Net profit for the year increased by 91%; debt reduction target achieved early; first dividend declared since 2008
Highlights for the Year
- EBITDA excluding special items up 18% to US$739 million (FY15 US$625 million
- Profit for the period up 91% to US$319 million (FY15 US$167 million)
- EPS excluding special items up 68% to 57 US cents (FY15 34 US cents)
- Net debt US$1,408 million, down 20% or US$363 million year-on-year
- Dividend of 11 US cents declared
Highlights for the Quarter
- EBITDA excluding special items US$209 million (Q4 FY15 US$201 million)
- Profit for the period up 35% to US$112 million (Q4 FY15 US$83 million)
- EPS excluding special items 18 US cents (Q4 FY15 16 US cents)
Commenting on the key financial highlights of the year and fourth quarter, Sappi Chief Executive Officer Steve Binnie said:
"I am very pleased that the group has delivered another strong performance to build on the momentum created in 2014 and 2015. Significantly, our profit for the year has nearly doubled to US$319 million and our earnings per share for the year increased by some 68% to US 57 cents. 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.
"I am delighted that our robust performance has allowed us to declare a dividend for the first time since 2008. The 2016 dividend was covered five times by basic earnings per share. The group aims to declare ongoing annual dividends, and over time achieve a long-term average earnings to dividend ratio of three to one.
"Looking towards the next quarter, the demand for Dissolving Wood Pulp remains favourable. Recent gains in spot prices in China indicates to us that the market is currently tightly supplied. We therefore expect higher average Dollar pricing in our first fiscal quarter for 2017 (October to December 2016). Our earlier concerns regarding possible Saiccor production losses due to the drought conditions in South Africa have lessened in the past few months after some late winter rains and we do not currently foresee any impact from drought in the first quarter.
For the full year, based on current market conditions; and in particular the recent strengthening of the Rand relative to the US Dollar, stronger US Dollar pricing for DWP and weaker paper demand and pricing in Europe, we expect the group's performance in 2017 to be broadly in line with 2016."
The year and quarter under review
In executing on our strategy, we implemented various projects which lowered our cost position and enhanced our competitiveness in the graphic paper segment. Furthermore, our initiatives to accelerate growth in speciality packaging in Europe and North America have boosted volumes and lifted margins. In addition, we are continuing to seek opportunities to shift production from graphic paper to various speciality packaging grades.
The quarter was characterised by buoyant dissolving wood pulp (DWP) markets, strong growth in speciality packaging sales and cost savings across the group. These helped to offset the effect of lower graphic paper volumes and selling prices.
During this seasonally stronger quarter, graphic paper sales volumes in Europe were 9% above those of the prior quarter, but 4% below those of the equivalent quarter last year. Lower raw material prices and ongoing cost reduction initiatives ensured variable costs were 9% lower than last year. Sales of our speciality packaging papers grew by 15% year-on-year, continuing to outpace average market growth rates of 1 to 5% for the products we produce. Average selling prices continued to be stable.
The North American business recovered in a seasonally stronger quarter that had no scheduled maintenance shuts. The strong Dollar, low paper pulp prices and an oversupplied coated freesheet market continued to put pressure on selling prices. Improved coated web and packaging volumes as well as lower variable costs offset these headwinds. Ongoing procurement and efficiency initiatives along with favourable markets for purchased pulp, chemicals, wood and energy led to lower average variable costs.
The Southern African business continued to strengthen in the quarter. Higher average net selling prices for containerboard, tissue and offices papers, tight fixed cost control and an improved sales mix contributed to the enhanced margins when compared to the equivalent quarter last year. Variable costs were well controlled with lower fibre, chemicals and energy costs compared to the prior quarter.
The group's EBITDA excluding special items for the year was US$739 million, an increase of US$114 million, or 18%, on the prior year. Operating profit excluding special items for the year was US$487 million compared to US$357 million in the prior year. Special items amounted to a gain of US$57 million, comprised mainly of a plantation fair value gain as a result of the weaker Rand and the resultant increase in local timber prices.
Net cash generation for the financial year was US$359 million (FY15 US$145 million), which included proceeds from the sale of Cape Kraft and Enstra mills of US$39 million.
Net debt at financial year-end decreased to US$1,408 million as a result of the cash generation. This equates to leverage of 1.9 times EBITDA, achieving our long term target of less than two times leverage. The reduction in net debt and refinancing of high cost debt will result in lower ongoing interest charges.
Graphic paper markets continue to be weak in Europe and the United States. Variable cost reductions in both regions continue to be important as prices remain under pressure. Whilst the prices of most inputs are not expected to continue to reduce in the coming year, we believe savings in variable costs can be achieved as a result of the group procurement and efficiency initiatives currently underway.
We believe that 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.
The first quarter of our 2017 financial year will comprise 14 weeks instead of the typical 13 week quarter. This is in order to adjust our reporting periods closer to the calendar periods. This will result in increased sales when comparing to comparative quarters.
Capex expenditure in 2017 is expected to increase to approximately US$350 million as we continue the debottlenecking of DWP production at Ngodwana and Saiccor and seek to take advantage of our strong growth in speciality packaging.
We expect to reduce net debt levels further during the course of 2017 and are considering utilising some cash reserves to repay the maturing 2017 bonds in order to lower future finance costs.