Decline in profits hits Sappi shares, rand volatility, shut-downs are to blame
Rand, shut-downs to blame
SAPPI fell nearly 10 percent in early trade on the JSE yesterday after the pulp and paper group reported a 12 percent decline in profits for the third quarter to end June as a result of a stronger rand and maintenance shut-downs at some of its operations.
Sappi said the rand strengthening against the dollar during the period, slashed its profits to $51 million (R739.50m) from $58m during the corresponding period last year.
It said shut-downs at its Saiccor and Ngodwana mills also took a toll, because they ran longer than planned, while additional production and commissioning issues on start-up impacted production volumes by about 30 000 tons for the quarter.
In the second quarter, Sappi reported 15.91 percent increase in profits to $102m.
Sappi’s shares closed 9.51 percent lower yesterday at R91.30 from Friday’s closing price of R100.90.
Chief executive Steve Binnie said that the performance was in line with previous guidance with earnings before interest, tax, depreciation and amortisation, excluding special items flat at $155m compared with a year ago.
“The third quarter is seasonally and historically our weakest quarter, due to the slowdown in business activity during the northern hemisphere summer holiday period and Sappi’s choice to use this quarter to undertake major annual maintenance shuts,” Binnie said.
“A strong performance by our European operations was offset by a number of onceoff operational and production issues in our South African and North American businesses.” He said the maintenance shutdowns cut profits by $11m.
Binnie said the group, however, expected better performance in the fourth quarter.
“Based on current market conditions, including the current rand/dollar exchange rate, we expect the group’s fourth quarter operating performance to be similar to that of last year, despite the lost production volumes in the third quarter impacting fourth quarter sales volumes due to the resultant low inventory levels. We expect to reduce net debt further in the coming quarter through positive cash generation,” Binnie added.
The group cut its net debt by $29m during the quarter to $1.6 billion.
Binnie said capital expenditure, which was mainly used for the paper machine conversion at Somerset and de-bottlenecking of dissolving wood pulp (DWP) production at the Ngodwana and Saiccor mills, rose to $188m during the period from $86m last year
“Capital expenditure increased due to the now-completed paper machine conversion at Somerset Mill and the de-bottlenecking of dissolving wood pulp production at our Ngodwana and Saiccor mills,” he said.
“I am pleased that we have completed the conversion projects at Somerset and Maastricht mills and that we can look forward to significantly improved packaging sales volumes in the coming finan- cial year.” The group said it expected the DWP market to remain tightly supplied, with limited new capacity in the medium term.
“Market prices are expected to remain stable at current levels, given historically high paper pulp prices that are supporting DWP pricing and viscose staple fibre prices that remain under pressure from new capacity entering the market. Fourth-quarter average realised DWP prices should be in line with those of the third quarter,” the group said.