The Somerset Mill PM2 conversion and expansion is the largest capital investment in Sappi’s history, with a commitment of US$418 million to transform the PM2 machine from 235,000 tpa of coated woodfree graphic papers to 470,000 tpa SBS paperboard. The project is progressing well and remains on schedule for start-up in April 2025. To date, approximately US$261 million has been spent, with US$157 million remaining for the first half of FY2025. SBS paperboard primarily serves three key applications – folding cartons, food service board (FSB) for cups and plates, and liquid packaging – each requiring high standards in print quality, durability, and virgin fibre compliance for food-contact products.

With our Somerset Mill PM1 machine we have approximately 7% market share of the North American SBS market (~5 million tpa) and will double this after the PM2 project. We anticipate a conservative 2% compound annual growth rate (CAGR) aligned with global gross domestic product (GDP) growth with demand driven by rising consumer preference for sustainable packaging options and stricter regulations on single-use fossil fuel derived packaging. Somerset Mill’s expansion through PM2 enables us to support growing demand from established customer relationships while also entering new segments in FSB cup stock and liquid packaging. PM1 and PM2 will be the most technically advanced and modern SBS machines in the US, allowing us to leverage significant economies of scale, enhanced technical flexibility, and our integrated supply of kraft and bleached chemi-thermo mechanical pulp, positioning us cost-effectively against competitors. The additional volume also caters to the needs of non-integrated converters seeking SBS supply independent of large, integrated players. Somerset Mill’s approach of meeting specific customer requirements and achieving a consistent quality standard, supported by a secure, domestic supply chain, ensures a stable and attractive value proposition in a complex market where brand owners increasingly prioritise sustainability, cost-efficiency, and product quality.

This project supports the broader Sappi Thrive strategy by advancing two key objectives: reducing exposure to the declining graphic papers markets and expanding our footprint in the growing packaging and speciality papers sectors. Once the PM2 machine is fully operational, the product mix in Sappi North America will shift, with graphic papers reducing from about 43% of capacity to less than 30% (~780,000 tpa reducing to 540,000 tpa), and packaging and speciality papers rising from 32% to 54% (~580,000 tpa increasing to 1,050,000 tpa). Given the expected 6% – 8% annual decline in US graphic papers demand, this strategic realignment enables us to reduce graphic papers capacity in step with market trends, maximising capacity utilisation whilst maintaining service to our graphic papers customers. Additionally, the hybrid capability of Somerset Mill PM1, which can produce both coated woodfree (CWF) and SBS, offers flexibility to support the PM2 ramp-up while managing decreasing CWF demand, optimising capacity utilisation and profitability.

We anticipate strong returns on the PM2 investment, with the project expected to exceed a 20% internal rate of return (IRR) thus contributing an additional US$100 million to the annual North American EBITDA over time.

In 2024, textile markets remained relatively subdued, impacted by persistent low consumer confidence driven by macroeconomic challenges, inflation and geopolitical uncertainties. Despite these pressures over the past year, VSF producers managed to sustain high operating rates and historically low downstream inventory levels. This apparent demand resilience is likely due to market share gains from cotton. Cotton prices were more volatile and at a premium compared to VSF over the past two years, encouraging a shift toward VSF in downstream applications.

The DWP supply landscape remained tight throughout 2024. Existing swing capacity between DWP and paper pulp was largely dedicated to DWP production this year, and further shifts are constrained without major capital upgrades, maintaining a restricted DWP supply landscape. The DWP market has a high barrier to entry, as adding new capacity requires significant capital investment. Additionally, traditional paper pulp operations are not technically equipped to produce DWP without expensive modifications to the production process. Historically, there was a strong correlation between DWP and paper pulp prices as swing producers would adjust output based on price differentials. Typically, when the differential exceeded US$300/ton, swing capacity would shift into DWP production, increasing supply and putting downward pressure on DWP prices. However, the past year has seen a notable disconnect between DWP and paper pulp pricing. The DWP price has risen over the past six months whereas paper pulp prices have dropped dramatically, leading to a differential that exceeds US$400 per ton. The weakness in paper pulp prices was mainly driven by a substantial influx of new paper pulp capacity amid weak paper market demand. In contrast, demand for DWP and VSF remained robust, leading swing capacity to continue producing DWP for a longer period. While some closures in DWP production partially offset the extended use of swing capacity, the DWP supply landscape remained tight. As a result, DWP demand dynamics have become the key driver of pricing.

DWP pricing is therefore increasingly influenced by the demand dynamics for textile fibres, specifically VSF and cotton demand and pricing. VSF producers have maintained a consistent pricing discount to cotton, which has supported demand for VSF within the context of weak textile markets. As a result, DWP pricing is effectively range-bound by VSF and overall textile fibre pricing trends. A recovery in the global economy and consumer demand for textiles should lead to more favourable textile fibre pricing dynamics, creating additional upward momentum for DWP pricing. The combination of strong downstream demand for DWP from the VSF sector, tight supply landscape and decoupling of pricing from paper pulp led to the more robust short-term market dynamics for DWP compared to other consumer-driven markets in 2024.

The VSF market has traditionally grown at a rate of 4% – 5% annually, outpacing the overall textile market’s 2% growth, largely due to a gradual market share gain from cotton, which faces limited growth, land-use challenges, and future climate change impacts. In the medium to longer term, we anticipate that textile markets will resume their growth trends as the global economy recovers. The wood-based textile fibres (VSF and lyocell) offer significant sustainability benefits over cotton and polyester and therefore the higher growth rate of these fibres is likely to be maintained as they slowly increase market share. We remain highly optimistic about the outlook for DWP markets and Sappi will continue to explore opportunities to capitalise on this positive growth.

