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SAPPI LIMITED - Third quarter results for the period ended June 2021

Release Date: 05/08/2021 09:00
Code(s): SAP     PDF:  
Wrap Text
Third quarter results for the period ended June 2021

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

Third quarter results for the period ended June 2021

 Short-form SENS announcement

                                             Quarter ended                 Nine months ended
 US$ million                              Jun 2021 Jun 2020         %     Jun 2021 Jun 2020        %
 Sales                                        1 393        907      54%       3 840      3 517      9%
 EBITDA excluding special items                 145          26    458%         355        296     20%
 Profit for the period                           18        (73)   -125%         (22)       (47)   -53%
 Net debt                                     2 055      1 977       4%       2 055      1 977      4%

 Headline EPS (US Cents)                         3         (12)   -125%         (4)         (6)    -33%
 Basic EPS (US Cents)                            3         (13)   -123%         (4)         (9)    -56%
 EPS excluding special items (US Cents)          5         (10)   -150%           3         (1)   -400%
 Net asset value (US Cents)                    362         326      11%        362         326      11%


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 on the quarter
The Covid-19 pandemic continued to evolve. In response, countries moved in and out of
restrictions of varying stringency over the past 18 months with many facing considerable
pressure to relax public health and social measures. A more favourable economic climate in
the majority of our trading regions during the quarter boosted financial performance.
The group delivered EBITDA excluding special items of US$145 million, which was a material
improvement on the second quarter EBITDA of US$112 million and resulted in an overall
return to profit for the quarter of US$18 million. Strong dissolving pulp (DP) prices and an
excellent performance from the packaging and specialities segment contributed to the
success. These were partially offset by lower profitability in Europe due to significant input
cost inflation. Global logistical challenges continued to impact sales volumes and delivery
charges escalated materially.

Higher selling prices facilitated a substantial increase in EBITDA for the DP segment
compared to the second quarter. The average Chinese market price for hardwood DP during
the quarter was US$1,088 per ton, a 19% increase on the prior quarter average price of
US$918 per ton. Due to the lag impact of selling prices incorporated into our major contracts,
the benefit of higher third quarter DP market prices will only be realised in the fourth quarter.
Sentiment generally remained buoyant on the back of steadily improving retail demand in the
apparel sector. However, increased stock levels of viscose staple fibre (VSF), yarn and grey
fabric through the supply chain exerted some downward pressure on the VSF price and
consequently led to a gradual reduction in the DP price to US$1,050 per ton at the end of
June. The DP segment sales volumes for the quarter were below expectations and 14% lower
than the second quarter due to a loss of production volumes at the Saiccor Mill and shipping
delays in both South Africa and North America. The planned maintenance shut at Saiccor Mill
in May was extended and the subsequent start-up took longer than planned, which resulted
in a production loss of approximately 40,000 tons. Due to Covid-19 travel restrictions, original
equipment vendors were unable to travel to South Africa. As a consequence, the execution of
a number of critical projects during the shut was negatively impacted. Vessel delays at quarter
end further reduced DP sales volumes by 21,000 tons. Included in the DP segment were
37,000 tons of bleached chemi-thermo mechanical pulp (BCTMP) sales volumes

The strategic decision taken to reduce exposure to graphic paper through diversification into
packaging and specialities grades continued to yield benefits. The EBITDA in this segment
reached a new record high and contributed almost half of the group EBITDA. Sales volumes
increased by 23% compared to the equivalent quarter in the prior year. The growth in sales
volumes and the improved margins in the segment are reflective of the encouraging progress
in North America to optimise the product mix at the Somerset Mill and a strong containerboard
performance in South Africa.

Demand for graphic paper improved during the quarter as a result of renewed economic
activity as countries eased Covid-19 lockdown restrictions and vaccination programmes
gained momentum. Sales volumes in the segment reached 90% of volumes in the pre-Covid-
19 equivalent quarter in 2019. The substantial capacity that exited the sector also tightened
the market balance. However, profitability in the segment remained under pressure due to
spiralling purchased pulp input costs, particularly in Europe, in combination with a lag in selling
price increases.

