Results for the quarter ended June 2019
(Incorporated in the Republic of South Africa)
Registration number: 1936/008963/06
JSE code: SAP
ISIN code: ZAE000006284
Issuer code: SAVVI
Results for the quarter ended June 2019
Short-form annoucement summary
Quarter ended ended
Jun Jun Jun
US$ million Jun 2019 2018 % 2019 2018 %
Sales 1 371 1 445 -5% 4 292 4 271 0%
EBITDA excluding special items 118 155 -24% 502 538 -7%
Profit for the period 8 51 -84% 161 216 -25%
Net debt 1 728 1 603 8% 1 728 1 603 8%
Headline EPS (US Cents) 2 9 -78% 31 38 -18%
Basic EPS (US Cents) 1 9 -89% 30 40 -25%
EPS excluding special items (US
Cents) 4 10 -60% 33 41 -20%
Net asset value (US Cents) 375 342 10% 375 342 10%
Sappi is a global diversified woodfibre company focused on providing dissolving
wood pulp, packaging and speciality papers, printing and writing papers as well as
biomaterials and biochemicals to our direct and indirect customer base across more
than 150 countries.
Our dissolving wood pulp products are used worldwide mainly by converters to
create viscose fibre for fashionable clothing and textiles, as well as other consumer
products; quality packaging and speciality papers are used in the manufacture of
such products as soup sachets, luxury carry bags, cosmetic and confectionery
packaging, boxes for agricultural products for export, tissue wadding for household
tissue products and casting release papers used by suppliers to the fashion, textiles,
automobile and household industries; our market-leading range of printing and
writing papers are used by printers in the production of books, brochures,
magazines, catalogues, direct mail and many other print applications; biomaterials
include nanocellulose, fibre composites and lignosulphonate; biochemicals include
second generation sugars.
The wood and pulp needed for our products are either produced within Sappi or
bought from accredited suppliers. Sappi sells almost as much as it buys.
Commentary on the quarter
Market conditions across Sappi’s major product categories were challenging during
the quarter. The principal factors affecting results were sluggish graphic paper
demand, resulting in 89,000 tons of production downtime scheduled across our
European and North American paper operations and dissolving wood pulp (DWP)
prices that weakened significantly due to soft viscose staple fibre (VSF) markets.
Due to the seasonality of the business we also scheduled much of our maintenance
activity during this period, including annual shuts at Ngodwana, Saiccor and Cloquet
The company continued to take action to diversify its product portfolio into higher
margin segments and position the company for future growth. The recent projects to
increase capacity at each of the DWP mills and convert capacity at Somerset and
Maastricht towards packaging boosted sales volumes in each of these segments
during the quarter, thereby lessening the impact of particularly weak graphic paper
The group generated EBITDA excluding special items of US$118 million, 24% below
that of last year. Profit for the period decreased from US$51 million to US$8 million
due to the lower operating profit and a US$9 million once-off finance costs charge to
the income statement for the refinancing of the 2022 bonds.
VSF markets were under significant pressure due to excess capacity and weak
textile exports from China. The margins for VSF producers were squeezed which
also impacted DWP demand. The situation was exacerbated by the low paper pulp
prices, which removed any incentive for swing producers to move away from DWP.
Consequently, prices for DWP followed VSF downwards and dropped to US$786/ton
by quarter end, the lowest level in a decade. The weaker Rand/US Dollar exchange
rate and the quarter lag in contracted pricing benefited the South African business
Packaging and speciality markets were mixed across our regions, with demand for
packaging offsetting weakness in the consumer speciality grades. A late start to the
citrus season in South Africa also lowered volumes. The ramp-up of commercial
volumes from both Somerset and Maastricht proceeded according to plan, however,
profitability remains constrained in both cases by the product qualification process as
well as lower average pricing during this period.
Higher average net selling prices and purchased pulp prices that declined
throughout the quarter partially offset the impact of weak graphic paper sales into the
publishing sector in Europe. The conversion of Lanaken PM8 from coated
mechanical to coated woodfree was completed during the quarter, with some impact
on fixed costs and production volumes.
The North American business remained under pressure, with weak graphic paper
markets, lower dissolving wood pulp prices, the annual maintenance shut at Cloquet
and the continued ramp-up of Somerset PM1 all weighing on margins. Earnings per
share excluding special items was 4 US cents, a decrease from the 10 US cents
generated in the equivalent quarter last year. Special items and once-off finance
costs reduced earnings by US$14 million.
On 13 May 2019 the board announced the appointment of Ms Janice E Stipp as
independent non-executive director with effect from 1 June 2019.
Post balance sheet event
On 31 July 2019, Sappi signed an agreement to acquire, subject to conditions
precedent including the prerequisite approvals of certain anti-trust authorities, the
270,000 ton Matane high yield hardwood pulp mill, in Quebec, Canada, from
Rayonier Advanced Materials Inc for US$175 million. The acquisition will increase
Sappi’s pulp integration for both its North American and European packaging
businesses and lower Sappi’s costs of pulp, reduce its volatility of earnings
throughout the pulp cycle and provide certainty of supply. The acquisition will be
financed from internal resources and is expected to be concluded in the fourth
calendar quarter of 2019. A separate JSE SENS announcement will be
made in this regard.
DWP pricing is expected to continue to be under pressure while VSF producers are
impacted by low margins, paper pulp prices remain low and uncertainty exists in
textile markets as a result of the US/China trade tensions. Our DWP sales volumes
are expected to stay healthy and the expanded production capacity at Saiccor,
Ngodwana and Cloquet will be utilised to meet customer demand.
Packaging and speciality markets show good growth prospects, however, growth has
slowed in some segments due to general economic conditions. Raw material prices,
particularly paper pulp, are declining and offer some relief for margins. Demand for
South African packaging products is expected to be strong going into the local
spring. The ramp-up and product mix optimisation process continues at
Somerset and Maastricht as qualification and customer acceptance is completed. As
mentioned above, the acquisition of Matane Mill will increase the pulp integration for
our North American and European packaging businesses, and lower costs going
Persistent weakness in graphic paper markets will require further production
downtime in the coming quarter. Sufficient capacity is expected to be shut or
converted within the industry, thereby allowing operating rates and margins to
recover in future periods. Lower paper pulp prices are offering some relief, however,
paper prices in both US and Europe have declined due to current market conditions.
Capital expenditure for the remainder of the year is expected to be approximately
US$200 million as we continue the transition to growing and higher margin
segments. Major projects currently underway include the 110,000 ton expansion at
Saiccor Mill and the final commissioning of Lanaken PM8 after the conversion from
coated mechanical to coated woodfree paper. No other major projects are currently
committed and therefore we expect annual capex levels to reduce over the next two
Given the current weak market conditions for graphic paper, DWP pricing pressure
from oversupplied VSF markets and global economic uncertainty related to trade
wars, our fourth quarter profitability will likely be below that of the prior year.
On behalf of the board
S R Binnie
G T Pearce
1 August 2019
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 1 August 2019 via the JSE link and also available the sappi website at
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:
JSE Sponsor: UBS South Africa (Pty) Ltd
Date: 01/08/2019 09:00:00
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