The companies that generally make headlines are the sexy ones – companies in exciting, novel growth industries like Facebook or Twitter, or companies producing sexy, advanced products like Apple or Samsung. Far less attention goes to companies that are eking out a living in mature or declining markets, even though such companies form a large part of the global economy, and face challenges that are as interesting and important as those facing their sexier peers. One such company is Sappi, the venerable South African-born paper products company. Sappi’s main business is producing graphic paper and the pulp that goes into other kinds of paper. The market for paper is neither sexy nor growing. Indeed, Sappi has seen a steady decline in the market for its products in Europe, which is the company’s most important market. In response, the company is investing in reducing its costs and managing its volumes in order to remain profitable in the sunset years of its industry. Sappi is a classic study of a company in a declining market, and watching its strategic decisions is a lesson for anyone interested in the life cycle of businesses. – FD
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ALEC HOGG: Sappi had a very difficult period in the fourth quarter of this financial year. Operating profit year on year down at 70 million dollars as against 118 million, but it is an improvement on the previous quarter, which was even more difficult than the three months to the end of September. Ralph Boettger joins us from Sappi. Ralph, this has been an important transitional year for you.
RALPH BOETTGER: Yes Alec, it has been a very important year for us, a challenging one in many ways but also a year in which we’ve had some very important achievements as well.
ALEC HOGG: What I’m trying to work out here, is that you’re saying the demand for graphic paper in your main market continues to fall, but you’re going to continue in that area and in particular in Europe.  What’s the thinking there?
RALPH BOETTGER: Yes, demand is continuing to fall and we expect that demand to continue to decline by between three and six percent for the foreseeable future. What we are doing is to lower our cost base and to curtail capacity as we forward, in line with market demands. These investments over the next three years are directed to our lowest cost, world-class, as it’s in Europe near me, and Gratkorn Mills and the investments will bring down the cost base of those mills very significantly to a point where we believe – even at these declining prices and increased costs – we will be very competitive. It’s therefore a two-pronged approach. One the one hand we manage capacity and on the other hand we have to manage cost. We’ll probably end up with only three or four world-class large assets. The reason why we’re not fast tracking that and adding capacity at a fast rate is that all our mills are cash-generative.
ALEC HOGG: It sounds a bit like the story we hear from the airline industry. You have to get rid of the old planes in order to bring in new planes, which are more fuel-efficient. Although it’s a new investment, it brings your costs down and then it’s sustainable.
RALPH BOETTGER: That’s exactly the same. Its long-term assets, large capital assets, and you cannot afford to maintain and continue operating over non-effective assets. In the long run, it simply does not work.
ALEC HOGG: Ralph, I was reading through my iPad this morning – an article in the Times of London about your long-time rival and competitor, Mondi, which is now a member of the FTSE 100. They quite like the stock in London and if one compares the stories of Sappi and Mondi over the past few years, you people are running a very poor second.
RALPH BOETTGER: Absolutely, I don’t think you can even compare the two companies. Firstly, Alec, we’re not rivals. We’re not competing at all in South Africa. It’s a very small part of the business. Mondi is a packaging company, a packaging paper company in specialised packaging and we are a graphics paper and pulp company. We operate in vastly different environments and vastly different product lines. The demand for their product is growing. A large part of our product’s demand is declining, so I don’t think it’s a fair comparison. What we are doing is actually moving our business to be less dependent on graphic paper and more dependent on our wood pulp, specialised cellulose and specialty papers. That’s growing and the margins are really good.
ALEC HOGG: The two of you were born in South Africa and you were always listed alongside each other, so I suppose that’s why there’s a perception that you are rivals. However, coming back to our country – you own a lot of land and you own a lot of timber. Are you finding that the legal processes that are being installed in that area are becoming more challenging?
RALPH BOETTGER: I don’t think necessarily so. I think that doing business globally today is a challenge and there are certainly different challenges year-to-year that one has to deal with. I think business in South Africa has become more complex. We’re dealing with not only commercial issues. You’re dealing with social issues and structural issues too, which certainly has it’s challenges. I don’t think any company in South Africa can lay the blame of performance in front of anyone else’s door. One needs to work around that and I think we’re effectively doing so. A good example is the massive investment at our Ngodwana plant in Mpumalanga, which we completed. It’s up and running and that’s despite the labour challenges and all the challenges that one faces in South Africa.
ALEC HOGG:Â Did that also bring the costs down at Ngodwana?
RALPH BOETTGER: Yes certainly, what it does is it brings the cost down on the paper side, but very importantly, it increases the capacity of our specialised cellulose quite significantly and that’s high margin growing business.
ALEC HOGG: That was Ralph Boettger talking to us from London. He’s the Chief Executive of Sappi.
