Sappi: a journey of re-invention

Total Views : 1,123
Zoom In Zoom Out Read Later Print

Find the exclusive interview of Mr.Steve Binnie, CEO of SAPPI a leading paper mill engaged in manufacturing of Coated Paper.

Sappi: A Journey of Re-invention

As we all read fewer and fewer newspapers and magazines, this poses challenges for the firms which have historically relied on sales of paper. One such is South Africa based Sappi.   The Messenger’s John Fraser spoke to Sappi CEO Steve Binnie to learn more

28 June 2018

Q. Remind me of Sappi’s traditional markets, and where they are in decline?

A.  Sappi’s global expansion in the 1990s was focused on coated fine (graphic) paper used for advertising and marketing materials as well as high-end magazines and photographic books, calendars, brochures etc. The reason for our focus on this market segment was two-fold in that it was the fastest growing market segment and it was very fragmented, which made our strategy of buying and consolidating market leaders feasible. 

At the time it proved very profitable. We focused on the markets with the highest consumption of paper (North America and Europe – while the US production was aimed at the American market, 25% of our European production was exported to other regions including Asia and South America). 

Our South African operations at that time produced a wide range of coated, uncoated, packaging, office and printing papers for the local market. As from the beginning of the 2000s the coated graphic paper market segment suffered dual setbacks. Firstly a reduction in marketing spend when the dot-com bubble ended (at that time IT companies were some of the largest spenders on paper-based marketing material) and then due to the 2008 financial crisis. 

Secondly, the emergence of digital communication, the shifting of marketing spend to digital, and the concomitant reduction in demand for paper as mass market magazines were losing readers. They were replaced by niche magazines, but overall readership (and thus paper volumes) declined. 

Overall market demand across these geographies is in a steady decline of around 3% per year. At the same time, capacity has been taken out of the market and at the moment supply and demand is more or less in balance. Paper-based communication is still an important channel for communication, and is being well used by companies who want to use the personal, emotional and sensory benefits that paper provides over instant mass digital communication. 

In South Africa the increasing presence of imported paper meant that by 2010 Sappi decided to exit most of the niche markets it was producing for, and to rather focus on those segments where it had a clear competitive advantage, in particular dissolving wood pulp, virgin fibre containerboard (fluting) and linerboard (used to produce boxes for fruit exports), office paper (the Typek brand) and tissue wadding. Sappi is also the only remaining local manufacturer of newsprint.

Our Vision 2020 strategy launched in 2015 recognised the decline in the coated graphic paper market and set the contribution of this segment to Sappi’s overall profit (EBITDA) at 25% (down from well over 50% in past years). Growth is being achieved through a higher margin segment which also shows strong year-on-year demand growth. These segments include dissolving wood pulp (for the manufacture of viscose textiles) with a contribution of 40-50% and packaging and speciality papers with a contribution growing to 25%. A new biomaterials and biochemicals segment (new products extracted by beneficiating the pulping stream chemicals) is ramping up and we are targeting an eventual contribution of 10%.

Q. What are, and how adaptable are, your raw materials? 

A. Our main raw material is wood fibre which is very adaptable. We have strong R&D facilities across Europe, the USA and in South Africa to ensure that we optimise the pulping of the various tree species we have available, to deliver the product characteristics required by our customers. We have three sources of wood fibre. In South Africa from our own and managed plantations or small growers. We provide all the seedlings and cuttings from our own nurseries which are based on hybrid species developed by our forestry R&D team. 

In Europe and the USA we either purchase timber or wood fibre chips from local farmers and other suppliers or we buy pulp at mills where we do not have pulping facilities. Other raw materials include the chemicals required to cook our pulp and those required for the coating formulations. These are constantly reviewed to ensure they deliver optimum performance and value and meet other requirements, including environmental stewardship.

Q. How long, hard, intense has it been to come up with a strategy for the future?

A. It would be fair to say that it has taken some time. Once the decline in the coated graphic paper market was clear, our first priority was to deal with a stressed balance sheet and to pay down our debt so that we could free up cash for investment. We managed this process over a period of five years through internal cash generation and refinancing our bonds at more favourable rates. 

Beyond closing and selling some mills and exiting various product segments, we decided to use some of the cash generated each year to begin to restructure our production capacity and invest in growth areas. This included refocusing our Alfeld mill to become a pure-play speciality and paper packaging mill, expanding our dissolving pulp mill (Saiccor) in South Africa and adding dissolving pulp lines to our Ngodwana mill in South Africa and our Cloquet mill in the USA. 

