Key message: Sappi’s Q1 25A results exceeded our expectations, with adjusted EBITDA rising by +56% YoY and -10% QoQ to $203mn. Net debt declined by -1% QoQ to $1.406bn, resulting in a net debt-to-EBITDA ratio of 1.8x. As anticipated, guidance for Q2 points to a decline in profitability, both sequentially and YoY.
First quarter adjusted EBITDA was better than expected: Adjusted EBITDA came in at $203mn (+56% YoY and -10% QoQ), +5% ahead of consensus ($194mn) as well as our estimate ($195mn). Accordingly, adjusted EPS came in at $0.14, ahead of our estimate and consensus ($0.13).
- Somerset conversion appears to be on schedule, however with the project cost now to be at least $25mn or +6% higher (originally $418mn): 2025 CapEx guidance has been increased from $500mn to $525mn, reflecting additional contingency provisions for higher labour costs related to the Somerset Mill PM2 conversion and expansion project. We previously flagged that Billerud announced a 10% budget increase for its North American expansion. The Somerset Mill PM2 will be offline for about 70 days in Q2 as Sappi finalizes its conversion and expansion to paperboard. Commissioning is expected to begin in April 2025. With the machine’s commercial ramp-up, the paperboard product mix will shift, initially increasing sales to the lower-margin food service market.
- Net debt edged down QoQ benefitting from a $89mn FX tailwind from a stronger $: Net debt for the quarter reached $1.406bn, despite a high-capex quarter of $101mn. Consequently, the net debt-to-EBITDA ratio reached 1.8x, aligning with our expectations. We expect net debt to peak in the first half of the year as the Somerset conversion wraps up.
- In line with our expectations, Sappi has guided for adjusted EBITDA to be lower QoQ and likely lower than the previous year ($180mn): The shift in timing of the annual maintenance shuts at Ngodwana and Saiccor Mills from Q1 last year to Q2 this year will negatively impact earnings by approximately $45mn. Furthermore, the Somerset conversion and expansion is projected to negatively impact Q2 earnings by around US$21mn.
EUROPE OVERVIEW
Profitability in Europe softened slightly sequentially: Revenue decreased modestly by -2% YoY (-5% QoQ), while EBITDA surged by +35% YoY (-3% QoQ), resulting in an EBITDA margin of +6.7%, missing our estimate of 7.9%. Variable costs rose by +2% YoY due to higher pulp and chemical costs, partially offset by wood and energy savings. Fixed costs continued to decrease by -12%, largely driven by personnel savings. Graphic paper volumes slumped by -9% YoY (-3% QoQ), well short of our estimates. Meanwhile Packaging & Specialty volumes showed some promising signs of some recovery, up +5%YoY and softening by -9% QoQ. Average pricing increased by +4% YoY and was stable QoQ, with Graphic Paper prices ticking up by +1% YoY, while Packaging Papers prices improved by +7% YoY.
NORTH AMERICA OVERVIEW
North America delivered another exceptional performance, with revenue rising by +17% YoY, but -3% softer QoQ: This was driven by a strong performance in Graphic Papers as well as no planned maintenance at Cloquet compared to the previous year. EBITDA was flat QoQ but was up an impressive +54% YoY, achieving an EBITDA margin of 15.2%. Variable costs decreased by -1% YoY, as higher raw material costs were offset by improved operational efficiency and no planned maintenance at the Cloquet mill compared to the previous year. Meanwhile, fixed costs rose by +4% YoY due to higher personnel expenses. Graphic paper volumes again exceeded expectations, increasing by +12% YoY (-7% QoQ). Packaging & Specialty volumes continued to recover, climbing +38% YoY and +1% QoQ. Dissolving pulp volumes also saw improvement, up +32% YoY, though down -8% QoQ. BCTMP volumes from Matane were in line with our estimates. Segment-wide average pricing improved by +1% both YoY and QoQ. This was largely driven by DP prices as graphic paper prices were broadly stable and packaging and specialty papers prices were softer as Sappi continues to adjust product mix and increases food service paperboard volumes ahead of the Somerset Mill PM2 conversion and expansion.
SOUTH AFRICA OVERVIEW
The South African segment profitability was lower QoQ as expected due to lower containerboard sales: Revenue increased by +7% YoY (-11% QoQ, while adjusted EBITDA improved by +61% YoY but showed a significant QoQ decrease of -18%, resulting in an adjusted EBITDA margin of 25.8%. Variable costs for the first quarter were down by -5% YoY, driven by chemical and energy savings from improved operational efficiency. Fixed costs were stable YoY due to lower maintenance costs. Packaging & Specialty volumes were slightly softer YoY, yet much lower QoQ (-31%). DP volumes too were -7% softer QoQ but improved by +5% YoY.
PULP OVERVIEW
GRAPHIC PAPER OVERVIEW
PACKAGING & SPECIALTY PAPERS OVERVIEW
