Paper and pulp manufacturer Sappi says the operational environment in SA is getting tougher to navigate as rail and port failures increase the cost of doing business.
CEO Steve Binnie said a challenging local operating environment with significant power and transport infrastructure headwinds disadvantaged the group, which relies on the dilapidated national rail network to move goods and raw materials across Southern Africa.
“It’s not easy doing business in SA,” Binnie said pointing to structural challenges impeding operations, productivity and profitability.
He said the company was previously a big user of the country’s rail infrastructure, getting its products from Ngodwana in Mpumalanga through Johannesburg and on to Durban. But with the railways breaking down Sappi has been forced to turn to road transport, which is far more expensive.
“Similarly, the rail network in Durban for Saiccor was washed away by the floods last year and unfortunately what we’ve had to do is put in place trucks to transport both raw materials and finished product. That comes at a much higher cost,” said Binnie.
The deficiencies of logistics delays at the country’s ports also affected the group’s customers and tainted the reputation of the manufacturing major among its customers.
“The port continues to be a major challenge for productivity and moving product out,” said Binnie. “Unfortunately there have been times where we’ve disappointed our customers because we haven’t been able to get products to them as quickly as they had liked — so very frustrating.”
Despite the challenges, Sappi’s Southern Africa division delivered a record R6bn in earnings before interest, tax, depreciation and amortisation (ebitda) for financial 2023 as higher selling prices boosted profitability.
The group, valued at about R23.3bn on the JSE, reported profit plunged 51.7% to $259m while headline earnings per share fell 61.5% to 50 US cents.
Sappi attributed the dip to less demand, lower sales and the customers holding on to their stock for longer, adding that the European markets were also particularly challenging.
“The widespread disruption caused by ongoing geopolitical instability, weak global economic growth, rising interest rates and an underperforming Chinese economy negatively impacted markets for our products,” said Binnie.
Sales fell 20.4% to $5.8bn and operating profit generated from the company’s core operations 50.6% to $380m.
The group retained its previous dividend of $0.15 per share.
It said the “unfavourable trading conditions faced in 2023 were further worsened by a prolonged period of downstream inventory destocking as buyers slowly worked through inventories that had been built up in the second half of 2022”.
Despite 2023 being one of the most challenging down cycles experienced in the pulp and paper industry, the group said it had further reduced debt to its lowest levels in 30 years, at $1bn.
Looking ahead, the CEO said notwithstanding the gradual recovery in pulp markets, and taking into consideration the effect of the planned maintenance shut, “we anticipate that ebitda for the first quarter of full-year 2024 will be below that of the fourth quarter of full-year 2023”.
Binnie said three of Sappi’s mills: Saiccor, Ngodwana and one in the US, would be shut in the current quarter to carry out the scheduled maintenance that happens every 18 months.
While maintenance will have positive long-term effects on plant operations, Binnie warned that the effect of all three mills facing disruptions was estimated at about $40m, which would be reflected in the first quarter of 2024.
The 87-year-old company is charging ahead with its strategy to reduce exposure to the dwindling graphics market segment saying it has become apparent that graphic paper demand has experienced a “permanent structural decline”.
Binnie said while the company’s strategy was to reduce exposure to graphics paper, it still believed that there would be some demand for the product and that the assets it has in that segment are world-class, delivering profit and generating cash.
“So it still has a role to play,” said the CEO. “The cash that we generate from those mills can be used to fund our other capital priorities including expansion in pulp and packaging.”
Sappi recently announced it had concluded the consultation process to close its Stockstadt Mill in Germany. Similarly, it has started a similar process on the potential closure of the Lanaken Mill in Belgium which will leave it with three mills that make graphic paper in Europe.
Sappi was founded in SA in 1936 but today is a global conglomerate that generates most of its sales in Europe and North America.
The company’s share price rose the most in a month on Thursday, up 4.92% to R41.40.
Correction: November 10 2023
An earlier version of this story reflected that Sappi’s net debt had come down to $1m. It has been corrected to $1bn in total.
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