Product review

Our pulp segment predominantly comprises two product categories, namely, DWP 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 DWP market. With capacity of 1.5 million tons per annum and 15% share of the DWP 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 DWP market segments.

Sappi’s DWP is a highly purified form of cellulose extracted from sustainably grown and responsibly managed trees using unique cellulose chemistry technology. The majority of DWP is consumed to make apparel, home textiles and non-woven products. DWP 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 DWP also act as good blend partners in fabric with cotton and polyester. Fibres produced from DWP, 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 DWP differentiate themselves versus the alternatives.

Viscose staple fibre (VSF) accounts for approximately 75% of global DWP 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 DWP provides both the quality and the sustainability assurance into this major market segment.

Lyocell represents the next generation of DWP fibres. With its sustainable DWP 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 50% of the world’s lyocell fibre is manufactured from DWP produced at Sappi’s dissolving wood pulp manufacturing sites.

DWP 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 DWP 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 DWP.

Market prices for DWP are influenced by VSF and other textile market dynamics, paper pulp market pricing which influences swing mills and US Dollar/RMB exchange rates fluctuations.

Sappi’s Matane Mill, located in Quebec, Canada, has the capacity to produce 285,000 tons of high-yield pulp (HYP). Approximately 39% of Matane Mill’s pulp production was consumed internally within our packaging and paper businesses during FY2024, thereby increasing pulp integration. The higher level 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.

Sales volumes of 1,445,000 tons included 177,000 tons of HYP from Matane Mill and 5,000 tons of kraft pulp produced at Somerset Mill.

Our markets in 2024 and outlook for 2025

Demand for DWP remained strong throughout the year, with selling prices rallying through the second half. Favourable market conditions were supported by a tight supply landscape following closures at competitors and little additional capacity added in the past two years, and strong demand buoyed by high VSF operating rates and low inventory levels. The hardwood DWP market price¹ recovered sharply and ended the year at US$960 per ton but overall net US Dollar selling prices for the pulp segment were slightly down year-on-year.

¹ Market price for imported hardwood DWP into China issued daily by the CCF Group.

Sales volumes declined by 5%, or 72,000 tons, compared to the prior year primarily due to scheduled maintenance shuts at Ngodwana and Cloquet Mills in the first quarter, which were not in the prior year, and lower HYP external sales. Substantial variable cost savings, mainly attributable to lower wood costs in South Africa, boosted profitability of the segment resulting in Adjusted EBITDA for the year being substantially higher than the prior year with Adjusted EBITDA margins improving from approximately 18% to 23%.

The reduction in HYP sales was due to higher integration into our own packaging paper assets in North America and Europe as packaging market conditions improved. Production at Saiccor Mill improved year-on-year due to more stable operations.

Dissolving wood pulp market dynamics are expected to remain favourable through the first quarter as VSF operating rates remain high and inventory levels through the value chain are at historical lows. The DWP supply landscape remains constrained with no new capacity anticipated in the short term. VSF pricing increased through November 2024, providing further support for hardwood DWP pricing which maintained its upward momentum and increased a further US$10 to US$970 per ton since the end of September.

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 has occurred and is planned, particularly for Asia, but much of this will be accompanied by integrated HYP and other integrated pulp 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 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.

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 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% – 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 papers 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. Flexible packaging is manufactured at our Alfeld Mill in Germany, at our Italian mills, Carmignano and Condino and Rockwell Solutions in Scotland.

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. Paperboard is manufactured at our Alfeld Mill in Germany, Maastricht Mill in the Netherlands and Somerset Mill in North America.

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. Containerboard is manufactured at our Ehingen Mill in Germany and at our South African mills, Ngodwana and Tugela.

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. Label papers and self-adhesives are manufactured at our Alfeld Mill in Germany, Carmignano Mill in Italy, Cloquet Mill in North America, Gratkorn Mill in Austria and Somerset Mill in North America.

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. Casting and release papers are manufactured at our Westbrook Mill in North America.

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. Dye sublimation papers are manufactured at our Italian mills, Carmignano and Condino.

Tissue paper

Used for bathroom tissue, kitchen towels, serviettes and medical and industrial wipes. Tissue paper is manufactured at our Stanger Mill in South Africa.

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.

Our markets in 2024 and outlook for 2025

Demand for packaging and speciality papers products improved steadily through the year as the destocking cycle of 2023 reversed, leading to an overall 8% increase in sales volumes compared to the prior year. Market dynamics varied across the regions, with North America and South Africa experiencing stronger recoveries and returning to full operating rates compared to Europe, where downstream demand remained suppressed due to lingering poor consumer sentiment. Although higher sales volumes and variable cost savings were achieved, these gains were offset by lower selling prices, leading to margin erosion for the segment. Adjusted EBITDA margins for the segment decreased from 12.2% last year to 7.4% in FY2024.

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 papers to SBS board. 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 April 2025. The FY2024 capital expenditure on the project was approximately US$160 million and the estimated spend for FY2025 is US$157 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 strategic investments are integral to our Thrive strategy to reduce exposure to declining graphic papers markets and increased capacity in growing packaging papers markets.

The long-term favourable outlook for our sustainably produced packaging and speciality papers products remains unchanged, and demand from our customers in South Africa and North America is healthy. Sappi is well-positioned to benefit from the additional paperboard capacity from the conversion and expansion of Somerset Mill PM2 that will start up in the third quarter. However, challenges persist in the short term in Europe as market recovery is taking longer than expected and we therefore do not expect any meaningful volume recovery in the region in the first quarter of the financial year.

Our markets in 2024 and outlook for 2025

Paper markets remained subdued throughout the year, with the expected recovery in demand after the prolonged destocking phase of 2023 unfolding more slowly than anticipated.

Graphic papers sales volumes were up 2% from the previous year but the pace of recovery slowed as the year progressed, which suggests a likely permanent structural shift in demand. Lower selling prices were partially mitigated by variable cost savings. The closure of the Stockstadt and Lanaken Mills significantly reduced the fixed cost base and enhanced European capacity utilisation, contributing to improved profitability of the segment compared to the prior year. The graphic papers segment generated Adjusted EBITDA of US$259 million with Adjusted EBITDA margins increasing from 9.7% in the prior year to 10.2%.

Graphic papers markets have experienced a permanent structural decline through FY2024 and are expected to resume the historical 6% – 8% decline through FY2025. Globally there is significant overcapacity. However, we have proactively reduced our capacity in Europe to align with our anticipated market share of demand and will remove further capacity in FY2025 as we ramp up the wet strength label production on Gratkorn Mill PM9. In North America, post the conversion of Somerset Mill PM2, we will continue to meet the needs of our graphic papers customers while fully utilising our assets.

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: The share of global advertising spend relative to print is expected to continue 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 13.8 million tons by 2025.

Sales: Sappi’s sales volumes for coated woodfree paper increased 5% from last year but sales revenue was 7% lower, due to a challenging macroeconomic environment where demand for graphic papers remained suppressed. Globally, demand for coated woodfree paper marginally increased from the approximately 16% decline experienced in the prior year.

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 volumes from coated mechanical paper were approximately 11% higher than the prior period, however, sales revenue was 6% lower year-on-year, due to the unfavourable economic climate. This year, the global market contracted by approximately 3% 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 24% lower than last year, largely as a result of the strategic rationalisation of our European assets. Globally, demand marginally increased 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 4% during the current year and an estimated decline of 5% – 6% annually through to 2028. 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 5% down and sales revenue was 11% lower. Globally, newsprint demand declined 4% versus 2023.