Sappi freezes dividends as its market shrinks
The group says the trade war between the US and China has hurt the price of dissolving wood pulp
Paper and packaging group Sappi has temporarily halted payment of dividends and cut capital expenditure, mainly because of lower prices for dissolving wood pulp and declines in sales of graphic paper due to the shift towards digital media.
Sappi’s share price fell to a four-year low in early trade on Thursday after the company released its full-year and fourth-quarter results. But it later rebounded to close 3.51% up at R37.46.
Sappi CEO Steve Binnie said the trade war between the US and China hurt the prices of dissolving wood pulp, which is used to create viscose fibre for fashionable clothing and textiles.
Profit for the year to September was down from $323m (R4.7bn) to $211m, while earnings before interest, tax, depreciation and amortisation (ebitda) for the year fell from $762m to $687m.
Binnie attributed the decline in ebitda to the lower prices of dissolving wood pulp and weak graphic paper demand.
He said the company, which has a net debt of $1.5bn, expects ebitda in the first quarter of the 2020 financial year to come in below that of 2019 due to the current “very weak” prices in the dissolving wood pulp market.
Binnie said the company had taken a number of steps to counter the effect of weak graphic paper demand and low prices. Graphic paper is best known for use in glossy magazines.
“These steps include tighter working capital management, the postponement and reduction in capital expenditure. The directors have furthermore concurred with management that it would be prudent to temporarily halt dividends until such time as market conditions improve,” he said.
Sappi also said that given the low prices for dissolving wood pulp, it had reduced capital expenditure. “Other than the 110,000-ton expansion of Saiccor (in KwaZulu-Natal) which is currently under way, we have not committed capital to any material project,” the company said.
The company said in 2018 that it would invest R2.7bn to increase the capacity of the Saiccor mill in Umkomaas, south of Durban, where it produces dissolving wood pulp.
Sappi said dissolving wood pulp prices had fallen 32% to a record low of $638 per ton, which is $306 per ton below that of a year ago. “We believe the current pricing is below the cash cost of production for a significant proportion of global supply and is therefore unsustainable over any prolonged period,” Sappi said.
Sappi is the world’s largest manufacturer of dissolving wood pulp, with two mills in SA and one in North America.
The company said it is considering other measures to reduce costs.
Binnie said the options considered included closing one of the machines in Europe, a market which he said is saturated with products. “I think we have too much capacity in that market,” he said. Closing one machine could take out as much as 250,000 tons of capacity.
Sappi said global graphic paper demand declined by almost 7% in the past nine months and by more than 10% in Europe and the US.
He said that despite Sappi’s strategy to diversify away from graphic paper in favour of higher-margin segments, the company will maintain a presence in the graphic paper market. Graphic paper “still generates cash, and the assets in that business are cost competitive”, Binnie said.