Sappi registers drop in profit for Q2 FY23 due to weaker demand

SOUTH AFRICA – Paper and packaging group Sappi has reported a dip in profit to US$69 million in the quarter ended March 31, compared with the profit of US$188 million reported for the quarter ended March 31, 2022.

Sappi attributes the lower profit to the group being hit by production issues in South Africa as well as weaker demand for key products.

According to the company, heavy rains and challenges associated with the recent of the containerboard machine at its Ngodwana mill in Mpumalanga added to pressure from customers destocking inventory and a slowing global economy. Sales for graphic papers and packaging were down 42% and 29% respectively.

On the upside, paper selling prices remained relatively stable through the quarter and were significantly above the levels in the same period of the prior year.

The higher average selling prices year-on-year were not sufficient to offset substantially lower sales volumes.

Sappi CEO Steve Binnie says the company has, nonetheless, managed to withstand the current market pressures, especially through its reduced debt and healthy cash reserves.

Sappi’s net debt stood at US$1.2 billion as of March 31, compared with a net debt position of US$1.7 billion at the end of March 31, 2022.

Earnings before interest, taxes, depreciation and amortization (EBITDA), excluding special items, of US$167 million in the quarter under review compare with EBITDA of US$337 million in the prior corresponding period.

Earnings per share (EPS) amounted to US$0.11 in the period under review, compared with EPS of US$0.35 in the prior comparable period.

Sappi expects to spend US$410 million on capital projects in the full 2023 financial year, including US$70 million for the Somerset PM2 conversion and expansion project in North America.

The company’s viscose staple fiber (VSF) operating rates in China improved through the quarter with renewed economic activity following the Lunar New Year celebrations in January and the opening of the economy following the relaxation of Covid-19 pandemic restrictions.

Downstream inventories in the textile value chain dropped from the peaks of last year and clothing retail sales were better than expected.

The hardwood DP market price responded positively to the improved sentiment and increased to US$920/t from a low of US$883/t in January.

Meanwhile, South Africa experienced production difficulties at the Ngodwana Mill following heavy rains and challenges associated with the recent upgrade of the containerboard machine further impacted supply.

The profitability of the South African business improved marginally year-on-year, despite significant cost inflation and slightly reduced sales volumes.

Prospects

The company said it expected third-quarter core profits to be below that of its second quarter.

Sappi said the third quarter is seasonally the weakest in terms of demand for its products, while global macroeconomic uncertainties continue to weigh on consumer sentiment and paper markets have yet to show signs of a sustained recovery.

“Sappi is well positioned to withstand the current market pressures given our significantly reduced debt profile and healthy cash reserves,” said Binnie in a statement.

“We remain committed to our strategy to reduce exposure to graphic paper markets while investing for growth in renewable packaging, dissolving pulp and biomaterials.”

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