Consumables

Results for the third quarter ended June 2012 in line with expectations despite tough market conditions. Sappi remains focused on debt reduction, chemical cellulose expansion.

Friday 03. August 2012 - Summary Operating profit excluding special items US$60 million (Q3 2011 US$60 million)

Summary
Operating profit excluding special items US$60 million (Q3 2011 US$60 million)
Market conditions deteriorated during the quarter
Extended maturities and lower finance cost from refinancing of 2014 bonds going forward
Once-off charges of US$89 million related to refinancing – negative EPS
Impact of planned annual maintenance shuts at major pulp mills
Chemical cellulose expansions on track
Commenting on the results, Sappi Chief Executive Officer Ralph Boëttger said:
“Operating profit excluding special items for the quarter was in line with expectations and guidance provided. Market conditions remain challenging with little visibility which impacted pricing and demand for most products.
“However the southern Africa chemical cellulose business continued to perform strongly with good margins and volumes. The chemical cellulose conversion projects at the Ngodwana and Cloquet mills are progressing well.
“The successful refinancing during the quarter of the expensive bonds due in 2014 will result in a substantial reduction in interest costs going forward and significantly improve Sappi’s debt maturity profile. Once-off charges related to the refinancing did, however, lead to a net loss per share for the quarter.
“Market conditions are expected to remain generally tough, with greater uncertainty and lack of visibility. Trading conditions are expected to be weaker than a year ago, with lower volumes for most of our products and pricing, particularly for pulp, to remain under pressure. We believe input prices should remain generally flat and that fixed costs are well under control.
“Notwithstanding the current tough trading conditions, we believe that the strategic actions that we are and have been taking are positioning the group well for both improved margins from our paper divisions and for expansion in higher margin growth businesses such as chemical cellulose. We are confident that the actions we have taken, including the refinancing completed in the last quarter, the disposal of non-essential assets as well as the reduction in our cost base, will allow us to complete the current growth projects whilst reducing our debt and strengthening our financial position.”

* Refer to the published results for details on special items, the definition of the terms, the reconciliation of profit/loss for the period to EBITDA excluding special items, the reconciliation of operating profit/loss excluding special items to segment operating profit/loss and the reconciliation of net debt to interest-bearing borrowings.
The table presented above has not been audited or reviewed.
The quarter under review
Operating profit excluding special items for the quarter was similar to that achieved in the corresponding quarter in the prior year. Performance was impacted, as anticipated, by planned annual maintenance shuts as well as seasonal factors when compared to the prior quarter. Market conditions however deteriorated more than expected in the quarter as a result of the uncertainty in Europe and a general slowdown in all major markets. The group achieved an operating profit excluding special items for the period of US$60 million (Q3 2011 US$60 million) and an operating profit excluding special items for the nine months ended June of US$285 million (2011 US$324 million).
The repurchase of the 2014 bonds will result in annual cash interest savings of approximately US$30 million. However, the full US$89 million accounting cost of the refinancing of the bonds was booked in the quarter, resulting in a loss per share for the quarter of 20 US cents (Q3 2011 loss of 13 US cents) and for the nine months of 1 US cent (2011 loss of 20 US cents).
The southern African chemical cellulose business had an excellent production and sales quarter, with higher US Dollar pulp prices and a weaker Rand compared to the prior quarter, generating R480 million in EBITDA excluding special items and an EBITDA excluding special items margin of approximately 30%. The scheduled annual maintenance shut at Saiccor Mill was postponed until early in the fourth quarter to enable the business to benefit from robust demand, continued strong manufacturing performance and in light of the declining trend in pulp prices.
As regards the fine paper business, sales volumes for the quarter were 5% lower than in the previous quarter and the equivalent quarter in the prior year. The improvement in margins compared to the equivalent quarter in the prior year reflects the benefits of the various variable and fixed cost reductions that have been implemented in the past year across all regions. In Europe, volumes sold during the quarter were lower as a result of the seasonally slower demand and the planned maintenance shuts at our pulp mills. Nevertheless, demand was weaker than expected and 7% below that of the equivalent quarter last year. In North America, despite a weaker market environment, sales volumes were 2% higher than the equivalent quarter last year and 3% higher than the prior quarter, due to higher coated paper sales volumes more than offsetting lower pulp and speciality paper sales volumes.
The southern African paper business experienced a decline in sales volumes and prices compared to the prior quarter. In particular the containerboard and paper pulp sales were challenging for both volume and price, whilst the office paper and newsprint businesses were more robust.
Cash retained from operating activities was US$52 million for the quarter, an improvement from the same quarter last year. Net capital expenditure for the quarter was US$108 million, reflecting the increased capital expenditure attributable to the Ngodwana and Cloquet mills chemical cellulose conversions. Net debt increased during the quarter to US$2,213 million as a result of the net cash utilised and the once-off charges related to the early redemption of the 2014 bonds, partly offset by currency movements.”
Outlook
Market conditions are expected to remain generally tough, with greater uncertainty and lack of visibility. Trading conditions are expected to be weaker than a year ago, with lower volumes for most of our products and pricing, particularly for pulp, to remain under pressure. We believe input prices should remain generally flat and that fixed costs are well under control.
US Dollar exchange rate strength should be favourable for our European and South African businesses with increased margins on export sales in particular.
Saiccor Mill’s production remains sold out and both the Ngodwana and Cloquet conversion projects are progressing well and expected to begin operations in the third fiscal quarter of 2013. Good progress continues to be made with volume commitments for the additional chemical cellulose capacity.
The benefits from the refinancing of the 2014 bonds completed in the past quarter are expected to commence in the fourth fiscal quarter, and the annual interest charge is expected to decrease by approximately US$45 million as a result, with the cash interest charge, as mentioned earlier, reducing by approximately US$30 million per annum. The refinancing has left us with a much improved maturity profile, with no substantial debt coming due until 2017.
Cash generated from operations for the quarter is expected to be strong. In addition, we are making good progress in terms of our strategy to dispose of non-essential assets in order to improve cash generation. Following the end of the quarter, the Biberist mill and associated land was sold for US$57 million and the Adamas mill land and buildings were sold for US$6 million. We expect our net debt to reduce through the quarter to around US$2 billion.
For the fourth fiscal quarter, operating profit is expected to be higher than in the equivalent quarter in 2011. Operating profit excluding special items for the year is expected to be below that achieved in 2011. We expect positive earnings per share for the full year.