Year ended September 2021 compared to year ended September 2020

The group returned to overall profitability and delivered EBITDA excluding special items of US$532 million, which was a substantial increase on the prior year of US$378 million. Market demand across Sappi’s major product segments improved steadily during the year as Covid-19 lockdowns eased and global economic activity resumed.

Highlights for the year included the recovery of profitability in the dissolving pulp (DP) segment driven by buoyant demand and significantly better market prices, combined with an excellent performance of the North American region, which delivered its highest financial year EBITDA in over a decade. The investments of recent years into packaging and speciality papers reaped rewards as the segment achieved record profitability and sales volumes increased by 21%. However, profitability of the European region was hindered by the impact of strict Covid-19 lockdowns, which suppressed economic recovery across the value chain, and spiralling costs.

As Covid-19 lockdowns eased and economic activity resumed, global trade rebounded much faster than initially anticipated. The requirement for shipping unexpectedly surged which triggered vessel and container shortages, severe port congestion and significant freight rate increases. The logistical disruptions described above severely constrained our export sales in all regions.

Furthermore, high demand for raw materials and commodities, coupled with long lead times and an inability to restock inventories, fuelled worldwide inflationary pressures. Consequently, escalating delivery and raw material costs, particularly purchased pulp, chemicals and energy, negatively impacted margins in all product segments. To mitigate the impact of these rising costs we implemented a series of price increases in our paper businesses.

DP market conditions rallied strongly from the first quarter on the back of improved apparel retail demand in the US and Asia, which favourably impacted demand for all textile fibres. Low DP and viscose staple fibre (VSF) inventory levels, high paper pulp prices and a weaker US$/Renminbi exchange rate were all factors that further contributed to the positive sentiment in the sector. The market price(1) for hardwood DP surged from a base of US$624 per ton in October 2020 to a peak of US$1,106 per ton in April 2021 and closed the year at the end of September 2021 at US$1,000 per ton. Sappi customer demand was robust and EBITDA for the segment of US$197 million was more than three times that of the prior year. However, the ongoing global supply chain challenges, exacerbated by the impact from the South African civil unrest and a cyber security breach at the Durban port constrained sales and resulted in a backlog of 100,000 tons at year end which reduced EBITDA by approximately US$30 million. In addition, once off events at the South African mills including a labour strike, shortage of oxygen due to Covid-19, an extended annual shut at Saiccor Mill and the civil unrest, which forced Saiccor Mill to close temporarily, significantly reduced production volumes. The project to expand the Saiccor Mill capacity was impacted negatively by Covid-19 lockdowns and associated travel restrictions, which delayed the project schedule. Commissioning of the plant began during the fourth quarter and additional production will commence in the first quarter of the 2022 financial year.

The 21% growth in sales volumes for the packaging and speciality papers segment was primarily driven by the successful ramp-up of sales volumes from Somerset Mill PM1 in North America. The line ran fully on packaging grades from the third quarter and the focus shifted subsequently to product mix and margin optimisation. Growth in the European packaging and specialities sales volumes was hampered by weaker demand for certain nonessential luxury product categories and prolonged speciality paper qualifications. Profitability in the European region was also impacted by higher purchased pulp, energy, chemicals and delivery costs. Containerboard demand in South Africa was robust on the back of strong fruit exports. EBITDA for the segment increased from US$179 million to US$214 million.

Global demand for graphic paper grades progressively improved through the course of the year. However, market recovery in Europe lagged that in North America due to stricter lockdowns in the European Union. Capacity closures in North America in combination with constrained imports into the region due to supply chain challenges contributed to a favourable shift in the supply and demand balance and enabled domestic producers to operate at full capacity. Conversely the lagging European demand recovery necessitated 367,000 tons of graphics production curtailment in the European operations. Despite overall graphic papers segment sales volumes increasing 3% compared to the previous year, EBITDA deteriorated from US$131 million to US$120 million driven primarily by substantial cost inflation in purchased pulp, chemicals, energy and delivery costs.

Special items for the year included US$19 million for asset impairments related to weak coated mechanical and newsprint market conditions and an additional US$23 million related to asset damage, floods and restructuring costs.

