Sappi Ltd (JSE:SAP) Q3 2024 Earnings Call Transcript Highlights: Strong EBITDA Growth and Strategic Moves

• Pulp: Strong demand and favorable pricing.
• Packaging: Volumes increasing, but margin impacted by extended shut at Somerset.
• Graphics: Recovery from lows, leveling off at around 500,000 tonnes per quarter.

Release Date: August 08, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• EBITDA increased by 40% year-on-year, indicating strong financial recovery.
• Strong market conditions and good demand in the pulp segment, with favorable pricing trends.
• Successful sale of the Stockstadt Mill, generating proceeds of USD 49 million.
• Positive net cash generation of $32 million for the quarter.
• Continued reduction in exposure to the graphics segment, with a target to reduce it below 30% by 2027.

Negative Points

• Muted recovery in the paper segment, with some negative pricing and mix impacts in packaging.
• Increased variable costs by 2% quarter-on-quarter, with pulp prices remaining high.
• Challenges in the European market, with mixed economic conditions and subdued performance.
• Negative fair value adjustment in Q4 due to recent reduction in wood prices in South Africa.
• Production issues and extended shutdowns at Somerset impacting packaging volumes and margins.

Q & A Highlights

Q: In terms of CapEx, where do you see that next year? Will it be similar to this year or higher/lower given the Somerset expansion cost? Also, are there any restructuring cash flows in Q4, either positive or negative? Lastly, are there any further energy credit possibilities?
A: On CapEx, it is likely to be a similar number to this year, predominantly around the Somerset project. Regarding restructuring costs, there will be some minor costs in Q4, but nothing substantial. As for energy credits, there are no energy credits expected for Q4.

Q: With the pulp price cracking in China, how might that feed through into DWP? Is there still some swing capacity?
A: The pulp price decline is expected to benefit our paper business. On the DP side, most swing capacity has already moved into DP, so no significant further moves are anticipated. Demand remains robust with no new supply, keeping us positive about the market conditions.

Q: With Lanaken and Stockstadt closed, what is your net short position in Europe?
A: We are about 600,000 tonnes short in Europe and about 200,000 tonnes in the US.

Q: Can you give us an understanding of the magnitude of the wood price drop in South Africa and its impact on your costs?
A: The wood price drop was ZAR125 per tonne. This reduction will benefit our cost per tonne applied to paper and pulp prices, with most of the benefit felt in the '25 year.

Q: How much would cotton prices need to fall for viscose prices to rise and become more favorable for cotton? Also, is your European graphic paper capacity still operating at around 90% as you enter Q4?
A: Cotton and viscose prices have different functionalities and manufacturing costs, so the correlation is not exact. Cotton has been volatile, while viscose has been more predictable. Regarding European graphic paper capacity, we are still close to the 90% level, above the industry average of mid-70s.

Q: Can you explain the impact of fair value adjustments on your EBITDA and cash flow?
A: The $31 million negative in the cash flow is a combination of price and volume fair value adjustments, both non-cash items. The volume adjustment flows through EBITDA, offset by operating costs incurred to grow trees.

Q: You mentioned a target to reduce paper contribution below 30% by 2027. Is this referring to EBITDA or volumes?
A: This target refers to volumes. The segments we are moving to are higher margin, so there will be both volume adjustment and improved margin contributing towards packaging and specialties grades.

Q: Are you seeing any downward price discussions due to falling pulp prices, particularly on the hardwood side? Also, what are you seeing in the packaging market that is causing pricing pressure?
A: We are not seeing significant downward pressure on paper prices. In the US, there was some negative price pressure on the SBS markets due to competitive landscape, but it was not significant. We feel good about the market.

Q: What can we expect in terms of maintenance shut impact in Q4?
A: We don't have any significant maintenance shuts in Q4. The next major shut is in Ngodwana in February.

Q: Were you able to carousel all volumes from Lanaken and Stockstadt closures?
A: Most of the volumes were carouseled, with a little bit of uncoated not transferred, which was anticipated.

Q: South African volumes and pulp volumes were down year-to-date. Is Saiccor ramping up? Also, did the fire at Saiccor lead to downtime? Lastly, what are the mechanics of the Somerset start-up?
A: Saiccor production is going well. The fire at Saiccor caused about five days of downtime. For Somerset, we have scheduled 70 days of downtime starting end of January, with a ramp-up planned over the next six months.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.