Sappi second-quarter profit falls sharply due to destocking in global markets

SAPPI was impacted by lower sales volumes, cost inflation and operational inefficiencies associated with inventory destocking, and second-quarter earnings before interest, tax, depreciation and amortisation (Ebitda) halved to $167 million (R3.13 billion) from $337m at the same time last year.

“Following the record profitability last year, the group faced a severe downstream inventory destocking cycle.

“This led to production curtailment in both the European and North American regions,“Steve Binnie, the CEO of the pulp and paper group, said in a statement.

The share price gained a sturdy 4.4% to R42.49 by yesterday afternoon and closed 6.44% higher at R43.31.

Profit fell sharply to $69m from $188m. Earnings per share excluding special items declined to 11 US cents from 35 US cents.

Binnie said Ebitda for the third quarter, seasonally the weakest in terms of demand, was expected to be below that of the second quarter given that economic global uncertainties continued to weigh on consumer sentiment, and paper markets had yet to show signs of a sustained recovery in demand.

Viscose staple fibre (VSF) and dissolving pulp (DP) markets were recovering and demand from major customers was healthy.

“The short-term DP supply/demand landscape is expected to remain relatively balanced. However, the DP market price remains range-bound at current levels by stagnant textile fibre pricing, which would need to rise to support DP pricing gains.”

A planned maintenance shut at the Saiccor Mill in KwaZulu-Natal as well as lower contract pricing for certain customers would impact margins and profitability for the pulp segment in the third quarter.

Underlying paper demand and market conditions were anticipated to remain weak until the destocking cycle was complete.

Global logistics challenges were mostly resolved.

Binnie said they would diligently manage working capital through production curtailments and adapt product and market mix to match demand.

Some relief could be expected from lower input costs as many variable cost categories had passed their pricing peak and “we anticipate input cost benefits to be realised in the coming quarters”.

The long-term net debt target of about $1bn remained a strategic imperative. Net debt fell by $568 million compared to the prior year and ended the quarter at $1.25bn.

“Sappi is well positioned to withstand market pressures given our reduced debt and healthy cash reserves.

“We remain committed to reduce exposure to graphic paper markets while investing for growth in renewable packaging, dissolving pulp and biomaterials,” Binnie said in a statement.

VSF operating rates in China improved through the quarter with renewed economic activity following the Lunar New Year celebrations in January and the opening of the economy following the Covid-19 pandemic restrictions.

The hardwood DP market price responded positively to the improved sentiment and increased to $920/ton from a low of $883/ton in January.

The packaging and speciality business faced headwinds from elevated downstream inventories.

In South Africa, production difficulties at the Ngodwana Mill following heavy rains and issues with the containerboard machine upgrade further impacted supply.

Graphic paper markets were weaker, with demand across all product categories lower due to the ongoing industry-wide destocking cycle.

As a result, sales volumes for packaging and speciality paper and graphic paper were 29% and 42% below the prior year, respectively.

In both North America and Europe profitability was negatively impacted by weak paper markets.

Higher year-on-year average selling prices were insufficient to offset much lower sales volumes.

Operations were curtailed to match market demand and proactively manage working capital. The downtime resulted in operational inefficiencies and reduced margins.

While the sale of three European graphic paper mills did not conclude, Sappi said it would explore options for these assets.

Profitability of the South African business improved marginally year-onyear despite significant cost inflation and slightly reduced sales volumes.

Ongoing poor rail service levels necessitated increased road transport to ensure reliable timber and raw material deliveries to the mills. Containerboard demand softened slightly.