Our progress in 2018
In 2018, DWP represented 52% of operating profit, specialities and packaging papers – 32% and printing and writing papers – 16%.Recognising the declining demand for printing and writing papers, we manage our capacity to strengthen our leadership position in these markets, realising their strategic importance to the group and maximising their significant cash flow generation. Actions we have taken in this regard include:
- Progressively transitioning Lanaken Mill to coated woodfree paper production in line with the downturn in the coated mechanical paper market, and
- Reducing coated woodfree paper exposure at Maastricht, Ehingen and Somerset Mills.
We have made good progress in our aim of having a cleaner, stronger balance sheet in order to accelerate our growth in adjacent businesses. Currently our net debt is US$1,568 million, which is a leverage ratio of 2.1 times our EBITDA―a level we are comfortable with.
Our success in bringing our debt levels to within range of the targeted leverage ratio of less than two times net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) has enabled us to increase our investments in growth projects.
Our debt reduction validates our strategy in the past decade to refocus operations away from the dwindling printing and writing papers market to the higher margin and growing DWP and specialities and packaging papers markets. Our capital expenditure programme reflects the increased focus on these market sectors.
We remain committed to maintaining our leverage to below two times net debt to EBITDA. Our capital expenditure plans take into account this leverage cap, as well as our intention to pay a reliable dividend at a long-term average cover ratio of three times. We focus on capital projects that achieve our strategic objectives and, as a minimum, beat our cost of capital. Typically, however, expansionary projects should earn a return on capital employed of at least 12%.
Our total capital expenditure for the 2019 financial year is forecast at US$590 million.
Our focus on having a cleaner, stronger balance sheet is helping to accelerate our growth in adjacent businesses. Significant developments in adjacent businesses included:
- After our hemicellulose sugar extraction demonstration plant, established in 2017 at Ngodwana Mill, exceeded all efficiency targets for cost, cycle time and yield, we are now further progressing the development of our biorefinery capacity with the construction of a demonstration plant to further scale up our Xylex technology.
- We established a 25 MW biomass energy unit at Ngodwana Mill, together with consortium partners KC Africa and African Rainbow Energy and Power under the South African government’s Renewable Energy Independent Power Producer Programme (REIPPP). We have a 30% stake in the facility, which is expected to contribute to the national grid from July 2020.
We work to lower fixed and variable costs, increase cost efficiencies and invest for cost advantages. Cost advantages are also achieved through our ongoing continuous improvement programmes.
Building on the global procurement and efficiency savings drive launched in 2016 whereby we achieved US$57 million more in savings than target three years ahead of schedule, in 2018 we achieved an additional US$81 million in group efficiency and procurement initiatives.
We continue to debottleneck pulp capacity in SEU and expect our €30 million upgrade to Gratkorn Mill’s PM9 and our expansion at Saiccor Mill to lead to lower variable costs.
Dissolving wood pulp
Demand for dissolving wood pulp (DWP) continued to show steady growth. Both cotton, which competes with viscose, and cotton linter pulp, an alternative feedstock to the viscose staple fibre (VSF) industry, experienced either diminishing or, at most, stable supply over the past few years. This has facilitated increased demand for VSF and consequently DWP. Our VSF customers have increased demand during this time, and have additional expansion plans over the next five years or more.
In 2018, we made large-scale capital investments in our DWP business. We completed debottlenecking projects at Ngodwana and Saiccor Mills in Southern Africa, adding approximately 50,000 tons of capacity towards the end of the year. A further debottlenecking project planned for Cloquet Mill in 2019 will increase our capacity by 30,000 tons. During 2018, we also announced an expansion plan to increase our capacity at Saiccor Mill by 110,000 tons to meet strong projected demand growth.
Environmental approval for this expansion project was granted by the relevant authorities at the end of 2018, and construction has now commenced.
Specialities and packaging papers
Part of our 2020Vision goals are to expand and grow our specialities and packaging papers segment to 25% of group EBITDA. Against this backdrop, in 2018, Sappi acquired the Cham Paper Group (CPG), a Swiss-based speciality paper producer, and completed two conversion projects with the aim of growing into these adjacent markets that exhibit good demand growth and higher average margins.
The acquisition of CPG supports our diversification strategy by adding three new paper grades under the Sappi portfolio which broadens our offering to customers and earning greater share of wallet with valued brand owners. These new products increase our relevance to more customers, enabling us to bundle both volumes and customer service, providing economies of scale and synergies.
Demand for Sappi’s wide range of products continues to grow in the specialities and packaging papers market, reflecting the increasing needs from customers for more sustainable and environmentally friendly packaging solutions.
In 2018, 19% of Sappi’s sales were specialities and packaging papers, up from 16% last year.
Two conversion projects and a machine upgrade were completed this year with the aim of matching supply and demand in the printing and writing papers market, as well as in the specialities and packaging papers market:
- We converted the paper machine at Maastricht Mill to ramp up production over three years to approximately 150,000 tons of folding boxboard, with the balance of the capacity on the machine dedicated to coated woodfree paper.
- A machine upgrade at Ehingen Mill has enabled us to expand our white topliner offering from the mill.
- We converted the PM1 at Somerset Mill to ramp up paperboard volumes over three years to capacity of 350,000 tons. As orders for paperboard grow, we will continue to fill the machine with legacy coated woodfree paper as we match supply demand in both grades. Taken together, over three years, our plans call for an additional 560,000 tons of paperboard, folding boxboard, white topliner and a number of other speciality papers while we reduce our overall exposure to the coated woodfree paper market by approximately 350,000 tons.