Our pulp segment predominantly comprises two product categories, namely DP and high-yield pulp (HYP). Occasionally, excess kraft pulp produced at Cloquet Mill, Somerset Mill and Ngodwana Mill is sold externally and included in the pulp segment.
Our Verve brand is a significant player in the DP market. With capacity of 1.5 million tpa and 17% share of the DP market, Verve is a truly sustainable brand. From textiles to pharmaceuticals and food applications, Sappi has the expertise, technology and the track record to meet almost any challenge from these DP market segments.
Sappi's DP is a highly purified form of cellulose extracted from sustainably grown and responsibly managed trees using unique cellulose chemistry technology. The majority of DP is consumed to make apparel, home textiles and non-woven products. DP is converted to viscose and lyocell staple fibres. From there, the fibre is spun into yarns and ultimately woven into textiles, providing naturally soft and breathable fabrics which are smooth to the touch, hold colour and drape well. The fibres produced from DP also act as good blend partners in fabric with cotton and polyester. DP, however, far exceeds cotton and polyester when it comes to sustainability. What consumers want are goods that are renewable, biodegradable and have superior resource efficiency. This is where DP fibres differentiate themselves versus the alternatives.
Viscose staple fibre (VSF) is the most prominent fibre, accounting for approximately 73% of global DP demand. VSF is most commonly used in fashion, home and decorating textiles, as well as non-woven applications such as the fibre component in face masks, health and hygiene, clothing and sanitation. Verve DP provides both the quality and the sustainability assurance into this major market segment.
Lyocell represents the next generation of DP fibres. With its sustainable DP raw material, reduced chemical processing and closed loop systems, Lyocell continues to be the most sustainable wood based cellulosic fibre. Our commitment to and investment in sustainability shows in that approximately 60% of the world's Lyocell fibre is manufactured from DP produced at Sappi's dissolving pulp manufacturing sites.
DP can also be processed into products that are used in food and beverages, health and hygiene, wrapping and packaging, pharmaceuticals and many more applications that touch our daily lives.
Demand for DP used in textiles, particularly viscose and lyocell fibres, is expected to continue to grow post the Covid-19 pandemic. Based on the growth rate in the overall textile market, driven by factors such as population growth, rising urbanisation, wealth and the shift towards more comfortable, environmentally friendly natural fibres, we expect long-term growth in demand to be between 4% to 6% per annum for DP.
Market prices for DP are influenced by VSF and other textile market dynamics, paper pulp market pricing which influences swing mills, as well as general macro-economic uncertainties pertaining to the ongoing US-China trade dispute and US Dollar/RMB exchange rates fluctuations.
Sappi's Matane Mill, located in Quebec, Canada, has the capacity to produce 285,000 tons of HYP. Approximately 45% of Matane's pulp production is consumed internally within our packaging business, thereby increasing the pulp integration. The higher levels of pulp integration lowers our cost of pulp, reduces its volatility on earnings through the pulp cycle and provides certainty of supply. External HYP sales to third parties are included in the pulp segment.
The pulp produced at Matane Mill is a high-quality HYP made from either Aspen or Maple hardwood. Sappi Matane Aspen pulp is a high-yield fibre with good bulk, excellent brightness and exceptional drainage. It is ideal for the manufacturing of printing paper grades. Sappi Matane Maple is a HYP with superior bulk and drainage properties, as well as excellent opacity and formation. It is an excellent fibre for the manufacturing of paperboard and linerboard products, as well as speciality papers.
In FY2022, the DP segment made up 17% of Sappi's sales revenue. Sales volumes of 1,421,000 tons included 175,000 tons of HYP from Matane Mill and 12,000 tons of kraft pulp produced at Somerset Mill.
OUR MARKETS IN 2022 AND OUTLOOK FOR 2023
The hardwood DP market price1 rallied during the first half of the year, peaking at US$1,220 per ton in July 2022. The rebound was primarily driven by positive momentum in global commodity markets including viscose staple fibre, cotton and polyester combined with DP supply-side constraints including our own losses due to a flood in South Africa and a major fire at another large market player. DP pricing began to soften in late August 2022 as Covid-19 lockdowns in China constrained VSF operating rates and global recessionary fears began to dampen the outlook for textile markets.
Strong market demand and improved logistics resulted in EBITDA for the year being substantially higher than the prior year with EBITDA margins improving from approximately 21% to 26%.
