South African-based pulp and paper giant Sappi had a tough third quarter and reported a headline loss of four United States cents per share for the three months to June after headline earnings per share of 12 cents in the March quarter and 18 cents for the June 2004 quarter.
For the nine months to June, Sappi’s headline earnings per share amounted to 14 cents, compared with 17 cents for the same period a year ago.
Demand for most of Sappi’s products is driven at the macro level by gross domestic product growth, corporate profitability and advertising spend, and indicators for all these factors continue to be positive, Sappi CEO Jonathan Leslie said on Thursday.
Sappi’s margins, however, remain unsatisfactory and worsened in the June quarter due to the combination of raw-material cost pressure, difficulty in achieving price increases in Europe and associated production downtime, and a sharp drop in US apparent consumption, “which we think is linked to customer inventory reduction”.
“It was a tough quarter and we had to make tough decisions — not all of which worked in our favour,” said Leslie.
However, he says the group is committed “to take the necessary steps”.
In North America, apparent consumption of coated fine paper for the quarter dropped by 11% compared with the unusual surge a year earlier. For Sappi’s fiscal year to date, North American apparent consumption was at the same level as last year.
“We believe that underlying demand in the market remains firm, supported by continuing growth in advertising pages,” Leslie said.
In Europe, apparent consumption was up 2% on a year earlier. Competition remained strong and Sappi achieved only part of the price increases announced in Europe and North America.
“We lost sales in Europe in the early part of the quarter as a result of our price increases, but order books filled later in the quarter. We curtailed production from normal levels and operated at around 75% of paper capacity in both Europe and North America during the quarter to match production to customer requirements, but this was insufficient to adjust our US inventories,” he said.
The Southern African businesses had some relief from a slightly weaker rand, but currencies remain volatile.
As part of the ongoing plan to achieve acceptable returns in the North American business, Sappi announced the restructuring of the Muskegon mill to eliminate high-cost capacity and position the mill as a high-quality, low-cost mill.
Group sales for the quarter were 3,7% lower than a year earlier, mainly as a result of lower sales volumes.
“There was no relief from cost pressure in the quarter. The price impact of higher wood, energy and chemical costs reduced our operating results by $32-million compared with last year, and compared to last quarter the impact was $6-million,” said Leslie.
Maintenance shuts at Sappi’s mills cost $19-million in the quarter, compared with $2-million in the prior quarter and $10-million a year earlier. There are only minor maintenance shuts scheduled in the final quarter, he added.
Sappi recorded an operating loss of $193-million after the pre-tax charge of $180-million in respect of an asset write-off at the Muskegon Mill.
The headline loss for the quarter was four US cents and the net loss per share was 77 US cents, with the primary difference between headline and net loss being the Muskegon impairment.
Cash generated by operations was significantly lower at $90-million from $154-million a year earlier as a result of lower operating profit.
Net debt was $1,823-billion at quarter end, a reduction of $111-million from March’s level.
Looking ahead, Sappi expects demand in the final quarter to be seasonally stronger than the third quarter, particularly in North America, but does not expect significant market price increases during the quarter as a result of continuing strong industry competition for market share.
“Our actions to close high-cost capacity at Muskegon mill, reduce overhead costs and return our inventory to target levels will help to improve our North American business in the medium term, but will contribute to disappointing results in the next quarter.
“We will take further curtailment next quarter to reduce inventory in North America. This will impact the operating result but will help reduce working capital and generate cash flow. The inventory reduction is expected to result in an under-recovery of manufacturing overheads of approximately $30-million next quarter,” Leslie added.
Sappi will continue to focus on the reduction of costs throughout its businesses.
The rand/dollar exchange rate remains strong, which continues to depress margins in the Southern African businesses. However, it is currently 5% weaker than this quarter’s average, which will boost margins on exports and, over time, help boost margins on local sales.
“For the group as a whole, we expect trading conditions to improve in the final quarter, which typically is our strongest quarter. Our inventory reduction action together with high input costs will, however, make it difficult to achieve positive earnings at the operating income level, before taking into account the additional Muskegon restructuring charges,” Leslie concluded. — I-Net Bridge