Strategy Update to Position Sappi for the Future
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Sappi, Johannesburg, South Africa, this week announced a strategy update it says will position the global pulp, paper, and cellulose-based group for the future. Dealing with current tough market conditions and the declining trend in demand for graphic paper in its major markets, Sappi has indicated for some time that it was taking decisive action to reposition itself for improved performance.
The company's strategy involves four key themes: continuing to optimize its better performing businesses, fixing its underperforming businesses, investing for future growth in higher margin businesses (including chemical cellulose), and achieving this within the reality of the group's liquidity and balance sheet.
Sappi says it aims to generate at least 60% of operating profit from these higher margin growth businesses within three to five years, achieving real growth in the revenue line and asset base and exceeding its minimum ROCE target of 12%.
Sappi further notes that "it is clear that there is a declining demand trend for graphic paper in our major markets, but we see opportunities in these businesses, which are currently the backbone of the group, to generate reasonable net profits and strong cash flows for many years."
Cost saving and capacity management measures are well advanced in Europe, Sappi continues. Following the closure of its Biberist Mill this past July/August, Sappi is progressing with the next stage of cost reduction action, including both fixed and variable cost minimization. Annual savings resulting from these actions (including the Biberist Mill closure) are expected to reach $100 million on a relative basis with effect from the next calendar quarter.
The company is restructuring its business processes and paper operations in South Africa to ensure that it adapts to its customers' changing needs and that it matches its 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 at both our administrative and production areas. Regrettably, we expect that these measures will lead to a significant additional reduction of jobs during the first half of financial 2012," the company said.
‘We expect that these essential changes will result in savings and benefits of approximately R250 million ($30 million) a year once fully implemented. In addition we expect to save approximately R100 million ($12 million) a year as a result of avoided maintenance capital expenditure.
To achieve the shift of focus to higher margin businesses and to achieve real growth in revenue and returns, Sappi will invest in the higher growth chemical cellulose business, in innovative products based on its successful Ultracast and other technologies, in energy projects related to its core operations, and in low cost wood resources.
The investment of $340 million at its Ngodwana Mill announced this May will add 210,000 metric tpy of chemical cellulose (dissolving pulp) production, raising Sappi's total chemical cellulose capacity to a million tons per year. This project is progressing well and is set to startup in early 2013.
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