Earnings per share excluding special items of 5 US cents was a substantial improvement on
the loss of 1 US cent in the second quarter and the loss of 10 US cents in the equivalent
quarter of the prior year and is indicative of the steady recovery from the negative impacts of
Covid-19.

Cash flow and debt
Net cash generated for the quarter was US$49 million compared to US$67 million utilised in
the equivalent quarter of the prior year primarily as a result of the improved profitability, lower
finance charges and a positive movement in working capital. Capital expenditure of US$79
million was comparable to the second quarter and the equivalent quarter of the prior year. The
finance charges normalised compared to the two prior quarters with no further charges
associated with the revaluation of the equity option for the South African subsidiary’s
convertible bond. Subsequent to quarter-end, the group has received conversion notices for
the convertible bond of just over 26% of the initial offering of ZAR1,800 million. The convertible
bond will be settled by the issue of approximately 14 million Sappi Limited shares.
Net debt decreased by US$15 million from March 2021 to US$2,055 million with the cash
generation of US$49 million offset by currency movements on the translation of Euro and ZAR
debt. The leverage ratio at quarter-end was substantially reduced compared to the second
quarter and is expected to continue to reduce progressively as the low EBITDA Covid-19
impacted quarters are eliminated from the calculation. Liquidity remains strong with cash on
hand of US$405 million and US$690 million available from the undrawn committed revolving
credit facilities (RCF) in South Africa and Europe.

Outlook
Although many businesses have re-opened and Covid-related restrictions have loosened, a new
wave of infections is developing in countries around the globe. The negative impact of Covid-19
on global economic activity has diminished but the continuing uncertainties represent an
ongoing risk to the business performance. Our focus is to keep our employees safe and
encourage participation in vaccination programmes.

A brief period of civil unrest in South Africa during July caused major disruptions to raw material
supplies and forced the temporary closure of the Saiccor, Tugela and Stanger Mills in KwaZulu-
Natal. A combined total of 28,000 tons of DP and 7,000 tons of paper production were lost,
which will have an estimated negative impact on fourth quarter EBITDA of approximately US$16
million. The completion and commissioning of the Saiccor Mill expansion project was also
negatively impacted by the unrest and ongoing Covid-19 travel restrictions. Therefore, the start-
up is projected to be delayed until early in the new financial year.

The outlook for the DP segment remains positive despite a gradual weakening of market pricing
in the third quarter. Prices of VSF, cotton and polyester all increased during July which should
support DP prices. The fundamental driver of market dynamics in the DP segment is apparel
sales, which continue to improve globally quarter-on-quarter as economic activity resumes. The
demand from Sappi’s DP customers remains strong and much of the benefit of the elevated
third quarter pricing will be realised in the fourth quarter due to the lag in contractual pricing.
The underlying demand in the packaging and specialities segment remains robust particularly
in South Africa and North America and opportunities for further growth in sales volumes exist in
Europe. The outlook for graphic paper in the fourth quarter is encouraging and market conditions
are anticipated to steadily recover as activities in the travel and entertainment sectors normalise.
This improvement in combination with global industry capacity closures are expected to tighten
market supply and allow for price increase traction. However, purchased pulp, chemicals and
logistics cost inflation are anticipated to continue into the fourth quarter and will negatively impact
margins.

Global logistical challenges including container shortages, port congestion and availability of
vessel capacity are still adversely impacting deliveries in all regions. Furthermore, on 22 July
the South African port operator, Transnet, was the victim of a cyber-attack which severely
disrupted port, rail and road operations and further exacerbated the congestion and
inefficiencies in the Durban Port due to the civil unrest.
Capital expenditure in FY2021 is estimated to be US$400 million and liquidity headroom within
the group remains strong.
Given the favourable conditions for DP and packaging and specialties combined with tighter
graphic paper markets, despite the loss of production volumes from the South African civil unrest
and higher raw material costs, we expect an improvement in the fourth quarter EBITDA relative
to the third quarter.


On behalf of the board

S R Binnie
Director

G T Pearce
Director

5 August 2021

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 August 2021
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/2021/jse/isse/SAVVI/sappiQ321.pdf

JSE Sponsor: UBS South Africa (Pty) Ltd

Date: 05-08-2021 09:00:00
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