- Financial highlights from the quarter: Group sales improved by 4% q-o-q (-28% y-o-y), missing our estimate by 4% (driven by Europe and North America). Meanwhile, group EBITDA improved by 58% q-o-q (-57% y-o-y), 25% ahead of our estimate. This was largely due to a better-than-expected performance in North America and South Africa. Gearing improved further with a net debt reduction of 8% q-o-q (-7% y-o-y) to $1,085mn (net debt/EBITDA of 1.5x), boosted by a high net working capital inflow of $164mn.
- Europe remains under pressure, just remaining EBITDA positive: Sales volumes improved by 8% q-o-q, largely driven by Graphic Paper but remain down 38% y-o-y. Packaging & Specialties missed our estimates, confirming Sappi’s view that the destocking in the value chain continues to take longer than expected. Prices in Europe came under pressure, falling by 8% q-o-q. Depreciation during the quarter accelerated to €52mn, compared to €18-20mn in previous quarters. This was driven by the derecognition of the available for sale assets. Accordingly, depreciation should normalize again in Q1 24E. Sappi has guided for fixed cost savings of €40mn p.a. from the Stockstadt closure, with benefits to be realised in H2. This will help address the overcapacity in Europe, which Sappi estimates at around 1mt.
- The North American segment saw a strong turn around in profitability as expected: Revenue missed our estimates by 4%, largely driven by lower-than-expected pricing. Meanwhile, Packaging & Specialties volumes disappointed, down 33% y-o-y. Despite this, EBITDA improved by 9% q-o-q, with an EBITDA margin of 13.9%.
- The SA segment had a strong quarter, with EBITDA increasing by 39% q-o-q: The EBITDA margin accelerated to 25.9%, beating our estimate mainly due to lower-than-expected costs. Packaging & Specialties volumes increased both y-o-y (+17%) and q-o-q (+16 q-o-q), while Graphic Paper volumes remained weak and DP volumes improved by 5% q-o-q as expected.
- Sappi believes most costs have now stabilized: Regionally, similar trends have been seen in Europe (variable costs -20% y-o-y: all categories except wood and fixed costs -10% y-o-y: personnel and maintenance) and in North America (variable costs -11% y-o-y: higher pulp integration and cheaper pulp purchase and fixed costs -10% y-o-y: personnel and maintenance). In contrast, costs in SA increased (variable costs +4% y-o-y: wood, energy and chemicals and fixed costs +8% y-o-y).
- To our surprise, Sappi maintained its dividend at $0.15/share (7% yield): With higher capex planned in FY 24E of around $500mn (FY 23A: $382mn), lower profitability, and the likely Lanaken closure (cash closure costs of €150mn) in Q3 (CRe), gearing will increase in 2024.
- Sappi expects Q1 24E EBITDA to be lower q-o-q: Sappi anticipates an adverse impact of around $40mn on EBITDA due to planned maintenance scheduled in Q1 at the Saiccor, Ngodwana and Cloquet mills. Sappi continues to re-iterate that the recovery in Graphic Paper and Packaging & Specialties (destocking ongoing) demand is likely to be gradual and not V-shaped. The group effective tax rate (FY 23A: 22%) will increase as assessed losses in SA have now been utilized as well as the investment allowances related to the Saiccor expansion. Furthermore, cash taxes are likely to be similar to FY 23A ($56mn). Our current forecasts are under review.
