Sales output tripled in four years as Portugal fights economic downturn
A year and a half is a long time in an economic downturn. When TW first met Fapajal in June 2011, the small independent tissue producer was expanding rapidly with a new Toscotec TM that added 55 tonnes of capacity per day. Visiting again in January 2013, the business, as with others in Portugal and much of Europe, is battening down the hatches, becoming even leaner and more cost effective, and putting previously planned expansion plans on hold.
Its strategy mirrors that of the Portuguese economy. The country had been experiencing only modest growth coming into the worldwide recession, since 2009 growth has been negative; it has attempted to deal with deficit reduction and is in the middle of debt restructuring and pressing ahead with a reform programme.
Is there any light at the end of the tunnel? “It’s a very dim light,” says Helen de Castro, the Brazilian-born director and a shareholder of Fapajal. “The Portuguese tissue market like everything else here has been hard hit by the crisis and is slowly disappearing. The state of the market is horrible. There’s reduced local consumption, bankruptcies…”
The company is based a 30 minutes drive out of Lisbon, and the last part of the journey passes through the quaint parish of Sao Juliao de Tojal, where the locals walk out of bright yellow, pink or white houses straight onto the narrow cobbled streets. It seems a world away from the reality of the country’s financial woes. The plant is hard to find; tucked away, there are no signposts, no “reception” indicators on arrival, and once inside no marketing or products are on show. The site, like the company, is to the point, discrete, and secure in what it does.
“We’ve maintained a low profile over the years and we haven’t done badly,” de Castro says with considerable understatement. “We’re a small, independent company but we think like we’re big. We’ve expanded and in the last four years we’ve tripled our sales, which is now more than €24m. For 2013 we expect around €26 million in sales. ” “The downturn has hit us as well as everyone else, but while it’s certainly not brilliant we can say that we’re in an OK position.”
The mill’s history dates back to the 18th century, when, after the Great Lisbon Earthquake in 1755, the monks of St. Vincent moved to Quinta da Abelheira and began producing writing paper. In 1836, the paper business was purchased by British port producers William Graham & Co. In 1923 it was remodeled and then in 1967 sold to Austrian shareholders. The introduction of the current PM2 for tissue paper was made in 1967, with printing and writing paper (P&W) made on PM1 and kraft on another PM.
Following post-revolution insolvency and nationalisation under state-owned Portucel, in 1973 the company shut down PM1 and transformed the kraft PM into P&W, resulting in huge losses. A sale at public auction in 1999 was won by private national shareholders led by de Castro, an entrepreneur
formerly of Inapa Papers and McKinsey & Co, and Luis da Cunha, executive board member of Inapa Paper. A period of investment took place with €3m ploughed into creating basic de-inking, natural gas cogeneration, a water treatment plant, converting facilities as well as reconditioning PM1 for paper for tablecloths and hand towels. Lastly, at the end of July 2011, PM3 started up producing 60tpd, and a fire in 2011 meant a loss but resulted in substantially improved facilities.
Fapajal’s initial growth came from what is a very minor local market, but today, with 150,000mt/yr of tissue produced in Portugal and tissue demand stale at best, local tissue players have had to broaden their horizons to survive. Sharing the Iberian Peninsula has held opportunities. “None of the tissue companies in Portugal are targeting the Portuguese market,” she says. “Our natural market is Spain, but the market there is volatile and has been hit by the downturn. So we’ve developed increasingly ambitious plans to expand across the broader European AfH markets and beyond.”
The company is supplying some heavyweight contracts around Europe, including major catering and AfH distribution companies, the local subsidiaries of French multinational Elis and Makro, as well as businesses in Spain, Morocco, Germany, the UK and Trinidad. When Spain contracted, many of the Portuguese and Spanish converting companies targetted the south of France. With competition fierce, de Castro says Fapajal distinguished itself by providing extremely good service and good quality products. “We’re a one-stop shop,” she says. “And fortunately the banks have supported us, although the credit insurers have reduced our credit, as with everyone else. Throughout everything, it’s been important for us to keep our reputation and we are optimistic in maintaining our small company.” She adds that sales should increase by 6% next year and the small PM1, which currently produces only during the week, will pass onto working weekends. “Last year was a bit of a disaster, due primarily to the virtual collapse in Spain in the middle of the year, but we are optimistic we can increase our EBITDA in 2013. We’re also focusing on increasing our converting facilities and generally becoming more energy efficient.”
Their energy costs are helped by their cogeneration plant. “It’s still profitable for us,” de Castro says. “It’s not rational for us to put in any more units at this stage, due to changed government policies. We’re very dependent on gas, electricity and energy prices, as well as the exchange rate. We can’t do much about it, we have to be very lean and cost effective. Taxes are huge, subsidies are non-existent and margins are low, and it will all go on for many years more. But we continue to be OK. We have some profit and we keep ourselves in a pretty stable position. We’re very flexible because we’re not a huge company. If the market is down in one region we can quickly switch to an area where it isn’t.”
The business is also increasingly providing recycled products, which de Castro says there is a lot of demand for. “In a recession, people want to down-grade, so recycled paper is perfect for that, as it’s a bit cheaper. It’s all about the price. We are planning for a PM that will just be for recycled products.”
Fapajal has always been an exporter and now exports more than half its products to European countries. But more and more business is coming from elsewhere, including northern Africa and the Portuguese-speaking African countries, to such an extent that some 65% of Fapajal’s non-converted jumbo rolls are exported and just over half of sales come from exported products. De Castro is cautious, saying that while the business is looking into other countries for export possibilities, first and foremost their market strategy is to survive. Tourism in some countries is driving a lot of the AfH business. “In Africa, there’s not a lot of demand at the moment, and certainly not a lot of local players. Brazil has huge barriers to entry, but prices are very high so it also has good potential for us. We would need to have very reliable local partners, but it’s definitely a market we would be interested in. As soon as opportunities come up, we will jump.”
Fapajal wants to substantially expand its converting capabilities because “it’s where the best margins are”. The Toscotec-supplied PM3 is the latest machine. “It’s done its job, it produces 55 tonnes per day,” de Castro says. PM2 produces recycled paper as well as virgin pulp, and PM1 produces paper for table clothes and mats. “With these three machines we’re flexible,” she says. “We’re a one- stop-shop in terms of converting, and we didn’t have any converting facilities 10 years ago.”
Two years from now, it’s impossible to predict what state the Portuguese economy will be in. However, for the short term at least, plans at Fapajal have been put on the back burner because of the recession. She says she couldn’t plan for five years ahead as things change so rapidly. “Our future plans are on that’s on hold, as well as PM4 for recycled fibre. By the end of 2013 we will have expanded our converting facilities by 60%, and will potentially be exporting to Brazil . During 2014 plans are to achieve high tension energy input, which has a payback in under four years,” she says. “The crisis is forcing more flexible labour legislation for improved productivity. We will continue to play on our major strengths and our efficient young team, the successful development of up to 3% filler loading for reduction of fibre input, our excellent geographic location for Europe and northern Africa, as well as the cultural ease of business in Portuguese speaking countries.”