Paper and pulp company Sappi reported lower profit and a decline in sales volumes in its latest interim results amid tough economic conditions worldwide, leading to lower demand from customers and weaker paper and pulp markets.
After the record profitability achieved last year, the group faced “a severe downstream inventory destocking cycle”, the company said in its results for the six months to end-March.
This led to production curtailment in both the European and North American regions to match the sluggish market demand and to prevent excess inventory accumulation, it said. “Profitability was negatively affected by reduced sales volumes, cost inflation and operational inefficiencies associated with the commercial downtime.”
As a result, profit was down 16.7% to $259m and its sales volume was just more than a fifth lower at 3.2-million metric tonnes.
Looking ahead, the company expects market conditions to remain weak until the destocking cycle, reducing a company’s inventory, is complete.
“Global logistics challenges are mostly resolved and destocking may take longer than expected if customers delay replenishing their supply chains and drive down inventories below historical levels in anticipation of pricing adjustments,” Sappi said.
The company, which is valued at R22.9bn on the JSE, sells raw materials such as dissolving pulp, wood pulp, biomaterials and timber, and end-use products, including packaging papers, speciality papers, graphic papers, casting and release papers and forestry products.
SA remains the company’s largest region in sales volumes, accounting for almost half, followed by Europe and North America. SA also generated the most operating profit, accounting for 39.5% of the bottom line, followed closely by North America (39.2%) and then Europe.
In other financials, gross profit — revenue minus the cost of sales — declined 12.1% to $532m, and operating profit, generated from a company’s core operations, was down 15% to $339m. In terms of cash flow, cash generated from operations fell 21.6% to $442m.
Sappi said the third quarter was often the weakest in terms of demand, so it expected its core earnings (ebitda) to come in lower than that of the second quarter.
In April, Sappi announced that the sale of its three European mills to Aurelius Group lapsed, dealing a blow to the group’s strategy to reduce its exposure to the graphics market.
The pulp and paper producer has been looking to exit the graphics paper market in favour of moving towards the dissolving pulp and packaging markets.
In 2022, Sappi received binding offers from several parties for the Maastricht Mill in the Netherlands, its Stockstadt Mill in Germany and its Kirkniemi Mill in Finland, and announced in September that the board had agreed to accept a €272m offer from a pan-European multi-asset manager, Aurelius Investment Lux One Group.
The transaction was subject to various standard suspensive conditions, including the conclusion of a separation and transitional services plan between Sappi and Aurelius to the satisfaction of both parties to be fulfilled by the long stop date, but this did not happen.
Update: May 11 2023
This story has been updated with additional information.
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