Sappi Ltd (SPPJY) Q2 2025 Earnings Call Highlights: Navigating Market Challenges and Strategic ...

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Fri, May 9, 2025, 1:22 AM 5 min read

Impact of Somerset Project Shut: $20 million impact due to the shut.
Additional Maintenance Impact: 13 million tonnes affected due to longer-than-anticipated maintenance shuts at Saiccor and Ngodwana mills.
Net Debt to EBITDA: Increased to 2.4 due to higher CapEx.
Refinancing: Completed refinancing of 2026 bonds with 2032 bonds.
Free Cash Flow: Lower than prior year, linked to maintenance shuts.
CapEx Projections: Increased to $550 million for the year due to Somerset project delays.
Debt Reduction Target: Committed to reducing debt with a medium-term target of $1 billion.
Dissolving Pulp (DP) Prices: Reduced from $970 to $900 during the quarter, further dropping to $830 post-quarter.
Packaging Segment Growth: Positive growth in the US and South Africa, despite profitability impact from shuts.
Graphics Segment: Stable volumes with market share gains in the US and Europe, but downward pressure on selling prices.
Adjusted EBITDA Outlook: Estimated to be at a similar level to Q2 due to cautious outlook on DWP prices.

Warning! GuruFocus has detected 4 Warning Sign with SPPJY.

Release Date: May 08, 2025

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

Positive Points

Sappi Ltd (SPPJY) successfully completed the refinancing of its 2026 bonds, replacing them with 2032 bonds, indicating strong demand and favorable pricing.
The company reported stable sales volumes, with the packaging segment showing higher volumes compared to previous periods.
Despite challenging market conditions, Sappi Ltd (SPPJY) generated strong cash flow from operations.
The Somerset project, which is now complete, is expected to double capacity and align with the company's strategy to reduce exposure to graphic paper and grow the packaging segment.
Sappi Ltd (SPPJY) has a disciplined capital allocation strategy, prioritizing debt reduction and maintaining a strong balance sheet.

Negative Points

Market conditions deteriorated across all segments, leading to pressure on selling prices and impacting earnings.
The company faced significant impacts from maintenance shuts at its South African mills, leading to lower production and higher fixed cost absorption.
There was a negative fair value adjustment on plantations in South Africa, affecting financial results.
Energy costs increased in Europe and South Africa due to inefficiencies during maintenance shuts.
The company is cautious about its outlook due to geopolitical trade tensions and the impact of tariffs, particularly affecting the dissolving pulp market.

Q & A Highlights

Q: What reaction have you seen from import competitors in the US market regarding pricing, and have you adjusted your prices for imports into the US? A: Stephen Binnie, CEO: We have seen various behaviors from different players due to the uncertainty, with some initially increasing prices and then reversing them. From our perspective, we have not increased our prices yet. Marco Eikelenboom, CEO of Sappi Europe, added that the uncertainty has led to a diverse approach, and they are waiting for negotiations between the EU and the US.

Q: How exposed are Chinese viscose producers to the US market? A: Stephen Binnie, CEO: About 35% of clothing to the US comes from China, but the exact ratio for viscose producers is unclear as it often gets blended. Mohamed Mansoor, EVP of Sappi Pulp, noted that very little viscose staple fiber is exported to the US, but finished garments make up about 35% of US clothing imports.

Q: Can you discuss the timing of the start-up of the new machine at Somerset and when it will be ramping up? A: Stephen Binnie, CEO: The initial ramp-up and teething issues are expected in Q3, with further improvement in Q4. Michael Haws, CEO of Sappi North America, added that the ramp-up is exponential in the early phase, and by the end of Q4, production levels should be back to pre-shutdown levels.

Q: Could you talk about the calculus around swinging Cloquet from DWP back to paper pulp given the price falls? A: Stephen Binnie, CEO: The differential is about $250 a tonne, and with DWP prices at $830, the gap is closer. Hardwood pulp prices have also dropped, particularly in China. Michael Haws, CEO of Sappi North America, mentioned that they evaluate this on an ongoing basis to make the right business decision.

Q: Can you update us on the timing delays of CCS prices and how they feed through into your top line? A: Stephen Binnie, CEO: Previously, 80% of our volume was on a quarterly lag, but now only about 15% is. The rest is either one month in arrears or on spot. This restructuring impacted Q2 and is why we are cautious about our Q3 outlook.

Q: Are maintenance shuts in South Africa due to a shortage of skills? A: Stephen Binnie, CEO: It's not primarily a skills issue. Graeme Wild, CEO of Sappi Southern Africa, explained that the main concern was on the recovery boiler side, requiring expertise from equipment manufacturers. The delays were due to material weaknesses, not a shortage of skills.

Q: How are you managing inventory levels in the dissolving pulp market amid tariff concerns? A: Stephen Binnie, CEO: A high proportion of our volumes is committed through contracts, so we don't anticipate significant volume risk. While there is a risk of inventory build-up, we expect a recovery similar to post-COVID once the tariff situation resolves.

Q: Could you discuss potential structural actions for your European asset base given market challenges? A: Stephen Binnie, CEO: We don't anticipate needing to close any capacity at the moment, but we continue to evaluate the situation proactively. The current challenge is more about pricing risk rather than volume risk.

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

This article first appeared on GuruFocus.

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