Sappi shares rocketed as much as 15% on Thursday despite reporting a dismal third quarter, with losses of $181m and inexorably growing debt of $1.997bn. Yet the market is clearly latching onto the paper and pulp maker’s view that the fourth quarter will produce “materially better” earnings. The FM spoke to CEO Steve Binnie.
The market is evidently quite excited, but it’s still hard to find the positives in the past quarter. Are there any? That is, besides expectations that the next three months will be better?
You know there were so many headwinds, like the war in Iran and what it was doing to logistics and chemical and oil prices, but what we started to see towards the end of the quarter was things beginning to improve. Now, that’s not to say we’re out of the woods; there are so many challenges in our industry, but one did start to see selling prices go up. I’m not surprised about the share price reaction because a couple of our competitors have also announced numbers in the past few days and were also upbeat about the outlook, and all their share prices have jumped.
You mentioned that dissolving wood pulp prices rose $53 a ton to $898 a ton. Is that just a recovery in prices or the start of an actual price rally?
I think it’s a bit of both. On the cost side, everyone’s costs are going up, so you have to get higher selling prices. And the global consumer is still not out of the woods, but underlying demand for clothing and textiles is positive. It’s reasonably OK. And the other strange thing with this crazy war in Iran and higher oil prices, the alternative fibres that are used in clothing — mainly polyester — have risen significantly, so when you combine that with all the other factors, and not a lot of new supply, the market balance is better than it has been. To be honest, the cost per ton to produce dissolving pulp has gone up about $100 over the past year and a half.
So are you only now recovering those costs?
Partially. The other thing that hasn’t helped is the rand. We’re a South African exporter; our costs are in rands, it was R18.50 for two or three years and suddenly it goes back to R16 — you can imagine what that does to the competitiveness of the manufacturing sector. So our margins in dissolving pulp are not back to where they need to be, but they are improving.
What would be an ideal margin — or at least a reasonable margin?
We’ve always talked about a 20%-25% ebitda margin, and with the rand at around R16 it’s going to be difficult to get to 25% at these exchange rates. But at some point the rand will resume its downward path and that will give us some benefit.
North America seems to be getting better for you?
This is the bit we’re most excited about [given] the investment we made two or three years ago. Strategically, we wanted to increase our footprint in the US; the economy is remarkably resilient and packaging continues to grow. Selling prices were relatively low, but now they’ve started to go up, some capacity came out and there have been two rounds of price increases that have been announced and we’ll benefit from that in Q4 and in the new financial year. And when you add that to the fact that our volumes are going up as we ramp up the new machine, things are looking better. I’m feeling very good about our North American business.
Can we expect another raft of ‘special items’ in the next quarter?
Look, there are two parts to it. As you know, we’ve gone into this joint venture in Europe and shareholders are behind it. When the transaction is finalised there will be impairments related to that, but from a cash flow perspective it makes a great deal of sense. [Another] line item that falls below our ebitda is our timber valuation — the plantations. And the way you value these things is you take the selling prices less the cost to sell the product. And the biggest cost is diesel. The diesel price in this quarter went up about $10, so when you do the maths and apply it across all your plantations, there was a huge fair value adjustment. Diesel has subsequently come down and there will be a positive adjustment in the current quarter.
