Sappi posts record third-quarter earnings despite weak pulp and paper market

SOUTH AFRICA – Pulp and paper producer Sappi has delivered another quarter of record earnings from strong demand and higher prices despite the backdrop of significant geopolitical turmoil, supply chain headwinds and extraordinary global inflationary pressures, says chief executive Steve Binnie.

The company’s earnings per share, excluding special items, of 39 US cents (R6.52) in the quarter to June 30 was a substantial improvement on the 5 US cents in the prior year.

Binnie says strong global paper demand and pricing momentum in the quarter offset sharply the rising costs and the negative impact of scheduled maintenance shutdowns at four mills.

However, Binnie warned, in a telephone interview, that there might, in time, be a limit to how much fast-rising costs could be offset by raising prices and strong sales – about 50 percent of group costs were in Europe and, for instance, were being exposed to “significant energy cost increases”, particularly for gas, due to the Ukraine conflict.

He said over the longer term, perhaps from the next financial year, he also expected that global demand might decrease in line with lower global growth.

Earnings before interest, taxes, depreciation and amortization (Ebitda) improved to a record US$371 million, up from US$337m in the prior quarter, and significantly higher than US$145m in the equivalent quarter a year ago.

Covid lockdowns in China and the Russian-Ukrainian conflict exerted renewed pressure on global supply chains and energy prices, resulting in broad-based inflation.

During April, a flood forced the temporary closure of three mills in KwaZulu-Natal and resulted in a loss of 24 000 tonnes of production and 32 000 tonnes of inventory, which was damaged in a warehouse at the Durban Port.

Despite these challenges, sizeable cash generation during the quarter of US$170m supported a strategy to de-gear the balance sheet and accelerated a timeline to reduce debt.

Net debt of US$1.53 billion was US$525m less than the prior year. Binnie said they intend to reduce debt to about US$1.3bn, after which they might consider dividends.

He said another strong performance was anticipated in the fourth quarter, with Ebitda below the record levels achieved in the third quarter.

Global logistical challenges continued and posed headwinds for export sales and raw material procurement in all regions.

He added that this was also true in South Africa, where the South Coast rail link to Durban from Umkomaas had not been repaired since the floods, and 90 percent of the group’s freight between Johannesburg and KwaZulu-Natal now needed to go by road instead of rail.

The hardwood dissolving pulp (DP) market price rallied to US$1200 per tonne on the back of buoyant viscose staple fiber (VSF) prices, which reached their highest level since 2017.

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