SAPPI LIMITED - Fourth quarter results for the period ended September 2020

            
SAP
Fourth quarter results for the period ended September 2020

Sappi Limited
Registration number: 1936/008963/06
JSE code: SAP
ISIN code: ZAE000006284
Issuer code: SAVVI

Fourth quarter results for the period ended September 2020

Short-form SENS announcement

                                  Quarter ended                      Year ended
US$ million                    Sep 2020     Sep 2019      %     Sep 2020 Sep 2019        %
Sales                               1 092      1 454     -25%       4 609      5 746    -20%
EBITDA excluding special
items                                   82        185    -56%         378        687    -45%

Profit for the period                  (88)       50    -276%       (135)        211   -164%
Net debt                             1 957      1 501     30%       1 957      1 501     30%


Headline EPS (US Cents)               (14)         11   -227%        (19)         42   -145%

Basic EPS (US Cents)                  (16)          9   -278%        (25)         39   -164%
EPS excluding special items
(US Cents)                              (4)        10   -140%          (5)        44   -111%

Net asset value (US Cents)            299         359    -17%         299        359    -17%



Sappi is a leading global provider of powerful everyday materials made from woodfibre-
based renewable resources. Together with our partners, we are quickly moving toward a
more circular economy.

Our raw material offerings (such as dissolving pulp, wood pulp and biomaterials) and end-
use products (packaging and specialities papers, graphic papers, casting and release
papers and forestry products) are manufactured from woodfibre sourced from sustainably
managed forests and plantations, in production facilities powered, in many cases, with bio-
energy from steam and existing waste streams. Many of our operations are energy self-
sufficient.

Sappi works to build a thriving world by acting boldly to support the planet, people and
prosperity.

Commentary for the quarter

The group generated EBITDA excluding special items of US$82 million, a decrease of 56%
over the same quarter last year, led by a large reduction in DP and graphic paper sales
volumes of 29% and 32% respectively.
Packaging and specialities volumes and profitability increased compared to the prior year as
the US business in particular experienced encouraging sales growth across all of the major
product categories, offsetting a slightly weaker performance from the European business
which was affected by the temporary shut of Alfeld PM3 following the fire at that machine in
the previous quarter and softer demand for non-essential consumer products. The South
African container board business also achieved a strong end to the year.

Industry demand for DP recovered faster than expected as global clothing retail sales
rebounded and supply chain inventory levels, which had been allowed to run down, were
refilled. In response to lower demand, we temporarily shut the calcium line at Saiccor and
switched some capacity at Cloquet to paper pulp. As a consequence, DP volumes were 29%
lower than the prior year. The segment includes 90,000 tons of BCTMP from Matane and
paper pulp produced at Cloquet and Ngodwana which were sold in external markets.

Graphic paper demand in Europe and North America was most affected by Covid-19 over
the May/June period. Since then we have experienced a slow recovery through to
September with volumes 32% lower than last year. Downtime of 321,000 tons was taken in
the fourth quarter, less than that required in the prior quarter, helping to improve profitability.
Export markets, many of which were impacted later by Covid-19, were particularly weak.
South African newsprint and uncoated woodfree demand continues to be impacted by the
weaker domestic economy.

Net finance costs were US$21 million compared to US$20 million in the equivalent quarter
last year.

Earnings per share excluding special items for the quarter was a loss of 4 US cents. Special
items for the quarter reflected an expense of US$39 million. This related mainly to asset
impairments due to weaker market conditions and restructuring provisions including the
machine closures at Stockstadt and Westbrook.

Cash flow and debt

Net cash generated for the quarter was US$88 million, compared to US$173 million in the
equivalent quarter last year. The decrease was as a result of reduced profitability and
restructuring costs, offset somewhat by lower capital expenditure. Capital expenditure of
US$95 million related mainly to the expansion of DP capacity at Saiccor.

Net cash utilised for the financial year was US$257 million (FY2019 US$1 million
generated). The deterioration in cash generation was largely due to the impact that Covid-19
had on sales volumes, lower average DP prices, the acquisition of the Matane pulp mill and
an increase in finance costs. Reduced capital expenditure and a reduction in working capital
helped mitigate these impacts.

