SOUTH AFRICA – JSE-listed dissolving pulp and paper-based solutions company Sappi has recorded a strong performance for the first quarter of its 2023 financial year, the best ever first-quarter results, CEO Steve Binnie points out.
For the quarter that ended December 31, 2022, Sappi’s earnings before interest, taxes, depreciation and amortization (EBITDA) was US$290 million, 21% higher year-on-year and in line with guidance.
The positive results were underpinned by year-on-year pricing gains for paper products, which offset cost inflation and lower sales volumes to deliver an EBITDA margin of 17.5%, Binnie says.
Sappi posted a net profit of US$190 million for the quarter under review, compared with a profit of $US123 million in the first quarter of the prior financial year, while net debt decreased to US$1.24 billion, from US$1.92 billion in the prior comparable quarter.
Sappi notes that 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 fibers, placing pressure on the hardwood dissolving pulp market price which decreased to US$900/t by quarter’s end.
Despite this pressure, Sappi’s net average sales price for the pulp segment was 9% higher than a year ago, although this was offset by an 8% 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% compared with the prior comparable quarter, 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% compared with the prior comparable quarter as a result of production rates having been optimized to match sales.
The profitability of Sappi’s operations in the European region improved substantially compared with 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, Sappi notes.
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 on by a broad-based softening in paper demand towards the latter part of the quarter.
Outlook
Sappi says the short-term outlook is expected to be negatively impacted on 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 dollar represents upside potential toward the second half of the calendar year for the dissolving pulp segment,” Sappi states.
Cost inflation is expected to recede in the full-year 2023. 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.
Sappi notes that pulp prices in the US and Europe are lagging relative to Asia and, therefore, it may take time for benefits to be realized.
Capital expenditure is estimated to be US$430 million for the full-year 2023 and includes US$70 million for the Somerset 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 quarters.
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