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Rising input costs are hurting margins at Mondi [JSE:MND] and Sappi [JSE:SAP]. But in the slowly improving global economy it works both ways for the two pulp and paper groups. They’re getting price increases through on most of the products they make, something unthinkable a few years ago.
“We’ve had four price increases in the United States market – for the first time since 2001,” says Sappi CEO Ralph Boëttger. “There’s been good demand for the majority of our products.”
Underlying operating profit has increased virtually throughout at all of Mondi’s businesses. “Price increases have been realised across all major products in first quarter 2011. Coupled with sales volume increases across all businesses on a like for like basis, that’s more than offset the ongoing cost pressures being experienced across most business segments,” says David Hathorn, CEO of Mondi.
Sappi will probably close a second mill it bought from M-real. Boëttger says all that remains is to finalise negotiations with the unions representing staff. But here’s the million dollar question: Are the two remaining mills paying for themselves? The short answer, it seems, is no. “We can’t claim we’re getting the returns we want in Europe. But we are working on that and will get there. Closing the mill allows us to control capacity,” Boëttger says.
And controlling capacity – and thereby increasing prices and demand – is the name of the game in Europe. “The closed mills have got us the market share we wanted. It’s grown from 17% to 30%,” he says.
Like Sappi, Mondi has also been refinancing its debt. It recently signed a new €750m five-year syndicated revolving credit facility with 10 banks to refinance its existing €1,55bn facility due in June next year. Hathorn says that will extend the average maturity of the group’s committed debt facilities from 2,6 to 4,2 years, leaving unutilised committed borrowing facilities of €760m, which puts Mondi in a good position to pounce on any acquisition opportunities that come up.
Despite refinancing and structuring better interest rates on its debt, at US$2,37bn, Sappi’s debt is still very high, despite dropping marginally. We blame the high debt partly on the M-real acquisition. But debt is a touchy subject between Sappi and Finweek and Boëttger almost growls when he replies. “I’ve tried to explain the debt position to you before. It’s high but we’re working to get it down. And debt has come off a lot since the M-real acquisition.”
He adds operating costs continue to improve and the benefits of the closure of the Biberist mill should be considerable. “In addition, we’ve identified further actions across our European business, which will result in fixed and variable cost savings of over $50m/year once fully implemented.”
Mondi’s uncoated fine paper business continues to perform strongly, Hathorn says. It’s largely due to the operating performance at its integrated Syktyvkar and Ruzomberok mills. “The former is now benefiting from the recently completed mill modernisation programme. The unintegrated operations also benefited from lower average input pulp prices.”
Mondi’s main problems are rising input costs and the recent weakening of the US dollar, which Hathorn says may inhibit the group’s ability to pass on further cost increases. “However, fundamentals generally remain strong in the group’s key paper grades, with the upward pricing momentum witnessed in 2010 continuing into first quarter 2011.”
The outlook for both groups – and respective share prices – is a lot brighter than two years ago. But investors must keep an eye on the tricky European market, where things can go wrong quickly.
“We’ve had four price increases in the United States market – for the first time since 2001,” says Sappi CEO Ralph Boëttger. “There’s been good demand for the majority of our products.”
Underlying operating profit has increased virtually throughout at all of Mondi’s businesses. “Price increases have been realised across all major products in first quarter 2011. Coupled with sales volume increases across all businesses on a like for like basis, that’s more than offset the ongoing cost pressures being experienced across most business segments,” says David Hathorn, CEO of Mondi.
Sappi will probably close a second mill it bought from M-real. Boëttger says all that remains is to finalise negotiations with the unions representing staff. But here’s the million dollar question: Are the two remaining mills paying for themselves? The short answer, it seems, is no. “We can’t claim we’re getting the returns we want in Europe. But we are working on that and will get there. Closing the mill allows us to control capacity,” Boëttger says.
And controlling capacity – and thereby increasing prices and demand – is the name of the game in Europe. “The closed mills have got us the market share we wanted. It’s grown from 17% to 30%,” he says.
Like Sappi, Mondi has also been refinancing its debt. It recently signed a new €750m five-year syndicated revolving credit facility with 10 banks to refinance its existing €1,55bn facility due in June next year. Hathorn says that will extend the average maturity of the group’s committed debt facilities from 2,6 to 4,2 years, leaving unutilised committed borrowing facilities of €760m, which puts Mondi in a good position to pounce on any acquisition opportunities that come up.
Despite refinancing and structuring better interest rates on its debt, at US$2,37bn, Sappi’s debt is still very high, despite dropping marginally. We blame the high debt partly on the M-real acquisition. But debt is a touchy subject between Sappi and Finweek and Boëttger almost growls when he replies. “I’ve tried to explain the debt position to you before. It’s high but we’re working to get it down. And debt has come off a lot since the M-real acquisition.”
He adds operating costs continue to improve and the benefits of the closure of the Biberist mill should be considerable. “In addition, we’ve identified further actions across our European business, which will result in fixed and variable cost savings of over $50m/year once fully implemented.”
Mondi’s uncoated fine paper business continues to perform strongly, Hathorn says. It’s largely due to the operating performance at its integrated Syktyvkar and Ruzomberok mills. “The former is now benefiting from the recently completed mill modernisation programme. The unintegrated operations also benefited from lower average input pulp prices.”
Mondi’s main problems are rising input costs and the recent weakening of the US dollar, which Hathorn says may inhibit the group’s ability to pass on further cost increases. “However, fundamentals generally remain strong in the group’s key paper grades, with the upward pricing momentum witnessed in 2010 continuing into first quarter 2011.”
The outlook for both groups – and respective share prices – is a lot brighter than two years ago. But investors must keep an eye on the tricky European market, where things can go wrong quickly.
