Sappi returns to profitability in 2021 buoyed by rising global demand

Sappi says it is looking forward to another positive performance in the first quarter of the new financial year. Picture: Simphiwe Mbokazi.

Sappi says it is looking forward to another positive performance in the first quarter of the new financial year. Picture: Simphiwe Mbokazi.

Published Nov 12, 2021

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Sappi turned a $135m (R2 billion) loss in 2020 into a profit of $13m for 2021 due to firming global demand and prices, particularly in the US, and is looking forward to another positive performance in the first quarter of the new financial year, chief executive Steve Binnie said yesterday.

High dissolving pulp (DP) prices and a good performance by the North American region in the fourth quarter had more than offset escalating raw material costs and supply chain challenges that constrained shipments and negatively impacted delivery costs, he said in a telephone interview.

He said a significant improvement in supply chain reliability was unlikely in the first quarter of 2022, “but it feels like we’ve hit the bottom”, and there were signs of improvement, for instance, such as being able to get additional shipping capacity.

Supply chain disruptions, including global port congestion, inefficiencies in Durban port and limited vessel availability, had resulted in a backlog of 100 000 tons of DP sales volumes, which would take time to resolve, he said.

Recent spikes in global energy prices for gas, power and coal were also likely to adversely impact 2022 first quarter results, principally in Europe, but selling price increases across all paper grades had been announced. In addition, energy surcharges of 100 euros a ton were implemented for European shipments from October 25, 2021.

The group did not declare a dividend as it intended to further reduce debt and improve liquidity, he said.

Net debt at the end of the financial year decreased to $1,95bn from $1.96bn. Liquidity comprised cash of $366m and $732m from revolving credit facilities in South Africa and Europe.

He said the group had ironically benefited from the global logistics challenges in the US, as imports to that country slowed, and the group benefited from being a local producer. He said the group had made its biggest quarterly profit in the US since 1997.

The market was tight, and demand there remained firm, he said. In addition, the shift from graphic paper to packaging materials was paying off, he said.

Despite the lower DP sales volumes in the fourth quarter compared to the prior quarter, Ebitda for the segment increased 38 percent due to beneficial pricing, which peaked in the third quarter and formed the basis of fourth quarter contract prices. Overall, market conditions for DP continued to be strong, he said.

Profitability in Europe remained a challenge. Low industry inventory levels and longer delivery lead times linked to the supply chain challenges had provided support for price increases during the quarter.

Sales volumes in the packaging and speciality papers segment increased 10 percent compared to the same quarter in the prior year following sales and margin improvement in North America across all major product categories. EBITDA for the segment improved 21 percent compared to last year.

Graphic paper demand continued to recover and, combined with industry capacity closures, ensured the market balance in Europe and North America was restored to healthy levels.

Group earnings per share excluding special items for the fourth quarter was 11 US cents, well up from 5 US cents in the prior quarter.

Net cash generated for the quarter was $33m, lower $88m in the equivalent quarter of last year and $49m in the prior quarter, due primarily to increased capex of $143m, which was mainly spent on the expansion of Saiccor Mill.

The project to expand the mill’s capacity was impacted negatively by Covid-19 lockdowns and associated travel restrictions. Commissioning of the plant began in the fourth quarter and would be completed in the first quarter of the 2022 financial year.

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BUSINESS REPORT ONLINE

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