Sappi Sees Debt Falling by Third in Two Years as Pulp Grows

Sappi Ltd. (SAP), the world’s biggest producer of dissolving wood pulp, sees debt falling almost a third to $1.6 billion within two years as the South African company cuts costs and moves away from lower-margin paper.

“We are very confident that the level will come down to where we can invest in new ideas,” Steve Binnie, who takes over as chief executive officer of the Johannesburg-based company in July, said in an interview today. “Finances have improved tremendously. The big capital expenditure is behind us.”

Sappi is increasing its focus on dissolving pulp, used to make luxury clothing, sportswear and pharmaceuticals, as the product carries a higher profit margin than paper. The company is targeting production of 1.3 million metric tons of the pulp in the year ending September, supplying about 20 percent of world demand, while continuing to reduce spending in Europe.

The ratio of debt to earnings before interest, taxes, depreciation and amortization will be about three times at the end of September, Binnie said during a visit to the company’s Ngodwana mill in South Africa’s Mpumalanga province, northeast of Johannesburg. The target is to reduce that to two times. Net debt declined to $2.25 billion from $2.38 billion in the second quarter.

The Ngodwana mill has been expanded to boost production of dissolving wood pulp to 210,000 tons a year, requiring an investment of 3.3 billion rand ($307 million). The plant also produces newsprint and containerboard.

“We are still not at 100 percent design capacity,” Alex Thiel, chief executive officer for Sappi Southern Africa, said on the visit. “We are ramping up.”

Smooth Transition

Sappi shares have advanced 18 percent this year, outpacing a 9.6 percent gain in the FTSE/JSE Africa All Share Index. They traded 1 percent lower at 38.55 rand as of the market close in Johannesburg, valuing the company at 20.2 billion rand.

Binnie, who has been chief financial officer for almost two years, will replace Ralph Boettger at the helm of the company when he retires at the end of the month. Both men said the transition was going smoothly and that the strategy of growing the pulp business was working.

“Our client base is now even stronger,” Boettger said at the plant visit. “We are exporting to many more clients in China and elsewhere. China is a huge market. It’s a growing market.”

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

To contact the editors responsible for this story: Simon Thiel at sthiel1@bloomberg.net John Bowker, Kim McLaughlin

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