Sappi up­grades pre­pare GROUP FOR FU­TURE GROWTH

Financial Mail - Investors Monthly - - Company Profile -

Sappi CEO Steve Bin­nie is a man clearly on a mis­sion, which is re­flected in an air of rest­less­ness as he sits down to talk about the group’s 2018 fi­nan­cial re­sults. His de­meanour is nei­ther anx­ious, nor con­cerned, but not en­tirely re­laxed – as if he’s al­ready fo­cused on the next task, the next mile­stone.

And there has been no short­age of mile­stones for the diver­si­fied wood­fi­bre group in the past fi­nan­cial year.

These achieve­ments are the re­sult of the group’s 2020 vi­sion to trans­form the busi­ness from be­ing fo­cused on high qual­ity graph­ics pa­per to a diver­si­fied group This di­ver­si­fi­ca­tion is tar­get­ing high growth and high mar­gin spe­cial­ity and pack­ag­ing pa­pers, bio­ma­te­ri­als and dis­solv­ing wood pulp that en­able it to ex­tract higher value, sus­tain­able ma­te­ri­als from its raw ma­te­rial, wood fi­bre.

It is within this con­text that the past fi­nan­cial year was a crunch year to make the nec­es­sary equip­ment con­ver­sions and up­grades, and take pain in the short term. This ‘pain’ in the form down­time meant that earn­ings for the year (US$762m) fell slightly short of the US$785m turnover in 2017.

How­ever, strong fourth quar­ter num­bers might be an in­di­ca­tion of what a fully trans­formed Sappi could look like. The fi­nal quar­ter profit of US$107m was nearly one-third of the full-year profit of US$323m (US$338m in FY17).

The com­par­a­tively good re­sults al­lowed Sappi to con­tinue its div­i­dend pay­out that it re­sumed three years ago. This was not al­ways as­sured, es­pe­cially when the group was grap­pling with debt that had bal­looned to above US$2.6bn in 2009.

The US17c div­i­dend an­nounced in mid-Novem­ber this year fol­lows the US15c paid in 2017 and US11c the year be­fore.

“We’ve come out of a pe­riod over a few years when we were de-lever­ag­ing and pay­ing down debt, and now we’ve moved into a growth phase,” Bin­nie com­ments.

He notes that the full im­pact of this growth might not be ev­i­dent in the full-year num­bers, which were im­pacted by lower pro­duc­tion due to clo­sures for the men­tioned up­grades and con­ver­sions.

Also, the stronger rand and higher raw ma­te­rial costs hurt ex­port-re­lated prof­its, while the trad­ing pe­riod was also one week shorter than 2017.

These fac­tors did not, how­ever al­ter the ma­jor fo­cus for the year, namely con­vert­ing and de­bot­tle­neck­ing pro­duc­tion ca­pac­ity at Sappi’s lo­cal, Euro­pean and US op­er­a­tions.

At its Maas­tricht plant, for in­stance, the mill is now able to pro­duce pack­ag­ing ma­te­ri­als whereas it had been a pro­ducer only of high-end print­ing pa­per. Sim­i­lar work was also un­der­taken at the Som­er­set plant in the US.

“So, with all that go­ing on, to come in flat and marginally up in the quar­ter, we were very sat­is­fied with the per­for­mance,” Bin­nie says. “We had to do this to en­able us to set up the plat­form for fu­ture growth.”

This is some­thing that Bin­nie has worked hard at com­mu­ni­cat­ing to share­hold­ers. He says the clar­ity brought by the 2020Vi­sion strat­egy and open com­mu­ni­ca­tion has been vi­tal to re­tain­ing their trust.

Sappi’s 2020Vi­sion aims, among other goals, to achieve a sig­nif­i­cant in­crease in EBITDA by 2020.

Cen­tral to this goal is cap­i­tal­is­ing on the group’s ex­pe­ri­ence and share of the dis­solv­ing pulp mar­ket. Its suc­cess in this sec­tor has breathed new life into the group at a time that the tra­di­tional print­ing pa­per in­dus­try was left for dead as the dig­i­tal era took hold.

This ur­gency to first de-bot­tle­neck pro­duc­tion and then ex­pand ca­pac­ity feeds into the strong global de­mand for sus­tain­able al­ter­na­tives to oil­based fi­bres.

The group has there­fore com­mit­ted to in­vest R7.7bn in its Saiccor op­er­a­tion in Umko­maas over the next five years. Bin­nie an­nounced this in Oc­to­ber at the Pres­i­den­tial In­vest­ment Sum­mit.

Sappi is in­vest­ing R2.7 bil­lion in ca­pac­ity ex­pan­sion this year and next, and then another R5 bil­lion over five years on main­te­nance and up­grades to cut costs, in­tro­duce new tech­nol­ogy, op­ti­mise pro­duc­tion and fu­ture-proof its man­u­fac­tur­ing sys­tems.

“In­ter­est­ingly, dis­solv­ing pulp has gone be­yond the 2020 tar­get we set our­selves. We thought it would be about 40% of our profit, and we are above that at the mo­ment,” Bin­nie says. “In time we would want to grow even fur­ther.”

Sappi’s fu­ture, how­ever, is also closely tied to new uses for wood by-prod­ucts.

These bio­ma­te­ri­als and bio­chem­i­cals are in var­i­ous stages from pi­lot plants to com­mer­cial sales. Lignins from wood are used as binders and the sug­ars that are ex­tracted can pro­duce xyl­i­tol and fur­fural. Add to this nanocel­lu­lose and fi­bre com­pos­ites and the mul­ti­tude of applications for these ver­sa­tile, en­vi­ron­men­tally friendly byprod­ucts be­comes clear.

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