Our performance in 2009 - Sappi

24
Interview with Ralph Boëttger, chief
executive officer
Considering how the global
economic crisis has panned
out and the collapse in demand
for coated paper, do you still
think the acquisition was a
good move?
How do you reconcile your
stated achievement of
acquisition synergies with the
poor results of the European
business?
How much of the decline
in coated paper consumption
is structural as a result of
new media?
Since Sappi is very focused on
the coated paper segment,
how will the group grow as
coated paper consumption in
the developed economies
matures?
You have improved the group’s
debt maturities and liquidity.
Can Sappi afford the higher
interest rate costs of its
refinanced debt?
How do you see Sappi’s profit
growth in the year ahead?
Q A
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The sharp drop in demand and difficult market conditions have certainly meant that the full benefits of the
acquisition have been delayed. We don’t see demand returning to historic levels in the near term, and we
may need to align capacity to demand levels or consolidate further to help improve market dynamics and
achieve acceptable returns. While we will never know what our results would have been without the
acquisition, I think they may have been much worse. So yes, I still think it was a good strategic move but
we will have to measure the result over a few years to know better.
Firstly, we have applied rigorous measures vetted by an external party, to appraise synergy benefits. We
have aimed to remove market effects and benefits not strictly related to the combination of the businesses
from our calculations which have in turn been reviewed by our internal auditors. We are satisfied that our
disclosure is realistic. Reconciling the synergy achievement to the overall results of the European business
shows that the European business without the acquisition would likely have returned a substantial operating
loss, excluding special items for the year.
Our view is that a downward shift in coated paper demand is likely in the developed markets following the
current recession, but we would expect demand over the next year or so to improve from these very low
levels to around 10% short of 2007/2008 levels. After that we expect a gradual decline in demand in
developed markets and modest growth in developing markets. We do believe that print media and coated
paper will continue to play an important role in communication, advertising and promotion. Paper will stay
relevant because it is versatile and effective in conveying messages and images, and because its environ -
mental credentials continue to improve.
We are convinced that we can improve the profitability and returns of our coated paper business, by
managing our business with a focus on customers, cash generation, costs and strict allocation of capital
expenditure. Also, our speciality paper businesses have good growth prospects. Some of these are based
on proprietary technologies which have applications beyond graphics, packaging and even paper itself. Our
chemical cellulose business has strong prospects both in existing and novel applications. Since our business
is based on renewable wood resources and we have many technologies to improve and beneficiate those
resources, we see a great future for the group.
Yes. The increase in interest costs will add substantially to our finance costs, but the group’s ability to
generate cash is strong. While taking steps to improve profitability, we will have to stay focused on generating
cash and containing capital expenditure. Importantly, we also aim to reduce debt substantially over the next
three years. We know the additional finance costs are a burden, but we took the view that re-establishing
good liquidity and extending debt maturities were essential and this could only be achieved at the available
market interest rates.
We expect a gradual improvement in market conditions over the next year. Combined with the improvements
made to our business in the last year, better conditions should lead to much better operating results. The
upside if market conditions improve faster than we expect, could be exciting given our operational gearing.