Commentary on the quarter

Third quarter results for the period ended June 2019

Market conditions across Sappi's major product categories were challenging during the quarter. The principal factors affecting results were sluggish graphic paper demand, resulting in 89,000 tons of production downtime scheduled across our European and North American paper operations and dissolving wood pulp (DWP) prices that weakened significantly due to soft viscose staple fibre (VSF) markets. Due to the seasonality of the business we also scheduled much of our maintenance activity during this period, including annual shuts at Ngodwana, Saiccor and Cloquet Mills.

The company continued to take action to diversify its product portfolio into higher margin segments and position the company for future growth. The recent projects to increase capacity at each of the DWP mills and convert capacity at Somerset and Maastricht towards packaging boosted sales volumes in each of these segments during the quarter, thereby lessening the impact of particularly weak graphic paper markets.

The group generated EBITDA excluding special items of US$118 million, 24% below that of last year. Profit for the period decreased from US$51 million to US$8 million due to the lower operating profit and a US$9 million once-off finance costs charge to the income statement for the refinancing of the 2022 bonds.

VSF markets were under significant pressure due to excess capacity and weak textile exports from China. The margins for VSF producers were squeezed which also impacted DWP demand. The situation was exacerbated by the low paper pulp prices, which removed any incentive for swing producers to move away from DWP. Consequently, prices for DWP followed VSF downwards and dropped to US$786/ton by quarter end, the lowest level in a decade. The weaker Rand/US Dollar exchange rate and the quarter lag in contracted pricing benefited the South African business somewhat.

Packaging and speciality markets were mixed across our regions, with demand for packaging offsetting weakness in the consumer speciality grades. A late start to the citrus season in South Africa also lowered volumes. The ramp-up of commercial volumes from both Somerset and Maastricht proceeded according to plan, however, profitability remains constrained in both cases by the product qualification process as well as lower average pricing during this period.

Higher average net selling prices and purchased pulp prices that declined throughout the quarter partially offset the impact of weak graphic paper sales into the publishing sector in Europe. The conversion of Lanaken PM8 from coated mechanical to coated woodfree was completed during the quarter, with some impact on fixed costs and production volumes.

The North American business remained under pressure, with weak graphic paper markets, lower dissolving wood pulp prices, the annual maintenance shut at Cloquet and the continued ramp-up of Somerset PM1 all weighing on margins.

Earnings per share excluding special items was 4 US cents, a decrease from the 10 US cents generated in the equivalent quarter last year. Special items and once-off finance costs reduced earnings by US$14 million.

Cash flow and debt

Net cash utilised was US$17 million, compared to the US$41 million utilised in the equivalent quarter last year, as a result of lower capital expenditure and a reduction in cash finance costs.

Cash taxes for the quarter were US$5 million, a slight decrease on that of the prior year. Once-off cash costs of US$4 million related to the refinancing of the 2022 bonds were also incurred in the quarter.

Net debt increased by US$48 million from the prior quarter to US$1,728 million as a result of the cash utilised in the quarter and the weaker Euro/Dollar exchange rate which increased the US Dollar translation of Euro denominated debt.

Liquidity comprised cash on hand of US$226 million and US$668 million available from the group's undrawn committed revolving credit facilities.

Operating review on the quarter


        Quarter ended  
€ million Jun 2019     Mar 2019 Dec 2018 Sept 2018 Jun 2018  
Sales 637     675 642 671 636  
Operating profit excluding special items 18     24 30 38 31  
Operating profit excluding special items to sales (%) 2.8     3.6 4.7 5.7 4.9  
EBITDA excluding special items 46     50 59 71 60  
EBITDA excluding special items to sales (%) 7.2     7.4 9.2 10.6 9.4  
RONOA pa (%) 5.1     6.9 8.8 11.3 9.3  

The European business continued to be affected by weak graphic paper markets, with higher average selling prices insufficient to offset lower sales volumes, production curtailment and a rise in input costs.

Sappi gained significant market share in coated woodfree as competitors looked to exit the market and, as a result, volumes were down only 3%. However, due to a weak publication paper demand and the Lanaken PM8 conversion, coated mechanical paper volumes were significantly lower. In order to manage inventory levels 30,000 tons of production downtime were taken in the quarter. Production was also impacted by the extended shut at Lanaken to complete the conversion of PM8 to coated woodfree. The project was completed on time and within budget. Average net selling prices for the graphics grades were 5% higher year-on-year.

