Global business strategy
Sappi is a leading global producer of fine paper and chemical cellulose. We also produce speciality, uncoated graphic, business and packaging paper, newsprint and pulp.
Our strategy
To achieve our long-term goal we have four main themes:
- Optimising our better-performing businesses, which are the South African chemical cellulose business and our North American business.
- Fixing our under-performing businesses, in particular, the coated graphic paper business in Europe and the paper business in Southern Africa.
- Investing for future growth in higher-margin businesses including chemical cellulose, textured surfaces, energy projects and low-cost wood resources.
- Working within the parameters of our balance sheet and liquidity.
Our goal
To be sustainably the most profitable company in pulp, paper and cellulose based solutions – to create value for our shareholders.
Page 3 - 2011 Integrated ReportPlease click on the image to open the PDF-file (180KB)
Sappi continues its improving trend in operating performance in 2011. Our chemical cellulose and North American businesses performed well during the year, benefiting from good market positions, high pulp prices and improved efficiencies. However, our European and Southern African paper businesses recorded disappointing performances.
2011 was a year of decisive intervention. We refined our strategy, which is described below, and took action to manage graphic paper capacity, and reduce fixed and variable costs. We implemented plans to reposition operations to adapt to our customers’ changing needs and match our assets to profitable markets and opportunities for future growth. We also restructured our business processes to improve efficiency and profitability. The majority of the group’s debt, due to mature in the next two years, was successfully refinanced with long-term financing at competitive rates.
These initiatives resulted in asset impairment and restructuring charges of approximately US$302 million (of which US$167 million was non-cash) and refinancing expenses of US$51 million. The unfavourable effect of these items resulted in a net loss of US$232 million.
Cash generated after capital expenditure, finance costs and taxation was US$163 million. Net debt was further reduced to US$2.1 billion. At year-end we had cash on hand of US$639 million and undrawn committed revolving credit facilities of €250 million (US$335 million).
We are confident that the major initiatives undertaken in 2011, painful and unsettling as they have been for our staff and management, and the exciting investments in growth we have made, will position Sappi well for the future. We expect to start seeing the financial benefits of these actions in our results for the 2012 financial year.
Performance against 2011 objectives
Continue improvement of profitability and returns
- Improve ROCE to 10% for 2011 (target 12%)
We made further progress towards improved profitability and returns, achieving a return on capital employed (ROCE) of 10.5% compared to 8% in 2010 and 1% in 2009. This improvement was not reflected in net profit or earnings per share as a result of the charges referred to above.
The group’s operating profit excluding special items increased 19% to US$404 million from US$339 million in 2010.
Reduce net debt and finance costs
- Reduce net debt to total capitalisation to <50%
We reduced our net debt during the year from US$2.2 billion to US$2.1 billion, which is US$700 million below the peak level in mid-2009. The net debt reduction is in line with the target we set in mid-2009 to reduce net debt to below US$2 billion by the end of 2012. We now expect our net debt to fluctuate around current levels for the next two years while we complete the announced chemical cellulose expansions. Reducing our gearing remains a focus and we expect our net debt to continue the downward trend after the chemical cellulose expansions have been completed.
Improve European operating margins and profitability
- Implement new service model in Europe
We did not achieve the necessary improvement in the profitability of our European business during the year, despite strenuous efforts. This was as a result of uncertain market conditions and high input costs. However, our market position remains strong and we continue to work with our customers to improve our business model and profitability by implementing a new service model, among other interventions.
Maintain operating profit and operating margins in North America
The North American business continued to perform well and improved its operating profit excluding special items slightly. Each of the product groups – coated paper, casting release paper and particularly pulp – performed well.
Improve profitability of the paper business in Southern Africa
We did not achieve this objective for the year. The business was faced with weak demand aggravated by increased imports, which were competitive as a result of the strength of the Rand against the US Dollar for most of the year. The business commenced a major restructuring to counter this, which will be completed in the first half of 2012.
Market conditions in South Africa started improving late in the year as the Rand weakened against major currencies, which reduced the competitiveness of imports into South Africa.
Reduction in safety incidents
Lost time injury frequency rate for the year increased slightly for the group. There was a reduction in North America and Europe with a pleasing improvement in the European mills which we acquired three years ago. Regrettably, four of our contractor’s employees died in work related accidents. We continue to apply the same standards to our contractors as to our own employees with a view that everyone who works in our operations should expect to return home safely.
During the year, the group’s safety effort was refreshed using the “Do You Know What’s In Your Safety Circle?” concept.
