Sappi aims to resume payment of dividends

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Kamlesh Bhuckory

Sappi, the world’s biggest manufacturer of glossy paper, plans to restart dividend payments after it has tackled a $2.3 billion (R25.6bn) debt burden built up during acquisitions and its subsequent refocus on wood pulp used in clothing.

“Now it’s the time for us to get debt down, which we are working on,” chief executive Ralph Boettger said in a recent interview.

“That will allow us to get into a place where we can pay dividends again. That is extremely important for us.”

Sappi’s debt would probably fall 13 percent to $2bn over the next 12 months as the company reduced costs and capacity at loss-making European operations and invested in the production and export of dissolving wood pulp, which is used to make sports and luxury clothing, he said.

Sappi has not paid a dividend since December 2008 as it grapples with losses caused by the economic crisis in Europe and falling demand for paper.

Boettger, who is leaving the company in June because of ill health after almost seven years at the helm, said $1.6bn was a “more attractive” debt level.

He declined to give a specific date for the resumption of the dividend payment.

“We want our net debt to be no more than 2.5 times earnings before interest, taxes, depreciation and amortisation. It is dangerous to talk about a specific debt level; $1.6bn is a much more attractive number.”

Sappi’s debt is about 3.7 times earnings before interest, taxes, depreciation and amortisation, according to Bloomberg calculations.

The company was ramping up production of dissolving wood pulp at mills in South Africa and the US to 1.3 million tons a year from 800 000 tons, Boettger said.

The material is used to make textiles, including modal, which in turn is used to make a wide range of apparel such as bathrobes and lingerie.

The company will have a 20 percent share of the market for dissolving wood pulp after the expansion.

Sappi’s focus on exporting the pulp meant it was benefiting from a weakening rand, Boettger said.

The currency has slid 6.6 percent against the dollar this year, making it the worst performer among 16 major currencies tracked by Bloomberg. It declined 19 percent last year.

“We have always said we like a weaker rand, but a runaway rand – it’s not good for the country. You import inflation. Socially, politically you put on pressure. Fuel costs go up.”

Sappi paid e750 million (R11.4bn) for four graphic paper mills in Europe at the height of the financial crisis in 2008. The company posted a $177m net loss the following year and reported a loss of $161m in the 12 months to September 2013, according to Bloomberg data.

The company has opened mills for dissolving wood pulp in South Africa and North America to increase its exposure to the product, which carries a higher profit margin than paper.

Sappi shares ended the day 0.38 percent higher at R34.29 in Johannesburg yesterday, valuing the company at about R17.9bn.

The stock gained 6 percent last year, compared with an 18 percent rise on the FTSE/JSE Africa all share index.

“One thing we feel good about is the debt in 2007 was $2.6bn net,” Boettger said. “We did those acquisitions. We closed a number of mills, which is expensive. We invested $500m in these two projects and debt is now $2.3bn.”

Sappi has not yet named a successor to Boettger. – Bloomberg


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