Sappi’s paper sales were 40% down in Q3 of its financial year compared to a year earlier, the result of plummeting advertising by consumer facing companies and of printers ceasing production, albeit temporarily.
Chief executive Steve Binnie says: “Lockdown and changes in consumer behaviour and logistical challenges had severe impacts.” The already weak demand for graphic papers and for dissolving pulp, used for textiles and clothing, continued through the third quarter.
The growth in demand for packaging and speciality grades could not offset these declines, but have reinforced the company’s belief that its long term strategy to focus on packaging and speciality sectors is right. These are sectors where higher margins and growth is possible.
The immediate focus is on tight cash management and improving cash flows. It has used furlough schemes, delayed annual shut downs and put capital expenditure on hold. The impact has been a reduction of €67 million in expenditure compared to last year. It has also negotiated a suspension of credit facility covenants from June this year until March 2021.
Now the company believes that worst may be over. “We believe that the decline in graphic paper demand in Europe and the US due to Covid-19 reached a low in June, and a slow recovery is underway as economies open and retail and advertising activity increase,” says Binnie.
“Significant capacity reduction in the US and Europe by our competitors, along with our own paper machine closures at Westbrook and Stockstadt Mills, should result in improved operating rates in the new financial year.”
This compares to continuing strong demand in the packaging and speciality sectors, thanks to a focus on food and hygiene sectors, which are resilient to the lockdowns. As these ease the company anticipates a recovery in demand for release liners and that digital imaging will increase, leading to qualification of new products.
The company is not issuing financial forecasts for the year, though reckons that demand for graphic papers will end the year at 70% of the levels experienced 12 months ago.