Segment sales volumes increased by 15%, or 185,000 tons compared to the prior year on the back of strong market demand and improved logistics as we secured regular breakbulk shipping alternatives for our South African exports. Demand for Verve during the year was particularly strong and sales were constrained by available production. The Saiccor Mill expansion project was successfully commissioned during the year and all new equipment operated as anticipated. However, production volumes were below expectations and were negatively impacted by a number of external factors such as unplanned stoppages due to the flood, Eskom2 power outages and raw material supply shortages, which severely disrupted operational stability at the mill.
Pulp segment made up
OF SALES IN FY2022
Macroeconomic uncertainty has increased considerably during the latter part of 2022. Ongoing lockdowns in China, the geopolitical turmoil in Europe and unprecedented inflation are increasing the likelihood of a global recession in 2023. This poses a risk to our pulp business as weakening consumer sentiment and diminishing discretionary spend will likely weaken demand in our dissolving pulp segment in upcoming quarters. Order activity has slowed in the first quarter of FY2023 and destocking is occurring across the value chain.
We aim to remain focused on meeting and exceeding the needs of our customers. We will continue to capitalise on our competitive advantages: our world-class and sustainably managed plantations, our geographic positioning and our sterling reputation as a reliable partner, to bring our customers sustainable products that create shared value for everyone.
Moderate HYP demand growth continues to be driven by increased packaging demand due to single-use plastic replacement, e-commerce-driven packaging demand and limited recovered paper availability. Significant board capacity expansion is planned, particularly for Asia, but much of this will be accompanied by integrated HYP capacity additions. Recession is a risk to HYP demand from both paper and packaging segments. Our focus remains on meeting our own growing need for high-quality HYP for our packaging and speciality papers businesses in Europe and North America, as well as external sales to third parties.
Legislative changes and growing consumer pressure are forcing brands to re-think their packaging choices. Governments, retailers, brand owners and their consumers are demanding paper-based packaging solutions that are biodegradable, recyclable, compostable and provide the necessary functionality for their applications. We estimate that the increasing demand for more sustainable and environmentally friendly packaging solutions will lead to demand growth of 3% to 6% per year globally, across the spectrum of our products.
Sappi's evolution within this segment is supported by the suitability of our technically advanced and efficient paper machines for conversion to packaging grades that require a variety of surface treatments or coatings for functionality. Ahead of commissioning conversion projects, we carefully analyse our assets, specifically their production capabilities and cost of production, the cost to serve customers, demand growth and competitive threats. We choose only those projects where we believe we hold a significant advantage.
We have made progress in growing our business with a compelling value proposition, a propensity for innovation, and a superlative service record. We aim to create solutions that solve our customers' most critical challenges, helping them grow their sales, lower costs, improve their sustainability metrics, and minimise their risk.
We work in partnerships based on trust and respect. For that reason, we place great value on reliability. Our well maintained assets, financial stability, global availability and consistent premium quality are vital to our customers.
In FY2022, 29% of Sappi's sales revenue was packaging and speciality papers, fairly flat compared to last year.
Sappi offers products and solutions in many different product categories including:
Flexible packaging: innovative paper-based solutions with integrated functionalities such as barrier technology from water, oxygen and grease, as well as sealing properties are suitable for various applications, notably in packaging for food, as well as non-food markets.
Label papers and self-adhesives: label papers are used for both wet glue and wet-strength labels processes in the beverage, food and packaging applications. Our clay-coated kraft and glassine release liners provide solutions, not only for labels but also applications such as self-adhesive tapes, and medical and industrial applications.
Containerboard: includes liners and fluting, for corrugated boxes. Sappi's products are found in applications like consumer packaging, shelf-ready packaging and transport packaging for agricultural and industrial uses.
Paperboard: high-quality coated boards for use in luxury packaging applications that require functionality and superior graphics across a range of market segments, including health and beauty, confectionery, premium beverages and food packaging.
Casting and release papers: used by suppliers to the fashion, textile, automobile and laminate industries. Our papers serve as moulds to impart textures on other surfaces, ranging from decorative laminates and synthetic leather, to engineered films and rubber.
Dye sublimation papers: for digital transfer printing with water-based dye sublimation inks. Designed for the transfer of an image onto various materials, such as apparel, outdoor advertising and home textiles.
Digital imaging papers: for large format inkjet printing. Posters, for indoor/outdoor applications and technical printing in the construction industry (CAD/engineering).
