Group overview

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Evolve

Evolution in the natural world is a slow process. But in the hyperconnected world in which we live and work, it’s
fast – and becoming faster all the time. As an example, twenty years ago, very few people had ever heard of the ‘Internet of Things’. Ten years ago, the term ‘Industry 4.0’ had not yet been coined. At the start of 2020, few people had paid attention to terms such as coronavirus, social distancing, lockdowns or infection waves. Yet today, these terms are part of our everyday vocabulary, showing just how fast the world around us is changing.

In response to our rapidly changing landscape, five years ago, we embarked on a strategy of intentional evolution, which involved diversifying our product portfolio in higher margin segments. By 2020, despite market challenges, we had essentially met and in many ways, exceeded this ambition.

Evolution is based on a series of events, processes and responses. Around the world, people are responding to natural resources constraints by seeking responsible alternatives to non-renewables and solutions that are truly sustainable from seed to final product.

We are responding to these needs by building on our success in intentional evolution to accelerate an enhanced journey of evolution aligned with our Thrive25 strategy. We are doing so from a foundation based on a coalition of diverse perspectives and expertise; as well as a history of seeking out and investing in breakthroughs that enable lasting outcomes for our partners and a lighter footprint on the world. We are building on these to ensure that every solution we create supports our goal of making everyday products more sustainable and that we accelerate meaningful change.

Creating value by responding strategically

2020 Sappi Annual
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Reimagine

Stars form when celestial clouds collapse, feeding a rotating disc of gas and dust into a dense, hot central core. Amongst other things, pulsating stars give off carbon, a key ingredient for life as we know it. From chaos, something beautiful – and essential – is created.

We can view this as a metaphor for the coronavirus pandemic that infected and affected people regardless of nationality, class or wealth, leaving intense disruption in its wake. However, it also ushered in a global drive to reimagine our way of being on the planet. A new agenda for change is emerging, gaining traction and raising questions that will not go away.

Questions like: How do we reimagine a collective future where changed behaviours will allow us to live more in balance with nature than before? How do we

maintain and even intensify the sense of connection, caring and community that was one of the unexpected, but welcome, impacts of the pandemic? How do we deal with the uncertainty on the horizon when future surges of Covid-19 occur?

At Sappi we are taking bold, decisive action to respond to these challenges by extracting the full potential of trees and woodfibre to develop practical innovations for everyday impact and innovate what we should, not just what we can. We’re also establishing and maintaining proactive dialogue with all our stakeholders as well as working with and supporting local communities.

In doing so, we can not only create a more sustainable future, but also unlock significant long-term value for all our stakeholders.

Our performance review

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Resilience

Rocks are the ultimate symbol of resilience. They are fused together over time from solid crystals of different minerals. These natural processes bind them all together, imparting strength and resilience. But even rocks are shaped and reshaped over time by natural forces like water, wind and sun.

They’re a reminder that none of us are impervious to the global forces shaping our world. Forces like climate change, urbanisation, social inequality and of course, the new reality brought about by the coronavirus pandemic and Covid-19.

We’ve proven our resilience to succeed in the ‘new normal’ and we will continue to do so as we work to accelerate our decarbonisation journey, meet the changing needs of rapidly urbanising populations while managing our environmental footprint and promoting a diverse, inclusive workforce.

At Sappi we operate across different geographies, meeting the needs of customers from New Zealand to New Mexico, but our common purpose makes us stronger and more resilient: Sappi exists to build a thriving world by unlocking the power of renewable resources to benefit people, communities, and the planet. This is our inspiration and our call to create a brighter future for the world and for our business.

Governance and compensation

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Emerge

Collectively, the world is drawing a deep breath as we slowly emerge from the coronavirus pandemic and impact of Covid-19.

During the crisis, the safety of our people was our top priority. After which, like many enterprises across the world, our underlying goal was economic survival. To achieve this, we focused on the preservation of liquidity, lowering costs by deferring non-critical capex projects and postponing some annual maintenance shuts. We also took commercial downtime across all segments as required, in order to match supply to demand and prevent the build-up of inventory.

The verb ‘emerge’ is derived from the classical Latin ēmergere, meaning ‘to rise out or up’. We are proud

to say that we are rising from the impact of Covid-19 with strong growth in sales and profitability for the packaging and speciality papers segment, quickly recovering dissolving pulp market and steady month-on-month improvement for graphic papers.

As OneSappi we are steely in our determination to emerge from survival mode back onto a growth curve. A curve based on our strategy of diversifying our product portfolio into higher margin and growing segments – a strategy fully justified during the events of the past year.

Doing so is challenging, but we believe we can realise our vision of a thriving world by collaborating with all our stakeholders to create solutions for our collective needs and emerge stronger than ever before.

