-year. In Europe the volumes increased by 50% year-on-year following the completion of the Maastricht Mill conversion and the inclusion of the Cham Paper volumes and in North America sales volumes of existing packaging grades and new paperboard grades helped drive packaging and specialities volumes 68% higher than those of last year.

“In South Africa packaging volumes also increased year-on-year, supporting a strong improvement in operating performance for the business.”

He said input cost pressures on non- or partially integrated mills persisted due to elevated paper pulp prices, which impacted margins. These cost pressures and sluggish demand in some market segments were offset by higher sales, higher selling prices and market share gains in other segments along with good fixed cost control.

Looking towards the rest of the year, Binnie said “Sappi expects EBITDA in the second quarter of financial year 2019, given current exchange rates, to be slightly below that of 2018 due to current weak graphic paper markets and paper pulp prices which remain high in Europe and North America. However, the full year result is expected to be above that of the prior year.”

Sappi said following the completion of the de-bottlenecking of Saiccor and Ngodwana Mills in 2018, it planned to grow dissolving wood pulp volumes through the remainder of 2019 to meet increased customer demand.

Market conditions for the various grades of packaging and speciality papers produced by the company had diverged in the past month or so, it said, with strong containerboard markets in South Africa and solid paperboard demand in Europe contrasting with some weakness in the release paper and various European speciality grades.

It added that graphic paper markets in Europe and North America had been weak in recent months which has impacted the market balance, particularly for Europe. Further potential industry capacity conversions and closures may happen in the coming periods, however short-term profitability will be negatively impacted if demand continues to be as weak as it has been recently.

“Capital expenditure in 2019 is expected to be approximately US$590 million as we proceed with the Saiccor 110kt expansion project, complete the Saiccor woodyard upgrade, convert Lanaken PM8 from coated mechanical to woodfree paper production and upgrade the Gratkorn Mill in our continued transition towards growing and higher margin segments,” the company said.

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