Tissue paper: used for bathroom tissue, kitchen towels, serviettes and medical and industrial wipes.
Packaging and speciality papers segment made up
OF SALES IN FY2022
We manufacture at sites throughout Europe, North America and South Africa, ensuring scale-based efficiencies and security of supply. Globally, we are well positioned to support and benefit from the paper for plastic packaging movement. For example, in 2019, the European Union introduced new rules to reduce marine litter by banning certain single-use plastic items, alongside a measure which holds those plastic producers responsible for the cost of cleaning these items from European beaches. Similarly, in 2022 legislation in several US states banning the use of polystyrene foam packaging was passed. The industry will also be given incentives to develop less-polluting alternatives for these products. With our comprehensive product range on three continents, R&D centres in each region, sharing best practices and collaborating with customers to develop new solutions, our customers can expect reliability of supply from a broad geographic footprint, and a leader in innovation within the sector.
OUR MARKETS IN 2022 AND OUTLOOK FOR 2023
The strategic priority to invest in packaging and speciality papers in recent years reaped rewards. The highlight of the year for this business segment was the achievement of record profitability driven by robust global demand and renewed growth in Europe. Sales volumes were 9% higher than last year, however, sales were constrained by available capacity and low levels of inventory in South Africa and North America where demand exceeded supply. Successful selling price increases and mix improvement offset rising costs and lifted margins for the segment. EBITDA margins for the segment increased from 13.6% last year to 17.0% in fiscal 2022.
Demand for packaging and speciality papers in North America is particularly robust and our customers are actively seeking to increase their volumes with Sappi. The board has therefore approved a US$418 million investment at Somerset Mill to convert PM2 from coated woodfree graphic paper to solid bleached sulphate board (SBS). The machine capacity will also be increased during the conversion from 240,000 tpa to 470,000 tpa. The project is expected to be completed in early 2025 and will be funded from free cash flow from operations. The capital expenditure will be phased over three years with the majority of the spend taking place in FY2024 and FY2025. This investment is fully aligned with our Thrive25 strategic focus to reduce our exposure to declining graphic paper segments.
The Covid-19 pandemic demonstrated that the underlying demand for packaging and speciality papers is more resilient in economic downturns, particularly for product categories in food, beverage and healthcare. Furthermore, the shift from plastic to paper offers significant opportunity to grow this segment. We believe we will achieve additional volume growth in 2023, aided by the shift from plastics to paper in various packaging and speciality paper categories.
At Sappi, we understand this difference and use our expertise to develop a variety of graphic papers designed to meet specific needs, whether a premium product for delivering a premium brand message, a comprehensive solution that caters to numerous requirements or a paper that is more budget friendly. We at Sappi deliver so that brands can have a more memorable impact.
OUR MARKETS IN 2022 AND OUTLOOK FOR 2023
Global demand for graphic papers has generally been in secular decline. The outbreak of Covid-19 in 2020 led to a significant decline in graphic paper usage across the globe. However, as Covid-19 lockdowns eased and economic activity resumed, global demand for graphic paper grades progressively improved. The remarkable turnaround from the lows of 2020 was driven by a number of factors, which led to an unprecedented global shortage of graphic paper. These included a surge in demand as economic activity normalised post-Covid-19 and a very tight market balance due to a combination of chronic global logistical challenges and reduced supply. Market capacity was impacted by permanent closures and a prolonged labour strike in Finland.
The buoyant demand boosted sales volumes for the segment by 8% compared to the prior year. Furthermore, the favourable market conditions provided support for a series of selling price increases and energy/freight surcharges, which were necessary to compensate for substantial cost inflation and facilitated the material improvement in profitability for the segment. The graphic papers segment generated record EBITDA of US$650 million with EBITDA margins increasing from 4.4% in the prior year to 16.4%.
Despite the extraordinarily tight market conditions in FY2022, the graphic paper markets are in long-term decline and indications are that demand in FY2023 will again be under pressure. A key element of our Thrive25 strategy is to reduce our exposure to declining graphic paper markets. Aligned to this objective, on 29 September 2022, Sappi signed an agreement with Aurelius Investment Lux One S.à.r.l. to divest the Maastricht Mill in the Netherlands, the Stockstadt Mill in Germany and the Kirkniemi Mill in Finland. The decision was taken following a detailed and thorough strategic review and will significantly reduce our exposure to graphic paper markets. For the most part, the product categories served by these assets (coated mechanical and uncoated woodfree paper) are no longer a core focus for Sappi and this divestment allows us to consolidate our portfolio and concentrate on commercial print (high-quality books, flyers, brochures, posters, manuals, special interest magazines, photobooks) where we have a competitive advantage. The sale will be subject to various standard suspensive conditions and is anticipated to close in the second financial quarter of 2023. The enterprise value of the transaction amounts to approximately €272 million. The proceeds will be used to reduce debt further, which will provide a platform for future expansion in our identified growth market segments.
