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SAPPI LIMITED - Results for the quarter ended September 2019

Release Date: 14/11/2019 09:00
Code(s): SAP     PDF:  
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Results for the quarter ended September 2019

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

Results for the quarter ended September 2019

Short-form SENS announcement

                                         Quarter ended                Year ended
                                         Sep       Sep               Sep     Sep
US$ million                              2019      2018        %     2019    2018        %
Sales                                     1 454     1 535     -5%    5 746   5 806      -1%
EBITDA excluding special items              185       224    -17%      687     762     -10%
Profit for the period                        50       107    -53%      211     323     -35%
Net debt                                  1 501     1 568     -4%    1 501   1 568      -4%

Headline EPS (US Cents)                      11        20    -45%       42      59     -29%
Basic EPS (US Cents)                          9        20    -55%       39      60     -35%
EPS excluding special items (US
Cents)                                       10        19    -47%       44      60     -27%
Net asset value (US Cents)                  359       361     -1%      359     361      -1%

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.

Fourth quarter commentary

The group generated EBITDA excluding special items of US$185 million, a decrease of
17.5% over the same quarter last year, led by a decline in profitability in the DWP and
graphic paper business, offset somewhat by growth in the speciality and packaging
paper segment volumes.

Continued demand growth for DWP and the lag effect of contracts on DWP pricing
relative to current spot market prices helped support profitability in the quarter, however
lower overall US$ prices and cost pressures in South Africa from energy and externally
purchased wood lowered margins for the segment.

The packaging and specialities segment delivered improved margins and higher profits
for the quarter, as the ramp up of Somerset PM1 and Maastricht continued and input
costs, led by pulp, declined.

The European business benefited from widening margins between selling prices and
input costs, however, this was not enough to offset the impact of the continued severe
decline in graphic paper sales volumes.

Profitability in the North American business improved sequentially in this seasonally
strong quarter, however, weak domestic coated paper markets and lower DWP selling
prices lowered profitability compared to last year.

Increased packaging and DWP sales volumes in addition to sales price benefits from
the weaker Rand/US$ exchange rate helped mitigate some of the cost increases for the
South African business.

Net finance costs were US$20 million compared to US$14 million in the equivalent
quarter last year which benefited from once-off exchange rate adjustments.

Earnings per share excluding special items for the quarter was 10 US cents.

The markets we operate in are expected to continue to be challenging in the coming
year, and profitability is likely to be negatively impacted as a result. DWP pricing in
particular will have a significant impact on earnings as this segment is a major
contributor to our profits and cash flow generation. We have responded by reducing our
capital expenditure both this past year and the next, and other than the 110,000 ton
expansion of Saiccor which is currently underway we have not committed capital to any
material project. We have reduced working capital, amended debt covenants, targeted
further cost reductions and are evaluating various options regarding our paper
machines in Europe in order to lower fixed costs and match capacity to demand.
DWP pricing remains under significant pressure, having declined to historic lows
of US$638/ton at the time of writing this report, US$306/ton below that of a year ago.
We believe that current pricing is below the cash cost of production for a significant
proportion of global supply and is therefore unsustainable over any prolonged period.
Underlying demand for DWP is still growing at rates consistent with our long-term
forecasts. A recovery in DWP prices is likely to be prompted by a recovery in VSF
prices which have been depressed by excess VSF capacity and a weak Chinese textile
In the packaging and speciality segment we are making good progress with customer
acceptance in both the US and European markets and the ramp-up of volumes
continues, aided by the shift from plastic to paper in many packaging categories.
However, the slowing South African economy will likely impact domestic demand for
containerboard in the coming year.
Global graphic paper markets continue to experience weakness due to a combination of
economic factors as well as the ongoing shift towards digital media. Pricing has
declined only marginally over the past quarter, and as paper pulp prices in Europe and
North America approach those prevalent in China, margins should be maintained.
Capital expenditure in 2020 is expected to decrease to US$460 million as we complete
the Saiccor 110kt expansion project and some smaller European pulp mill
debottlenecking projects. The payment of the adjusted Matane net acquisition price of
approximately US$158 million will be made in the first quarter of the financial year,
funded via a new term loan.
Due to the current very weak pricing in the DWP market and with paper markets yet to
show signs of a sustained recovery in demand, we expect EBITDA in the first quarter of
financial year 2020 to be below that of 2019.

Management have taken a number of steps to mitigate the effect that the current
uncertain market conditions and low DWP prices are having on the profitability and
leverage of the group. These steps include tighter working capital management, the
postponement and reduction in capital expenditure. The directors have furthermore
concurred with management that it would be prudent to temporarily halt dividends until
such time as market conditions improve.

On behalf of the board
S R Binnie
G T Pearce
14 November 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 14 November 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:

The JSE link is as follows:

JSE Sponsor: UBS South Africa (Pty) Ltd

Date: 14/11/2019 09:00:00
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