Sappi reports results for the second financial quarter

Commenting on the group’s results, Sappi Chief Executive Officer, Steve Binnie said: “The operating performance for the second quarter fell short of expectations due to challenging market conditions and issues that arose during scheduled maintenance shuts, with the group delivering Adjusted EBITDA of US$107 million.”

Challenging market conditions prevailed across all segments, driven by heightened uncertainty from potential global trade tensions and a broader economic slowdown, which placed downward pressure on selling prices. The forestry fair value price adjustment for the quarter was a loss of US$17 million.

Despite these headwinds, year-on-year sales volumes remained stable, with a modest recovery in packaging and speciality papers volumes, underscoring the long-term potential of these markets. While market conditions for graphic papers remained soft, targeted efforts to grow market share delivered positive year-on-year gains. Amid these macroeconomic challenges, the group remained focused on optimising asset utilisation and advancing cost-saving initiatives to support future performance.

The quarter was negatively impacted by issues that arose during the scheduled maintenance shuts in South Africa, which required additional repairs and extended the shutdowns beyond the planned timeline thereby reducing production for the period. This resulted in an additional financial impact of US$13 million over and above the US$45 million guidance. These issues were resolved and both Saiccor and Ngodwana Mills are running well post start-up. The quarter was also affected by the extended shut for the conversion and expansion of Somerset Mill PM2 in North America, which was US$20 million as per guidance.

Looking forward to Sappi’s 3rd quarter, Binnie stated: “Given the uncertainty in our markets due to ongoing global trade tensions and their broader indirect effects on macroeconomic conditions, particularly the tariffs imposed by the US on textile and apparel manufacturers in China which is impacting demand and pricing for DWP, we are adopting a cautious outlook and estimate that Adjusted EBITDA for the third quarter of FY2025 will be at a similar level to that of the second quarter.”

Financial summary for the quarter

• Adjusted EBITDA US$107 million (Q2 FY24 US$180 million)
• Loss for the period US$20 million (Q2 FY24 profit of US$29 million)
• Net debt US$1,670 million (Q2 FY24 US$1,366 million)
• Adjusted EPS 1 US cent (Q2 FY24 12 US cents)

Demand for dissolving wood pulp (DWP) remained steady during the quarter, but the typical seasonal boost in demand post Chinese New Year was not observed as textile and apparel markets slowed on the back of increasing geopolitical trade tensions and macroeconomic uncertainties. Viscose staple fibre (VSF) pricing consequently came under pressure catalysing a US$70 per ton decline in the hardwood DWP market price, which ended the quarter at US$900 per ton. The profitability of the pulp segment was negatively impacted by the lower production at the Saiccor and Ngodwana Mills during the quarter. Although market prices dropped during the quarter, the net average selling price for the segment was above the equivalent period last year. However, this positive year-on-year sales price momentum was offset by the lower sales volumes, increased costs resulting from the extended maintenance shuts.

Sales volumes in the packaging and speciality papers segment increased by 9% year-on-year, reflecting a normalisation of inventory levels and modest recovery in demand in North America and South Africa. However, overall global demand remained subdued due to persistent macroeconomic headwinds and weak consumer sentiment. Profitability was impacted by the extended maintenance shut at the Ngodwana Mill.

Graphic paper sales volumes remained relatively stable year-on-year, despite the ongoing structural decline in market demand, reflecting positive market share gains for Sappi. The segment continued to operate in an oversupplied environment, with pricing largely influenced by cost dynamics rather than demand fundamentals. Downward pressure on selling prices negatively impacted profitability of the segment.

The European business remained under pressure due to persistent macroeconomic weakness and the significant oversupply in paper markets. Whilst sales volumes were relatively stable year-on-year, margins were adversely affected by lower selling prices. The region continued to benefit from a focus on operational efficiency with variable cost savings contributing positively to profitability. Variable costs were 1% below last year driven by lower purchased pulp and wood costs. Fixed costs were 3% above the prior year due to personnel cost inflation.

