Charlotte Mathews
10 November 2009
Johannesburg — PULP and paper producer Sappi yesterday fulfilled its earlier promise that it would return to an operating profit in the fourth quarter, but bottom line earnings were hit by a number of special items as it cut costs to respond to weak markets.
Globally, paper producers have been facing very difficult conditions for several years because of industry overcapacity, which worsened in the past year because of the recession in main markets. Two-thirds of Sappi's sales are generated from coated fine paper, used in glossy magazines and calendars.
The group reported a basic loss of US20c a share for the September quarter, of which US18c represented one-off items, compared with a loss of US12c in the June quarter. One-off charges included asset impairments and restructuring provisions -- in the past few months Sappi has taken steps to cut capacity and costs in all its operating regions, except its chemical cellulose business in southern Africa, where prices have picked up strongly since March. Chemical cellulose is not used in paper but in other consumer items.
CEO Ralph Boëttger said apart from ongoing cost reductions, no further capacity closures beyond those already announced were envisaged, but Sappi would continue to monitor supply and demand in Europe particularly.
For the year to September, the group made a loss of US37c a share compared with a profit of US28c a share last year. Revenue dropped 8% to 5,4bn from 5,9bn, as weak demand and lower pulp prices were partly offset by the inclusion of four graphic paper mills bought from Finnish group M-real. An operating loss of 73m was made, against last year's profit of 314m. The dividend was passed.
Sappi recently refinanced its short-term debt, but warned this would increase net finance charges to 250m this year from 145m in the past year. Net debt at the end of the year was 171m higher than a year before at 2,57bn, mainly as a result of the M-real acquisition, offset by strong cash generation.
Boëttger said Sappi would like to resume dividend payments as soon as possible. It was likely to return to net profit this year, but it would be premature to promise that dividends would be resumed immediately. Although Sappi planned to bring debt levels below 2bn within three years, it would not wait for that point to resume dividend payments, as it believed it had an obligation to reward shareholders.
Sappi's North American and European businesses returned to an operating profit in the quarter, while the southern African operations were moving in the same direction, the company said. Although global conditions remained hard to predict, Boëttger expected demand for Sappi's products would grow gradually and moderately in most markets in the coming year.
Sappi's shares traded between R28,30 and R29,70 yesterday, where they are almost double the 12-month low of R12,90.
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