Sappi, the world’s largest manufacturer of dissolving wood pulp, says it is cautiously optimistic that its earnings will normalise by about mid-2021, after the first waves of Covid-19 shaved off some $300m (R4.7bn) in operating profits during its year to end-September.

The group idled plants as demand for wood pulp and graphic paper wilted during the pandemic, but CEO Steve Binnie said there has already been a partial recovery, though a second wave of Covid-19 remains a threat.

The group swung into a $135m loss for its year to end-September, from profit of $211m previously, with group sales falling about a fifth to $4.6bn.

Sales volumes for the group’s major product, dissolving wood pulp, fell 18% for the year, and prices were already at a historic low before coming under pressure from the pandemic.

Dissolving wood pulp is used in, among other things, textiles for clothing, and generates just less than half the group’s revenue.

Prices have already begun to recover, said Binnie, and though global oversupply has been an issue for the past two to three years, capacity has either temporarily or permanently exited the market in the past few months.

“We are seeing a bit of a rebound after Covid-19,” said Binnie. “Clothing retailers and manufacturers had let their inventories run down, but they are now filling supply chains.”

The positive highlight for the year was strong growth in sales and profitability for the packaging and specialities segment, with much of this used for food packaging or cosmetic products. This generated 22% of the group’s revenue but half its profit during the year, said Binnie.

About five or six years ago, this business line generated no profits for the group and Sappi had previously set a target for it to generate a quarter of profits, he said.

“2020 has been an unusual year, but the group is looking to reallocate capacity to packaging from graphic paper, meaning it could generate about 30% of profits. Our strategy to diversify into this has been fully justified,” said Binnie.

Graphic paper volumes fell 20% during the group’s year, with Sappi unsure it will return to pre-pandemic levels.

Net debt at financial year-end increased 30.3% to $1.96bn, and the group has received covenant waivers from lenders, but Binnie said Sappi is not overly concerned, citing measures to preserve cash, as well as the recovery in demand.

In afternoon trade on Thursday, Sappi’s share was up 2.70% to R25.45, having fallen 41.72% in the year to date.


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