Vigourexplore our theme

Lizards are estimated to have been around for 240 million years. Little wonder, given that they make use of a variety of antipredator adaptations, including venom, camouflage, reflex bleeding and the ability to sacrifice and regrow their tails. What’s more, as with other reptiles, the skin of lizards is covered in overlapping scales made of keratin, providing protection from the environment and reducing water loss through evaporation. This characteristic enables them to thrive in some of the driest deserts on earth.

Vigour, strength and adaptability have ensured lizards’ ability to thrive over the course of time.

So, too, at Sappi, our commitment to growing our business and maintaining a healthy balance sheet, has sustained us for almost 90 years. We are vigorous in our commitment to deliver on our Thrive strategy, including by reducing exposure to graphic paper markets while investing for growth in our target markets and capitalising on our leadership position in pulp supply to the lyocell market.

Evolveexplore our theme

Very little in nature is static – everything is constantly changing and evolving. One miraculous example of this is the metamorphosis of the egg, the caterpillar (larva) and the chrysalis (pupa) into the adult butterfly. This process embodies fresh ideas, renewal and unexpected outcomes.

The caterpillar’s new form as a butterfly opens new horizons, but also new risks, particularly in the form of climate change. Butterflies are particularly sensitive to environmental changes like climatic shifts. That is because they are strictly adapted to certain environmental conditions and their development depends on certain larval food plants and specific microhabitat structures.

In Sappi’s case, climate change presents both risks and opportunities. We are addressing short- and long-term physical and transitional climate risks identified through processes outlined by the Task Force on Climate-related Financial Disclosures (TCFD) to build resilience. In addition, we are determined, as a socially responsible business, to play our part in ensuring a just transition in South Africa as the country faces the reality of reducing its dependence on coal.

We are also determined to accelerate our science-based decarbonisation trajectory which we see as an opportunity to future-proof our business. So too, are the opportunities presented by evolving customer needs and legislation – notably growing demand for sustainable packaging, based on low-carbon impact, together with demand for more sustainable textile fibres.

We cannot achieve our vision of a thriving world without an evolving response to climate change. By collaborating with a broad range of stakeholders we are working to achieve energy security and climate resilience and transform our vision into reality.

Postureexplore our theme

Beauty and confidence. Pride and upright posture. These attributes have meant that many cultures over the ages have associated peacocks with royalty and power.

This image is appropriate to Sappi because we too, can stand tall with pride when we consider our past achievements and drive to create not just enterprise value, but value for our people and for communities.

We have achieved enterprise value through our ability to be nimble and optimise profitability in ever-changing markets, reshaping our products and processes to create value and growth for our own business and our customers. We continue to offer our customers a broad range of solutions based on the power of renewable resources that enable them to achieve their sustainability goals and contribute to the low-carbon, circular economy. In doing so, we have continued to focus on treading more lightly on the Planet.

Creating value for our people and communities is underpinned by the structures and programmes we have established which facilitate open, authentic communication, by our ongoing investment in training, development and transformative community programmes, as well as by our collaborative partnerships focused on workable solutions to industry challenges.

Our commitment to delivering sustainable value to our stakeholders is based on our focus on living our values at all times: At Sappi we do business safely with integrity and courage, making smart decisions which we execute with speed.

Diving deeper into our,
performance and prospects

Fortifyexplore our theme

Hermit crabs are shapeshifters, moulting as they grow, continually shedding their exoskeletons and growing new ones. As their exoskeletons are fragile, they need shells for protection. Rather than produce their own shell, as they grow, they use shells abandoned by other marine creatures. This process is not a one-off, but continues throughout their lifespan, depending on water temperature, habitat and species.

Many species will enhance their chances of survival by encouraging anemones to attach to their shell, as the latter’s stinging tentacles may deter predators. The crabs even transfer the anemones from shell to shell when they move house.

We can draw parallels with Sappi, fortified as we are by our iterative Thrive strategy and by our agility in responding to changes in our operating context to emerge stronger and better positioned for growth. This process is underpinned by ongoing engagement with our stakeholders, whose input helps us shape our response to our environment as we collaborate to build a thriving world.

Balanceexplore our theme

Bubbles are things of fragility, wonder – and balance. That’s because the inward surface tension forces of the water film are exactly balanced by the outward-pushing pressure of the air inside.

Blowing more air in to make a bigger bubble means more air pressure inside and also means the bubble must get thinner in the process, because there is only so much water to go around. Should one keep blowing more air in, the film eventually won’t have enough reserve water to spread out into a bigger surface, and the ultimate catastrophe occurs: the bubble bursts.

The success of Sappi’s business is also based on balance. This includes continuous capital prioritisation as we look to reduce costs and grow the business while sustaining a healthy balance sheet. It involves reshaping our product portfolio to meet changing market needs and taking advantage of growth opportunities while being mindful of the risks. It means balancing the needs of people and communities with our responsibility to our shareholders.

