Sappi shares dipped by almost 8% on the JSE yesterday despite its quarterly profits being in line with its guidance but as it flagged the softening in demand for its products, which led to lower volumes.
The shares slid to an intraday day low of R48.25. In the past year, they have increased by 11.6%.
Despite this, the group said it had the best quarter ever, delivered a strong performance well above pre-Covid-19 levels, and the best ever first-quarter results.
In its first-quarter results for the period ended December 2022, the wood fibre product group said its earnings before interest, taxes, depreciation, and amortisation (Ebitda) for the reported period amounted to $290 million (R4.9bn), 21% higher year-on-year and in line with guidance.
Sappi posted a net profit of $190m for the period, compared with a profit of $123m in the first quarter of the prior financial year, while net debt decreased to $1.24bn, from $1.92bn in the prior comparable quarter.
The group reported that earnings per share, excluding special items for the quarter, were 30 US cents, which was a substantial improvement from the 20 US cents in the prior year.
“Special items increased earnings by $6m due to a positive plantation fair value adjustment,” it said.
Sales volumes were down 14% compared to the prior year, driven primarily by the large customer inventory build.
CEO Steve Binnie said: “The positive results were underpinned by year-on-year pricing gains for paper products, which offset cost inflation, lower sales volumes, and delivered an Ebitda margin of 17.5%.“
He said the lower profits were relative to the record levels in the prior quarter. This was reflective of the slowing global economy, which led to a softening in demand for Sappi products.
Challenges were the volatile and uncertain macroeconomic environment, including the ongoing geopolitical turmoil, rampant inflation, rising interest rates, and an underperforming Chinese economy, as well as rapid downstream inventory accumulation in all the firm’s major product categories.
“Factoring in the protracted macroeconomic uncertainty, and coming off three-quarters of outperformance, we anticipate a return to a normalised level of earnings in full-year 2023,” Binnie said.
He warned that the second quarter would likely be the most challenging with a recovery in earnings expected later in the financial year.
“Ebitda for the second quarter of full-year 2023 is expected to be below that of the first quarter,” Binnie said.
The group said a series of price increases in the previous year neutralised the impact of cost inflation and lower sales volumes in the graphic papers segment. Margins remained healthy, but reduced relative to the highs of recent quarters. Sales volumes were down 31% compared to the prior year and production rates were optimised to match sales.
“Underlying demand in the packaging and speciality papers segment remained relatively stable. Selling price realisation more than offset the lower sales volumes and supported year-on-year margin expansion for the segment,” it said.
Looking forward, Sappi said: “Although the global economy will undoubtedly face significant challenges in 2023, the recent easing of the energy crisis in Europe, slowing of global inflation, and the opening of the Chinese economy are positive economic indicators.
“Nevertheless, the short-term outlook is expected to be negatively impacted by the combination of the final phase of the downstream inventory destocking cycle, the resulting impact on sales volumes across all market segments, and the relatively high-cost base- albeit this is starting to turn,” it said.
BUSINESS REPORT