An increase in net finance costs for the year to US$134 million from the US$88 million in the prior year was primarily due to non-cash fair value adjustments arising from the revaluation of the conversion rights for the Sappi Southern Africa ZAR1,8 billion (US$123 million) convertible bond issued in the first quarter and refinancing costs for our 2023 European bonds which were upsized with a new issue of €400 million which will mature in 2028.

The improvement in market conditions and ensuing substantial recovery of operating profitability translated to a profit for the period of US$13 million compared to the loss of US$135 million for the 2020 financial year.

The ongoing recovery from Covid-19 continued in the fourth quarter. High DP prices and an excellent performance by the North American region more than offset escalating raw material costs and ongoing supply chain challenges, which constrained shipments and negatively impacted delivery costs. Consequently, group EBITDA excluding special items of US$177 million was a further increase on the US$145 million achieved in the third quarter.

VSF prices dropped during the quarter due to higher inventory levels and a delay in the seasonal upswing in demand ahead of the Chinese National Holidays in October. This had a corresponding impact on the hardwood DP market price, notwithstanding it remained above US$1,000 per ton due to various DP supply side constraints, including unforeseen mill outages and the ongoing global supply chain challenges. DP sales volumes for the quarter of 263,000 tons, which included 37,000 tons of high yield BCTMP pulp, were significantly below expectations. The supply chain disruptions including global port congestion, inefficiencies in the Durban port and limited vessel availability were responsible for this shortfall. Despite the lower sales volumes compared to the prior quarter, the EBITDA for the segment increased by 38% due to beneficial pricing which peaked in the third quarter and formed the basis of fourth quarter contract prices.

Sales volumes in the packaging and speciality papers segment increased 10% compared to the equivalent quarter in the prior year as the North America region experienced encouraging sales growth and margin improvement across all of the major product categories. EBITDA for the segment improved 21% compared to last year.

Graphic paper demand continued to recover and, combined with industry capacity closures, ensured the market balance in Europe and North America was restored to healthy levels. However, profitability in Europe remained a challenge due to inflationary cost pressures. Low industry inventory levels and longer delivery lead times linked to the global supply chain challenges provided support for price increases during the quarter.

Earnings per share excluding special items for the quarter was 11 US cents, which was a substantial improvement on the 5 US cents in the prior quarter and indicative of the recovery of profitability for the group.

Fourth quarter commentary

The ongoing recovery from Covid-19 continued in the fourth quarter. High DP prices and an excellent performance by the North American region more than offset escalating raw material costs and ongoing supply chain challenges, which constrained shipments and negatively impacted delivery costs. Consequently, group EBITDA excluding special items of US$177 million was a further increase on the US$145 million achieved in the third quarter.

VSF prices dropped during the quarter due to higher inventory levels and a delay in the seasonal upswing in demand ahead of the Chinese National Holidays in October. This had a corresponding impact on the hardwood DP market price, notwithstanding it remained above US$1,000 per ton due to various DP supply side constraints, including unforeseen mill outages and the ongoing global supply chain challenges. DP sales volumes for the quarter of 263,000 tons, which included 37,000 tons of high yield BCTMP pulp, were significantly below expectations. The supply chain disruptions including global port congestion, inefficiencies in the Durban port and limited vessel availability were responsible for this shortfall. Despite the lower sales volumes compared to the prior quarter, the EBITDA for the segment increased by 38% due to beneficial pricing which peaked in the third quarter and formed the basis of fourth quarter contract prices.

Sales volumes in the packaging and speciality papers segment increased 10% compared to the equivalent quarter in the prior year as the North America region experienced encouraging sales growth and margin improvement across all of the major product categories. EBITDA for the segment improved 21% compared to last year.

Graphic paper demand continued to recover and, combined with industry capacity closures, ensured the market balance in Europe and North America was restored to healthy levels. However, profitability in Europe remained a challenge due to inflationary cost pressures. Low industry inventory levels and longer delivery lead times linked to the global supply chain challenges provided support for price increases during the quarter.

Earnings per share excluding special items for the quarter was 11 US cents, which was a substantial improvement on the 5 US cents in the prior quarter and indicative of the recovery of profitability for the group.

Cash flow and debt

Net cash generated for the quarter was US$33 million, compared to US$88 million in the equivalent quarter of last year and US$49 million in the prior quarter. The decrease was primarily as a result of increased capital expenditure of US$143 million related mainly to the expansion of DP capacity at Saiccor Mill.

