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SAPPI LIMITED - Third quarter results for the period ended June 2022

Release Date: 04/08/2022 09:00
Code(s): SAP     PDF:  
Wrap Text
Third quarter results for the period ended June 2022

Sappi Limited
Registration number: 1936/008963/06
JSE code: SAP
ISIN code: ZAE000006284
Issuer code: SAVVI
(“Sappi” or “the company”)

Third quarter results for the period ended June 2022

Short-form SENS announcement


                                            Quarter ended                   Nine months ended
                                                                 %                                   %
 US$ million                        Jun 2022   Jun 2021     Change     Jun 2022    Jun 2021     Change
 Sales                                 1 818      1 393        31%        5 373       3 840        40%
 EBITDA excluding special items          371        145       156%          948         355       167%
  
 Profit for the period                   199         18      1006%          510        (22)        N/M
 Net debt                              1 530      2 055       -26%        1 530       2 055       -26%


 Headline EPS (US Cents)                  35          3      1067%           93         (4)        N/M

 Basic EPS (US Cents)                     35          3      1067%           91         (4)        N/M
 EPS excluding special items (US
 Cents)                                   39          5       680%           94           3      3033%

 Net asset value (US Cents)              421        362        16%          421         362        16%

* N/M not meaningful

Sappi is a leading global provider of everyday materials made from woodfibre-based
renewable resources. As a diversified, innovative and trusted leader focused on sustainable
processes and products, we are building a more circular economy by making what we should,
not just what we can.

Our raw material offerings (such as dissolving pulp, wood pulp, biomaterials and timber) and
end-use products (specialities and packaging 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.

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

Commentary on the Quarter (1)
The group generated a record quarterly EBITDA excluding special items of US$371 million, an
excellent achievement against a backdrop of significant geopolitical turmoil, supply chain
headwinds and extraordinary global inflationary pressures. Strong global paper demand and
pricing momentum offset sharply rising costs and the negative impact of the maintenance shuts
in the pulp segment. The sizeable cash generation during the quarter supported our strategic
objective to de-gear the balance sheet and accelerated our timeline to reduce debt.
Covid lockdowns in China and the ongoing Russian-Ukrainian conflict exerted renewed
pressure on global supply chains and energy prices resulting in further broad-based inflation
during the quarter.

During April, a flood in South Africa forced the temporary closure of our three mills in the
KwaZulu-Natal region and resulted in a loss of 24,000 tons of production and 32,000 tons of
inventory which was damaged in a warehouse at the Durban port. The insured margin on the
damaged inventory and business interruption of US$19 million were recognised in EBITDA.

The hardwood dissolving pulp (DP) market price(2) rallied to US$1,200 per ton on the back of
buoyant viscose staple fibre (VSF) prices, which reached their highest level since 2017. Global
DP supply-side constraints, including our own flood losses and a major fire at another large
market player, served to tighten DP markets which further bolstered the price upswing.
However, the profitability of the pulp segment was impacted negatively by the maintenance
shuts at all three DP mills, significant input cost inflation and lower than planned sales
volumes. Saiccor Mill production was unstable after the floods and the scheduled
maintenance shut. In addition, further challenges at the Durban port after the floods led to
renewed congestion which delayed shipments of approximately 24,000 tons at quarter end.
Consequently, DP sales volumes were limited to 217,000 tons in the quarter.

(1) “year-on-year” or “prior year” is a comparison between Q3 FY2021 versus Q3 FY2022;
    “quarter-on-quarter” or “prior quarter” is a comparison between Q3 FY2022 and Q2 FY2022.
(2) Market price for imported hardwood dissolving pulp into China issued daily by the CCF Group.

Graphic paper sales volumes were 4% higher than the prior year. The segment benefited from
tight market conditions which supported selling price increases and drove margin growth.
These favourable market conditions enabled all assets to run at full operating rates during the
quarter.

The packaging and speciality papers segment reached another record level of profitability
despite flat year-on-year sales volumes, which were constrained by available capacity and
low inventory levels in North America and South Africa. Demand remained robust and further
selling price increases lifted margins for the segment.

Earnings per share excluding special items of 39 US cents was a substantial improvement on
the 5 US cents in the prior year. Special items reduced earnings by US$34 million, related
mainly to a negative plantation fair value adjustment of US$16 million and the net loss after
insurance proceeds for the South African floods of US$19 million.
Cash flow and debt
Due to the higher profitability, net cash generated for the quarter of US$170 million was
substantially better than the US$49 million in the prior year, despite an outflow of working
capital related to inflationary increases for inventories and accounts receivables. Capital
expenditure of US$93 million was in line with expectations.

Net debt of US$1,530 million was US$525 million less than the prior year as a result of strong
cash generation and a positive translation impact of a weaker EUR/US Dollar exchange rate
on the predominantly Euro-denominated debt.

In terms of the relevant banking facilities, the covenant leverage ratio reduced to 1.4 times at
the end of June 2022; a significant improvement on the 4.7 times last year and 2.0 times in
the prior quarter.

Liquidity comprised cash on hand of US$570 million and US$643 million from the undrawn
committed revolving credit facilities (RCFs) in South Africa and Europe.

Outlook
Although macroeconomic uncertainties related to geopolitical volatility within Europe and
persistently high global inflation may dampen consumer sentiment and discretionary spend in
the short term, we expect the favourable price levels and strong demand for our products to
continue in the fourth quarter.

DP markets are expected to remain tight due to ongoing logistical challenges and supply
constraints. Demand from our customers remains healthy and the benefit of the higher market
pricing in the third quarter will support margins on our contracted sales in the fourth quarter.
However, in late June, global recessionary fears prompted a broad-based selloff in
commodities which triggered a sharp drop in cotton prices in China. The differential between
cotton and VSF pricing has been eroded and VSF pricing may come under pressure which
could impact future DP prices.

Despite early indicators of the graphic paper market softening in some of our sales regions,
our order books remain healthy. Input cost inflation is likely to weigh upon margins in this
segment, but we still anticipate favourable margins significantly above long-term trends.

Demand from our packaging and speciality papers customers remains robust. This segment
has proven to be resilient through economic downturns and we will continue to focus our
efforts to optimise product mix and maximise sales volumes.

The ongoing threat to gas and energy supplies in Europe poses a potential risk to our
European business. To date, our energy risk mitigation strategies have successfully
neutralised cost impacts, and we will continue to monitor developments and take action where
appropriate.

Capital expenditure is estimated to be US$395 million for FY2022.
Notwithstanding inflationary cost pressures, we are anticipating another strong performance
in the fourth quarter, with EBITDA below the record levels achieved in the third quarter.

On behalf of the board

S R Binnie
Director

G T Pearce
Director

4 August 2022


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 from 4 August 2022
via the JSE link and also available on the home page of the Sappi website at www.sappi.com.

Copies of the full announcement may be requested by contacting Rosa Moodley on telephone:
+27 (0)11 407 8515, email: Rosa.Moodley@sappi.com.

The JSE link is as follows:

https://senspdf.jse.co.za/documents/2022/jse/isse/SAVVI/sappiQ322.pdf

JSE Sponsor: RAND MERCHANT BANK (A division of FirstRand Bank Limited)

Date: 04-08-2022 09:00:00
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