As we move forward into the future, we know we can rely on the expertise and passion of our people and the ongoing cooperation of our stakeholders to maintain this balance and drive sustainable value creation.

Connectexplore our theme

Some mushrooms are bioluminescent, due to luciferins, the same compounds that make fireflies light up at night. This ability is used to attract insects which then spread the mushroom spores elsewhere in the forest, allowing the fungi to reproduce.

But that’s not where connection ends. Beneath every forest and wood lies a complex network of roots and fungi that connects trees and plants to one another. This network – sometimes called the Wood Wide Web – is almost 500 million years old and is vital for most plants on earth. Trees and plants obtain nutrients that the fungi acquire from the soil, such as nitrogen and phosphorus by means of enzymes that the trees do not possess. In return, the fungi receive carbon-rich sugar from the roots of the trees.

This symbiotic relationship enables all connected organisms to thrive.

Similarly, at Sappi our connection with our stakeholders shapes our work to build a thriving world. This connection enables us to meet the changing needs of every employee at Sappi and to offer our partners the renewable innovation they need to be successful. By understanding and connecting with community needs, we drive positive social impact, playing a role beyond making and selling.

Like mushrooms, our business is a living organism – growing, adapting and evolving in a continually shifting context. As we shape our response to this context, we prioritise value creation for all stakeholders.

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"We continue to invest in all three of our world-class production sites – further entrenching our leadership position as a trusted source for responsible and sustainable DP."

Our pulp segment predominantly comprises two product categories, namely, DP and high-yield pulp (HYP). Occasionally, excess kraft pulp produced at 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 tons per annum and 15% share of the DP market, Verve is a truly sustainable brand. From textiles to pharmaceuticals and food applications, Sappi has the expertise, technology and 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. Fibres produced from DP, however, far exceed 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 fibres produced from DP differentiate themselves from the alternatives.

Viscose staple fibre (VSF) is the most prominent fibre, accounting for approximately 70% 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 quality and sustainability assurance in 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 55% 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. 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 approximately 4% 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 and US Dollar/RMB exchange rate fluctuations.

Sappi's Matane Mill, located in Quebec, Canada, has the capacity to produce 285,000 tons of HYP. Approximately 30% of Matane's pulp production was consumed internally within our packaging business during FY2023, thereby increasing 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 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 FY2023, the pulp segment made up 22% of Sappi's sales revenue.

Sales volumes of 1,517,000 tons included 180,000 tons of HYP from Matane Mill and 21,000 tons of kraft pulp produced at Somerset Mill.

Our markets in 2023 and outlook for 2024

During the early part of the year, DP demand and pricing were dampened by elevated stock levels and negative consumer sentiments. However, VSF operating rates in China improved steadily as economic activity resumed from the third quarter onwards. Operating rates in the VSF industry remained at a high level through the remainder of the year and downstream VSF inventories dropped below historical levels, which supported demand for DP. The hardwood DP market price1 fell more than US$200 from the elevated levels of last year to reach a low of US$840 in August. The movement was driven primarily in the early part of the year by high-retail inventories and weak consumer sentiment and then in the latter part of the year by relatively subdued VSF pricing and the weak Chinese Renminbi exchange rate against the US Dollar.

1 Market price for imported hardwood DP into China issued daily by the CCF group.

Demand for DP remained robust during the year with segment sales volumes increasing by 7% or 96,000 tons, however, lower average pricing and cost inflation adversely impacted profitability resulting in EBITDA for the year being lower than the prior year with EBITDA margins reducing from approximately 26% to 18%.

Due to production curtailments on our packaging paper assets in Europe and North America, more BCTMP capacity became available for external sales. Production at Saiccor Mill improved year-on-year due to more stable operations.

Dissolving pulp markets appear more positive as VSF operating rates continue to be strong and the differential between cotton and VSF pricing remains supportive. Hardwood DP market pricing has increased in recent weeks to US$900 per ton.

Additionally, paper pulp pricing has also moved into an upward trajectory, which will benefit our HYP sales. DP sales volumes in the first quarter of FY2024 will, however, be lower than the prior quarter due to scheduled maintenance shuts at all three of our DP mills.

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.

Pulp segment made up

22%

OF SALES REVENUE IN FY2023

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.

"We manufacture innovative packaging and speciality paper products and services with a commitment to sustainability and a circular economy. Working closely with brand owners, converters, printers, designers and communications agencies, we pride ourselves on being a reliable and global business partner."

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 FY2023, 30% of Sappi's sales revenue was packaging and speciality papers, 1% higher compared to last year.