Our European business is particularly exposed to graphic papers markets with approximately 70% of capacity in the region serving this declining market. Sales volumes for FY2024 were up 3% year-on-year but this was not due to any meaningful change in underlying demand but rather a result of inventory normalisation following the destocking cycle in 2023. The historical rate of decline for graphic papers has been approximately 6% per annum but we are now taking a more conservative modelling approach of 8% annual decline as our base case assumption going forward. RISI’s European Graphic Paper five-year forecast (July 2024) estimates that the capacity for coated woodfree (CWF) and coated mechanical (CM) paper in 2024 was close to 9 million tpa with demand at only 5 million tons for the year. While our estimates of capacity are slightly lower than RISI’s as we assume that producers have shifted some capacity to speciality papers, this still represents a significant oversupply and industry operating rates are estimated to be in the low 70%. With a continued decline in demand projected for the foreseeable future and recognising that these low operating rates are unsustainable, it is clear that capacity closures will be required to balance the market.

Sappi has been proactive in adjusting our capacity to match our share of demand. With the closures of the Stockstadt and Lanaken Mills we removed 30% of our European capacity and were successfully able to transfer the sales from these mills to our other assets thereby maintaining our market share and continuing to supply our customers whilst maximising our capacity utilisation. The operational efficiency benefits of substantially improved utilisation of our assets and the lower cost base of our other mills relative to Stockstadt and Lanaken Mills yielded variable cost savings and boosted contributions for the transferred sales volumes. In addition, substantial annualised fixed cost savings of approximately US$120 million led to improved profitability of our graphic papers business in the region in spite of the extremely unfavourable market conditions.

These actions helped to sustain healthy EBITDA margins, demonstrating that, with efficient operations and a balanced capacity, the graphic papers segment remains profitable and cash-generative, which can support future growth in other areas of the group. In the short term, we will continue to reduce our graphic papers capacity as we increase label production on our Gratkorn Mill PM9 machine following the successful capital project to expand our label capabilities to produce wet strength labels. Through this project we will remove a further 100,000 – 150,000 tpa of CWF capacity thereby maintaining our capacity/demand balance for the near future. We are also committed to shifting more production on our hybrid assets at Ehingen Mill and Maastricht Mill to packaging papers grades as markets in Europe recover and will continue to explore potential for incremental investments to expand our packaging and speciality papers capabilities.

The increase in net debt for FY2024 was expected, driven by planned capital expenditure for the Somerset Mill PM2 project and restructuring costs in Europe. We anticipate a further cash outflow in the first half of FY2025 as we make a shareholder dividend payment in January and complete the Somerset Mill project, with PM2 scheduled to be offline for 70 days from January to April. Additionally, annual maintenance shutdowns at Ngodwana and Saiccor Mills are planned for FQ2. Therefore, net debt will likely peak in the second quarter.

Our strategic focus on sustaining our financial health through disciplined capital allocation and a strong emphasis on cash generation has materially repositioned our balance sheet over the last two years. We are committed to our net debt target of US$1 billion, or a leverage ratio of 1.5x net debt/ Adjusted EBITDA through the cycle. Debt reduction will therefore be our capital allocation priority in the second half of FY2025 and into FY2026. With no major capital projects planned during this period and additional Somerset Mill PM2 volumes boosting FY2026 earnings, we expect to rapidly deleverage our balance sheet. We recognise that a lower debt profile and healthy cash reserves provide us with flexibility to navigate the headwinds of cyclical downturns and provides opportunities for investments for growth in our target markets and debt management therefore remains our top priority in the short term.

Sustaining our operations and enhancing our environmental footprint are also high priorities, with typical maintenance and sustainability capex around US$320 million per year. We are confident that our strategic focus on reducing graphic papers exposure and expanding our packaging papers business will strengthen cash generation and profitability. We are committed to delivering shareholder value, with a dividend policy targeting a three-times earnings cover.

Setting targets is essential for Sappi’s sustainability journey because it provides clear, measurable goals that drive progress towards our strategic objectives and contribute to global sustainable development. With well-defined targets, Sappi can create a sustainability roadmap that balances the needs of Prosperity, People, Planet: ensuring responsible growth, and contribution to a healthier planet and society, helping to create a world in which both people and nature can thrive.

Reflecting on our progress toward our 2025 goals, it’s clear we have made significant strides on our sustainability journey. While there have been challenges in certain areas where progress hasn’t fully met our ambitions, our commitment remains steadfast. We are focused on making the greatest positive impact possible in the next 12 months. Looking ahead to 2030, our vision is to ensure that sustainability is embedded in every part of our business, with each Sappi employee empowered to contribute directly to our shared goals.

By prioritising innovation and growth in biobased solutions for a circular economy, Sappi is helping to drive the global shift toward a nature-positive, low-carbon future. Our 2030 goals will continue to align with the UN SDGs and the ‘3Ps’ of sustainability: Prosperity, People, Planet.

	Prosperity: These targets will lay the groundwork for sustainable growth and profitability, ensuring resilience and long-term value creation for stakeholders.
	People: By setting goals around workplace safety, diversity and community engagement, we will strengthen Sappi’s workforce and contribute to a healthier, more inclusive society. These initiatives will also help build a skilled, motivated team, driving our success.
	Planet: Given Sappi’s significant manufacturing and forest footprint, our environmental targets are critical to ensure that we minimise our impacts on nature and address pressing ecological challenges, such as climate change, biodiversity loss and resource depletion. By focusing on carbon emission reduction, water conservation, waste reduction, biodiversity and forest protection, we will minimise our environmental impact, address climate change, and meet the rising expectations from our stakeholders for sustainable operations.

This integrated approach will enable Sappi to contribute to global sustainability while building a resilient, forward-looking business.