Volumes in the packaging and specialities business were flat year-on-year, with stable packaging demand offsetting weakness in the consumer speciality products, especially for release liner. Average sales prices were up 4% over the prior year, matching variable cost prices increases.

Variable costs in Euro were 3% higher year-on-year, driven by higher softwood pulp and wood prices, with the weaker Euro more than offsetting US Dollar price declines. However, pulp, energy and wood costs all declined compared to the prior quarter. Fixed costs were flat year-on-year.

North America

      Quarter ended
US$ million Jun 2019 Mar 2019 Dec 2018 Sept 2018 Jun 2018 Mar 2018  
Sales 343 378 351 388 339 363  
Operating profit (loss) excluding special items (9) 10 9 31 1 18  
Operating profit (loss) excluding special items to sales (%) (2.6) 2.6 2.6 8.0 0.3 5.0  
EBITDA excluding special items 11 31 29 51 20 37  
EBITDA excluding special items to sales (%) 3.2 8.2 8.3 13.1 5.9 10.2  
RONOA pa (%) (3.0) 3.4 3.2 10.9 0.4 6.8  

Higher coated paper prices and lower fixed costs were insufficient to offset the impact of a very weak domestic graphic paper market. Industry apparent consumption fell an estimated 15% for the quarter year-on-year, which necessitated 59,000 tons of production downtime to manage inventory levels.

Significant coated woodfree price increases last year led to an inventory build and affected downstream demand which was further exacerbated by some customers downgrading to coated mechanical and uncoated paper. Softer demand, along with a surge in imports earlier in the year, have pulled selling prices downwards since February.

DWP sales volumes increased year-on-year, with the successful debottlenecking of the Cloquet Mill in April. Average net selling prices were 4% below those of last year.

The ramp-up of Somerset PM1 paperboard grades progressed with commercial sales volumes up 38% on the prior quarter, however, average net selling prices remain below target and variable costs above optimum as we grow the business and optimise the machine. Overall packaging and speciality volumes were 88% higher than the prior year.

Variable costs were 5% higher than a year ago due to operating inefficiencies arising from the production downtime as well as higher wood and energy costs, but 1% lower than the prior quarter as the Somerset ramp-up progressed and pulp costs started to decline. Fixed costs were 7% lower year-on-year as the comparative quarter last year included costs related to the Somerset PM1 conversion.

Southern Africa

      Quarter ended  
ZAR million Jun 2019 Mar 2019 Dec 2018 Sept 2018 Jun 2018  
Sales 4,720 5,234 4,981 5,103 4,383  
Operating profit excluding special items 496 1,121 1,217 1,081 553  
Operating profit excluding special items to sales (%) 10.5 21.4 24.4 21.2 12.6  
EBITDA excluding special items 754 1,374 1,446 1,344 742  
EBITDA excluding special items to sales (%) 16.0 26.3 29.0 26.3 16.9  
RONOA pa (%) 9.0 21.1 24.0 22.4 11.9  

The Southern African results were impacted by lower average US Dollar pricing for DWP and a delayed start to the citrus season which impacted containerboard sales volumes. A weaker Rand/US Dollar exchange rate only partially offset these factors.

US Dollar DWP sales prices declined as continued pressure from excess VSF capacity impacted textile fibre prices and VSF producers lowered their demand for DWP. Sales volumes were marginally up year-on-year, but some 20% below those of the prior quarter as scheduled maintenance shuts were completed at both Saiccor and Ngodwana Mills during the quarter.

Packaging sales volumes were below those of the prior year due to the timing differences on citrus exports, while local sales prices increased to match variable cost rises. Newsprint sales volumes were negatively impacted by low stock volumes post the annual maintenance shut.

Fixed costs rose in line with inflation, while variable costs were 14% higher as a result of a higher proportion of DWP production and by increases in energy and wood costs.


On 13 May 2019 the board announced the appointment of Ms Janice E Stipp as independent non-executive director with effect from 1 June 2019.

