Sappi’s earnings per share fell to 5 US cents (R0.89) from 39 US cents in its third quarter to June 30 off a high base considering record profits last year, and after a decline in hardwood dissolving pulp (DP) prices and weaker graphic paper markets.
CEO Steve Binnie said yesterday although the group was impacted by weaker global economic conditions, particularly in Europe, and destocking of products that built up last year from post-Covid-pandemic demand, the group’s liquidity was healthy and its debt reduction strategy remained firmly in place.
“You must remember we sat for many years with over $2 billion dollars in debt. We have reduced that to about $1bn, and we will continue to do so,” he said in a telephone interview.
He said much of the high raw material-based costs of last year, such as for energy, chemicals and for transport and logistics, had fallen substantially. Further cost-saving measures were being implemented – in the past quarter, group costs fell 7%.
In addition, he said there were signs of small recovery in the group’s markets, which had underpinned their forecast that earnings before interest, tax, depreciation and amortisation would be slightly higher in the fourth quarter, over the third quarter.
“There are indications the destocking cycle is nearing completion and it is expected that demand will gradually improve throughout the fourth quarter,” he said.
Despite the difficult economic environment and a $22 million share buyback early in the quarter, net debt reduced by $49m to $1.18bn, as progress continued to the net debt target of $1bn.
Demand for DP remained positive, supported by high operating rates for viscose staple fibre (VSF) and a recovery in pricing for alternative textile fibres such as cotton.
However, the hardwood DP market price declined from $920 per ton to $870 per ton during the quarter, driven by the weak Chinese Renminbi exchange rate against the dollar, relatively low VSF pricing and the sluggish global economy.
DP market prices fell a further $30 per ton in July, but relatively low stocks of VSF in the value chain may provide resistance against further price declines.
Continued weakness in graphic paper markets was driven primarily by the destocking cycle and negative consumer sentiment. Selling prices were resilient at 5% above last year, despite facing a 45% reduction in sales volumes compared to the prior year.
In Europe there was a 47% decrease in year-on-year sales volumes of graphic papers. The packaging and speciality papers segment in Europe experienced 34% decline. Sales volumes in both segments were flat compared to the prior quarter, signalling that the destocking cycle had potentially bottomed.
In North America, sales volumes of graphic paper reduced by 46% compared to the previous year, and by 21% below the prior quarter. The contraction in sales volumes for packaging and speciality papers was less severe, with declines of 37% and 9% from the prior year and previous quarter respectively.
Profitability of the South African business was stable relative to the prior quarter and significantly higher than the previous year, helped by a more stable production environment.
Higher sales volumes for Sappi’s Verve brand and a weaker rand/dollar exchange rate offset cost inflation. Verve sales volumes more than doubled compared to the previous year due to improved plant stability and operating rates following an annual maintenance shut at the Saiccor Mill.
Containerboard demand was lower due to a downstream inventory build as customers imported product at the end of 2022. Nonetheless, higher year-on-year selling prices offset cost inflation and improved margins for the segment.
Binnie said weak global macroeconomic conditions and a slower- than-anticipated recovery in the Chinese economy was weighing on general consumer sentiment, and customers were reluctant to build stock and were opting to manage their paper supply on a just-in-time basis.
BUSINESS REPORT