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Sappi reports strong results for first quarter of its financial year

Sappi reported results for the first quarter of its financial year ended January 2023.

Commenting on the group’s results, Sappi CEO Steve Binnie said, “I am pleased with another strong performance from the group which was well above pre-COVID levels and the best ever first quarter results. EBITDA of US$290 million was 21 percent above the prior year and in line with guidance provided in the previous quarter. The positive results were underpinned by year-on-year pricing gains for paper products which offset cost inflation, lower sales volumes and delivered an EBITDA margin of 17.5 percent.”

The lower profits relative to the record levels in the prior quarter were reflective of the slowing global economy, which led to a softening in demand for our products, driven by the volatile and uncertain macroeconomic context including ongoing geopolitical turmoil, rampant inflation, rising interest rates and an underperforming Chinese economy as well as rapid downstream inventory accumulation in all our major product categories.

“Factoring in the protracted macroeconomic uncertainty, and coming off three quarters of outperformance, we anticipate a return to a normalized level of earnings in FY2023. The second quarter will likely be the most challenging with a recovery in earnings expected later in the financial year. EBITDA for the second quarter of FY2023 is expected to be below that of the first quarter,” added Binnie.

Financial summary for the quarter is as follows:

• EBITDA excluding special items US$290 million (Q1 FY22 US$240 million)
• Net debt US$1,241 million (Q1 FY22 US$1,917 million)
• Profit for the period US$190 million (Q1 FY22 US$123 million)
• EPS excluding special items 30 US Cents (Q1 FY22 20 US Cents)

Recent improvements in global supply chains resulted in a reduction in delivery lead times and a surge in customer inventory levels.

The same market dynamics of elevated retailer stock levels and general concerns over negative consumer sentiment adversely impacted demand for all textile fibres, placing pressure on the hardwood dissolving pulp market price which decreased to US$900 per ton by quarter end. Despite this pressure Sappi’s net average sales price for the pulp segment was nine percent higher than a year ago, although this was offset by an eight percent reduction in sales volumes.

Underlying demand in the packaging and specialty papers segment remained relatively stable. Selling price realization more than offset the lower sales volumes and supported year-on-year margin expansion for the segment. Sales volumes were down 14 percent compared to the prior year driven primarily by the large customer inventory build.

A series of price increases in the previous year neutralized the impact of cost inflation and lower sales volumes in the graphic papers segment. Margins remained healthy but reduced relative to the highs of recent quarters. Sales volumes were down 31 percent compared to the prior year due with production rates optimized to match sales.

Profitability of the European region improved substantially compared to the prior year as pricing gains offset cost inflation. Lower demand occurred across all product categories and there was a significant inventory build. Selling prices remained stable quarter-on-quarter which protected margins.

The North American region delivered another strong performance with first quarter EBITDA of US$114 million. Selling price gains offset significant cost inflation but sales volumes were negatively impacted by a broad-based softening in paper demand towards the latter part of the quarter.

Significant year-on-year cost inflation and slightly reduced sales volumes negatively impacted profitability of the South Africa region despite higher average US Dollar selling price for Verve (dissolving pulp) and a significant Rand/US Dollar exchange rate benefit on the Rand selling price. A fire in a municipal electrical substation disrupted production at the three operations in the KwaZulu-Natal region.

Outlook

Although the global economy will undoubtedly face significant challenges in 2023, the recent easing of the energy crisis in Europe, slowing of global inflation and the opening of the Chinese economy are positive economic indicators. Nevertheless, the short-term outlook is expected to be negatively impacted by the combination of the final phase of the downstream inventory destocking cycle, the resulting impact on sales volumes across all market segments and the relatively high cost base – albeit this is starting to turn.

The opening of the Chinese economy following the relaxation of Covid restrictions and strengthening of the Renminbi against the US Dollar represent upside potential toward the second half of the calendar year for the DP segment. VSF producer operating rates and pricing are slowly increasing and order activity in China has resumed in recent weeks.

Downstream inventory levels for our paper products have declined in recent months but remain at historically elevated levels. It may take a further few months before order activity normalizes.

Cost inflation is expected to recede in FY2023. Specifically, lower European natural gas prices are expected to have a positive impact on European costs. Globally, paper pulp prices are expected to decline as new Latin American capacity enters the market. It should be noted that pulp prices in the US and Europe are lagging relative to Asia and therefore it may take time for benefits to be realized. Logistics bottlenecks are steadily improving, and delivery costs are anticipated to reduce through FY2023. Similarly, chemical costs have started to decline in recent weeks.

Capital expenditure is estimated to be US$430 million for FY2023 and includes US$70 million for the Somerset Mill PM2 conversion and expansion project.

The divestment of three European mills to Aurelius is expected to close during the second quarter. The cash proceeds and receivables will be collected in the second and third quarter.