300709 Sappi production line.photo supplied 232
300709 Sappi production line.photo supplied 232

V-shaped recovery not likely for Sappi this year

By Edward West Time of article published Jul 31, 2020

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CAPE TOWN - The Covid-19 pandemic and lockdowns had a severe impact on Sappi in the quarter to the end of June, and weak graphic paper and dissolving pulp prices have been shredded by further significant declines in demand and lower prices.

Despite the easing of lockdown restrictions globally, a V-shaped recovery was not likely and trading was only likely return to normal around the new year, chief executive Steve Binnie said in a telephone interview yesterday.

The market responded negatively to the results, with Sappi’s share falling 7.65percent to R27.06 yesterday morning. Sappi sank to a $73million (R1.2billion) loss for the third quarter, compared with an $8m profit in the same period in 2019 after Covid-19 related lockdowns globally caused less buying of glossy paper, newsprint and forced the closure of clothing stores, Binnie said.

Earnings before interest, tax, depreciation and amortisation (Ebitda), excluding special items, fell to $26m from $118m in 2019.

Binnie said although there had been some improvement in July from the quarter just passed, it was still not at normal levels.

The group has had some coronavirus cases in its South African operations, but these employees were isolated according to health and safety protocols and production had not been affected.

Although there had been no permanent retrenchments in October, in some countries, staff had been retrenched and provided with government support until they could be re-employed again, while some 150 staff would be affected by the closure of two plants in Germany in October, said Binnie.

The packaging and specialities business, which the group was growing in line with a strategy to diversify the portfolio into higher margin growing segments, however, increased sales volumes and proved resilient in the difficult period, due in part to continuing food and health sector packaging sales, said Binnie.

Ebitda from packaging and specialities increased 109percent.

Dissolving pulp (DP) and graphic paper sales volumes were 29percent and 40percent lower, respectively.

Cost containment initiatives saw fixed costs fall $67m over the equivalent quarter last year.

The packaging and specialities segment sales volumes rose 11percent, which combined with lower input costs and delayed maintenance shuts at Ngodwana and Tugela, offset some lower selling prices.

The DP segment experienced a rapid downturn in demand as retail stores globally were shut in response to the pandemic, with clothing sales particularly hard hit. This led to a chain reaction throughout the supply chain as orders were cancelled.

There were some volume gains in China.

Some production was switched at Ngodwana and Cloquet mills from dissolving pulp to paper pulp for internal consumption and external sales.

Although no profit forecast was made, the group expected a slow recovery in its markets in the coming quarter, Binnie said. Liquidity headroom remained good, with cash deposits of $190m and committed revolving credit facilities of about $503m.

Sappi’s shares closed 12.94 percent lower at R25.51 on the JSE yesterday.

BUSINESS REPORT

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