Paper and pulp manufacturer Sappi on Thursday declared a dividend of $0.11 for the year ended September 30, its first since 2008, when it stopped paying dividends as it grappled with losses caused by the economic crisis in Europe and falling demand for paper, as well as crippling debt.

However, its improved cash generation, which increased from $145-million in the 2015 financial year to $359-million for the year under review, has resulted in the group achieving the targeted leverage of less than two times net debt to its earnings before interest, taxes, depreciation and amortisation, which amounted to $739-million, earlier than expected.

The reduction in net debt to $1.41-million and refinancing of high-cost debt will also result in lower ongoing interest charges.

Sappi attributed the improved cash generation, in part, to the proceeds from the sale of the Cape Kraft and Enstra mills for $39-million.

Further, Sappi’s overall earnings growth was attributed to a buoyant dissolving wood pulp (DWP) market, strong growth in speciality packaging sales and cost savings across the group.

This was further bolstered by graphic paper sales volumes in Europe increasing 9% quarter-on-quarter in the fourth quarter of the year.

Lower raw material prices and ongoing cost reduction initiatives ensured variable costs for the fourth quarter were 9% lower than the year before. Sales of speciality packaging papers grew by 15% year-on-year, continuing to outpace average market growth rates of 1% to 5% for the products Sappi produces. Average selling prices continued to be stable.

Further, the Southern African business continued to strengthen in the quarter. Higher average net selling prices for containerboard, tissue and office paper, tight fixed cost control and an improved sales mix contributed to the enhanced margins compared with the equivalent quarter of 2015. 

Variable costs were well controlled with lower fibre, chemicals and energy costs compared to the prior quarter.

During a conference call on Thursday, CEO Steve Binnie noted that the company was pleased that its robust performance allowed Sappi to declare the dividend.

“The group aims to declare ongoing yearly dividends and, over time, achieve a long-term average earnings to dividend ratio of three to one,” he highlighted.

He added that the group’s profit for the year had nearly doubled to $319-million, paired with a 68% increase in earnings a share to $0.57c apiece. “The success of our strategy is evident in our strong cash generation which has allowed us to reduce our debt levels to below our stated target and to do this earlier than anticipated.”

The JSE-listed company also posted improved operating profit to $487-million, up from $357-million in the prior year. 

However, the group conceded that graphic paper markets would continue to be weak in Europe and the US, which would see Sappi continuing to implement variable cost reductions in these regions.

While the prices of most inputs are not expected to continue to reduce in the coming year, Sappi believes savings in variable costs can be achieved as a result of the procurement and efficiency initiatives that are under way across the group.

“We believe demand for our speciality packaging grades will continue to grow and we will, therefore, look to allocate more of our graphic paper capacity to these products,” Binnie said.

Capital expenditure in 2017 is expected to increase to about $350-million as Sappi continues the debottlenecking of DWP production at Ngodwana and Saiccor and seeks to take advantage of strong growth in speciality packaging.

“We expect to reduce net debt levels further during the course of 2017 and are considering using some cash reserves to repay the maturing 2017 bonds to lower future finance costs,” Binnie said.

Sappi’s share price on the JSE rose by 4.6% in early morning trade.