Q & A with the CEO
Chief Executive Officer
We believe that our leading position in the dissolving wood pulp (DWP) market offers us exciting growth prospects into the future.
Q Despite your continued efforts in employee and contractor safety you have again suffered fatalities in your operations – what more can you do to achieve your aim of zero harm?
Regrettably, we suffered two fatalities in the past year, one of our own employees at the Ehingen Mill and one South African contractor employee that died in a vehicle accident. Our group-wide commitment to our goal of zero lost time injuries, is a non-negotiable priority, and as such a world leader in safety performance was commissioned to review and audit Sappi's safety initiatives, processes and procedures, focusing mainly on employee engagement and risk-based approach. Detailed action plans and focus areas have been implemented and are underpinned with the 'Own Safety, Share Safety' theme – to get into the hearts and minds of our people and ensuring safety becomes engrained into our business values. Each region and mill has undertaken exciting initiatives and there will be ongoing engagement with our people across the business. Where there are operations that are centres of excellence in terms of safety performance we will look to them to share best practices with the rest of our operations. Importantly, safety performance is an integral part of the leadership and management reward and recognition system.
Q Sappi completed a number of significant capital projects in the past year, though not without delays and cost overruns. How are you going to manage future project execution risk?
The specific issues with each of the major projects at Somerset, Saiccor and Ngodwana Mills were different, but there were some common themes. Firstly, we encountered certain vendor design issues in some of the projects which were not expected and were ultimately resolved but not without delay. A second key issue was availability of local resources and skills due to other projects or local conditions in those regions, particularly in the United States of America (USA) where unemployment is very low. Lastly, with the latest technology installed on some of the projects, it took longer than expected to optimise the upgraded equipment and processes. In recent months, we are pleased to report that the performance of the various machines has reached the technical, quality and market performance expectations. The packaging papers qualification trials are mostly complete, with encouraging results and growing commercial sales.
To improve our delivery on future capital projects we have completed a detailed and comprehensive internal review of the various projects to ensure both positive and negative lessons learnt are communicated and integrated globally in upcoming projects. As a result of this review additional detailed front-end engineering must be completed and we revised our supplier contract philosophies specific to the regions in which we operate. In addition to the above, greater emphasis is placed on the use of modern tools available to improve the efficacy in design, engineering, standards, cost control and planning functions. We continue to develop strong relationships with the main suppliers and have a rigorous process in place to select potential contractors that are aligned to Sappi's commitment to safety and quality. Lastly, we will be implementing more regular risk based critical review processes.
Q What impact has growing regulatory and policy uncertainty had on the business and how do you manage the business in this environment?
Policy or regulatory uncertainty is seldom good for business. The USA/China trade tariffs situation is disrupting markets all over the world. There are direct impacts where the price competitiveness of either our or our customers' products are affected by the tariffs, and there are indirect consequences where whole industries may be uncertain as to the longer-term affect of the tariffs. In this environment companies may reduce activity levels, lower inventory and even cancel projects or postpone investment decisions. We believe that this uncertainty has negatively affected the textile industry in China in particular, and that this is apparent in textile fibre pricing. The debate around expropriation without compensation in South Africa, where we own significant land, has raised investor concerns as to the impact this could have on Sappi. While we do not believe that the outcome of the current land debate will result in any negative outcome for our operations, we are involved in many forums to ensure that our views, suggestions and contributions to the resolution of a pressing social issue are heard. We are of the view that the legacy of property ownership is an obstacle to transformation, economic growth and human development, we thus support the objective of pursuing accelerated land reform. Importantly, we note the ANC's comments that any changes should not undermine future investment in the economy, damage agricultural production nor food security, and that other sectors of the economy must not be harmed.
Q Leadership in business is often about trade-offs. What trade-offs have you had to make in the past year?
Whether in reference to the 3Ps of Prosperity, People and Planet or the six capitals, it is clear that many, if not all, decisions a business makes involve some trade-off where one element benefits at some expense to another. As I think about the past year, two trade-offs come to mind. Firstly, safety and the goal of zero harm to our employees which underpins our values. Mechanisation of manual processes is certainly a route to lowering risk, especially in high risk activities such as plantation tree harvesting. However, mechanisation inevitably leads to lower employment, and in a country such as South Africa where such a high percentage of people are unemployed, especially in the rural areas in which we operate, there is a social cost related to mechanisation that cannot be ignored. Therefore we have redoubled our efforts with all employees and contractors in the forestry area to train and educate in all aspects of safety. Timber certification is a second – where the concerns of rural smallholders, that may find certain certification schemes prohibitively expensive, must be weighed against the needs of customers for ever increasing levels of certified timber, and the realities of sustainable forest practices which may benefit from smaller scale timber operations.
Q The world has become more focused on the harmful impact of plastics, especially on the world's water sources and landfills. What are the opportunities in this for Sappi?
Individuals, NGOs and governments have become increasingly aware of the challenges caused by pollution of our water sources and oceans as well as landfills that are being filled with waste that cannot or is not being recycled. Much of this waste is packaging. In some instances the nature of the packaging makes it more difficult to recycle. Plastics can and will continue to have a major role to play in the packaging industry, especially in multi-use applications or where the material is easily recycled. Multi-substrate, single use packaging is a particular challenge, however, and it is here where we believe we should focus our strategy. The shift towards paper-based solutions represents a significant opportunity for Sappi. We have made investments to convert printing and writing papers machines to packaging applications as well as additional research and development. Furthermore, we have made acquisitions, such as Rockwell Solutions and Cham Paper Group, that will give us the technology to replace some of the barrier layers in multi-layer packaging and to make us more relevant to large FMCG companies who are emphasising paper based materials.
The textile and non-woven wipes industries are responding to the challenge of making their products more sustainable, with polyester coming under increasing scrutiny for the release of microplastics when washed and a need for biodegradable and flushable fibres for use in applications like cosmetic and baby wipes. Cellulosic fibres, such as DWP produced from sustainably sourced wood, offer solutions to these challenges.
Q For the past few years you have spoken about the opportunities to significantly grow your DWP business. Do these opportunities still exist given the rising acquisition/construction costs of pulp mills and a major customer's backward integration plans?
We believe that our leading position in the DWP market offers us exciting growth prospects into the future. Our debottlenecking investments in the past year at Saiccor and Ngodwana Mills, as well as the upcoming debottlenecking of Cloquet and expansion of Saiccor Mills, will add 200,000 tons (15% growth) of additional DWP capacity in a little over two years. Most of this additional capacity is already committed to our major customers. While the backward integration plans of major customers mean that further growth with them may be limited for some time, we believe that the market and growth aspirations of other customers, particularly in China, can more than make up for that lost opportunity. Excluding our current large contract customers in China, we supply only 4% of the DWP used in that market.
As highlighted in a question above, the textile market is increasingly becoming aware of the importance of sustainability in the value chain. The Chinese viscose industry has adopted a road map towards a better environmental footprint, and our strong certified timber base, including FSC®, PEFC™ and SFI® are key differentiators which not all DWP suppliers can emulate.
We don't want to overpay for these opportunities, either in capital costs to convert or build DWP mills, nor in acquiring mills. With current DWP and paper pulp price levels, and looking at recent pulp mill acquisitions it is clear to us that valuations have become stretched, making it difficult to achieve the returns that we would want to deliver to shareholders. We will continue to look for opportunities to deliver the growth and returns and entrench our leading position in this market.