Sappi CEO Steve Binnie has cautioned investors to expect a dip in third-quarter earnings as the pulp and paper producer readies for planned maintenance shutdowns at two of its biggest mills — a process that will shed $30m off its bottom line.
Sappi’s operating performance for the second quarter was slightly ahead of expectations, with earnings per share (EPS) excluding special items 9% higher than a year ago. Earnings before interest, taxes, depreciation, and amortisation (ebitda) excluding special items for the March quarter was up 10% at $183m.
The increase was due to an improvement in the pulp segment and significant cost savings, which included a 9% reduction in cash fixed costs after the closures of the Stockstadt and Lanaken mills in Europe.
Speaking to Business Day on Thursday after the release of group results, Binnie said the group was seeing a “gradual recovery” in the graphic paper markets after the volatility of the previous two years where there were record highs in 2022, followed by demand challenges in 2023.
The packaging business had performed well in SA and the US, with a strong market recovery, he said. However, its European packaging operations were still under pressure.
Binnie said that while profitability improved in the second quarter and market sentiment was generally improving, the third quarter was seasonally the weakest in terms of demand for Sappi products.
This trend, coupled with rising pulp prices and the planned maintenance shutdowns at its KwaZulu-Natal Saiccor and US-based Somerset mills, would see its earnings slip slightly in the quarter but recover in the following period, he said.
“While we expect a gradual improvement in paper markets, there will be a reduction in output due to a number of planned maintenance shuts in the quarter,” said Binnie, adding that the effect of the shutdowns was estimated to be $30m.
“We therefore anticipate that ebitda (excluding a slightly negative fair value price adjustment) for the third quarter of the 2024 financial year will be below that of the second quarter but substantially above last year.”
Additionally, pulp market prices have started rising globally, which could negatively affect the profitability of Sappi’s paper business. Binnie said the group was anticipating the effect to start trickling through in the third quarter.
“It’s a modest rise, but it is upward moving,” he said, adding that while the paper business would suffer from rising costs, other businesses that sell varieties of pulp would possibly benefit from the pulp price increases and help to mitigate the effect.
Sappi, which is valued at R33.2bn on the JSE, sells raw materials such as dissolving pulp, wood pulp, biomaterials and timber, as well as end-use products, including packaging papers, speciality papers, graphic papers, casting and release papers, and forestry products.
Half-year EPS at 20 US cents, were 51% lower than a year ago. Sales for the March quarter were 6% lower at $1.35bn and down by 15% at R2.62bn for the half year.
Profit for the March quarter was down 58% at $29m. For the half year the group has reported a loss of $97m from a profit of $259m a year ago.
Binnie was optimistic, saying market sentiment was generally improving across all of the group’s product segments and Sappi was well positioned with healthy cash reserves and liquidity to manage market uncertainties.
Capex for the year is at $500m, with $154m of that earmarked for the Somerset conversion, which will convert machinery from coated wood-free graphic paper to solid bleached sulphate board, reducing its exposure to graphics and expanding its packaging capabilities.
“We want to continue to reduce our exposure to graphics and one of our strategic drivers is to grow our packaging footprint, and this supports that,” said Binnie. “The ebitda and profits linked to the project going forward are very attractive, so it’s going to add a substantial amount to our profits.”
The gradual recovery of graphic papers demand continued throughout the quarter, the company said. However, there has been a structural decline in demand from the highs of 2022.
A strong recovery of demand in North America facilitated a return to full paperboard capacity utilisation at the Somerset Mill during the quarter.
Operating rates at Sappi’s European graphic paper assets increased substantially during the quarter due to the successful transfer of sales volumes from the closed Stockstadt and Lanaken mills.
Though sales volumes also improved in Europe, the market conditions remained challenging and the underlying demand for many of the group’s products was negatively affected by weak downstream consumer sentiment in the region, it said.
Underlying demand in SA was healthy, but sales volumes continued to be affected by overstocked paper supply chains.
Sappi shares ended 3.43% weaker at R53.25 on Thursday.
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