Appendices

2020 Sappi Annual
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Momentum

Linear momentum is defined as the product of a system’s mass multiplied by its velocity. The greater an object’s mass or the greater its velocity, the greater its momentum. In other words, momentum is about both magnitude and direction.

It can be difficult to maintain momentum in times of profound change or crisis, but it’s important to do so. That’s because action creates movement which in turn can create unanticipated opportunities.

Recognising this, at Sappi we responded to the coronavirus pandemic and Covid-19 in order to keep our forward momentum. We swiftly implemented a comprehensive Covid-19 action plan that ensured the health and safety of our employees and enabled us to operate in a safe, uninterrupted manner where demand permitted. Working closely with our

customers and suppliers we systematically increased activity and output in response to improved market demand. Our support for local communities helped mitigate the impact of the pandemic and the ensuing socio-economic consequences on them.

Looking ahead, we are confident that we can accelerate our momentum to navigate forward: We have the mass in the form of wide-ranging expertise, extensive infrastructure, strong foundation of research and development, together with our range of sustainable solutions produced from renewable woodfibre. And we have the velocity in the form of our ambitious but achievable Thrive25 strategy, which allows us to take advantage of the changing dynamics between the environment, consumers and the products they require. Above all, our passionate, committed people provide the impetus to power us forward.

Our strategy and performance

Our strategy

Through intentional evolution we
will continue to grow Sappi into a
profitable and cash generative,
diversified woodfibre group –
focused on dissolving pulp, paper
and products in adjacent fields.


Achieve cost advantages

What this means

  • Continuously improve cost position
  • Continue to maximise global benefits
  • Best-in-class production efficiencies

How we performed in 2020

  • Group efficiency, procurement and continuous improvement savings > US$100 million
  • Unfortunate significant downtime in graphic paper due to Covid-19 drop in demand resulted in increased cost per ton
  • Maximised the benefits of OneSappi to achieve cost advantages
  • Successfully integrated Matane Mill in Sappi

Closing out 2015-2020

  • During the last five years, Sappi dramatically increased its focus on costs and embedded a culture of achieving ongoing efficiencies and savings throughout the group

Rationalise declining businesses

What this means

  • Maximise production at low-cost mills
  • Continuously balance paper supply and demand in all regions
  • Continue to transition graphic papers capacity to higher margin and growing packaging and speciality papers

How we performed in 2020

  • Where possible graphic paper production was allocated to the lowest cost machines to reduce cost per ton. Unfortunately, the supply and demand balance were severely affected by Covid-19
  • Packaging and speciality paper volumes and profitability continued to grow
  • Substituted growing packaging and speciality grades for graphic grades on swing machines which cushioned the drop in demand brought by Covid-19
  • Announced the closure of graphic coated paper machine capacity in Stockstadt and Westbrook Mills

Closing out 2015-2020

  • Sappi effectively managed and rationalised its graphic paper capacity through conversions, closures and carrousel opportunities to ensure it remains relevant and profitable in these segments

Maintain a healthy balance sheet

What this means

  • Maintain net debt:EBITDA at ~2x
  • Continuously improve working capital
  • Continue to monitor bond market for opportunities

How we performed in 2020

  • Net debt:EBITDA at 5.2x
  • Reduced capital expenditure to essential projects to effectively manage liquidity and cash flow. Negotiated covenant suspension period until September 2021 – first measurement December 2021

Closing out 2015-2020

  • The targeted net debt:EBITDA ratio of 2x was well maintained during the period to balance future growth opportunities with lower debt. Unfortunately, the unexpected Covid-19 pandemic negatively impacted the objective

Accelerate growth in higher margin growth segments

What this means

  • Grow DP capacity, matching market demand
  • Continue to expand and grow packaging and speciality papers in all regions, targeting 25% of group EBITDA by 2020
  • Commence commercialisation of Sappi Biotech opportunities

How we performed in 2020

  • Increased packaging and speciality volumes year on year up 12.9% vs 2019 sustained packaging and specialities EBITDA margin at 13.7%
  • Saiccor Mill expansion was delayed by Covid-19, but project continues and should be concluded during 2021 providing additional DP capacity
  • Strong growth in lignin sales and favourable advancement of other Sappi Biotech opportunities

Closing out 2015-2020

  • The business was transformed during the period with the substantial growth in packaging and speciality papers, which contributes meaningfully to the growth of the business. Continued investment in DP and Sappi Biotech opportunities resulted in a stronger and more resilient business

Guided by our strategy, we measure our progress holistically against our mission, collaborating and partnering with stakeholders as we strive to be a trusted and sustainable organisation with an exciting future in woodfibre.

Return on average capital employed (ROCE)

Our strategic performance indicators

ROCE (%)

Why is this important?

