Sappi announces financial results for third quarter

Commenting on the impact of Covid-19, Sappi Limited Chief Executive Officer, Steve Binnie said: “In response to the impact that the pandemic is having on people’s lives, we have developed a comprehensive Covid-19 action plan where our priority remains the health and safety of our employees and their families. Our mills and other facilities apply stringent guidelines to mitigate the spread of Covid-19. This ensures our operations continue to operate in a safe and uninterrupted manner where demand for our products permit.

During the quarter we continued to focus on the preservation of liquidity and cash flow through cost containment initiatives, a reduction in capital expenditure, delays to major annual maintenance shuts, furloughing of staff where possible and a focus on optimising working capital.

We continue to work closely with our customers and suppliers as we systematically increase activity and output in response to market demand and we support our local communities to mitigate the impact of the pandemic and the ensuing socio-economic consequences.”

Q3 financial results

Turning to the results for the third quarter, he stated: “The overall economic effect of the Covid-19 pandemic and related lockdowns, changes in consumer behaviour and logistical challenges had a severe impact on the business in the quarter.

Previously weak graphic paper and dissolving pulp (DP) markets were further affected by significant declines in demand and lower sales prices. Our packaging and specialities business increased sales volumes during the quarter and has proven resilient in the current difficult economic circumstances. This segment continues to support our strategy to diversify the group’s product portfolio into higher margin and growing segments.”

Financial summary for the quarter:
*Severe impact from Covid-19 on profitability
*EBITDA excluding special items US$26 million (Q3 2019 US$118 million)
*Loss for the period US$73 million (Q3 2019 Profit of US$8 million)
*Net debt US$1,977 million (Q3 2019 US$1,728 million)
*EBITDA from packaging and specialities segment increases 109%

For the quarter dissolving pulp (DP) and graphic paper sales volumes were 29% and 40% lower respectively. In response, a number of cost containment initiatives were implemented which, along with a positive currency movement, resulted in fixed costs being US$67 million less than the equivalent quarter last year. Consequently, the group generated EBITDA excluding special items of US$26 million compared to US$118 million in the equivalent quarter last year, which led to a decline in profitability and a loss of US$73 million for the quarter.

The growth of the packaging and specialities segment continued, with sales volumes increasing by 11%, which combined with lower input costs and delayed annual maintenance shuts at Ngodwana and Tugela Mills offset some lower selling prices.

The DP segment experienced a rapid downturn in demand as retail stores globally were shut in response to the Covid-19 pandemic and clothing sales were particularly hard hit. This led to a chain reaction throughout the supply chain as orders were cancelled. There were some volume gains in the Chinese market which partially offset greater volume reductions from our major customers. In response to the lower demand, curtailment was taken and some production was switched at Ngodwana and Cloquet Mills from dissolving pulp to paper pulp for internal consumption as well as external sales.

The lockdowns and the corresponding economic slowdown had a serious impact on graphic paper demand. Many companies including retailers and consumer related businesses reduced advertising spend and printers halted production. This led to significant declines in sales volumes across Europe and in key export markets. Despite areas of strength in packaging and specialities, EBITDA for the region slipped into a loss for the quarter.
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