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.

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.

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.

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.

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.

Q&A with the CEO

CEO

Steve Binnie
CEO

We are targeting reductions in both our absolute emissions and emission intensity and in the past year we have committed to setting a science-based target for our emissions reduction initiatives.”

Q1

How did the Covid-19 pandemic impact Sappi, and what actions have you taken to mitigate these affects?

The pandemic has had a profound impact on society. Our priority remains the safety of our people across all of the territories where they are present, and as such our mills and other facilities apply stringent guidelines for social distancing and sanitising. This ensures our operations continued in a safe and uninterrupted manner. By the end of November 2020, 308 confirmed cases of Covid-19 had occurred amongst our employees, predominantly from community transmission outside of the workplace. Sappi provided extensive employee well-being services to all our employees to manage individual fears, stress, loneliness, anxiety or depression through individual sessions, education material, change management and appropriate referrals. These services were furthermore extended to those contractors that did not have ready access to assistance programmes. Special care was given to vulnerable employees to ensure they had the coping skills and support structures in place through a very difficult and abnormal time.

The group’s focus was to preserve liquidity and cash flow, and we implemented various cost saving measures across our operations, curtailed excess production and where possible, deferred non-essential capital expenditure and applied measures to optimise working capital. On balance, our packaging and speciality paper markets were relatively unaffected by the pandemic. Certain categories of packaging products, generally those related to food or medicine, were positively affected, however, other packaging or speciality products experienced periods of reduced demand, primarily as a result of the temporary closure of customers’ plants or operations as a result of lockdowns in various geographies. Graphic paper demand was negatively affected globally, and a slow recovery has been underway since May/June. We do not expect a full return to pre-Covid demand levels in this segment, perhaps returning to 80-85% of 2019 demand by our second fiscal quarter of 2021. The second wave of Covid-19 in Europe could de-rail this recovery once again. DP demand experienced a very sharp correction in April as retailers globally were forced to close outlets and sales of garments declined by 80% or more in many geographies. Demand, however, has returned quicker than initially expected as retail outlets opened once again, and supply chains were replenished. Demand for DP at present is close to pre-Covid levels.


Q2

DP prices remained depressed throughout the year, what do you believe will lead to a sustained recovery in pricing and profitability?

 

DP prices remained below the cash cost of marginal cost producers for the entire year, and while they have risen some US$70/ton from their lows, they remain unsustainably low at present. A perfect storm of low paper pulp prices, excess DP and VSF capacity, low cotton and polyester pricing and a Chinese textile industry already impacted by US/China trade tensions was further impacted by the global Covid-19 pandemic and lockdowns which closed clothing retailers for extended periods. Clothing sales have rebounded quickly, and supply chains that emptied rapidly during our third and fourth quarter are now being restocked, leading to a more rapid increase in demand for DP than initially expected. Encouragingly, textile prices increased, and this has led to the rise in DP prices. Excess DP capacity was temporarily removed through the swinging of many DP mills capable thereof to paper pulp. VSF operating rates also recovered and hence profitability improved for our customers. A return to normalised levels of profitability for this segment will require a combination of further textile price increases and higher paper pulp prices. In the case of the latter, indications are that prices will start to rise in the coming year, and that this will support further DP price increases.

     

Q3

Both absolute debt levels and leverage have increased in the past year. How will you manage these?

 

Market conditions are steadily improving for graphic papers and DP, albeit from a low base. As operating rates in graphic paper improve with capacity reductions by both Sappi and competitors in CWF and CM in the US and Europe, profitability will improve. Higher DP prices, coupled with increased sales volumes in the latter part of the year as the expansion of the project at Saiccor Mill is complete, will further boost profitability. However, debt levels and leverage ratios are likely to remain elevated as we complete the Saiccor Mill expansion project and the quarters most impacted by the economic impacts of Covid-19 remain part of the bank covenant calculation. As a result of this we negotiated the suspension of our covenant measurement till end September 2021, when we believe much of the short-term impact from Covid-19 will be behind us, and we have focused on the preservation of liquidity and cash flow management since the onset of the pandemic. Discretionary capex projects were postponed, and no new major capital commitments have been made. We have no significant debt maturities due before 2023 and thus will not need to refinance debt while credit metrics are under pressure, finance costs will be a little higher in the coming year due to higher average net debt levels.