Recently we have made further investments to support of higher margin growth segments through the purchase of a barrier coating company, technology to extract hemi-cellulose sugars from our pulp stream, and building demonstration plants for nanocellulose production and industrial sugar extraction. We have also increased our packaging and speciality paper capacity by reconfiguring our Maastricht mill in the Netherlands and one large volume paper machine at our Somerset Mill in the USA. We also acquired the speciality paper and packaging capacity, brands and know-how of Cham paper in Italy.

As background, in 2015 we launched our Vision 2020 strategy which, as I stated earlier, adopted a diversified market segment approach, built around 4 key pillars. Maintaining our strong market position in coated graphic paper but taking into account that this segment would not show growth into the future (i.e. the need to adjust supply to remain in line with demand); ensuring that we maintain our low-cost position for global competitiveness (to remain profitable throughout the pricing cycles); keeping our net debt to EBITDA ratio at 2x or lower; and targeting our investments for growth in higher margin growing market segments. 

The growth segments are built around dissolving pulp as the largest contributor to profit (40-50%), packaging and speciality papers at (25%) and biomaterials and biochemicals once commercially operational at (10%). Coated graphic papers will continue to contribute 25%.

It would be safe to say that to date we have hit all our targets, the company is focused on growth, we have resumed dividend payments and we continue to invest to ensure that we can grow market share and margins. We have also begun to work on our strategy towards 2025 which in essence will focus on how we expand and develop new capacity to meet the strong customer demand across all segments. During this period the bio-based business will increase in importance as it begins to deliver product to market and capacity is expanded. 

Q. And where does all this fit in with a greener planet?

A   There is today more focus on where the raw materials used for products come from, and a growing preference for products (where possible) to come from renewable resources. Sappi’s raw material is a natural, renewable and sustainable product – wood fibre. Our customers also require products which are easier to recycle (paper is by far the easiest in this regard) and enable them to move away from non-recyclable barrier technologies needed to seal foods. 

This is where we are focusing our development work for bio-degradable coating technologies which can be integrated into our paper packaging products.

As a resource, our commercial plantations will not be used up but will continue to deliver wood fibre along with acting as carbon sinks (which take carbon from the atmosphere), as protection for biodiversity, and as a stable economic presence around which rural development can take place. 

Globally, we are committed to independent certification, which ensures that our own wood fibre is correctly managed, and if we procure from third parties then it meets stringent global standards. 

Indeed, planting trees for commercial use (using the correct management framework) has had a significantly positive impact on conserving and expanding natural forests. With our aim to extract value from the whole tree, including the wood fibre, the lignin and the natural chemicals present in each tree, we are providing alternatives to the traditional petroleum-based products. Alternatives which do not rely on extraction but rather come from a natural and a renewable resource.

Our product development work is responding to customer requirements for products which can replace existing fossil fuel based, non-recyclable products.

Q. In the past, the ordinary consumer would have encountered a Sappi product when reading a glossy magazine or brochure, or a newspaper. In future, where will your footprint be detectable? 

A. In South Africa, Sappi is the only local producer of newsprint, which still has a strong role, in particular for community news.

While we have cut back our production of coated graphic or printing paper, and it makes up a much smaller part of Sappi’s overall business, we are committed to serving our print customers and to maintain our leadership role in supplying global fashion and other lifestyle magazines as well as paper for many luxury brands.

However, in retail, the consumer will encounter Sappi’s (packaging) paper on the shelves. From food packaging (including ready-to-eat meals) to cosmetics packaging, liquor packaging and other applications. Also, Sappi (technical) papers are increasingly used in many industrial applications such as siliconized base papers which carry decals or other printed materials and casting release papers which impart the textures found on flooring, sports equipment, shoes, handbags, car dashboards and aircraft interiors.

The consumer will also find Sappi’s wood-fibre based microcrystalline cellulose, lignosulphonates, hemicellulose sugars and nanocellulose in products such as medicine tablets, washing powders, lipstick, Xylitol (sugar replacement), sunscreens and moisturisers, with industrial applications used to improve paints, cement, animal feeds, brick-making and composite fibre products.  

Lastly, consumers will be wearing more of Sappi’s dissolving wood pulp which is turned into viscose fibre used in textiles for clothing, bedding and towels.

Source: The Messenger 

See More

Latest Photos