Rising paper prices boost Sappi earnings

Sappi CEO Steve Binnie reflects on ‘a record set of numbers’ and describes why paper still sells well in the digital age.

FIFI PETERS: Paper and packaging group Sappi today released a blockbuster set of results, if I do say so myself. Profits in the period soared over 1 000%, boosted by strong global paper demand in the third quarter which ended in June.

We have Sappi CEO Steve Binnie on the Market Update for more on the numbers. Steve, thanks much for your time.

These are really strong results. I don’t know why the market is reacting to your results in this manner because your share price was coming under pressure today. Nonetheless, let’s start there. What do you think about the market’s reception of your numbers?

STEVE BINNIE: Look, it is a little strange. In my opinion this is a record set of numbers with strong cash generation.

I think what’s impacting on the share price is this anticipation of a global economic slowdown, which is obviously linked to higher inflation, rising interest rates. Certainly in Europe I know there’s a lot of economic pressure coming through linked to the Ukrainian war. So I speculate that’s what it’s about.

But I don’t agree with this impact on the share price today, because I do think it was a record set of numbers and we’re very proud of the performance.

FIFI PETERS: Perhaps quell the fears, as it were, in terms of letting us know what a recession would mean for your business, or a marked slowdown in global growth? What do the numbers for Sappi look like in that scenario?

STEVE BINNIE: Look, our focus in the short term has been to pay down debt and de-risk the balance sheet. We’ve been able to do that with these continuous excellent numbers over the last few quarters. I think our focus certainly has been to reposition the business longer term.

We are moving away from a traditional graphic paper business, which was more volatile and exposed to these economic upturns and downturns, whereas we’re moving towards more consistent performance in packaging goods, which are linked to food products and so on and so forth.

As we continue to reposition the business, it is going to make us more resilient. So we’re certainly in a much stronger position than we have been in previous downturns. We’re pretty optimistic about the outlook moving forward. You would’ve seen in our outlook statement we said that Q4 earnings, while they may not be the record numbers of Q3, are still going to be very strong.

FIFI PETERS: So just on the point of the debt that you repaid, it’s noteworthy that you reduced your net debt 26% in the period. You’re sitting at $1.5 billion at this stage.

Before we talk about your outlook, let’s talk about the period that was, because you’re talking about really strong global demand for paper. We’re in this digital age now, where we are told that everything is moving to digital, or has moved to digital, and paper is no longer a thing. Yet your numbers seem to be suggesting otherwise.

So talk to us about where this global demand for paper is coming from and what they’re using it for.

STEVE BINNIE: Look, there’s been a strong bounce back from the Covid lockdown.

A lot of the paper that’s used goes into marketing literature [for] some retailers, financial institutions, the travel and entertainment [sector], tourist-related industries – and there’s been a big bounce-back. You’ll see, with all the challenges they’re having at airports and so on and so forth, there’s been huge demand.

On top of that, as I alluded earlier, with Sappi repositioning itself towards more packaging, and a strong demand for paper as an alternative to plastics, global trends are more favourable for paper as a greener alternative.

FIFI PETERS: So a strong demand for paper boosting the numbers, boosting sales this time around, but pricing [has been] helping you quite a bit also. Just talk to us about the pricing environment. First of all [there’s] inflation which is triggering a whole lot of concern around a possible recession, but how is inflation impacting your business right now?

STEVE BINNIE: It has a huge impact. In the quarter that we just reported, as I said there were record profit numbers, but our variable costs, which is our raw materials that we use in the production process, amazingly were up 26% year on year.

So a huge, huge impact from an inflation perspective. And it was across the board.

It was from the energy that we use, it was the chemicals that we use in the manufacturing, the pulp, and then ultimately the freight costs of transporting our product via road and rail, but ultimately shipping. So all of that combined contributed to this 26% rise.

We knew that the demand was good, markets were tight. So we hiked selling prices to offset the impact of these costs. And in fact our sales were actually up 31% year on year, largely driven by, on the one hand, strong demand, but these higher selling prices coming through.

FIFI PETERS: Which was also quite notable in your statement. So how much was your selling [a result of] inflation or by how much did you increase your costs?

STEVE BINNIE: Yes, it has gone up 31% year on year.

FIFI PETERS: So what are your clients saying about that? I know also what is happening right now – you describe the fact that the market is pretty tight because of a whole host of factors. Feel free to weigh in. But your clients who are having to pay 31% more [than] they did perhaps the same time a year ago, are they okay, and how long do you expect them to be able to stomach such higher pricing?

STEVE BINNIE: Yes, clearly it put pressure on our customers. It’s, as I say, not unique to our industry. There are many industries across the globe that are impacted by the inflationary pressures that we haven’t seen in many, many years.

It’s a good question that you ask because clearly indefinitely costs are continuing to rise and at some point the customers are going to say that they can’t take any more.

So that’s why we’re a little bit cautious in our outlook statement, saying that earnings won’t be as high, because we’ve seen further rises of costs post the quarter end and it’s mainly in Europe – it’s mainly linked to gas prices in Europe. They have gone up substantially and we are being cautious. We’re obviously trying to preserve our margins and we’ve announced further selling price increases, but if costs continue to rise it is going to put pressure on us.

FIFI PETERS: In South Africa a quick comment on the operations here, and how the recovery’s going [after] the impact of the floods? Is everything business as usual again?

STEVE BINNIE: It’s been tough.Clearly the floods had a major impact on Sappi, because we are a big business in KwaZulu-Natal.

Three of our plants are down there and we had to stop production. It takes time to ramp up thereafter. We had a lot of damaged inventory.

And then to add to the challenges most of the product gets exported out of the Durban port, and that was impacted by the floods as well.

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It’s taken us time, but things have progressively got better. As we said today, things are much better than they were back in April, obviously, when the floods occurred. We’re much more confident about the prospect in the current quarter.

FIFI PETERS: Steve, thanks so much for taking the time to join us. That was the CEO of Sappi, Steve Binnie.

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