Commentary on the quarter(1)
Operating performance for the third quarter was substantially above last year with the group delivering EBITDA(2) excluding special items of US$151 million. Despite the third quarter being seasonally the weakest for our business and a sluggish global economy, the underlying profitability, excluding a US$30 million impact of the scheduled maintenance shuts at Saiccor and Somerset Mills, remained steady quarter-on-quarter. The performance was driven by sustained strong market conditions in the pulp segment, offset somewhat by a muted recovery in paper markets. Included in EBITDA was a positive plantation fair value price adjustment of US$3 million.
Globally consumer sentiment showed signs of improvement as inflation continues to subside, which provided a boost for packaging and textile markets. However, graphic papers markets generally remained subdued with the recovery post the destocking cycle of 2023 slowing during the quarter.
Market conditions for dissolving pulp (DP) continued to be favourable, supported by tight supply and strong demand, which was enhanced by high downstream viscose staple fibre (VSF) operating rates and low inventory levels. The hardwood DP spot market price was stable during the quarter rising by US$2/ton to end the quarter at US$942/ton. Pulp sales volumes declined by 5% compared to the prior year and quarter. This was driven by low inventory levels at the beginning of the quarter and lower external high yield pulp(3) sales due to the scheduled annual maintenance shut at the Matane Mill. DP sales volumes and US$ pricing were roughly in line with the prior year and quarter.
Graphic papers sales volumes increased by 13% compared to the very weak performance of last year, which supported a substantial year-on-year improvement in profitability for the segment. However, the gradual market recovery following the destocking cycle of last year slowed during the quarter as underlying demand continues to be suppressed by global macroeconomic challenges and a likely shift in consumer behaviour following the Covid-19 pandemic. Escalating costs also impacted margins compared to the prior quarter.
The packaging and speciality papers segment experienced a challenging quarter. Paperboard demand in North America rebounded during the quarter, but selling prices came under pressure and the region was further negatively impacted by the scheduled Somerset Mill maintenance shut. European demand also improved, albeit off of a low base. Market sentiment showed modest signs of recovery, particularly in the label and self-adhesive categories. Containerboard demand in South Africa was negatively impacted by a weaker than forecast citrus fruit season due to adverse weather events. Despite these headwinds, sales volumes were 22% above last year and improved by 10% quarter-on-quarter. The positive sales volumes momentum was offset by rising costs and declining prices which negatively impacted profitability of the segment.
Earnings per share excluding special items for the quarter was 9 US cents, well above the 5 US cents in the prior year. Special items decreased earnings by US$3 million.
| (1) | "year-on-year" or "prior/previous year" is a comparison between Q3 FY2024 versus Q3 FY2023; "quarter-on-quarter" or "prior/previous quarter" is a comparison between Q3 FY2024 and Q2 FY2024. |
| (2) | EBITDA in this report excludes special items. |
| (3) | High yield pulp = bleached chemi-thermomechanical pulp (BCTMP). |
CASH FLOW AND DEBT
Net cash generated for the quarter of US$32 million was an improvement on the prior quarter. A positive working capital inflow of US$44 million and the proceeds of US$49 million for the sale of the Stockstadt Mill land was partially offset by a cash outflow of US$61 million for the closure and restructuring of the Lanaken Mill. Capital expenditure of US$108 million was in line with phasing expectations for the Somerset PM2 conversion and expansion project.
Positive cash generation supported a quarter-on-quarter reduction in net debt of US$26 million to US$1,340 million. Liquidity comprised cash on hand of US$365 million and US$662 million from the committed unutilised revolving credit facilities (RCF) in South Africa and Europe.
POST-BALANCE SHEET EVENTS
On 15 July 2024 Sappi announced that it has concluded a sale agreement for the Lanaken Mill with UTB Waalwijk B.V. a privately owned Dutch company specialising in industrial property conversions. In terms of the agreement UTB will acquire all the shares in Sappi Lanaken N.V. including all its assets for a value of €50 million, of which €40 million will be paid in cash. The transaction is unconditional and expected to close during October 2024.
