Commenting on the impact of Covid-19, Sappi Chief Executive Officer, Steve Binnie said: “The impact of Covid-19 on people, business and society has been severe. Sappi’s approach to the outbreak of Covid-19 is guided by our values and purpose. Our priority remains the safety of our people across all of the territories where they are present. This ensures that our operations continue in a safe and uninterrupted manner. We remain in close contact with our customers and suppliers as we try to minimise any negative impacts within government constraints, helping local economies to mitigate the negative economic consequences of the various measures imposed. We also assist with efforts to help mitigate the impact of the virus on local communities. I am proud of the Sappi team around the world who are living our values, being innovative and taking initiative to help our stakeholders. We understand that overcoming the impact of Covid-19 and returning to normal business operations will require significant time and effort, for which we are preparing.”
Turning to the impact of Covid-19 on the second quarter, he continued: “Covid-19 had a relatively small impact on profitability during the quarter. However, an anticipated improvement in dissolving pulp (DP) prices did not materialise, principally as a result of the outbreak of Covid-19 in China. The subsequent actions taken by various governments only directly impacted our operations during the last few weeks of the quarter, and there was minimal disruption to production, although the Condino Mill in Italy was temporarily shut. We began to receive significant cancellations of DP and graphic paper orders scheduled to be delivered in the third quarter, and new orders for both product categories slowed considerably.”
Q2 financial results
Commenting on the quarter’s result, Binnie said: “I am very pleased with the strong packaging and specialities performance which saw EBITDA contribution almost double. I am also pleased with the solid results in the graphics paper segment, as well as the significant increase in market share across both segments. Despite these strong performances, the results were negatively impacted due to the historic low dissolving pulp (DP) prices, and reduced DP sales volumes.”
Financial summary for the quarter
- EBITDA excluding special items US$131 million (Q2 FY19 US$187 million)
- Profit for the period US$2 million (Q2 FY19 US$72 million)
- EPS excluding special items 4 US cents (Q2 FY19 13 US cents)
- Net debt US$1,879 million (Q2 FY19 US$1,680 million)
DP market prices fell US$233/ton in the last twelve months as the combined impact of soft global textile markets, US duties on textiles from China, excess viscose staple fibre (VSF) capacity and a weaker US$/Renminbi exchange rate drove the DP price downwards. On the supply side, low paper pulp prices provided limited relief for swing producers. This significantly impacted both the segment and group profitability levels.”
Our strategy to diversify the product portfolio into higher margin segments and position the company for future growth continues to bear fruit. The packaging and specialities segment continued to grow profitability despite slow containerboard demand in South Africa. Improved product mix and machine efficiencies combined with lower input costs and increased sales volumes in Europe and North America contributed positively. The ramp up of Somerset Mill PM1 and Maastricht Mill on paperboard grades further assisted us to significantly reduce commercial downtime compared to the prior year.
Strong customer relationships and service levels, along with a focus on efficiencies and costs enabled us to make significant market share gains in our graphics paper business, and as a result helped maintain profitability in this segment, despite weak market conditions.
Sales volumes for packaging and specialities in Europe increased by 5% on the prior year, with food and hygiene related packaging experiencing especially strong demand. In North America sales volumes for packaging and specialities grew 68% year-on-year, and 49% versus the prior quarter, driven mainly by the ramp up of the paperboard grades on PM1 at Somerset Mill as well as strong growth in label paper volumes. In South Africa the containerboard sales volumes recovered from the first quarter, but still 4% below the prior year. A recovery in demand is expected later in the season. The market share gains in coated woodfree paper in both North America and Europe countered the ongoing deterioration in graphic paper demand, enabling us to take fewer production curtailments than in recent quarters. Declining input costs helped maintain healthy margins.