Financial Reports & Markets
Sappi releases financial results for fourth quarter and full financial year
November 25, 2022 By P&PC Staff/Sappi
Sappi released its financial results for the full year ended September 30.
Highlights for the year included strong demand and the implementation of higher sales prices to offset rising costs, combined with a focus on product and customer mix optimization, supported margin expansion in all product segments. In addition, Sappi has resumed dividend payments, with a dividend of US 15 cents being declared.
“I am very pleased with Sappi’s exceptional performance this past year. Once again, the dedication and resilience of the Sappi team shone through, this year delivering EBITDA of US$1,339 million, well above the previous record set in FY2000 (US$1,052 million). The outstanding performance was particularly noteworthy within the context of a challenging macroeconomic environment. Significant headwinds included extreme weather-related events, lingering Covid pandemic effects in China as well as extraordinary global inflation, which was triggered by geopolitical turmoil and ongoing global supply chain disruptions. Amidst this volatility, we demonstrated adaptability and persistence and remained committed to our Thrive25 strategy,” said Sappi CEO Steve Binnie, in a press statement.
Sappi’s strategic priority to invest in packaging and specialty papers in recent years reaped rewards, according to the company. The segment continued to grow and achieved record EBITDA of US$359 million compared to US$214 million in the prior year. Sales volumes increased by nine percent, driven by global demand and renewed growth in Europe. However, sales were constrained by available capacity and low levels of inventory in South Africa and North America where demand exceeded supply.
Sales volumes for the pulp segment increased by 15 percent compared to the prior year on the back of strong market demand and improved logistics as the company secured regular breakbulk shipping alternatives for its South African exports. Demand for Verve during the year was particularly strong and sales were constrained by available production.
The graphic papers segment generated record EBITDA of US$650 million. The remarkable turnaround from the lows of 2020 was driven by a number of factors which led to an unprecedented global shortage of graphic paper. These included a surge in demand as economic activity normalized post-Covid and a very tight market balance due to a combination of chronic global logistical challenges and reduced supply.
Sappi’s Thrive25 strategic objective to reset the balance sheet was largely achieved. Net debt at financial year end decreased by 40 percent, from US$1,946 million to US$1,163 million as a result of the substantial cash generation and a positive translation impact of a weaker EUR/US Dollar exchange rate on the predominantly Euro-denominated debt. This is the lowest net debt level in over twenty years. In addition, in October 2022 Sappi repurchased US $206 million of the aggregate principal amount of its 2026 bonds via a tender offer. The transaction is fully aligned with the Thrive25 strategic objective to strengthen the balance sheet and yielded a capital gain of US$16 million and will reduce gross annual interest payments by approximately US$6 million per annum.
Sappi has set a new long-term strategic objective to target net debt of approximately US$1 billion. This materially lower debt level will provide more flexibility to withstand market downturns and, combined with strong anticipated future cash generation, should provide sufficient opportunity to fund growth in the company’s targeted market segments, notes Sappi.
A highlight for the year was the validation of Sappi’s 2030 decarbonization targets by the Science Based Targets Initiative.
Looking forward, Binnie stated, “Deleveraging of our balance sheet has been material and combined with substantial cash reserves we are well positioned to navigate any market downturn. We remain encouraged by the increasing resilience of our business and opportunities for growth in our packaging and specialty papers segment. Notwithstanding the inflationary cost pressures and weakening demand in some product segments, we anticipate that the EBITDA for the first quarter of FY2023 will be above that of the equivalent quarter in FY2022.”
Financial summary for the quarter and full year
- EBITDA excluding special items
- For the quarter US$391 million (Q4 FY21 US$177 million)
- For the year US$1,339 million (FY21 US$532 million)
- Profit for the period
- For the quarter US$26 million (Q4 FY21 US$35 million)
- For the year US$536 million (FY21 US$13 million)
- EPS excluding special items
- For the quarter 44 US cents (Q4 FY21 11 US cents)
- For the year 138 US cents (FY21 15 US cents)
- Net debt US$1,163 million (FY21 US$1,946 million)
- Resumption of dividend 15 US cents per share
The strong operating performance continued into the fourth quarter. Improved profitability for the pulp segment and another excellent performance by the North American region more than offset substantially higher raw material costs, principally energy in Europe. Consequently, the group delivered a new record quarterly EBITDA excluding special items of US$391 million, which was US$20 million above the previous record achieved in the prior quarter.
Viscose staple fibre (VSF) and hardwood dissolving pulp (DP) market prices dropped during the quarter responding to weaker demand in China related to Covid lockdowns, which negatively impacted operating rates for VSF producers, and general concerns around global inflation and recessionary impacts on textile demand. Despite these challenges, the profitability of the pulp segment improved substantially year-on-year with a 61 percent rise in EBITDA due to increased sales volumes and pricing.
The packaging and specialty papers’ segmental year-on-year sales volumes were up three percent, constrained by an extended shut in South Africa during the quarter for a quality and product range upgrade to the containerboard machine at the Ngodwana Mill combined with low inventory levels in North America and South Africa following the strong sales earlier in the year. EBITDA for the segment grew by 37 percent compared to last year.
The graphic papers segment continued to benefit from favourable market conditions, which supported quarter-on-quarter sales price increases. However, extraordinary cost inflation in Europe, particularly for energy, reduced segmental margins relative to the prior quarter. Graphic paper sales volumes declined four percent year-on-year due to lower inventory levels and a shift towards packaging and specialty paper grades. Order activity began slowing towards the end of the quarter as consumer sentiment dampened with the inflationary pressures and challenging economic environment.
Despite the extraordinarily tight market conditions in FY2022, the graphic paper markets are in long-term decline and indications are that demand in FY2023 will again be under pressure. A key element of Sappi’s Thrive25 strategy is to reduce its exposure to declining graphic paper markets. Aligned to this objective, Sappi signed an agreement to divest the Maastricht Mill in The Netherlands, the Stockstadt Mill in Germany and the Kirkniemi Mill in Finland. The decision was taken following a detailed and thorough strategic review and will significantly reduce its exposure to graphic paper markets.
Demand for packaging and specialty papers in North America is particularly robust and Sappi’s customers are actively seeking to increase their volumes. The board has therefore approved a US$418 million investment at Somerset Mill to convert PM2 from coated woodfree graphic paper to solid bleached sulphate board (SBS). The machine capacity will also be increased during the conversion from 240,000 tons to 470,000 tons per annum. The project is expected to be completed in early 2025 and will be funded from free cash flow from operations taking into account the company’s net debt target of approximately US$1 billion. The capital expenditure will be phased over three years with the majority of the spend taking place in FY2024 and FY2025.
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