Sappi Ltd. is putting a new twist on an old trick as the company expands in specialty packaging to counter declining prospects for its traditional glossy paper business.
The company is using the expertise gained over decades applying coatings to paper for luxury magazines and advertising literature to the production of high-end packaging for products from cosmetics to consumer electronics, Chief Executive Officer Steve Binnie, 48, said in an interview last week.
Sappi is developing new businesses as a global shift to digital publishing and advertising reduces demand for its biggest product by sales. The Johannesburg-based company has already diversified by expanding in dissolving wood-pulp, a high-margin cotton substitute used in items from lingerie to golf shirts, and has become the world’s biggest maker of the material. It’s investigating ways to profit from the by-products of its pulp-making process.
“We know that our traditional graphic paper business is in decline and we accept that,” Binnie said Sept. 16 at Bloomberg’s Johannesburg office. “We need to look for opportunities to diversify and look for other areas to grow our business.”
While Sappi sees dissolving wood pulp as having the best prospects for growth, the company’s targeting higher sales from specialized packaging, where it can meet requirements for complicated prints, finishes and colors thanks to its coatings expertise, Binnie said.
“It’s about the quality of the surface, and what you can do with the surface -- does it look good and can you get the right color?” he said. “Those colors are beautiful, the boxes are beautiful and you can’t believe the technology that goes into them.”
Paper-based packaging is also seen by marketers as more environmentally friendly and often more upmarket than plastic options, he said.
Sappi wants its packaging division to contribute 25 percent of earnings before interest, taxes, depreciation and amortization by 2020, from 18 percent now, Binnie said. The company’s targeting 40 percent of Ebitda from dissolving wood pulp by the same date, leaving graphic paper at 25 percent, plus an additional 10 percent from new businesses. Coated paper accounts for 47 percent currently, with dissolving wood pulp at 35 percent.
For now, any significant investments will have to wait until Sappi reaches its debt-reduction target of two times Ebitda, which Binnie said is achievable by 2017.
Sappi has already reduced net debt from a peak of $2.8 billion in the third quarter of 2009 to $1.9 billion at the end of June. That should decline to $1.8 billion by the end of this month, Binnie said.
Refinancing bonds that are due 2017 and 2021 will be considered over the next 18 months or so, and Sappi expects to reduce the interest it pays on the debt “substantially,” he said. The paper producer has reduced its interest bill to about $100 million a year, from a peak of about $250 million.
“These two remaining bonds, once we refinance them, if we can take off another $20 or $30 million we are in a very much stronger position,” Binnie said.
Binnie has been CEO since the start of July last year. Sappi has risen 8 percent in Johannesburg trading since, compared with a 0.2 percent decline in the FTSE/JSE Africa All Shares Index.
Once the debt target is achieved, Sappi will be better positioned for growth, Binnie said.
The 79-year-old group is already looking at opportunities to switch more European mills to produce specialty packaging paper, he said. It probably can’t achieve the 25 percent target with conversions alone though, he said.
“Long term, we have to think about where we can get further opportunities.”