ROCE long-term profitability by comparing how effectively assets are performing with how these assets are financed

® Linked to executive remuneration

2021 objectives

Finalise Saiccor Mill expansion and ramp up Somerset and Maastricht Mill conversions. Maximise recovery of the graphic paper volume declines from 2020 Covid-19 impact

Self-assessment of 2020 performance

Link to Thrive25 strategic objectives – for more info

Link to 3Ps

EBITDA (US$ million)

Our strategic performance indicators

EBITDA (US$ million)

Why is this important?

EBITDA measures how we performed operationally by excluding the impact of financing, accounting treatments or tax implications

® Linked to executive remuneration

2021 objectives

Focus on maximising cash generation through efficient capital expenditure and working capital management

Self-assessment of 2020 performance

Link to Thrive25 strategic objectives – for more info

Link to 3Ps

EBITDA margin (%)

Our strategic performance indicators

EBITDA margin (%)

Why is this important?

EBITDA margin is an important and comparable measure of our profitability (excluding the impact of financing, accounting treatments or tax implications) against our revenue

2021 objectives

Focus on reducing fixed and variable costs and maximise pricing

 

Self-assessment of 2020 performance

Link to Thrive25 strategic objectives – for more info

Link to 3Ps

Sales (US$ million)

Our strategic performance indicators

Sales (US$ million)

Why is this important?

While not the only determinant of financial success, sales is a key measure of demand, customer loyalty and a critical contributor to profit

2021 objectives

Continue to grow packaging and specialities post conversions and regain and grow graphic paper volumes from lower 2020 sales

Maximise DP volumes to capacity

Self-assessment of 2020 performance

Link to Thrive25 strategic objectives – for more info

Link to 3Ps

Net debt (US$ million)

Our strategic performance indicators

Net debt (US$ million)

Why is this important?

Given the capital-intensive nature of our operations, we need to raise debt to complete significant projects that enable our long-term success. Net debt comprises current and non-current interest-bearing borrowings and bank overdrafts (net of cash, cash equivalents and short-term deposits)

2021 objectives

During 2021 net debt will increase due to finalising strategic capital projects

Self-assessment of 2020 performance

Link to Thrive25 strategic objectives – for more info

Link to 3Ps

Net debt:EBITDA

Our strategic performance indicators

Net debt:EBITDA

Why is this important?

The net debt:EBITDA ratio measures our ability to pay off our debt should net debt and EBITDA remain consistent. EBITDA focuses on the operating decisions of a business as it looks at profitability from core operations before the impact of capital structure

® Linked to executive remuneration

2021 objectives

Covenant suspension negotiated during 2021

Self-assessment of 2020 performance

Link to Thrive25 strategic objectives – for more info

Link to 3Ps

Lost-time injury frequency rate (LTIFR)

Our strategic performance indicators

LTIFR

Why is this important?

LTIFR is an important measure of our business's safety. We target zero harm and aim to improve LTIFR by at least 10% year-on-year

® Linked to executive remuneration

△ Identified sustainability goal1

2021 objectives

Reduce LTIFR and zero fatalities

Self-assessment of 2020 performance

Link to Thrive25 strategic objectives – for more info

Link to 3Ps

Sustainable engagement (%)

Our strategic performance indicators

Sustainable engagement (%)

Survey takes place every second year

Why is this important?

We rely on a productive and engaged workforce. Employee engagement has been linked to higher safety performance, lower staff turnover, improved productivity and efficiency. We aim to maintain or improve from our 2015 base of 74%

△ Identified sustainability goal2

2021 objectives

Sustain and/or improve engagement

Self-assessment of 2020 performance

Link to Thrive25 strategic objectives – for more info

Link to 3Ps

Energy intensity GJ/adt

Our strategic performance indicators

Energy intensity (GJ/adt)

Why is this important?

Energy intensity is a measure of how efficiently we are operating. By continually improving this metric, we manage costs and lower our impact

△ Identified sustainability goal1

2021 objectives

5% improvement from 2014 base year

 

Self-assessment of 2020 performance

Link to Thrive25 strategic objectives – for more info

Link to 3Ps

Certified fibre (%)

Our strategic performance indicators

Certified fibre (%)

Why is this important?

We are committed to sourcing woodfibre from forests and timber plantations in a manner that promotes their health and supports community well-being

△ Identified sustainability goal1

2021 objectives

Maintain or improve percentage certified fibre

 

Self-assessment of 2020 performance

Link to Thrive25 strategic objectives – for more info

Link to 3Ps

 

1 For this indicator, we have clear targets for 2020 that we are working towards. See our 2020 Sappi Group Sustainability Report for more information.
2 Not measured as survey takes place every second year.