How Sappi turned it all around with a bold strategic change

The Sappi story has been an interesting one. A few years ago, in the face of the digital revolution and rising competition from developing country manufacturers, Sappi founds itself in a losing business. As a paper producer, Sappi saw its demand weakening, and its costs were unfavorable compared to lower-cost producers elsewhere.

At the time, Sappi made a bold decision – it decided to deemphasise the mature paper market, and invest more heavily in cellulose production. Cellulose is an input for paper manufacturing, and after heavy investment, Sappi is now the world's biggest and lowest-cost producer of cellulose (which is also used in some other industrial applications, like textiles and building materials). The gamble is slowly paying off – Sappi is returning to profit, and according to outgoing CEO Ralph Boettger, the future looks bright. – FD 

ALEC HOGG: SAPPI, a global pulp and paper company, reported significantly increased second-quarter profits.  This is taking its interim profits (or the half-year, so far) to a far better level than it was in the past.  SAPPI also expects capital expenditure for the full-year to be under $300m.  Joining us on the line is Ralph Boettger, the CEO of SAPPI.  Ralph, it's really good talking to you.  The last engagement from SAPPI was that you are stepping down due to ill health.  I hope you've been taking it a bit easier over these past few months.

RALPH BOETTGER:  Good afternoon.  It's nice talking to you as well.  No, we've been fully at it and going strong.

ALEC HOGG:  Are you then still on track to leave the company at the end of June?

RALPH BOETTGER:  Yes, I am, Alec.  It's a decision I've made, which I think is in SAPPI and my family's best interests.  Although I'm strong, the prognosis is not great.  Everything is in place for my succession.  There's a strong team and a good man to take over from me.

ALEC HOGG:  Steve Binnie: was he your appointed successor?

RALPH BOETTGER:  Steve Binnie was appointed as CFO 18 months ago, when Mark Thompson retired.  When I took the decision that I would be stepping down at some point in time, we worked with the board, looked at external and internal candidates, and Steve was the candidate we decided upon.  He wasn't appointed to SAPPI as my successor.  He was appointed as a CFO but turned out to be (in our opinion) the best candidate.

ALEC HOGG:  When you say 'in our opinion', is it in your opinion?  It's also important how the CEO feels.

RALPH BOETTGER:  Firstly, it's the board's decision obviously, but yes, mine too.  I fully support Steve.  There were some very strong candidates internally, more than one in my opinion that could do the job, but Steve (in my personal opinion) is the right choice.

ALEC HOGG:  Ralph, it's been a tough run for SAPPI over the past few years, particular when compared against Mondi.  Mondi's market cap is now three times what SAPPI's is today and there are many who feel that perhaps you went the wrong route and Mondi a better route.  I guess this is the last set of results we can talk to you about.  Look back on it over your seven years, do you think there were some missteps?

RALPH BOETTGER:  For anybody to look back over a seven-year career at a company and think he did everything perfect and right must have quite a view of himself.  I suppose there were times when, with hindsight, one could have made better decisions but overall, we're very a very different company to those we compare to.  In graphic papers, it was an exceptionally tough market.  Today, looking back, we're sitting with demand more than 30 percent down on what it was in 2008.  I think we've been successful in repositioning the company.  We're growing.  We have very strong growth areas in our business and even our paper businesses have returned to profitability.  Overall, yes it was tough.  We've had the global economic crisis to deal with, but today I believe SAPPI is well positioned.  Debt is coming down quickly and all our businesses are profitable again.

ALEC HOGG:  The reposition, in layman's terms: are you already starting to see that cellulose side is a good bet?

RALPH BOETTGER:  I'm convinced that was the right decision.  If you look at the operating profit in the past quarter, 75 percent of the operating profit came from cellulose and 25 percent from paper.  On the other hand, paper produced 52 percent of the cash.  Yes, I think that repositioning was successful.  It was a big bet, which we took to embark on major capital expenditure with two massive investments at the same time, but they're behind us.  They're up and running, and producing a very large proportion of our income.

ALEC HOGG:  With more capacity coming on globally on the cellulose market, is this not a concern that perhaps your best days there might also be not be ahead of you?

RALPH BOETTGER:  No, I don't think so.  I'm not denying the fact that there's a lot of capacity coming into the market, but the demand for cellulose is still going between five and eight percent per annum and most of what we produce is used in textiles, as the market is growing very quickly.  The difference between our past paper strategy and the cellulose strategy is that not only are we the world's biggest supplier, but much more importantly, we are the lowest cost producer in the world.

ALEC HOGG:  That does make a big difference.  Ralph, in closing, it looks like a good turnaround.  It looks like the J-curve is now in your favour with earnings per share of zero cents (in U.S. terms) in the previous quarter, three cents in the same quarter last year.  Are we on the right trajectory and can we can expect, from here on that the earnings will grow?

RALPH BOETTGER:  I'm of the opinion that, that is the case, yes.  Our debt is coming down quickly.  The business has been repositioned.  We've returned all of our three regions to profitability.  There will be times when the market will be tough and times when it will be better, but I believe SAPPI is now set for sustainable improvement in profitability going forward – and much reduced debt.

ALEC HOGG:  All the very best to you personally, Ralph.  It's been lovely talking with you over the years and all of us here at CNBC Africa wish you well into the future.  That was Ralph Boettger, the Chief Executive of SAPPI, who is stepping down at the end of June due to ill health.