Sappi share price drops after reporting R570m HY loss

Q2 results. A major headache has been the scarcity of shipping space and containers, increasing overall costs as well as delays in delivery of product: CEO Steve Binnie.

NOMPU SIZIBA: Paper specialist producer Sappi released its second-quarter results today, May 5, 2021. For the three months ended March 2021 it reported overall sales revenue down 2% at US$1.3 billion, with earnings before interest, tax, depreciation and amortisation down 15% at $112 million. The company also reported that its earnings per share, excluding special items for the quarter, was at a loss of 1¢, down from earnings per share of 4¢ in the first quarter – that being the quarter of October through to December, 2020.

Well, to take us behind the numbers I’m joined on the line by Steve Binnie. He’s the CEO at Sappi. Thanks very much, Steve, for joining us. The numbers seem to suggest that you continue to face a fairly tricky operational environment. But, given your geographical range, I guess you have different narratives for your different markets.

STEVE BINNIE: Yes, that’s right. We operate predominantly out of South Africa, Europe and North America. What is interesting is that our North American and South African businesses have made a substantial recovery from the lows of Covid. Unfortunately Europe has lagged and, as you know, there’s been a big second wave of Covid in Europe, and renewed lockdowns. That’s meant that unfortunately Europe has been a lot slower in the recovery for us.

NOMPU SIZIBA: You sell a number of different products. Which ones have remained quite resilient in terms of demand during the Covid period?

STEVE BINNIE: Well, first and foremost, our packaging business – and specifically packaging products, as you would imagine, that are in the food sector and the health sector – has been very strong. However, those in the more kind of luxury-related goods, for example perfumes and alcohol-related kind of products, those were impacted negatively because of Covid.

NOMPU SIZIBA: You indicate that you’ve experienced logistical nightmares with scarce shipping vessels, as well as containers. Presumably that resulted in higher freight rates.

STEVE BINNIE: Yes. We’ve seen that coming through, and it’s across the world. It’s not unique to South Africa and it’s in many different industries. Unfortunately it was very difficult to get space on shipping, and it was difficult to get containers as well. It has increased our costs across all the regions, but equally it’s caused delays in our delivery of our product to customers. So it’s been a major headache. We are starting to see a little bit of improvement, but it’s still with us, unfortunately.

NOMPU SIZIBA: Broadly speaking, what did your cost curve look like in the period? I do see that in South Africa the strong rand/dollar exchange rate proved problematic for you guys.

STEVE BINNIE: We’ve started to see costs going up a little bit. Our main cost for our paper businesses is pulp, and pulp prices and chemicals, like a lot of commodities, have started rising. So that’s pushed up our costs a little bit, albeit they are coming off a low.

Perhaps the bigger challenge for us in the short term has actually been the stronger rand, because we are an export business. We export out of South Africa. So when it strengthens, it pushes up our relative costs. Fortunately, the selling prices of our products, as we’ve recovered from Covid, have jumped significantly, and those will more than offset the higher costs associated with the stronger rand.

NOMPU SIZIBA: Correct me if I’m wrong, but I see that your net debt rose by 10% to just over $2 billion. Is that a manageable number in the scheme of things?

STEVE BINNIE: I think so. We obviously were impacted by Covid, and that reduced our profitability and pushed up our debt levels. However, as the business continues to recover, we’ve progressively improved from the terrible lows of about a year ago in the June quarter last year. Each quarter has got progressively better. So I would expect that, as our profits continue to improve, our debt levels will come down quite significantly in the year ahead.

NOMPU SIZIBA: In terms of your capex, you’re talking about spending US$400 million. Where is the bulk of that investment going to be going?

STEVE BINNIE: The biggest investment we’re making actually is done at our Saiccor Mill, just South of Durban. It’s a big project. It’s a wonderful project for South Africa. We are boosting our capacity there by an extra 110 000 tonnes, which will service export markets. It’s a very exciting project for us. Unfortunately once again, Covid caused some delays because it was difficult to get parts and people were on site. But ultimately we expect to finish the project in the September quarter of this year.

NOMPU SIZIBA: It sounds like a big number. Have you managed to create a few jobs there?

STEVE BINNIE: We have done, both short term and on the project itself, including local labour. But longer term it does mean we’re going to be employing more people at the mill.

NOMPU SIZIBA: Do you feel that, going forward, your Covid direct costs are going to be coming down somewhat, or to what extent are you concerned that we may actually face a third wave?

STEVE BINNIE: I think in terms of the third wave, specifically on South Africa it could cause some disruptions at the mill. We’re fortunate because most of our product does get exported, and we’ve seen a significant rebound in Asia and in the US. Look, Europe’s lagging a little bit, but ultimately when all those economies do continue to improve as vaccines take hold, we’re pretty confident that we can continue the recovery.

NOMPU SIZIBA: In terms of your revenue mix when you look at the geographical places that you’re are dispersed across, give us a sense of how much you get in terms of revenue from North America, Europe, South Africa and so on.

STEVE BINNIE: If you look at the Sappi Group, about 70% of our assets and sales are in Europe, and 25% of our assets and sales are in the US. So that actually means that 25% of sales are out of South Africa. But what’s interesting, even that 25% out of South Africa, most of that gets exported as well – probably 80%. So we’re a truly global business that exports out of the country. That’s why we are feeling pretty good about the recovery.

NOMPU SIZIBA: Yes. To that point, many economic pundits are predicting a much improved global growth story. What’s your outlook for the business for the balance of the year?

STEVE BINNIE: We are certainly much more positive. We’re a little bit negative about Europe at the moment because, as you know, they’re still in lockdowns and they’ve been slow on vaccines. But we think that’s just the timing delay, and ultimately we’ll start to get the benefits, even in Europe, as we go out six months or beyond.

NOMPU SIZIBA: That was Steve Binnie, the CEO at Sappi.



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