Release Date: May 09, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Sappi Ltd (JSE:SAP, Financial) generated EBITDA of $183 million, a 10% increase from the prior year.
- The company saw improved profitability in the pulp segment and a modest recovery in global paper markets.
- A substantial reduction in fixed costs by 9% year-on-year contributed to profitability.
- Successful closure of two mills in Europe, aiding in cost reduction.
- Positive cash flow from operations and free cash flow, with expectations to be cash positive for the rest of the year.
Negative Points
- The global paper market recovery is slow, and some curtailment was necessary.
- Cost inflation in categories like wood and pulp is expected to continue rising.
- European market remains challenging due to economic conditions.
- The company anticipates a negative fair value adjustment in Q3 due to higher fuel costs and discount rates.
- Operating rates in the European speciality business are currently in the mid-70s, indicating underutilization.
Q & A Highlights
Q: You're trying to raise prices in Europe due to the rise in pulp costs, especially in coated paper. Can you talk about your strategy for specialities and whether you think you can achieve price increases there? Also, could you elaborate on the cost savings in South Africa?
A: In Europe, we are striving to get price increases across all categories, not just graphics but also specialities. The market situation is slightly better, making it somewhat easier to implement price increases. In South Africa, cost savings have been achieved through better operations at Saiccor, own power generation, savings on pulping chemicals, and improved logistics.
Q: Given the current volume levels in your European packaging business, which are similar to lockdown levels, when do you think it would be time to consider rationalizing some capacity?
A: We believe there will be a recovery in key categories, so we want to give it more time. The uncertainty around European regulation has also hindered demand growth, but with more clarity now, we are confident in a recovery.
Q: What sort of demand tailwind would you expect from the Packaging and Packaging Waste Regulation (PPWR) for your packaging volumes?
A: The uncertainty around PPWR has hindered traditional demand growth of 2-4%. With more clarity now, we expect demand to normalize and return to traditional growth rates.
Q: Is there a difference between the revenue and cost lag with pulp price increases? How does this impact margins?
A: Yes, there is a difference. On the selling side, we get most of the pricing benefit fairly quickly, while on the cost side, the impact is more likely to be felt in the following quarter. Historically, higher pulp prices have led to higher profitability for our business.
Q: Is there any cash out remaining related to the restructuring, or is it all paid out?
A: There is still some cash out remaining, approximately EUR60 million, but we have also received proceeds from the sale of Stockstadt land, which was about EUR43 million. So, the net amount remaining is closer to EUR20 million.
Q: How do you view M&A in the context of your business, especially given recent sector activity?
A: Our focus is on our current business and the Somerset project. We are not looking at M&A at this stage. We aim to continue transforming and de-risking our business through internal investments.
Q: Could you provide more details on your restructuring costs and operating rates in Europe for the speciality business?
A: The vast majority of restructuring costs are related to Lumacan. Operating rates in Europe for the speciality business are currently in the mid-70s, and we anticipate improvement in the next couple of quarters.
Q: Despite increasing production at Saiccor, South African volumes are still below last year. What is the reason for this?
A: We started the year with low opening inventories and faced downstream inventory issues. However, production at Saiccor is improving, and we expect stronger sales in the second half of the year. The extended maintenance shutdown earlier in the year also contributed to lower volumes.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
