Commenting on the group’s results, Sappi Chief Executive Officer Steve Binnie said: “I am pleased with the steady recovery from the ongoing challenges of the Covid-19 pandemic. EBITDA continued to improve quarter-on-quarter from a low of US$26m in our third quarter of 2020 through US$98m in the previous quarter to US$112 for the current quarter, with further improvement expected for our third quarter.”
He continued: “The North American and South African regions recorded strong improvements in profitability. This was in contrast to Europe where extended lockdowns and restrictions on economic activity hindered the performance. Covid-19 also severely affected global shipping and container availability, which impacted sales volumes in a number of product categories.
Our comprehensive Covid-19 action plan is fully entrenched in all of our operations and employee safety remains a top priority. The rate of employee and contractor infections reduced significantly during the quarter across all regions and as a consequence there was minimal impact on mill operations.”
Looking forward, Binnie stated: “Given the favourable market conditions for DP and packaging and speciality papers, offset partially by the weak graphic paper demand and global logistical challenges, we expect the third quarter EBITDA to improve relative to the second quarter. However, earnings in the European business will be lower due to rising pulp costs.”
Financial summary for the quarter
- EBITDA excluding special items US$112 million (Q2 FY20 US$131 million)
- Net debt US$2,070 million (Q2 FY20 US$1,879 million)
- Loss for the period US$23 million (Q2 FY20 Profit of US$2 million)
- EPS excluding special items -1 US cent (Q21 FY20 4 US cents)
For the quarter, a strong packaging and specialities performance combined with solid results from dissolving pulp (DP) more than offset the weak demand and margin squeeze in graphic paper.
A positive highlight for the quarter was the continued rapid recovery of DP markets, with Chinese market prices at the highest levels since May 2012. The key factors supporting the positive sentiment in the sector include continued tight DP supply, low viscose staple fibre (VSF) inventory levels throughout the textile value chain, improved apparel retail demand in the US and Asia which favourably impacted all textile fibre prices, higher paper pulp prices and a continued weaker US$/Renminbi exchange rate.
Sales volumes in the packaging and specialities segment increased by 25% compared to last year due to a further ramp-up of board products in North America and strong containerboard demand in South Africa. While demand for most categories in Europe was positive, some non-essential products were affected by Covid-19 related lockdowns.
The steady rate of recovery in graphic paper demand over the last two quarters slowed and sales volumes in the segment were 17% lower than the same quarter last year. Capacity closures enabled Sappi to gain market share but pressure on input costs, particularly pulp, and rising delivery charges impacted profitability negatively.
Across all regions logistics issues, including congested networks, shipping line schedule disruptions, lack of containers and vessel space constraints impacted regular customer deliveries, saw a rise in delivery costs and higher freight rates and prevented Sappi from achieving the benefits of improved export market demand, in particular from Europe and South Africa.
In a positive development, new leverage covenants have been agreed with the banking group as Sappi exits the financial covenant suspension period in September 2021. The new covenants will start at 5.50 for December 2021 and reduce quarterly to 4.25 by March 2023.
DP market indicators remain positive and demand from our customers currently exceeds our capacity. As at 30 April 2021 the Chinese DP market price was US$1,100 per ton. However, pricing for VSF and other textile fibres has reduced in recent weeks. Much of the benefit from the material recovery of DP prices in the second quarter will be realised in subsequent quarters due to the lag in contractual pricing. A prolonged stronger ZAR/US$ exchange rate will temper some of the pricing benefits for the South African DP segment.
The underlying demand in the packaging and specialities segment in North America and South Africa remains robust and our focus is shifting to improving margins through machine efficiencies, mix optimisation and price realisation. However, as long as there is uncertainty in Europe regarding the continuing lockdowns due to Covid-19, the sluggish economic activity in this region is expected to impact demand for non-essential consumer products.
Graphic paper markets remain challenging and demand is still well below the long term pre-Covid-19 trend levels. The persistent weak demand in Europe is likely to keep the market in oversupply and diminish pricing power. The lag in sales price increase realisation in combination with rising raw material and logistics costs could exacerbate the margin squeeze even further in that region.
Ongoing worldwide logistical challenges of container shortages, port congestion and availability of vessel capacity pose a risk to export volumes from all regions in the third quarter.
Capital expenditure in FY2021 is estimated to be US$400 million and the Saiccor Mill expansion project is expected to commence production in the fourth quarter. Liquidity headroom within the group is good. The successful reinstatement of our leverage covenants as described earlier provides a comfortable level of headroom when covenant measurement commences again from December 2021.