OUTLOOK
Global macroeconomic conditions and consumer sentiment are slowly improving but a high level of uncertainty still exists, exacerbated by ongoing logistical challenges. Sappi remains well positioned with our competitive dissolving pulp business and strategic focus on growing the packaging and speciality papers segment to benefit from a global economic rebound.
Dissolving pulp market conditions remain robust as low downstream viscose staple fibre inventories and a constrained DP supply landscape continue to offer support for DP prices. Both VSF and DP prices have risen in recent weeks driven by an earlier than usual upsurge in seasonal activity in the textile value chain and concerns around logistical challenges. Cotton pricing has dropped in recent weeks from relatively high levels and is generally more volatile than VSF and polyester pricing. The VSF discount to cotton nevertheless remains healthy which should support continued demand for VSF.
Graphic papers markets remain suppressed, particularly in Europe. The fourth quarter is seasonally stronger and we anticipate some recovery in demand for graphic papers through the quarter. Market conditions for packaging and speciality papers in North America and South Africa are steadily improving, but recovery in Europe continues to lag. Margin management remains our primary focus for the paper businesses to mitigate the impact of rising costs.
Logistical challenges are driving up global shipping costs, which is expected to negatively impact delivery expenses. Additionally, variable costs, particularly chemical costs, are anticipated to increase as suppliers seek to pass on the higher logistics costs. Paper pulp prices appear to have peaked and are expected to begin reducing in coming months. However, there is typically a lag in European and North American pulp markets and therefore the benefit of purchased pulp savings are only likely to be realised in the new financial year.
Capital expenditure for FY2024 is expected to be slightly below previous guidance due to phasing projects and will likely be in the region of US$480 million. This includes approximately US$154 million for the Somerset PM2 conversion and expansion project.
Market prices for hardwood timber have reduced in recent weeks and we anticipate that the plantation fair value price adjustment for the fourth quarter will offset the majority of the gain from prior quarters. Notwithstanding the slow recovery in global macroeconomic conditions, and taking into consideration the impact of rising costs, we anticipate that EBITDA(2) (excluding the plantation fair value price adjustment) for the fourth quarter of FY2024 will be above that of the equivalent quarter in the prior year.
| (2) | EBITDA in this report excludes special items. |
On behalf of the board
SR Binnie
Director
GT Pearce
Director
08 August 2024
FORWARD-LOOKING STATEMENTS
Certain statements in this release that are neither reported financial results nor other historical information, are forward-looking statements, including but not limited to statements that are predictions of or indicate future earnings, savings, synergies, events, trends, plans or objectives. The words “believe”, “anticipate”, “expect”, “intend”, “estimate”, “plan”, “assume”, “positioned”, “will”, “may”, “should”, “risk” and other similar expressions, which are predictions of or indicate future events and future trends and which do not relate to historical matters, identify forward-looking statements. In addition, this document includes forward-looking statements relating to our potential exposure to various types of market risks, such as interest rate risk, foreign exchange rate risk and commodity price risk. You should not rely on forward-looking statements because they involve known and unknown risks, uncertainties and other factors which are in some cases beyond our control and may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements (and from past results, performance or achievements). Certain factors that may cause such differences include but are not limited to:
- the highly cyclical nature of the pulp and paper industry (and the factors that contribute to such cyclicality, such as levels of demand, production capacity, production, input costs including raw material, energy and employee costs, and pricing);
- the impact on our business of adverse changes in global economic conditions;
- unanticipated production disruptions (including as a result of planned or unexpected power outages);
- changes in environmental, tax and other laws and regulations;
- adverse changes in the markets for our products;
- the emergence of new technologies and changes in consumer trends including increased preferences for digital media;
- consequences of our leverage, including as a result of adverse changes in credit markets that affect our ability to raise capital when needed;
- adverse changes in the political situation and economy in the countries in which we operate or the effect of governmental efforts to address present or future economic or social problems;
- the impact of restructurings, investments, acquisitions, dispositions and other strategic initiatives (including related financing), any delays, unexpected costs or other problems experienced in connection with dispositions or with integrating acquisitions or implementing restructurings or other strategic initiatives, and achieving expected savings and synergies;
- currency fluctuations.
We undertake no obligation to publicly update or revise any of these forward-looking statements, whether to reflect new information or future events or circumstances or otherwise.