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Sappi reports results for Q4 and full financial year, declares dividend

Sappi shared the results for its full financial year as well as the fourth quarter. Operating performance for the fourth quarter was ahead of the company’s expectations. This enabled the group to reportedly deliver EBITDA excluding special items of US$168 million, which was a marked improvement from the low of US$106 million achieved in the prior quarter. A small recovery in graphic paper sales volumes and record pulp sales volumes combined with lower variable costs and currency exchange rate benefits in the South African business boosted profitability. Despite the improvement, the group continued to experience challenging trading conditions related to the weak global economy and lingering customer destocking.

Financial summary for the quarter and full year

• EBITDA excluding special items
  • For the quarter US$168 million (Q4 FY22 US$391 million)
  • For the year US$731 million (FY22 US$1,339 million)
• Profit/Loss for the period
  • Loss for the quarter US$40 million (Q4 FY22 profit US$26 million)
  • Profit for the year US$259 million (FY22 US$536 million)
• EPS excluding special items
  • For the quarter 6 US cents (Q4 FY22 44 US cents)
  • For the year 52 US cents (FY22 138 US cents)
• Net debt US$1,085 million (FY22 US$1,163 million)
• Dividend 15 US cents per share (FY22 15 US cents per share)

Sappi Chief Executive Officer Steve Binnie said, “Following the records achieved in FY2022, I am pleased that we have been able to deliver a satisfactory set of results under particularly difficult circumstances with an EBITDA excluding special items of US$731 million for the year ended September 2023. The widespread disruption caused by ongoing geopolitical instability, weak global economic growth, rising interest rates, and an underperforming Chinese economy negatively impacted markets for our products.

Despite 2023 being one of the most challenging downcycles experienced in the pulp and paper industry, with demand for our paper products falling below that of the COVID-19 pandemic years, we achieved some significant milestones. The South African business delivered record EBITDA and North America the second highest ever EBITDA. The group generated significant cash, which enabled a further reduction of net debt at year-end to US$1,085 million, the lowest level in 30 years.

Amidst the persistently volatile and challenging macroeconomic environment, we demonstrated adaptability and persistence and remained committed to our Thrive25 strategy.”

Demand for DP remained robust during the quarter supported by high operating rates for VSF producers and low downstream VSF inventories in China. Additionally, textile fibre prices slowly increased and hardwood paper pulp prices shifted from their recent lows. Sales volumes in the pulp segment increased 10% year-on-year reflecting improved production at the Saiccor Mill and strong demand from our customers. The average sales prices for the pulp segment were 15 percent below the elevated levels of the prior year which eroded margins.

Sales volumes for the graphic paper segment improved by 13 percent compared to the prior quarter. Year-on-year sales volumes were however down by 36 percent reflecting the ongoing macroeconomic challenges and necessitating production curtailments across the graphic paper assets in Europe and North America.

The market conditions for the packaging and specialty papers segment were also impacted by high inventory levels and the unfavourable economic climate. Segmental sales volumes improved by nine percent compared to the prior quarter but were 18 percent lower than last year.

Profitability of the North American business improved from the lows of the third quarter and the full year EBITDA of US$267 million was the second highest in the region’s history. Strategic investments in recent years in pulp and packaging and specialty papers have created a more resilient and diversified product portfolio, significantly enhancing profitability and buffering the business from the impact of cyclical economic swings. Our strategic project to convert and expand Somerset PM2 from coated wood-free paper to solid bleached sulphate paperboard progressed well during the quarter and is on track for start-up in 2025

The unfavourable trading conditions faced in 2023 were further exacerbated by a prolonged period of downstream inventory destocking as buyers slowly worked through inventories that had been built up in the second half of 2022. In response to these headwinds, we concentrated on preserving selling prices, efficiently managed our capacity and inventories to optimize working capital and implemented various cost-saving initiatives across our operations, all of which positively contributed to the earnings performance.

Graphic paper demand declined sharply and remained weak throughout the year due to weak consumer confidence related to the slowing economy and an inventory destocking cycle that took longer than anticipated. Sales volumes declined 38 percent year-on-year and production curtailments were required to manage these weak demand dynamics. Selling prices were 14 percent higher than the prior year and remained resilient.

The packaging and specialty papers segment faced similar weak trading conditions related to high levels of downstream inventory and muted consumer demand. Positive year-on-year pricing gains of seven percent were insufficient to offset input cost inflation and a 22 percent reduction in sales volumes leading to a decline in the segment’s profitability.

Looking forward, Binnie stated, “The stronger balance sheet with a significantly reduced debt profile and healthy cash reserves provides us with flexibility to navigate the headwinds of cyclical downturns and positions the business well to deliver on our Thrive25 strategy to reduce exposure to graphic paper markets while investing for growth in our target markets.

Persistent global macroeconomic challenges and generally subdued consumer sentiment continue to impact the demand for many of our products. Notwithstanding the gradual recovery in pulp and paper markets and taking into consideration the impact of the scheduled maintenance shuts, we anticipate that the EBITDA for the first quarter of FY2024 will be below that of the fourth quarter in FY2023.”