Sappi first quarter results ahead of expectations: Up 56% year-on-year

Graeme Wild, CEO of Sappi Southern Africa, Mike Haw, CEO of Sappi North America, Steve Binnie, CEO of Sappi Limited, and Marco Eikelenboom, CEO of Sappi Europe

Year-on-year profitability improved across all segments, supported by cost-savings, operational efficiency gains, higher dissolving pulp (DP) selling prices and sales volumes combined with improved packaging and speciality papers sales volumes. 

Against the backdrop of global macroeconomic headwinds, weak consumer spending and overcapacity in paper markets, our thrive strategy, in particular our strategic capacity rationalisation and cost-saving initiatives, continued to deliver positive outcomes.

The pulp segment delivered another strong performance with profitability significantly above that of last year. Demand for DP continued to be robust despite the Chinese viscose staple fibre (VSF) market entering the seasonally slow period ahead of the Chinese Lunar New Year. VSF industry operating rates remained high and inventories in the value chain continued to trend below historical levels.

The profitability of the packaging and speciality papers segment improved compared to the prior year, albeit off a low base. Sales volumes increased by 14% due to a significant recovery in North American paperboard sales volumes. Recovery in Europe continued to lag, driven by weak consumer sentiment and overcapacity. In South Africa, underlying demand was satisfactory within the context of the typical low seasonal activity in fruit export markets in the first quarter.

Profitability of the graphic papers segment improved year-on-year driven primarily by cost savings related to operational efficiency improvements. Sales volumes declined by 3% compared to the prior year as market demand resumed its historical decline following the volatility observed over the last two years. Selling prices were resilient despite significant supply overcapacity and low industry operating rates, which supported healthy EBITDA margins for the segment.

Looking forward, Binnie stated: “Notwithstanding relatively stable underlying market conditions and after taking into account the $45m negative impact of the annual maintenance shuts at Ngodwana and Saiccor Mills in South Africa, along with a 70-day shut to complete the Somerset Mill PM2 project, we anticipate that Adjusted EBITDA for the second quarter of FY2025 will be below that of the first quarter of FY2025.”

Steve Binnie

Graeme Wild

Financial summary for the quarter 

• Adjusted EBITDA $203m (Q1 FY24 $130m)
• Profit for the period $70m (Q1 FY24 loss of $126m)
• Net debt $1,406m (Q1 FY24 $1,216m) 
• Adjusted EPS 14 US cents (Q1 FY24 5 US cents)

The performance of the European region improved relative to last year benefiting from savings related to the strategic rationalisation of the graphic paper assets and higher selling prices. For graphic papers, the reduced sales volumes were offset by higher selling prices and improved capacity utilisation. In packaging papers underlying demand remained muted due to weak consumer sentiment and overcapacity, however for speciality papers, particularly label grades, sales volumes and selling prices were up compared to the prior year. Overall fixed costs were down 12% due to personnel savings associated with the closure and restructuring actions within the region.  

The North American region delivered another good performance for the quarter with adjusted EBITDA substantially above last year. Success was largely driven by improved sales volumes compared to last year (up 12% for graphic paper and up 38% for packaging and speciality paper), which boosted operational efficiencies, and the absence of the scheduled maintenance shut at the Cloquet Mill that occurred during the comparative period.  

Improved year-on-year profitability in the South African region was primarily driven by reduced costs and higher DP sales prices and volumes. The sales volumes and cost savings were due to improved operational efficiencies and the absence of maintenance shuts at Saiccor and Ngodwana Mills in the current period compared to the previous year. Containerboard sales volumes were in line with last year and underlying containerboard demand in local markets remained steady. Demand for office paper improved relative to last year driven by good back-to-school seasonal demand. Other paper categories struggled in a weak domestic economy.

Adjusted earnings per share for the quarter was 14 US cents, which was substantially above the 5 US cents in the prior year and reflective of the improved operating performance. Special items reduced earnings by $11m and were mainly related to the final write-offs for the mill closures of last year and fire-damaged timber. The forestry fair value price adjustment for the quarter was a loss of $1m.

Outlook

The underlying demand for dissolving pulp remains strong, supported by high operating rates in the VSF industry. However, we expect the seasonal slowdown in China's textile industry during the Lunar New Year celebrations to apply short-term pressure to DP pricing in the second quarter.

Packaging and speciality papers markets in North America and South Africa are expected to remain stable with good demand from our customers. European markets remain weak, and recovery is taking longer.  

Graphic paper markets have normalised following a prolonged destocking cycle, and demand across all regions has resumed its historical decline. Overcapacity remains a significant headwind for the industry, particularly in Europe. Our strategic focus for this segment is to maximise our market share and proactively manage our capacity utilisation as we transfer graphic paper sales from our Somerset Mill PM2 to alternate assets.  

Challenging global macroeconomic conditions, persistent geopolitical tensions, and uncertainties surrounding US trade tariffs pose both risks and potential opportunities to our business, which we continuously assess. In this environment, our strategic focus remains firmly on cost savings to safeguard our competitive advantage.

The Somerset Mill PM2 will be shut for a period of approximately 70 days in the second quarter as we complete the conversion and expansion to paperboard. The machine is expected to start commissioning in April 2025. The paperboard product mix will shift with the commercial ramp-up of the machine, initially increasing the proportion of sales to the lower-margin food service market. The project will adversely impact the second quarter earnings by approximately $21m.  

Global paper pulp markets continue to be oversupplied and downstream paper demand recovery is slow. Prices have stabilised in recent weeks and market analysts are forecasting that we are approaching the trough in the cycle. We anticipate that our paper business will continue to benefit from the lower pulp input costs in the second quarter. Annual maintenance shuts are scheduled for the Ngodwana and Saiccor Mills in the second quarter (these occurred in the first quarter of last year), which will have a negative impact on earnings of approximately $45m. We anticipate that the forestry fair value price adjustment will be negative in the second quarter due to rising fuel costs. 

Our capital expenditure forecast for FY2025 has risen from $500m to approximately $525m as we have made additional contingency provisions to account for increased labour costs associated with the Somerset Mill PM2 conversion and expansion project.