Macro-economic uncertainty has increased considerably during the latter part of 2022. Ongoing lockdowns in China, the geopolitical turmoil in Europe and unprecedented inflation are increasing the likelihood of a global recession in 2023. This poses a risk to our graphic papers business as weakening consumer sentiment and diminishing discretionary, advertising spend will likely weaken demand in this segment in upcoming quarters. Order activity in this segment has slowed in the first quarter of FY2023 and destocking is occurring across the value chain.
In FY2022, 54% of Sappi's sales revenue was from the graphic papers segment. The four major grades of graphic papers are discussed below:
Coated woodfree paper
Printers and publishers use coated woodfree paper for a variety of marketing promotions including brochures, catalogues, calendars, corporate reports, direct mail, books and magazines. Coated woodfree paper provides a smooth and uniform surface for optimal print fidelity. We manufacture coated woodfree paper in our North American and European businesses but sell to customers all over the world. Coated woodfree paper products are sold through large paper merchants, as well as directly to commercial printers.
Demand trends: Global advertising expenditure is forecast to grow, but the share of that spend relative to print is expected to decline. However, we believe there will always be a place for paper within the marketing mix. Globally, demand for coated woodfree paper is forecast to decline from approximately 21 million tons in 2019 to approximately 16 million tons by 2024.
Sales: Sappi's sales volumes for coated woodfree paper increased 5% from last year and sales revenue was 44% higher, due to a surge in demand as economic activity normalised post-Covid-19 and a very tight market balance due to a combination of chronic global logistical challenges and reduced supply. Globally, demand for coated woodfree paper decreased by approximately 2%, however, Sappi gained market share.
Coated mechanical paper
Coated mechanical paper is primarily used in magazines, catalogues, newspaper inserts and other advertising materials. Sappi's coated mechanical paper sales all come from our European business. Customers for this paper are typically large web printers, publishers, retailers and cataloguers.
Demand trends: Demand for coated mechanical paper is more closely linked to that of demand for magazines. Readership, subscriptions, circulation, pagination and advertising revenue continue to decrease in larger markets as consumers opt for digital formats.
Sales: Sappi's sales revenue from coated mechanical paper was 74% higher than last year, due to reduced supply as economic activity resumed post-Covid-19. Volumes were approximately 26% higher than the prior period. This year, the global market contracted by approximately 8% relative to the prior year.
Uncoated woodfree paper
Uncoated woodfree paper is used for letterheads, business stationery, photocopy paper, books, brochures, envelopes, pamphlets and magazines. Sappi manufactures and sells uncoated woodfree paper in our European and South African businesses. Our main customers in this sector are paper merchants, commercial printers and retailers.
Demand trends: Demand for uncoated woodfree paper is expected to marginally decline over the next several years.
Sales: Our sales revenue from uncoated woodfree paper was 26% higher than last year, largely as a result of the resumption of global economic activity as Covid-19 lockdowns eased. Globally, demand decreased by approximately 1% in the current financial year.
Graphic papers segment made up
OF SALES IN FY2022
Newsprint is manufactured from mechanical and bleached chemical pulp, with uses including the printing of newspapers and advertising inserts. We manufacture and sell newsprint from our South African business.
Demand trends: Demand for newsprint is principally derived from newspaper circulation and overall retail advertising. Newspaper readership is declining around the world. This industry segment was hard hit by the Covid-19 pandemic with an estimated drop in demand of approximately 5% during the current year and an estimated decline of 5% to 6% annually through to 2025. Publishers are consolidating, while some titles have closed. Pockets of growth exist in advertising-financed daily newspapers typically found in large metropolitan cities.
Sales: Newsprint volumes continue to be impacted by the negative impacts of Covid-19 on the economy, however, no production curtailment was necessary in the current financial year. Relative to the prior year, our volumes were 4% down and sales revenue was 3% higher. Globally, newsprint demand declined 5% versus 2021.