JOHANNESBURG–(BUSINESS THREAD)–Commenting on the group results, Sappi chief executive Steve Binnie said: “I am very proud of another quarter of record earnings against a backdrop of significant geopolitical turbulence, headwinds from the supply chain and extraordinary global inflationary pressures.
Strong global paper demand and price momentum offset the sharp increase in costs and the negative impact of the planned closure of four mills. EBITDA improved to a record $371 million, up from $337 million in the prior quarter and $145 million in the year-ago quarter.
Covid lockdowns in China and the ongoing Russian-Ukrainian conflict put renewed pressure on global supply chains and energy prices, leading to broader inflation during the quarter. During the month of April, flooding in South Africa forced the temporary closure of our three factories in the KwaZulu-Natal region, resulting in a loss of 24,000 tonnes of production and 32,000 tonnes of damaged inventory in a warehouse in the port of Durban.
Despite these challenges, strong cash generation during the quarter of US$170 million supported our strategic objective of de-leveraging the balance sheet and accelerated our timeline for debt reduction. In that regard, net debt of $1.53 billion was $525 million less than a year ago and earnings per share excluding special items of 39 US cents were a substantial improvement from 5 cents in previous year
Looking ahead, Binnie stated: “Despite inflationary cost pressures, we expect another strong performance in the fourth quarter, with EBITDA below the record levels achieved in the third quarter.”
Financial summary of the quarter
EBITDA excluding special items US$371 million (US$145 million 3Q21) Net debt US$1.53 billion (US$2.055 million 3Q21) Profit for the period US$199 million (US$18 million 3Q21) EPS excluding special items 39 US cents (3Q FY21 5 US cents)
Global logistics challenges continued unabated and hampered our export sales and raw material procurement in all regions. Substantial inflation in energy, raw materials and delivery costs during the quarter was offset by higher selling prices in the paper business.
The market price of hardwood dissolving pulp (DP)1 increased to US$1,200 per tonne due to high viscose staple fiber (VSF) prices, which reached their highest level since 2017. Global DP supply constraints, including our own flood losses and a A large fire at another major market player, served to tighten DP markets, which further strengthened the rise in prices. However, the profitability of the pulp segment was negatively impacted by maintenance shutdowns at the three DP plants, significant input cost inflation and lower than expected sales volumes. The output of the Saiccor Mill was unstable after the floods and the shutdown for scheduled maintenance. In addition, further challenges at the Port of Durban following the floods led to further congestion which delayed shipments by approximately 24,000 tonnes at the end of the quarter. Consequently, DP sales volumes were limited to 217,000 tonnes during the quarter.
The packaging and specialty papers segment achieved another record level of profitability despite flat year-over-year sales volumes, which were constrained by available capacity and low inventory levels in North America and South Africa. Demand remained robust and further increases in selling prices boosted segment margins.
Graphic paper sales volumes were 4% higher than the previous year. The segment benefited from tight market conditions that supported higher selling prices and drove margin growth. These favorable market conditions allowed all assets to operate at full operating rates during the quarter.
A substantial improvement in the profitability of the European business was the result of favorable market conditions, which facilitated higher selling prices in the paper segments and allowed the region to offset higher costs in all categories of inputs.
The profitability of the North American business continued its upward trajectory with the region posting another record quarterly EBITDA of US$118 million. Tight markets and higher selling prices contributed to this success despite high cost inflation. Further progress was made in optimizing the product mix for assets.
The South African business experienced a difficult quarter. Operational activities were adversely affected by the flooding in KwaZulu Natal and scheduled closures at the Saiccor and Ngodwana factories. Saiccor Mill in particular was affected by these outages and the subsequent increase in production at the mill was a challenge. In addition, renewed congestion at the port of Durban delayed deliveries by some 24,000 tonnes.
While macroeconomic uncertainties related to geopolitical volatility in Europe and persistently high global inflation may dampen consumer sentiment and discretionary spending in the near term, we expect favorable price levels and strong demand for our products to continue in the quarter quarter
DP markets are expected to remain tight due to current logistical challenges and supply constraints. Demand from our customers remains healthy and the benefit of higher market prices in the third quarter will support our contract sales margins in the fourth quarter. However, at the end of June, fears of a global recession led to a broad commodity sell-off that led to a sharp drop in Chinese cotton prices. The spread between cotton and VSF prices has eroded and VSF prices may be under pressure which could affect future DP prices.
Despite early signs of softening in the graphic paper market in some of our business regions, our order books remain healthy. Input cost inflation is likely to weigh on margins in this segment, but we still anticipate favorable margins well above long-term trends.
Demand from our customers for packaging and specialty papers remains strong. This segment has proven resilient through the economic crisis and we will continue to focus our efforts on optimizing the product mix and maximizing sales volumes.
The ongoing threat to gas and energy supplies in Europe poses a potential risk to our European business. To date, our energy risk mitigation strategies have successfully neutralized the cost impacts, and we will continue to monitor developments and take action where necessary.
Capital expenditure is estimated to be US$395 million by FY2022.
The full result announcement is available at www.sappi.com
There will be a conference call to which investors are invited. Full details are available at www.sappi.com using Investor links; Latest financial results