Commenting on the group’s results, Sappi Chief Executive Officer Steve Binnie said: “I am very proud of the excellent performance during the quarter particularly in light of the impact of Covid-19 in the last two years and the global economic turmoil. Tight global paper markets were the principal factor behind the quarter’s success and enabled the implementation of higher selling prices which offset extraordinary cost inflation. The Russian-Ukrainian conflict triggered renewed volatility in global commodity markets and further disrupted already constrained global supply chains, which intensified cost inflation across all regions and all product segments.
Despite these headwinds we were able to improve EBITDA by 40% on the prior quarter from US$240 million to US$337 million and three-fold over the equivalent quarter in 2021. Net debt was reduced to US$1,793 million (from US$2,070 million a year ago) and earnings per share excluding special items for the quarter was 35 US cents, a further improvement on the 20 US cents in the prior quarter, providing further evidence of the steadily improving profitability of the group.”
Looking forward, Binnie stated: “In light of the favourable operating environment, the group is in a strong position to maintain the recent momentum and the underlying EBITDA for the third quarter should be consistent with that of the second quarter subject to the impacts of the annual maintenance shuts.”
Financial summary for the quarter
- EBITDA excluding special items US$337 million (Q2 FY21 US$112million)
- Net Debt of US$1,793 million (Q2 FY21 US$2,070 million)
- Profit for the period US$188 million (Q2 FY21 loss of US$23 million)
- EPS excluding special items 35 US cents (Q2 FY21 loss of 1 US cents)
Global logistical challenges continued unabated and posed headwinds for our export sales and raw material procurement in all regions. Substantial energy, raw material and delivery cost inflation in the quarter was offset by selling price increases in the paper business.
Sales volumes in the pulp segment increased by 9% compared to the prior year on the back of robust demand and improved logistics in South Africa. Rising global paper pulp prices, driven by supply constraints due to unplanned production downtime, provided further support for both dissolving pulp (DP) and bleached thermomechanical (BCTMP) pricing. DP production volumes for the quarter were approximately 57,000 tons below expectation at Saiccor Mill due to unplanned Eskom power outages, raw material supply disruptions and operational challenges which severely disrupted the mill stability. However, the equipment related to the Saiccor Mill expansion project performed in line with expectations.
Packaging and speciality papers sales volumes grew 13% year-on-year, driven by robust global demand and renewed volume growth in Europe. Successful selling price increases and mix improvement offset rising costs and aided margin expansion for the segment. However, periodic contractual commitments deferred some increases in selling prices, particularly in Europe, that are required to restore margins to normalised levels.
A significant recovery in graphic paper demand combined with a reduction in supply, ongoing logistical challenges, and a prolonged labour strike at Finnish paper mills led to an unprecedented global shortage of graphic paper. Sales volumes for the segment increased 12% year-on-year and the tight market dynamics allowed all assets to run at full operating rates during the quarter. Successful implementation of a series of selling price increases and energy/freight surcharges offset significantly higher costs and facilitated margin restoration for the segment.
A highlight for the quarter was the turnaround of the European business, which achieved a strong second quarter EBITDA of €124 million. The success was despite geopolitical uncertainty and significant input cost inflation.
The North American business delivered another excellent quarter with EBITDA of US$114 million. Tight markets and significantly higher year-on-year selling prices across all product segments contributed to this achievement. However, cost inflation and ongoing logistical supply chain challenges remained as noteworthy headwinds for the business.
The South African business was impacted by significant cost increases, lower net selling prices for DP and production challenges at Saiccor Mill. Year-on-year variable costs rose 23% due to inflation across all categories. Expanding fruit export markets and constrained paper imports into South Africa contributed towards healthy market dynamics for packaging paper. Customer demand exceeded supply for all paper categories.
Markets across all of our key product segments remain encouraging and selling prices continued to rise in April. Continuing tight graphic paper markets provide an opportunity to maintain profitability in Europe and North America. Additionally, the demand in the packaging and specialities segment remains robust.
DP market indicators remain positive despite operating curtailments in April within the textile value chain in China due to another wave of Covid infections. The differential between cotton and VSF prices continues to be elevated, which should support DP pricing. Subsequent to quarter-end, the market price for hardwood DP increased sharply to US$1,100 per ton. The benefit of the improved DP pricing will be realised in the fourth quarter due to the lag in certain contractual pricing. DP sales volumes in the third quarter will be lower than the prior quarter due to scheduled annual maintenance shuts at Cloquet, Ngodwana and Saiccor Mills, which will have an estimated US$50 million impact on profitability.
In early April, heavy rainfall and extreme storms in the KwaZulu-Natal province of South Africa led to widespread flooding and destruction of infrastructure. Saiccor, Tugela and Stanger mills, as well as the export warehouse facilities at the Durban Port, were impacted and production was temporarily halted. There was no material Sappi Second Quarter FY22 Financial Results Presentationn a SENS announcement issued on 21 April 2022. We anticipate that there will be no material impact on EBITDA for the year. However, after external insurance proceeds, the estimated net loss of approximately US$28 million will be reflected as a special item expense in the third quarter.
An inflationary macroeconomic environment continues to exert pressures on our cost base across all regions. Additionally, geopolitical volatility within Europe poses a risk to energy and natural gas supplies in the region. Therefore, we anticipate delivery, chemicals and energy costs to increase further in the third quarter. To counteract the cost inflation, we will continue to focus on improved operating efficiencies, price and mix management.
As previously disclosed, capital expenditure is estimated to be US$395 million for FY2022.
The full results announcement is available at www.sappi.com
- Sappi Second Quarter Results – for the period ended March 2022
- Sappi Second Quarter FY22 Financial Results Presentation
- Sappi Q2 FY22 Results Fact Sheet