Sappi upgrades prepare GROUP FOR FUTURE GROWTH

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.