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Paper and packaging group Sappi said on Thursday its profits fell almost two thirds in its second quarter, after it was hit by production issues in SA as well as weaker demand for key products.
Heavy rains and challenges associated with the recent of the containerboard machine at its Ngodwana mill in Mpumalanga added to pressure from customers destocking inventory and a slowing global economy, it said. Sales for graphic papers and packaging were down 42% and 29% respectively.
Group profit in the second quarter fell 63% to $69 million (about R1.3 billion) year-on-year, it said, though net debt fell almost a third to $1.22 billion, and its net asset value grew 7%.
Sappi, valued at about R23 billion on the JSE, generates only about 8% of its sales in SA, but the country accounts for more than half of its operating assets by value, and more than a third of its workforce.
The group said that following its record profitability achieved last year, it faced a severe downstream inventory destocking cycle. This led to production curtailment in both the European and North American regions to match the sluggish market demand and to prevent excess inventory accumulation.
Profitability was negatively affected by reduced sales volumes, cost inflation and operational inefficiencies associated with the commercial downtime. However, paper selling prices remained relatively stable through the quarter and were significantly above the levels in the prior year, it said.
The market for dissolving pulp - a key ingredient for textiles - improved due to robust demand from China, though textile fibre prices remain "stagnant."
"High levels of downstream inventory are obscuring our short-term visibility of underlying paper demand and market conditions are anticipated to remain weak until the destocking cycle is complete.
"Global logistics challenges are mostly resolved and destocking may take longer than expected if customers delay replenishing their supply chains and drive down inventories below historical levels in anticipation of pricing adjustments."
The company said it expected third quarter core profits to be below that of its second quarter. Sappi said third quarter is seasonally the weakest in terms of demand for its products, while global macroeconomic uncertainties continue to weigh on consumer sentiment and paper markets have yet to show signs of a sustained recovery.
“Sappi is well positioned to withstand the current market pressures given our significantly reduced debt profile and healthy cash reserves," CEO Steve Binnie said in a statement.
"We remain committed to our strategy to reduce exposure to graphic paper markets while investing for growth in renewable packaging, dissolving pulp and biomaterials.”
Shares in Sappi were down just over 1% on Thursday, and have lost about a third of their value over the past year. Click here for details of Sappi's shares as well as other info.
Correction: An earlier version of this article incorrectly said Sappi's Ngodwana mill was in KwaZulu-Natal.