Net cash generated for the financial year was US$29 million (FY2020 US$257 million utilised). The improvement in cash generation was largely due to the recovery of sales volumes and improved profitability. The prior year also contained the acquisition of the Matane Mill.

Net debt at financial year end decreased to US$1,946 million (FY20 US$1,957 million) as a result of the cash generation. The covenant leverage ratio at year end reduced substantially from a peak of 6.7 in the second quarter to 3.7 at year end and is expected to continue to reduce progressively as the low EBITDA Covid-19 impacted quarters are eliminated from the calculation. At year end, liquidity comprised cash on hand of US$366 million and US$732 million from the committed revolving credit facilities (RCF) in South Africa and Europe.

Operating review for the quarter

Europe

Despite positive gains in selling prices across all product categories during the quarter, profitability continued to be under significant pressure due to rapid cost inflation.

Graphics sales volumes increased 5% compared to the prior quarter and were 37% higher than the previous year. Tighter market dynamics facilitated a 7% rise in selling prices compared to the prior quarter. Coated woodfree and coated mechanical sales volumes reached 99% and 80% respectively of pre-Covid 2019 levels which enabled a reduction of production curtailment from 85,000 tons in the prior quarter to 43,000 tons.

Packaging and specialities sales volumes grew 16% year-on-year but were slightly below that of the prior quarter due to the usual seasonally weaker demand linked to customer summer shutdowns. Sales of packaging grades, self-adhesives, digital solutions and functional papers were all positive year-on-year. However, other non-essential consumer categories continued to lag. A 7% average sales price increase was realised for the segment compared to the prior quarter.

Variable costs per ton increased 23% year-on-year driven by high purchased pulp, energy and delivery costs. Fixed costs were 13% above the previous year primarily due to the removal of temporary unemployment benefits from certain European governments, which was not repeated in the current financial year.

North America

The North American region delivered another excellent quarter recording an EBITDA for the fourth quarter of US$90 million, which was the highest quarterly EBITDA in more than twenty years. The success was broad based and demand across all product segments was strong. The focus in the quarter was on implementation of higher selling prices to offset rising costs and product mix optimisation into higher margin categories.

The tight supply situation in the region was intensified by constraints on imports due to supply chain challenges and supported the implementation of higher selling prices. Packaging and specialities sales volumes and pricing were up 20% and 18% respectively year-on-year. Similarly, the graphics segment sales volumes were 2% higher than last year and net selling prices improved by 13%.

The DP segmental sales volumes included 37,000 tons of high yield BCTMP pulp sales from Matane Mill. Profit continued to increase as a result of high DP prices which were 52% above last year. However, approximately 18,000 tons of DP sales volumes were delayed at year-end due to logistical challenges.

Variable costs escalated 19% year-on-year due to higher purchased pulp costs and to a lesser extent higher chemical and energy pricing, partly offset by lower wood prices. Delivery costs increased substantially by 24% primarily due to rate increases associated with congested domestic transport networks, higher fuel costs and higher export shipping rates. Fixed costs were 14% higher due to higher personnel and maintenance costs.

South Africa

EBITDA for the region increased substantially compared to the previous year driven mainly by the improvement in DP pricing. Quarter-on-quarter net selling price increases were achieved in all product segments but were partially offset by variable, delivery and fixed costs increases.

Demand for containerboard remained strong on the back of an excellent citrus export season. Newsprint and uncoated woodfree volumes continue to be impacted by the negative impacts of
Covid-19 on the economy.

The most significant headwinds for the region were supply chain challenges related to inefficiencies in the rail network and at the Durban port. The already strained conditions in the port due to the impact of the global shipping problems were further aggravated during the quarter by the civil unrest, cyber-attack, equipment failures and adverse weather events. Containers and vessel space availability were prioritised for refrigerated fruit exports and extreme congestion resulted in numerous blank sailings as vessels by-passed the port. The net effect was a substantial increase in the backlog of shipments and approximately 82,000 tons of DP sales volumes were delayed at year end.

Variable costs increased 9% year-on-year due to escalating energy and chemical costs. Fixed costs were 22% higher due to maintenance and silviculture costs.