Post balance sheet event

On 31 July 2019, Sappi signed an agreement to acquire, subject to conditions precedent including the prerequisite approvals of certain anti-trust authorities, the 270,000 ton Matane high yield hardwood pulp mill, in Quebec, Canada, from Rayonier Advanced Materials Inc for US$175 million. The acquisition will increase Sappi's pulp integration for both its North American and European packaging businesses and lower Sappi's costs of pulp, reduce its volatility of earnings throughout the pulp cycle and provide certainty of supply. The acquisition will be financed from internal resources and is expected to be concluded in the fourth calendar quarter of 2019. A separate JSE SENS announcement will be made in this regard.


DWP pricing is expected to continue to be under pressure while VSF producers are impacted by low margins, paper pulp prices remain low and uncertainty exists in textile markets as a result of the US/China trade tensions. Our DWP sales volumes are expected to stay healthy and the expanded production capacity at Saiccor, Ngodwana and Cloquet will be utilised to meet customer demand.

Packaging and speciality markets show good growth prospects, however, growth has slowed in some segments due to general economic conditions. Raw material prices, particularly paper pulp, are declining and offer some relief for margins. Demand for South African packaging products is expected to be strong going into the local spring. The ramp-up and product mix optimisation process continues at Somerset and Maastricht as qualification and customer acceptance is completed. As mentioned above, the acquisition of Matane Mill will increase the pulp integration for our North American and European packaging businesses, and lower costs going forward.

Persistent weakness in graphic paper markets will require further production downtime in the coming quarter. Sufficient capacity is expected to be shut or converted within the industry, thereby allowing operating rates and margins to recover in future periods. Lower paper pulp prices are offering some relief, however, paper prices in both US and Europe have declined due to current market conditions.

Capital expenditure for the remainder of the year is expected to be approximately US$200 million as we continue the transition to growing and higher margin segments. Major projects currently underway include the 110,000 ton expansion at Saiccor Mill and the final commissioning of Lanaken PM8 after the conversion from coated mechanical to coated woodfree paper. No other major projects are currently committed and therefore we expect annual capex levels to reduce over the next two years.

Given the current weak market conditions for graphic paper, DWP pricing pressure from oversupplied VSF markets and global economic uncertainty related to trade wars, our fourth quarter profitability will likely be below that of the prior year.

On behalf of the board

S R Binnie

G T Pearce

1 August 2019

Forward-looking statements

Certain statements in this release that are neither reported financial results nor other historical information, are forward-looking statements, including but not limited to statements that are predictions of or indicate future earnings, savings, synergies, events, trends, plans or objectives. The words "believe", "anticipate", "expect", "intend", "estimate", "plan", "assume", "positioned", "will", "may", "should", "risk" and other similar expressions, which are predictions of or indicate future events and future trends and which do not relate to historical matters, and may be used to identify forward-looking statements. You should not rely on forward-looking statements because they involve known and unknown risks, uncertainties and other factors which are in some cases beyond our control and may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements (and from past results, performance or achievements). Certain factors that may cause such differences include but are not limited to:

  • the highly cyclical nature of the pulp and paper industry (and the factors that contribute to such cyclicality, such as levels of demand, production capacity, production, input costs including raw material, energy and employee costs, and pricing);
  • the impact on our business of a global economic downturn;
  • unanticipated production disruptions (including as a result of planned or unexpected power outages);
  • changes in environmental, tax and other laws and regulations;
  • adverse changes in the markets for our products;
  • the emergence of new technologies and changes in consumer trends including increased preferences for digital media;
  • consequences of our leverage, including as a result of adverse changes in credit markets that affect our ability to raise capital when needed;
  • adverse changes in the political situation and economy in the countries in which we operate or the effect of governmental efforts to address present or future economic or social problems;
  • the impact of restructurings, investments, acquisitions, dispositions and other strategic initiatives (including related financing), any delays, unexpected costs or other problems experienced in connection with dispositions or with integrating acquisitions or implementing restructuring and other strategic initiatives and achieving expected savings and synergies; and
  • currency fluctuations.

We undertake no obligation to publicly update or revise any of these forward-looking statements, whether to reflect new information or future events or circumstances or otherwise.