JSE-listed paper and packaging manufacturer Sappi has announced that nonexecutive director Nkululeko Sowazi will succeed Sir Nigel Rudd as independent chairperson, from February 8 next year.

To this end, Sowazi will resign as a member of the audit and risk committee.

Sowazi is also chairperson and co-founder of Tiso Investment Holdings, while holding board- and committee-level positions at Grindrod, MTN Group and Sanlam Private Equity Fund.

He previously served on the boards of Exxaro Resources, Aveng, Emira Property Fund and Eris Property Group.

Meanwhile, Sappi delivered record earnings before interest, taxes, depreciation and amortisation at its South African operations for the financial year ended September 30, as well as the second-highest ever earnings before interest, taxes, depreciation and amortisation (Ebitda) at its North American operations.

This was despite widespread geopolitical instability, weak global economic growth, rising interest rates, a dampened Chinese market and overall lower paper and pulp demand, compared with pre-Covid-19 levels.

The North American business’ Ebitda came to $267-million, with recent investments in pulp and packaging, and speciality papers, having created a more diversified product portfolio and enhanced profitability.

The South African business delivered Ebitda of R6.03-billion, with a good performance reported across all product segments despite a challenging local operating environment with power and transport infrastructure issues.

Group Ebitda amounted to $731-million in the year under review, excluding special items. This compares with Ebitda of $1.3-billion in the prior financial year.

Sappi reported a $259-million profit for the year, compared with a $536-million profit in the prior financial year.

Earnings per share (EPS) were $0.52 for the reporting year, compared with EPS of $1.38 posted for the prior year.

Sappi was able to reduce its net debt at year-end to $1.08-billion – the lowest level in 30 years, owing to significant cash generation. It was also able to maintain its prior year’s dividend at $0.15 apiece.

CEO Steve Binnie explains that the unfavourable trading conditions faced in the year under review were further exacerbated by a prolonged period of downstream inventory destocking as buyers slowly worked through inventories that had been built up in the second half of 2022.

In response to these headwinds, Sappi concentrated on preserving selling prices and efficiently managing its capacity and inventories to optimise working capital. The group also implemented various cost-saving initiatives across its global operations, all of which positively contributed to earnings in the reporting year.

MARKET VIEW

Graphic paper demand declined sharply and remained weak throughout the year owing to weak consumer confidence related to the slowing economy and an inventory destocking cycle that took longer than anticipated.

Sales volumes declined by 38% year-on-year and production curtailments were required to manage these weak demand dynamics.

Selling prices were 14% higher than the prior year and remained resilient.

In response to the market overcapacity and in line with Sappi’s strategy to reduce exposure to graphic paper markets, the group made the difficult decision to close the Stockstadt Mill, in Germany, and initiated a consultation process for the potential closure of the Lanaken Mill, in Belgium, shortly after year-end.

The packaging and speciality papers segment faced similar weak trading conditions related to high levels of downstream inventory and muted consumer demand.

Positive year-on-year pricing gains of 7% were insufficient to offset input cost inflation and a 22% reduction in sales volumes leading to a decline in the segment's profitability.

The same market dynamics of elevated stock levels and negative consumer sentiments dampened demand and pricing for textile fibres in the early part of the year.

However, viscose staple fibre (VSF) operating rates in China improved steadily as economic activity resumed from the third quarter onwards. Operating rates in the VSF industry remained at a high level through the remainder of the year and downstream VSF inventories dropped below historical levels, which supported demand for dissolving pulp (DP), Binnie says.

Looking ahead, he expects the group’s stronger balance sheet and healthy cash reserves to provide support in continued headwinds of cyclical downturns.

DP markets are appearing more positive as VSF operating rates continue to be strong. The differential between cotton and VSF pricing also remains supportive.

Hardwood DP market pricing has increased in recent weeks to $880/t.

Additionally, paper pulp pricing has also moved into an upward trajectory, which will benefit Sappi’s high-yield pulp sales. DP sales volumes in the first quarter will, however, be lower than the prior quarter owing to scheduled maintenance shuts at all three of Sappi’s DP mills.

It has become apparent that demand for graphic papers experienced a permanent structural decline, the company states.

Sappi remains committed to its strategy to reduce exposure to graphic paper markets and will proactively manage overcapacity through conversion and expansion of the Somerset PM2 graphic paper asset, in the US, to solid bleached sulphate paperboard in the US in 2025 and rationalisation of the European capacity through closure of the Stockstadt Mill and potential closure of the Lanaken Mill.

It is anticipated that strategic action in the European region will significantly improve the capacity utilisation of the graphic paper assets and improve the fixed cost position of the business in the second half of the new financial year.

The long-term favourable outlook for Sappi’s sustainably produced packaging and speciality paper products remains unchanged; however, in the short term, challenges persist.

The destocking process in the segment is taking longer than expected and the macroeconomic landscape remains unpredictable, which is likely to continue to weigh on consumer sentiment.

Sappi expects to invest capital expenditure of about $500-million, including $154-million for the Somerset PM2 project, in the 2024 financial year.