We've come a long way, says Sappi CEO - despite R328 million loss

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Demand for graphic paper used in the media indstry, has declined
Demand for graphic paper used in the media indstry, has declined
  • Major paper producer Sappi's share price took a beating on Thursday after its second quarter results were released.
  • Sappi CEO Steve Binnie said the quarter to June 2020 as the worst Sappi has experienced but he explained that the company has been recovering with each quarter since then.
  • In the upcoming quarters, Sappi will begin seeing the impact of the current Chinese market price increase for dissolving pulp, from $340 per ton to $1 066 per ton, the highest level since May 2012.

Paper producer Sappi's share price fell more than 6% on Thursday after the release of its second quarter results, which showed the devastating impact of Covid-19 on its performance.

Its second-quarter results for the period ended in March 2021 show that Sappi swung into a $23 million (almost R328 million at the current exchange rate) loss, from a $2 million (about R28 million) profit in the second quarter of 2020 - a staggering 1 250% drop. And its debt increased to just over $2 billion from $1.8 billion, painting a picture of a company whose performance has suffered on the back of Covid-19 and declining paper demand. 

CEO Steve Binnie, however, maintains the 84-year-old group – which is the world's largest producer of dissolving pulp – has come a long way.

"I think we're still being impacted by Covid-19, the business has come a long way ... from our perspective, we are focusing on the [earnings], the operating profit. And things have progressively improved over the last two quarters," said Binnie.

The results announcement cited "steady recovery" from the impact of Covid-19 during the second quarter. The group’s operating profit has grown from $98 million in the quarter ended December 2020, to $112 million.

Binnie described the quarter to June 2020 as the worst Sappi has experienced, but he said the company has been recovering with each quarter since then.

The biggest improvement has been in South Africa and North America, but Europe has been seen a slower recovery due to the second wave.

However, Binnie conceded that the group is not out of the Covid-19 woods yet.

"I think there’s always a risk for a third wave … we’re not that exposed to South Africa; most of our product is exported, [but] there are smaller paper categories that we sell into the South African environment and clearly a third wave here in South Africa would be a headache for us," he said. 

With regards to dissolving pulp, which is used in the textiles, pharmaceuticals and food industries, over the next few quarters, Sappi will begin seeing the impact of Chinese market price increasing by $340 per ton to $1 066 per ton, the highest level since May 2012. The price increase was driven by increased demand in the textile value chain in the US and Asia. 

Binnie said although the price is looking good for the short term, he anticipates that it may come back slightly in the longer term.

For decades, graphic paper was Sappi’s mainstay, with demand coming from the print media industry for sheets used to produce newspapers and magazines and office printing paper. But over the years, as people turn to digital sources for news and information sharing, the demand has hit a low.

The best way Sappi can deal with the challenge, said Binnie is for its capacity to match demand and for the machines it still has in use to convert its capacity.

"If I were to look at five years, I would estimate that probably less than a quarter of our profitability or Ebitda would come from the graphic space. I know it’s that currently but that’s obviously Covid-19 linked but on a normalised basis, it would be less than a quarter of our business," he said.

In the longer term, he said he expected graphic paper demand to fall by about 5% per annum. 

As for new growth, the group is continuing to expand its packaging and specialities business, which contributed 58% to Sappi’s earnings over the past 12 months.

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