Profitability of the North American business was adversely affected by higher costs related to the planned shut for the conversion and expansion of Somerset Mill PM2 combined with general production challenges early in the quarter. Although these factors weighed on margins for the period, the underlying fundamentals of the business remained sound with stable sales volumes compared to last year. The average net selling price was broadly in line with the prior year with resilient graphic paper prices offsetting downward pressure in the packaging papers and high yield pulp segments. Variable costs were 5% above last year primarily due to higher energy and raw material usage costs associated with operational disruptions during the quarter and higher purchased pulp costs, which were partially offset by lower wood costs. Fixed costs were 2% above the prior year primarily due to higher maintenance and personnel costs.

The South African business experienced a challenging quarter as the planned maintenance shuts at the Ngodwana and Saiccor Mills adversely impacted profitability. The shuts and subsequent start-up took longer than scheduled and we experienced other production challenges during the period. As a result, production in the quarter was lower than expected.

Despite the shuts, sales volumes were steady year-on-year, and the average net selling price was higher. The forestry fair value price adjustment for the quarter was a loss of ZAR307 million. Variable costs were 11% above the prior year primarily due to higher raw material usage, specifically energy, due to operational inefficiencies associated with the scheduled shuts. Fixed costs were 27% above last year due to higher personnel costs and increased maintenance costs during the quarter.

Adjusted earnings per share for the quarter was 1 US cent, which was below the 12 US cents in the prior year due to the challenging market conditions and the adverse impacts of the once-off operational challenges experienced during the quarter. Special items reflected a net expense of US$17 million primarily due to US$12 million related to fire and other extraordinary events at our sites together with the final closure costs for the Lanaken mill of US$4 million.

Outlook

The escalating tariff trade tensions initiated by the United States against key trading partners introduces a high level of uncertainty into the global macroeconomic outlook which poses risks to our financial performance. We expect the direct impact of the currently proposed United States trade tariffs on our business to be relatively limited. At present, less than 7% of the group’s sales volumes involve cross-border trade with the United States, limiting our direct revenue exposure to tariff-related risks. Importantly, we maintain a strong domestic presence in the United States, and the paper markets in which we operate are net importers. As a result, tariffs could present a strategic opportunity as downstream participants in the value chain may increasingly shift toward domestic supply. However, the disruption of trade flows related to tariff actions could contribute to global inflationary pressures which may materially weaken consumer demand across all of our key markets. We continue to monitor these developments closely and remain focused on maintaining operational flexibility and cost discipline in the face of these external challenges.

The Somerset Mill PM2 conversion and expansion project was successfully completed in early May 2025 and machine commissioning is in progress. Our strategic focus for the packaging and speciality papers segment is to execute the commercial ramp-up of the PM2 machine, optimise our product portfolio mix and capture long-term growth opportunities as market conditions improve.

The textile and apparel market, with its long and complex supply chain, is particularly vulnerable to ongoing trade tensions and inflationary pressures. Moreover, inflation driven constraints on consumer spending are likely to dampen demand for discretionary items such as clothing. Demand for VSF and DWP in China has slowed in recent weeks as the value chain assesses the implications of these newly imposed tariffs. This has exerted downward pressure on pricing causing the hardwood DWP market price to drop to US$847 per ton in early May. Despite current headwinds, our DWP business remains well positioned for sustained long-term growth.

Demand for graphic papers continues to decline. Our strategic focus in this segment is to proactively manage capacity utilisation and cash generation from our assets. Our efforts to maximise our market share is yielding positive results, with year-on-year gains reinforcing our competitive positioning.

Despite current raw material costs being relatively low, potential global inflationary impacts associated with trade tensions pose a risk for our input costs. Maintenance shuts are scheduled for the Cloquet and Saiccor Mills in the third quarter, which will have a negative impact on earnings of approximately US$20 million. We further anticipate that the forestry fair value price adjustment will be negative due to lower wood market prices in South Africa.

Our capital expenditure forecast for FY2025 has risen to US$550 million due to the delay in the start-up and substantially increased labour costs associated with the Somerset Mill PM2 project. We anticipate that net debt will peak in the third quarter as the capital expenditure for the project is completed. We remain committed to disciplined capital allocation and reducing net debt is our priority for FY2026 and FY2027.

Source: Sappi

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