20 February, 2019
Sappi delivers strong first quarter
Financial summary for the quarter
- EBITDA excluding special items US$197 million (Q1 FY18 US$172 million)
- Profit for the period US$81 million (Q1 FY18 US$63 million)
- EPS excluding special items 16 US cents (Q1 FY18 14 US cents)
- Net debt US$1,557 million (Q1 FY18 US$1,349 million)
Commenting on the result, Sappi Chief Executive Officer Steve Binnie said: "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. 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.
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 indicated that "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."
Following the completion of the debottlenecking of Saiccor and Ngodwana Mills in 2018, we plan to grow dissolving wood pulp volumes through the remainder of 2019 to meet increased customer demand. DWP prices in China have come under pressure in the past two months as the lower Chinese VSF prices and current weak Chinese paper pulp markets influence DWP pricing. Demand from our customers remains good and we anticipate that continued high paper pulp prices in the rest of the world will support DWP prices going forward.
Market conditions for the various grades of packaging and speciality papers that we produce have diverged in the past month or so, 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. The ramp up of packaging paper production at Maastricht and Somerset post the completion of the conversion projects at these mills in 2018 will result in further sales growth in this segment.
Graphic paper markets in Europe and North America have 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 110 kt 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.