Outlook

Overall market conditions for DP continue to be strong. However, short-term demand in China is impacted by the recent implementation of energy savings regulations which impose curtailments for energy intensive manufacturing operations across the country. The textile value chain has been negatively impacted thereby reducing VSF production and DP demand. Consequently, DP market prices dropped to US$940 per ton in October. However, lower VSF supply and a widening price differential to cotton fuelled a significant rise in VSF pricing, which should be positive for DP pricing. Sappi’s sales volumes are not expected to be impacted by the weaker Chinese DP demand.

The recovery of demand for graphic paper combined with industry capacity closures has tightened the market balance. In North America, ongoing restrictions on imports due to global supply chain disruptions have further contributed to a positive environment in this region. The underlying demand in the packaging and specialities segment remains robust in both the North American and South African regions and opportunities for further growth in sales volumes exist in Europe. The scheduled Somerset annual maintenance shut, which includes an extended statutory cold outage, will have an estimated US$22 million impact on profitability in the first quarter.

Recent spikes in global energy prices for gas, power and coal are anticipated to have an adverse impact on our first quarter results, principally in Europe. To offset rising costs, we have announced selling price increases across all paper grades. In addition, energy specific surcharges have been implemented for all European shipments from 25 October 2021.

Global logistical challenges and vessel shortages are expected to continue through FY2022, which may have an ongoing negative impact on our export sales. It is unlikely that any significant improvement in supply chain reliability will be realised in the first quarter and hence the backlog of 100,000 tons of DP sales volumes will take time to resolve.

Capital expenditure in FY2022 is estimated to be US$395 million and includes approximately US$30 million of Saiccor Mill expansion capex, US$80 million for cost optimisation and quality improvement projects and US$75 million for sustainability projects.

The first quarter of FY2022 will comprise 14 weeks instead of the typical 13-week quarter. This is in order to adjust our reporting periods closer to the calendar periods and will result in increased sales compared to comparative quarters.

We remain encouraged by the growing resilience of global economies as the Covid-19 pandemic evolves and the corresponding recovery in underlying demand in all of our product segments. However, the supply chain challenges and the extraordinary cost inflation may affect profitability. In addition, the maintenance shut at Somerset Mill is scheduled for the first quarter and will impact EBITDA. Taking these factors into account, we anticipate a further improvement in EBITDA for the first quarter of FY2022 relative to the fourth quarter of FY2021.

On behalf of the board

S R Binnie
Director

G T Pearce
Director

11 November 2021

Forward-looking statements

Certain statements in this release that are neither reported financial results nor other historical information, are forward-looking statements, including but not limited to statements that are predictions of or indicate future earnings, savings, synergies, events, trends, plans or objectives. The words “believe”, “anticipate”, “expect”, “intend”, “estimate”, “plan”, “assume”, “positioned”, “will”, “may”, “should”, “risk” and other similar expressions, which are predictions of or indicate future events and future trends and which do not relate to historical matters, identify forward-looking statements. In addition, this document includes forward-looking statements relating to our potential exposure to various types of market risks, such as interest rate risk, foreign exchange rate risk and commodity price risk. You should not rely on forward-looking statements because they involve known and unknown risks, uncertainties and other factors which are in some cases beyond our control and may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements (and from past results, performance or achievements). Certain factors that may cause such differences include but are not limited to:

• the highly cyclical nature of the pulp and paper industry (and the factors that contribute to such cyclicality, such as levels of demand, production capacity, production, input costs including raw material, energy and employee costs, and pricing);
• the Covid-19 pandemic;
• the impact on our business of adverse changes in global economic conditions;
• unanticipated production disruptions (including as a result of planned or unexpected power outages);
• changes in environmental, tax and other laws and regulations;
• adverse changes in the markets for our products;
• the emergence of new technologies and changes in consumer trends including increased preferences for digital media;
• consequences of our leverage, including as a result of adverse changes in credit markets that affect our ability to raise capital when needed;
• adverse changes in the political situation and economy in the countries in which we operate or the effect of governmental efforts to address present or future economic or social problems;
• the impact of restructurings, investments, acquisitions, dispositions and other strategic initiatives (including related financing), any delays, unexpected costs or other problems experienced in connection with dispositions or with integrating acquisitions or implementing restructurings or other strategic initiatives, and achieving expected savings and synergies;
• currency fluctuations.

We undertake no obligation to publicly update or revise any of these forward-looking statements, whether to reflect new information or future events or circumstances or otherwise.