Sappi Plans to Cut Capacity in Weak Europe to Boost Profit

Sappi Ltd. (SAP), the world’s largest maker of glossy paper, plans to shut down part of its European operations amid sluggish demand in its biggest market as it heads for a loss in fiscal year 2013.

“Plans are being finalized that will result in significant capacity closure, lower costs, and improved operating margins in Europe,” the Johannesburg-based company said in a statement today. “We envisage these actions will occur over a three-year period and that any cash costs will be self-funded.”

Sappi will probably make a “small net loss in 2013”, excluding any impairments, according to Chief Executive Officer Ralph Boettger. The company expects demand to deteriorate further in Europe, which accounts for 46 percent of total sales and 54 percent of production.

The company’s loss per share narrowed to 8 cents in the third quarter from 20 cents a year ago, while sales fell to $1.42 billion from $1.54 billion, Sappi said. The shares fell as much as 8.2 percent, the biggest intraday drop since June 3, and traded 3.5 percent lower at 25.53 rand by 12:25 p.m. in Johannesburg. The stock has declined 17 percent this year, compared with a 62 percent gain at fellow South African paper maker Mondi Ltd. (MND)

Closing Plans

“The results were weaker than I was expecting,” Sean Ungerer, an analyst at Johannesburg-based Avior Research (Pty) Ltd., said in a phone interview today. The announcement of significant closures in Europe without detail on quantity, timing or costs has added to uncertainty surrounding the company, he said.

Plans to close down European capacity will help boost operating profit margin to 5 percent from a negative margin of 2.3 percent, Boettger said. A lower cost base will lead to increased focus on speciality paper rather than graphic, he said.

Sappi also plans to reduce its debt, which stood at $2.3 billion at the end of June, Boettger said. The company wants the ratio of its debt to earnings before interest, taxes, deprecation and amortization to shrink to a range of 1.5 times to two times over the next three years from four times in the third quarter, according to the CEO.

Sappi plans to sell 67,000 hectares of forest in Swaziland for about 1 billion rand, the company said in a July statement. Proceeds from the sale will go toward reducing the debt and improving the balance sheet, Boettger said.

To contact the reporter on this story: Kamlesh Bhuckory in Johannesburg at kbhuckory@bloomberg.net

To contact the editor responsible for this story: Simon Thiel at sthiel1@bloomberg.net

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