Sappi Says Weak European Sales to Hurt Full-Year Earnings

Sappi Ltd., the world’s biggest maker of glossy paper, expects weak sales in Europe to hit full-year earnings after second-quarter results came in below the company’s expectations.

Profit declined to $7 million in the three months through March, compared with $58 million a year earlier, the Johannesburg-based company said in a statement today. Sales dropped to $1.5 billion from $1.6 billion.

The results were “disappointing,” Chief Executive Officer Ralph Boettger said in a phone interview from Johannesburg. Economic and market conditions in Europe were “much worse” than expected, he said.

The European operation, which makes paper accounting for 55 percent of sales, posted an operating loss of 1 million euros ($1.3 million) for the quarter compared with a 16 million euro profit in the same period in 2012.

Price increases in Europe “have not been sufficient to restore margins given rising input costs,” Sappi said in the statement. “Despite the interventions and major cost reductions that have taken place, we expect the European business to only achieve a breakeven operating profit excluding special items for the full year.”

Traded Down

Sappi’s shares fell as much as 7.6 percent and were down 4.2 percent at 24.61 rand at the close in Johannesburg, their lowest level since October. The stock has declined 20 percent this year, compared with a 2.8 percent gain on the FTSE/JSE Africa All Share Index.

The fiscal year through September is considered as “transitional” by the company, Boettger said. The conversion of mills in South Africa and the U.S will add an additional 500,000 metric tons of dissolving wood pulp to existing capacity by the end of June, he said.

Dissolving wood pulp is a “very important part of our business,” Boettger said. The product will generate as much as 20 percent of revenue from fiscal 2013-2014, he said. Sappi sells most of the pulp to clothing industry clients in India, China and South-East Asia, according to André Oberholzer, group head corporate affairs.

Sappi is rated Ba3 by Moody’s Investors Service, three levels below investment grade. It issued bonds worth 1.5 billion rand ($166.62 million) on April 16.

Debt is expected to peak at about $2.4 billion at the end of the third quarter, falling to $2.2 billion by the fiscal year end, the company said. Sappi has no plans to sell additional debt in the current financial year, Boettger said.

(Updates with closing share price in sixth paragraph.)
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