Sappi targets new dividends after tackling R25-billion debt

Sappi paper mill (Gallo).

Sappi paper mill (Gallo).

Sappi, the world's biggest manufacturer of glossy paper, plans to restart dividend payments after the company has tackled a $2.3-billion (R25.5-billion) debt burden built up during acquisitions and a 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 (52) said in a January 24 interview at the company's headquarters in Johannesburg. "That will allow us to get into a place where we can pay dividends again. That is extremely important for us."

Sappi's debt will probably fall 13% to $2-billion over the next 12 months as the company reduces costs and capacity at loss-making European operations and invests in the production and export of dissolving wood pulp, used to make sports and luxury clothing, Boettger said.
Sappi hasn't paid a dividend since December 2008 as it grappled 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 as chief executive, said $1.6-billion was a "more attractive" debt level. He declined to give a specific date for a resumption of dividend payment.

"We want our net debt to be no more than 2.5 times earnings before interest, taxes, depreciation and amortisation [Ebitda]," he said. "It is very dangerous to talk about a specific debt level. I think $1.6-billion is to me a much more attractive number."

Sappi's debt is now about 3.7 times Ebitda, according to Bloomberg calculations.

Metsa Board OYJ, a Finnish manufacturer of coated and uncoated fine papers, resumed dividend payments in April after a five year break, according to data compiled by Bloomberg.

Making Lingerie
Sappi is ramping up production of dissolving wood pulp at mills in South Africa and the US to 1.3-million metric tonnes a year from 800 000 tonnes, Boettger said. The material is used to make textiles including modal, in turn used to make a wide range of apparel such as bathrobes and lingerie. The company will have a 20% share of the market for dissolving wood pulp after the expansion. Manufacturers including Mumbai-based Aditya Birla Novo also make the pulp, according to the chief executive.

Sappi's focus on exporting the pulp means the company is benefiting from a weakening rand, Boettger said. The South African currency has slid 6.6% against the dollar this year, making it the worst performer among 16 major currencies tracked by Bloomberg. It declined 19% in 2013.

"We've always said that we like a slightly weaker rand, but a runaway rand – I don't think it's good for the country," Boettger said. "You import inflation. Socially, politically you put on a lot of pressure. Fuel costs go up."

Opened Mills
Sappi paid 750 million euros ($1.03-billion) for four graphic paper mills in Europe at the height of the financial crisis in 2008. The company posted a $177-million net loss the following year and reported a loss of $161-million in the 12 months through September 2013, according to data compiled by Bloomberg. 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 gained 0.5% to R34.34 as of 12:56pm on Tuesday in Johannesburg, valuing the company at R17.91-billion ($1.6-billion). The stock gained 6% in 2013, compared with an 18% rise on the FTSE/JSE Africa All Share Index.

"One thing I think that we feel good about is the debt in 2007 was $2.6-billion net," Boettger said. "We did those acquisitions. We closed a number of mills which is expensive. We invested $500-million in these two projects and debt is now $2.3-billion."

Sappi hasn't yet named a successor for Boettger. – Bloomberg

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