Sappi sees 80% drop in profits

Paper mill company Sappi saw a massive decline in its profits for the third quarter of its financial year and a significant drop in earnings.

Sappi, one of the oldest companies listed on the JSE, released its third-quarter results for the period ended June 2023 today.

These results revealed a company under immense pressure, as its EBITDA declined by 71% and its headline earnings per share decreased by 80%.

Sappi’s profits for the period declined from $199 million (R3.69 billion) in the comparable period in 2022 to $40 million (R741.29 million) in the reporting period.

The company saw a significant drop in sales, declining from $1.82 billion (R33.67 billion) in the comparable period to $1.33 billion (R24.56 billion).

Sappi said it faced “persistent challenges in the global economy and encountered ongoing weakness in paper and pulp markets”, which led to its significant reduction in EBITDA.

“Specifically, the paper businesses experienced a significant downstream destocking cycle,” the company said. “Customers reduced their inventories in anticipation of lower prices, thereby affecting demand.” 

“In response, we proactively curtailed excess production in Europe and North America, implemented various cost-saving initiatives across our operations, and applied measures to optimise working capital.”

The profitability of Sappi’s South African business was more stable than its American operations, as it was bolstered by the company’s dissolving pulp business. 

Its local operations in the comparative quarter of last year were constrained by the floods in South Africa and contributed to the pulp segment increasing sales volumes by 46% year-on-year. 

The higher sales volumes offset the negative impact of lower selling prices, and the segment maintained flat year-on-year EBITDA margins.

“Despite the challenging economic environment, we generated cash in the quarter, and liquidity in the group remained strong,” Sappi said.

The net cash generated for the quarter of $73 million (R1.35 billion) was impacted by the company’s lower profitability and was thus substantially below the $170 million (R3.15 billion) it saw the previous year.

However, the company’s liquidity remains healthy, with cash on hand of $504 million (R9.34 billion) and $668 million (R12.38 billion) from unutilised committed revolving credit facilities in South Africa and Europe. 

On 6 July, Sappi announced that a consultation process had been initiated at the Stockstadt Mill involving management and the Works Council to discuss the future of the mill. 

This process includes considering the mill’s potential closure and the site’s sale. The company said in its results today that, consequently, the pulp mill and paper machine may cease operations. 

“In light of these developments, we anticipate incurring a net asset impairment and additional costs related to restructuring and closure,” it said.