Sappi returns to profit in Q3 but expects $16m Ebitda impact from unrest for Q4

5th August 2021 By: Chanel de Bruyn - Creamer Media Senior Deputy Editor Online

Pulp and paper producer Sappi has posted a profit of $18-million for the quarter ended June 30 – the third quarter of its 2021 financial year – compared with a loss of $73-million recorded in the third quarter of 2020.

Earnings a share, excluding special items, were $0.05, compared with a loss a share of $0.10 reported for the prior comparable period.

Sappi's earnings before interest, taxes, depreciation and amortisation (Ebitda), excluding special items, were $145-million. That compares with Ebitda of $26-million in the third quarter of 2020 and $112-million in the second quarter of the current financial year.

“We have seen a significant improvement in market conditions in the majority of our trading regions during the quarter. This contributed to a material increase in quarter-on-quarter Ebitda and an overall return to profit of $18-million.

“I am particularly pleased with the performance of our packaging and specialities segment, which delivered a record Ebitda and validates our strategic investments in this sector. Strong demand and good pricing in the dissolving pulp (DP) segment also had a beneficial impact on our South African and North American businesses.

"In contrast, margins in our European business remained under pressure due to escalating raw material costs and logistical challenges, which constrained export sales," CEO Steve Binnie comments.

Sappi reports that higher selling prices facilitated a substantial increase in Ebitda for the DP segment and that sentiment generally remained buoyant on the back of steadily improving retail demand in the apparel sector.

The average Chinese market price for hardwood DP increased by 19% on the prior quarter to $1 088/t but increased stock levels of viscose staple fibre (VSF), yarn and grey fabric through the supply chain exerted some downward pressure on the VSF price and consequently led to a gradual reduction in the Chinese DP price at quarter-end.

DP sales volumes for the quarter were below expectations owing to 40 000 t of lost production at the Saiccor Mill as a result of a longer-than-planned start-up following the yearly planned maintenance shut. Sappi explains that Covid-19-related travel restrictions had prevented original equipment vendors from travelling to South Africa, which affected a number of critical projects during the maintenance shut, which started in May.

Shipping delays in both South Africa and North America also negatively impacted on DP sales volumes.

The packaging and specialities segment's Ebitda, meanwhile, reached a new record high and contributed almost half of the group Ebitda.

Sales volumes increased by 23% year-on-year. Sappi says this validates the strategic actions taken to reduce exposure to graphic paper through diversification into the packaging and specialities segment.

The growth in sales volumes and the improved margins are reflective of the encouraging progress in North America to optimise the product mix at the Somerset Mill and a strong containerboard performance in South Africa, Sappi points out.

Further, demand for graphic paper improved during the quarter as a result of renewed global economic activity as countries eased Covid-19 lockdown restrictions.

Sales volumes reached 90% of volumes in the pre-Covid equivalent quarter in 2019.

"The substantial capacity that exited the sector also tightened the market balance. However, profitability in the segment remained under pressure due to spiralling purchased pulp input costs, particularly in Europe, in combination with a lag in selling price increases," the group notes.

The gains made as a result of strong DP prices and "excellent" performance from the packaging and specialities segment, were also partially offset by ongoing global logistical challenges, which impacted on export deliveries and costs in all three regions. It also contributed to lower margins in Europe owing to significant input cost inflation.

"Logistics continued to be a global obstacle; container availability, port congestion and vessel space remained severely constrained in all of our export shipping routes and freight costs escalated significantly," says Binnie.

Sappi reports that in addition to the global logistical challenges, challenges were experienced at the Port of Durban, as a result of unrest in South Africa in mid-July and a cyberattack on port operator Transnet Port Terminals' operations in the same month.

The unrest, which contributed to disruptions to raw material supplies, forced Sappi to temporarily close its Saiccor, Tugela and Stanger mills, in KwaZulu-Natal, in July. That resulted in the loss of 28 000 t of DP and 7 000 t of paper production and is expected to have a negative impact on the group's fourth-quarter Ebitda to the tune of about $16-million.

The completion and commissioning of the Saiccor Mill expansion project was also negatively impacted by the unrest and ongoing Covid-19 travel restrictions and the start-up is likely to be delayed until early in the new financial year.