     

Q4

As the decline in graphic paper demand seems to have worsened in the past year, do you have further plans to convert additional graphic paper machines to packaging and speciality paper grades?

 

While we foresee a time when further conversions may be attractive, our focus in the medium term is to expand our barrier paper technology capabilities via the utilisation of the technology acquired in the Rockwell acquisition at our Alfeld Mill. This should be complete by mid-2022 and will allow us to take advantage of the growing demand for more environmentally friendly packaging solutions. Furthermore, both Somerset PM1 and the Maastricht Mill conversions continue to ramp up production of paperboard, displacing graphic paper production on these machines. Operating rates on our graphic paper machines are likely to return to pre-Covid-19 levels in 2021, both as a result of the recovery in these markets from their lows, but also as a result of significant capacity reductions already announced or implemented by competitors and ourselves in 2020 and 2021. These improved operating rates will not only support improved margins, but also reduce the need to convert machines in the near term.

     

Q5

Your Thrive25 strategy seems to be an evolution of the 2020Vision, was a more radical change not required given the events of the past year?

 

The board and senior management of Sappi believe that the core of our 2020Vision strategy remains relevant to our business today. While the Covid-19 pandemic rebased graphic paper demand to a lower level than previously envisaged, the actions of the industry as a whole to balance supply and demand through closures and conversions will allow this segment to operate at reasonable margins. More importantly this will generate the cash that allows our business to fund the strategic investments in growing and higher margin segments. Our position as leading European and North American graphic paper suppliers, with well-invested low-cost mills, gives us confidence that these assets have a sustainable future. DP experienced a tough year for pricing in 2020 and a temporary drop in demand, but the growth prospects for DP remain attractive as Viscose and Lyocell continue to meet the demands of the textile industry for natural cellulosics. Our position as a low-cost producer, particularly with the low-cost wood supply to our South African operations and ongoing expansion and upgrade of the Saiccor Mill, gives us confidence that we will again generate attractive returns in this segment. Legislation, consumer preference and brand owner focus on sustainability continue to drive the shift from plastic to paper in many categories of packaging and speciality paper. Our investments in the packaging and speciality papers segment over the past seven years have positioned us well in respect of technology, R&D, cost base and customer service to take advantage of this shift. Given the impacts on our business of the past year, the Thrive25 strategy also recognises that there will need to be two phases to the continued evolution of our business of the next five years. In the initial period we will focus on strengthening the balance sheet and returning leverage levels to more appropriate levels for a cyclical industry like ours, before making further investments in the growing and higher margins segments. Where the Thrive25 strategy does clearly differ is the embedding of sustainability and innovation within the overall business strategy, recognising that as an industry that utilises renewable resources there is both great opportunity and an ethical obligation to reduce adverse impact inherent in our business.

     

Q6

Climate change has been identified as a top risk for business globally, how does Sappi intend to address this risk?

 

We are addressing climate change through two main mechanisms. Firstly, we are targeting reductions in both our absolute emissions and emission intensity and in the past year we have committed to setting a science-based target for our emissions reduction initiatives. The first significant step towards this ambitious target is the work we are currently doing at Saiccor Mill where we are installing a new recovery boiler and converting the calcium line to magnesium. This will lead to a significant reduction in the fossil fuel energy requirements and increase our renewable energy usage. Secondly, we have created a working group to implement the recommendations of the TCFD. See Helping to mitigate climate change (in the plant tab). This will allow us to more effectively evaluate climate-related risks and opportunities, make better capital allocation decisions and make more informed strategic decisions. This work will be completed in the coming year and will inform our climate change strategy.