Net debt at financial year-end increased to US$1,957 million as a result of the cash
utilisation, as well as the implementation of IFRS 16 Leases (US$105 million) and the
acquisition of the Matane Mill (US$160 million). At the end of September 2020, liquidity
comprised cash on hand of US$279 million and US$582 million from the committed
revolving credit facilities (RCF) in South Africa and Europe.
 At quarter end we agreed an extension of the covenant suspension period applicable to our
debt facilities financial covenants until September 2021 with the first measurement due
again at the end of December 2021.

Outlook

Underlying demand for most packaging and speciality products remains robust, driven by
consumer preference and the shift from plastic to paper. First quarter sales volumes will be
impacted in both Europe and South Africa by usual seasonal weakness and exacerbated by
both the Ngodwana annual maintenance shut which was delayed from the third quarter of
FY2020 and the scheduled Somerset annual maintenance shut. These shuts will have an
estimated US$30 million impact on profitability, predominantly linked to the packaging
segment. Some products remain affected by weaker economic activity in certain regions or
end-use markets impacted by Covid-19.

Market conditions for DP have improved and pricing has recovered during October. At the
time of this report the Chinese market price has risen to US$680/ton, driven by an
acceleration in DP demand, tighter market balance and higher viscose staple fibre prices.
However, in the short term, the combination of the mill maintenance shut at Ngodwana,
constrained production on the calcium line at Saiccor due to the closure of the Lignotech
plant and DP pricing which still favours own consumption paper pulp production at Cloquet,
will mean that DP sales volumes in the first quarter will be only marginally higher than in the
preceding quarter. Port and rail challenges in South Africa may additionally impact sales
volumes for the quarter. We are evaluating opportunities to recover some of the lost DP
production prior to the completion of the Saiccor expansion project.

Graphic paper demand continues to improve, and a series of paper machine and mill
closures or conversions in the industry recently completed or imminent should improve
operating rates in the coming quarter and year. However, a second wave of Covid-19
infections in Europe is leading to stricter lockdown conditions and a slowing of the recovery
in many countries. Pricing is expected to move in line with variable cost movements.

Current liquidity headroom in the group remains good, with cash deposits at the end of the
quarter of US$279 million and committed revolving credit facilities of approximately US$582
million. We negotiated an extension of our credit facility covenant suspension period until
September 2021. The first measurement of these covenants will now take place at the end
of December 2021.

Capital expenditure in FY2021 is estimated to be US$370 million and includes approximately
US$100 million related to the decision to delay the Saiccor expansion project and the
postponement of major shuts at Saiccor and Ngodwana which reduced capital expenditure
in FY2020.

In the first quarter the underlying performance of the business will continue to improve,
barring a widespread Covid-19 second wave, driven by the current recovery in DP and
graphic paper markets. However, this will be offset by the impact on the packaging and
speciality segment of the delayed shut at Ngodwana and the scheduled annual maintenance
shut at Somerset. As a result, EBITDA in the first quarter of FY2021 is expected to be
slightly below that of the fourth quarter of FY2020. We remain encouraged by the resilience
of our business and the opportunities offered by our strategic focus on the transition of the
business towards higher
growth segments.

On behalf of the board

S R Binnie
Director

G T Pearce
Director

5 November 2020

Short form announcement
This short-form announcement is the responsibility of the directors. It is only a summary of
the information in the full announcement and does not contain full or complete details. Any
investment decision should be based on the full announcement accessible on 5 November
2020 via the JSE link and also available the sappi website at www.sappi.com.

Copies of the full announcement may be requested by contacting Jeanine Olivier on
telephone: +27 (0)11 407 8307, email: Jeanine.Olivier@sappi.com.

The JSE link is as follows:
https://senspdf.jse.co.za/documents/2020/jse/isse/SAVVI/sappiQ420.pdf


JSE Sponsor: UBS South Africa (Pty) Ltd

Date: 05-11-2020 09:00:00
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