Sappi offers products and solutions in many different product categories including:

Packaging papers and boards

Legislative changes and growing consumer pressure are forcing brands to rethink 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 – 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 the growth potential and technical requirements of a wide range of packaging market segments to match those requirements with our assets, specifically our production capabilities and cost of production, the cost to serve customers, and competitive threats. We choose only those projects where we believe we hold a significant advantage.

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.

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.

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.

Label papers and self-adhesives

Label papers are used for both wet glue (cut and stack) and wet strength label processes in beverage, food and packaging applications. Our clay-coated kraft and glassine release liners provide solutions not only for labels but applications such as self-adhesive tapes, medical and industrial applications.

Casting and release papers

Used by suppliers in 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.

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 local and state legislation in several US states has passed, banning the use of polystyrene foam packaging. 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.

Packaging and speciality papers segment made up

30%

OF SALES REVENUE IN FY2023

Our markets in 2023 and outlook for 2024

The packaging and speciality papers segment faced weak trading conditions related to high levels of downstream inventory and muted consumer demand. Positive year-on-year pricing gains of 7% were insufficient to offset input cost inflation and a 22% reduction in sales volumes leading to a decline in the segment's profitability. EBITDA margins for the segment decreased from 17% last year to 12% in fiscal 2023.

Demand for packaging and speciality papers in North America is particularly robust and our customers are actively seeking to increase their volumes with Sappi. In November 2022, the board approved a US$418 million investment at Somerset Mill to convert PM2 from coated woodfree graphic paper to solid bleached sulphate paperboard (SBS). The machine capacity will be increased during the conversion from 235,000 tons to 470,000 tons per annum. The project is progressing well and on track to start-up in early 2025. The capital expenditure will be phased over three years with the majority of the spend taking place in FY2024 and FY2025. The FY2023 capital expenditure on the project was approximately US$100 million and the estimated spend for FY2024 is US$154 million. Refer to Letter to the stakeholders – Grow our business section of this report for further information on investments made in our packaging and speciality papers segment. These investments are fully aligned with our Thrive strategic focus to reduce our exposure to declining graphic paper markets.

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. The long-term favourable outlook for our sustainably produced packaging and speciality paper products remains unchanged, however, in the short term challenges persist. The destocking process in the segment is taking longer than expected and the macroeconomic landscape remains unpredictable, which is likely to continue to weigh on consumer sentiment. We therefore do not expect any meaningful recovery in the first quarter of the next financial year. Sappi is well positioned to benefit from the turn in the cycle. We believe we will achieve year-on-year volume growth in 2024, 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 2023 and outlook for 2024

Global demand for graphic papers has generally been in secular decline. The remarkable turnaround in FY2022 from the Covid-19 pandemic lows was driven by a number of factors which led to an unprecedented global shortage of graphic paper in the prior year. Graphic paper demand declined sharply and remained weak throughout the year due to weak consumer confidence related to the slowing economy and an inventory destocking cycle that took longer than anticipated.

Sales volumes declined 38% year-on-year and production curtailments were required to manage these weak demand dynamics. Selling prices were 14% higher than the prior year and remained resilient. However, cost inflation and operational inefficiencies associated with low capacity utilisation significantly eroded profitability. The graphic paper segment generated EBITDA of US$271 million with EBITDA margins decreasing from 16.4% in the prior year to 9.7%.

It has become apparent that demand for graphic papers has experienced a permanent structural decline. In response to the market overcapacity and in line with Sappi's strategy to reduce exposure to graphic paper markets, we made the difficult decision to close the Stockstadt Mill and initiated a consultation process for the potential closure of the Lanaken Mill shortly after year-end.

It is anticipated that strategic action in the European region will significantly improve the capacity utilisation of the graphic paper assets in the second half of the next financial year.

In FY2023, 48% of Sappi's sales revenue was from the graphic papers segment.

The four major grades of graphic paper 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: The share of global advertising 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 15 million tons by 2024.

Sales: Sappi's sales volumes for coated woodfree paper decreased 42% from last year and sales revenue was 33% lower, due to a challenging macroeconomic environment where demand for graphic paper remained suppressed. Globally, demand for coated woodfree paper decreased by approximately 13%.

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 32% lower than last year, due to the unfavourable economic climate. Volumes were approximately 38% lower than the prior period. This year, the global market contracted by approximately 13% 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.

Graphic papers segment made up

48%

OF SALES REVENUE IN FY2023

Sales: Our sales revenue from uncoated woodfree paper was 13% lower than last year, largely as a result of the challenging market conditions. Globally, demand decreased by approximately 5% in the current financial year.

Newsprint paper

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 challenging macroeconomic environment with an estimated drop in demand of approximately 8% during the current year and an estimated decline of 5 – 6% annually through to 2027. 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 volatile and challenging macroeconomic environment, however, no production curtailment was necessary in the current financial year. Relative to the prior year our volumes were 3% down and sales revenue was 8% higher. Globally, newsprint demand declined 8% versus 2022.