Sappi profits tumble on weak prices and soft demand
The world’s largest manufacturer of dissolving wood pulp expects the price of that product to recover
Paper and packaging group Sappi, which is experiencing a slump in key product segments, has not committed to big new projects other than the upgrade of the Saiccor mill in KwaZulu-Natal, CEO Steve Binnie says.
Sappi attributed its decision to weak prices in the dissolving wood pulp (DWP) and graphic paper markets.
The company is the world’s largest manufacturer of DWP, with two mills in SA and one in North America. Sappi’s DWP products are used to create viscose fibre for clothing and textiles, pharmaceutical products and a range of household products.
Speaking after the release of the company’s results for the first quarter of 2020, Binnie said on Wednesday that market conditions deteriorated in the past quarter in most product segments.
“Market prices for DWP remained at historically low levels throughout the quarter and were $272 a tonne (more than R4,000) below that of last year,” Binnie said.
In November 2019 the company said it would halt dividend payments until the market conditions improved.
“DWP pricing remains under pressure, albeit prices have risen slightly from the recent lows. Demand for DWP continues to grow and this is consistent with our long-term forecast. This gives us confidence that our strategy to grow volume in this segment is sound despite the current margin pressures,” Binnie said.
He said graphic paper markets continued to decline at about 10% a year. Graphic paper is best known for use in glossy magazines.
In a review of Sappi’s rating published in August 2019, Moody’s Investors Service analyst Dirk Steinicke flagged the company’s significant exposure to the graphic paper business, which he said required constant restructuring and reduction of production capacity.
Steinicke said Sappi’s DWP and speciality and packaging businesses were subject to volatile prices.
Binnie said the company expects to spend $460m in capital projects in 2020. This includes the completion of the upgrading of the Saiccor mill in Umkomaas, KwaZulu-Natal. The project entails increasing the mill’s capacity by 110,000 tonnes.
“We continue to manage capital expenditure, working capital and costs tightly. Aside from the aforementioned Saiccor mill expansion, no material capital projects have been committed,” Binnie said. The upgrade of the Saiccor mill is due for completion later this year, Sappi said.
“Given the current low DWP prices, we expect the ebitda [earnings before interest, tax, depreciation and amortisation] in the second quarter to follow the trend experienced in the first quarter,” Binnie said.
During the quarter, Sappi concluded the acquisition of the Matane hardwood pulp mill in Canada from Rayonier Advanced Materials. The acquisition will support its future growth in the packaging business. The company produces 270,000 tonnes of hardwood pulp per year.
Low operating cash generation and higher finance costs increased cash utilisation during the quarter. Sappi financed the Matane acquisition through a new eight-year term loan.
Sappi’s profit for the quarter fell from the previous $81m to $24m, while earnings per share were down from 16 US cents to 6 US cents. Sappi’s net debt was up $359m to $1.91bn.
Ebitda was $139m, down from $197m in the same period in the prior year.
“Given the current low DWP pricing levels and uncertainty regarding the coronavirus and the impact this may have on trade flows and economic activity in China, we expect ebitda in the second quarter of financial year 2020 to follow the trend experienced in the first quarter,” Binnie said.
Sappi shares gained 0.82% to R35.76. The stock is down 18.11% since the beginning of 2020.