JSE-listed woodfibre-based products company Sappi CEO Steve Binnie has said the company expects to post fourth-quarter results – for the three months to September 30 – that will be materially above that reported on August 6 for the third quarter to end June.

During a conference call to present the company's results for the three months to June 30, he said that, despite challenging market conditions, the teams delivered disciplined cost-containment and encouraging sales performance.

Sappi reported earnings before interest, taxes, depreciation and amortisation of $53-million for the quarter under review, up from $52-million in the second quarter to March 31.

Capital expenditure of $62-million in the quarter had been tightly controlled and focused primarily on essential maintenance and operational reliability initiatives, he said.

A key feature of the quarter was the improved performance of the company’s North American operations.

“We have consistently guided that North America will be a key driver of growth for Sappi in the coming years. The region delivered a significant improvement in profitability quarter-on-quarter and year-on-year.

“Paperboard sales volumes [from the North American operations] increased substantially by 63% year-on-year. The commercial ramp-up of the Somerset Mill PM2 saw paperboard volumes increase by 41% year-on-year and 24% quarter-on-quarter.”

Volumes benefited from increased paperboard production and sales in North America.

North America delivered a significant improvement in profitability compared with the prior quarter and prior year, and the continued commercial ramp-up of Somerset Mill PM2 was a key driver of performance, Binnie said.

Improved operational stability, higher sales volumes and cost efficiencies contributed to stronger earnings, while recent industry paperboard price increases are expected to support future profitability.

Two main factors drove the price increases in the US. Higher raw materials, higher costs of competing products and chemicals costs globally supported increases in selling prices.

Additionally, two competing producers in the US reduced production capacity, which meant the overall market balance was more favourable for Sappi and also supported the price increase announcements made by producers in the US, including by Sappi.

Binnie noted that these price increases would provide some benefit to Sappi during the current fourth quarter and during the subsequent quarter to December 31, which is the first quarter of the company’s 2027 financial year.

“The performance of Somerset Mill PM2 continues to improve and is delivering the operational and commercial benefits we anticipated. As volumes grow and efficiencies improve, the project will become an increasingly important contributor to earnings,” Binnie said in a statement.

In South Africa, the profitability of Sappi’s operations was lower owing to the stronger rand during the period under review. However, dissolving wood pulp (DWP) demand was stable, solid container board demand was underpinned by citrus exports and paper demand remained relatively stable, he said.

“There is growing recognition, in government and industry, of the impact that low-cost imports are having on South Africa's industrial base. Discussions about trade and tariff measures to counteract this are more prominent and we are engaging with policymakers.”

While the strong rand helped to make imports cheaper during the quarter under review, low-cost imports of woodfibre-based products were coming into South Africa prior to the strengthening of the rand at the beginning of the year.

“This is the reason we are engaging with regulators and policymakers. We have made an application, and believe this is a matter the authorities need to look at,” said Binnie.

During the quarter under review, Sappi continued to face pressure from lower selling prices in several product categories, higher logistics and chemical costs linked to geopolitical tensions in the Middle East and an unfavourable rand:dollar exchange rate.

Demand for DWP remained healthy and pricing continued to strengthen during the quarter, supported by favourable viscose staple fibre market fundamentals.

Demand from the textiles and clothing industries globally had started to normalise and was gradually increasing. This created demand-pull for DWP. Additionally, higher oil prices meant that the prices of polyester, which was a competing product to DWP, had also increased, explained Binnie.

Additionally, there is no new supply of DWP coming into the global market, and this, with the gradual rise in demand and higher prices for alternative products, supported an increase in prices.

Meanwhile, Sappi maintained a strong liquidity position of about $783-million at quarter-end.

Net debt, which was just under R2-billion at the end of the quarter, remained a key area of focus and, through disciplined capital allocation and careful cash management, was only marginally higher than the prior year despite the lower earnings performance, Binnie said.

The ongoing conflict in the Middle East continues to contribute to uncertainty and cost inflation across global supply chains.

However, market conditions across several of Sappi's key product categories are improving. The group expects to benefit from stronger DWP pricing, continued progress at Somerset Mill PM2, lower maintenance costs and the recent paperboard price increases in North America.

“While uncertainty remains in the global economic and geopolitical environment, we are encouraged by improving market fundamentals and the momentum building across our businesses. We remain focused on executing our strategy, strengthening the balance sheet and delivering a stronger performance in the fourth quarter,” he said.