Pulp and paper group Mondi said on Monday that underlying operating profit in the third quarter 2010 was above that of each of the first two quarters of the year and well in excess of that achieved in the comparable period of the prior year.
Releasing its interim management statement, the group said turnover for the third quarter was marginally higher than that of the second quarter.
"The upward momentum in selling prices continued. Order books remain strong, although sales volumes in the quarter were reduced due to maintenance shuts at various facilities and the extended shut at Syktyvkar as part of the integration of the modernisation project," Mondi said.
Increasing raw material costs, less pronounced than in the first half of the year, were offset by ongoing cost optimisation activities. This led to a quarter on quarter improvement in the group's underlying operating profit, the group said.
It noted that the final phase of the modernisation of the Syktyvkar mill in Russia was successfully completed during September, following the commissioning of the recovery boiler and rebuilt container board machine. Construction of the project commenced in April 2008 and was completed on schedule.
"Total costs are expected to be within the revised 545 million euro budget. The estimated impact on underlying operating profit of the shut during the quarter was 15 million euro."
"The focus is now on bringing the mill up to full production during 2011," Mondi said.
The group said that the sale of the central European paper merchant, Europapier, to the Heinzel Group for a consideration of 60 million euro on a cash and debt free basis, would be concluded in early November with all regulatory approvals having been secured. The funds will be utilised to reduce Mondi's net debt.
In August, agreement was reached with Hadera Paper to sell down the group's 50.1 percent interest in Mondi Hadera Paper for a consideration of 10 million euro, with the group retaining a 25 percent minority interest. The deal is conditional upon regulatory approval.
Mondi said that operating cash flows for the third quarter reflected the improved operating profit and enabled the group to reduce its net debt position to €1.536 million at end September 2010 from 1.632 million euro as at end June 2010.
"Working capital as a percentage of turnover, at 10 percent, remained within forecast parameters," the group said.
Mondi said that the financial position of the group at 30 September 2010 remained robust with net assets moderately up on the back of exchange impacts on translation into euro.
Following the completion of funding of the major capital projects in 2011, Mondi said it would enter a period of increased free cash flow generation. "While focused growth clearly remains an option, the group will allocate increasing free cash flow to debt reduction and to improving cash returns to our shareholders," it said.
The South Africa division's underlying operating profit for the third quarter was significantly better than that of the previous quarter, largely due to ongoing cost saving initiatives and increased pulp sales volumes.
Mondi said that the previously announced mothballing of the 120 000 tonne uncoated fine paper machine at Merebank was completed during the third quarter and the benefits from this restructuring are expected to be realised from the fourth quarter onwards.
"The fourth quarter will however be negatively impacted by a planned maintenance shut of the Richards Bay facility," it said.
"Domestic uncoated fine paper (UFP) demand remained stable, with selling prices largely unchanged quarter on quarter," it said.
The underlying operating profit for the third quarter for Mondi Packaging South Africa (MPSA) was above that of the second quarter and of the comparable period in 2009 mainly due to increased sales volumes and ongoing cost saving initiatives, the group said.
"Sales price increases are expected to take effect during the fourth quarter of the year which is also traditionally stronger due to seasonal variations. The euro result was enhanced on translation by a stronger rand versus the comparable period," it said.
Although input costs remain elevated, at or near their highs for the year, Mondi said: "the rapid increases in raw material costs experienced in the previous two quarters are showing signs of slowing."
"Monthly average benchmark prices of pulp and recovered paper in the third quarter remained relatively unchanged with hardwood pulp reflecting a slight reduction in recent months."
"Wood prices continued to increase, although at a more moderate pace than in the first half of the year," Mondi said.
Following the mothballing of the 120 000 tonne uncoated fine paper machine at Merebank in South Africa and the completion of the Syktyvkar modernisation, Mondi said it was essentially balanced in respect of its pulp production and consumption, being net short about 30 000 tonnes.
The group said that recent currency volatility impacted the profitability of the group. "The continued strength of the rand against the US dollar places severe pressure on export sales margins from the South Africa Division," it said.
Excluding the major capital projects in Russia and Poland, capital expenditure as a percentage of depreciation is running at 54 percent year-to-date, reflecting a continued conservative investment approach, it said.
Looking ahead, Mondi said: "The business will continue to benefit from the optimisation of the major capital investment projects in Poland and Russia."
The group said that the current trend in foreign exchange rates is of concern. Notably, the continued strengthening of emerging market currencies is impacting on the relative competitiveness of the Group's businesses located in these markets, while the recent weakness of the US dollar versus the euro may undermine pricing in Europe for a number of the Group's products.
"Overall, the price increases achieved to date in all of the group's key grades, together with the ongoing initiatives to contain cost increases, should see the business continue to deliver a strong performance in the final quarter of the year," it concluded.
Mondi will publish its results for the year ended December 2010 on February 21 2011. - I-Net Bridge