Sappi now focussed on chemical cellulose

The group‚ the world's largest maker of chemical cellulose‚ is moving away from a reliance on paper packaging and office paper markets into pulp-derived chemical cellulose‚ which is used in textiles - including clothing - pharmaceuticals‚ foodstuffs and cigarette filters.

The US$42m loss for the period was better than the US$106m loss in the same period last year. But operating profit‚ excluding special items‚ fell from US$60m in the quarter last year to just US$8m.

"It's weaker than we expected‚ particularly in Europe‚" chief executive Ralph Boëttger said last week.

"The paper business is performing so badly in Europe‚ that the majority of our profits came from the chemical cellulose business‚ even before we started these new plants‚" he said.

He said the outlook had pointed to this on the back of weaker seasonal paper demand in Europe and North America during the third quarter‚ planned maintenance shutdowns at most of its major pulp mills‚ and the costs of bringing its newest chemical cellulose businesses online.

Transitional year

"The group is making a strategic move to higher margin‚ higher growth markets‚" Boëttger said‚ adding it would cut capacity and costs in its European business over the next three years‚ so it had much less exposure to paper markets.

SA's paper packaging and office paper markets were also weak during the quarter. However‚ Boëttger said the group's North American paper business performed "reasonably" well.

Sappi said this was a "transitional year" for the group. Earnings in the quarter were affected by extended shutdowns at the Cloquet mill in Minnesota and Ngodwana mill near Mbombela (Nelspruit)‚ as capital projects to convert existing paper pulp lines to chemical cellulose had incurred hefty expenditure.

The Cloquet mill was now fully operational. Ngodwana started up in late July and was expected to increase to full production over the next three months. The total 500‚000 tons of extra chemical cellulose output meant Sappi was able to produce about 1.3-million tons of cellulose a year.

Net group debt was US$2.3bn in the quarter‚ slightly up on last year's US$2.2bn in the same period. However Boëttger said this was "acceptable and in line with what was expected" in light of the two "massive" projects.

"We want the balance sheet to be stronger‚ but there is no cause for concern‚" he said.

He said the group wanted net debt-to-earnings before interest‚ tax‚ depreciation and amortisation to be between 1.5 and two times‚ and not the nearly four times it was at present.

The third-quarter results were also affected by special items‚ including an US$11m charge related to a plantation price fair value adjustment‚ and a charge of US$4m for plantation fire damage in SA.

Disappointing results

"Sappi released disappointing third quarter results with headline earnings per share excluding special items for the quarter (showing a loss of) $0.08 versus my expectations of $0.01‚" Abdul Davids‚ head of research at Kagiso Asset Management‚ said last week.

"Operating profit‚ excluding special items‚ was also below my expectations‚" he said.

Sappi said the European paper industry was expected to remain subdued. Input costs‚ particularly pulp‚ remained high‚ and the group did not expect to see any price increases in major paper grades in the coming quarter.

But it said it would rationalise the European business‚ including improving operating margins. This would be self-funded‚ with the benefits of these actions beginning to flow in financial 2014.

"We expect our European business to make an operating loss in the fourth financial quarter‚ which will result in the group making a small net loss for the financial year‚" the group said.

But it said liquidity was strong with cash on hand of US$236m andUS $561m available from revolving credit facilities in Europe and SA.

It expected debt levels to peak during the fourth quarter as the final outlays for the chemical cellulose projects were made.

Source: Business Day via I-Net Bridge