Commitment to engaging our people as a strategic imperative
Notwithstanding the economic downturn and the restructuring initiatives in our European and Southern African businesses, our employee engagement survey results are in line with the global industry benchmarks.
Reductions in specific purchased energy and water consumption not only reduce our environmental footprint, but also result in lower costs of doing business
Over the past five years we have reduced in specific purchased energy by 8%, and water consumption of 49%. There was no improvement in these measures in 2011 compared to 2010, as lower paper sales in South Africa and a greater proportion of coated mechanical paper sales in Europe affected the specific energy demand. We continue to focus on energy efficiency projects such as our ‘Somerset recovery cycle project’ which was completed in 2011 in order to continue the improving trend.
Strategic review
We assessed our strategy during the year in relation to our long-term goal to be, on a sustainable basis, the most profitable company in pulp, paper and cellulose based solutions.
Sappi’s revised strategy features four themes: optimising our better performing businesses, fixing our underperforming businesses, investing for future growth in higher-margin businesses, and achieving these objectives within the parameters of the group’s liquidity and balance sheet.
We aim to generate at least 60% of operating profit from higher-margin growth businesses within three to five years, achieving real growth in our revenue and asset base. At the same time we intend to improve the level of profit of the lower-margin businesses.
The coated graphic paper market is characterised by a declining demand trend in developed countries and a growing demand trend in China and many other emerging and developing countries. Globally, there is also a supply/demand imbalance in this market, particularly in China where 2.5 million tons of coated paper capacity has come on line in the last two years.
Despite these market dynamics, we see opportunities in our coated paper businesses – which are currently the backbone of the group – to generate reasonable net profits, that are substantially higher than in recent years, as well as strong cash flows. To realise these opportunities, we have changed our management focus in these businesses over the past few years. We have emphasised developing customer relationships, cutting all unnecessary costs, eliminating high-cost operations and managing capital expenditure tightly.
The initiatives underway to advance our strategic themes are set out below.
Optimising better performing businesses
Decisions taken to restructure the North American business in 2009 and to expand our Southern African chemical cellulose capacity have again been rewarded with excellent results from these businesses. We will explore further opportunities to enhance the returns and cash generation of these businesses.
Fixing underperforming businesses
We have undertaken wide-ranging reviews of our existing businesses with a focus on our graphic paper business, in particular in Europe, and our Southern African paper business.
- Europe
Cost saving and capacity management measures are well advanced in Europe. Following the closure of the Biberist Mill announced in March 2011 and completed in August 2011, we are progressing with the next phase of cost reduction action, including minimising both fixed and variable costs. The annual savings resulting from these actions (including the Biberist Mill closure) are expected to reach US$100 million on a relative basis from the first financial quarter of 2012. We have had good support for these changes from our customers.
- Southern Africa (paper business)
We are restructuring our business processes and paper operations in South Africa to ensure we are able to adapt to our customers’ changing needs and to match our assets to profitable markets and future growth. The first step in this regard was the closure of the Adamas Mill, which has now been completed. We are well advanced with the implementation of further cost reduction and streamlining related to both our administrative and production areas. Regrettably, we expect these measures to lead to a significant additional reduction of jobs during the first half of financial 2012.
We expect that these essential changes will result in savings and benefits of approximately ZAR250 million (US$30 million) a year once fully implemented. In addition, we expect to save approximately ZAR100 million (US$12 million) a year in maintenance capital expenditure.
Investing for future growth
To achieve the shift in focus to higher-margin businesses and deliver real growth in revenue and returns we will continue investing in our chemical cellulose business, in innovative products based on our very successful Ultracast® and other technologies, in energy projects related to our core operations and in low-cost wood resources.
Sappi is a global leader in chemical cellulose production, a high-growth and high-margin business serving the textiles, consumer goods, foodstuffs and pharmaceutical industries. We have announced two investments that will increase our chemical cellulose capacity by 540,000 tons to over 1.3 million tons a year. These investments will cost approximately US$500 million and comprise the conversion of the Ngodwana Mill’s pulp mill in South Africa to produce 210,000 tons of chemical cellulose and the Cloquet Mill’s pulp mill in Minnesota, USA to produce 330,000 tons of chemical cellulose a year. These projects are progressing well and are set to start up in early 2013. The projects take advantage of our leading market position and lowest quartile cost structure. We have customer commitments for a significant part of the increased capacity.
Liquidity and balance sheet
In implementing our growth strategy we will continue focusing on maintaining a good liquidity position and carefully managing the group’s gearing. During 2011, we successfully refinanced most of our debt which was due to mature in the next two years, with long-term financing.
To view the Q&A with Chief Executive Officer Ralph Boëttger, please
click here.