Throughout this unprecedented time, the health and safety of our employees remained paramount. Execution of a comprehensive Covid-19 action plan enabled us to operate in a safe and 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. We are very pleased to report there were no work-related fatalities during the year, but regrettably 17 employees succumbed to Covid-19. We recognise the pandemic has a tremendous impact on the mental health of our employees and their families, and our employee-wellbeing programmes and communication campaigns focused on providing emotional support and encouraging vaccination.
Our performance with respect to safety across the group was mixed. Sappi Southern Africa achieved an all-time low LTIFR in 2021, however, Sappi North America and Sappi Europe’s safety performance deteriorated relative to 2020. The pleasing progress in Sappi Southern Africa was a result of continuous focus on and integration of programmes such as the “Life Saving Rules”, “Visible Felt Leadership” and Sappi Forest’s “Stop. Think before you act”. In Sappi North America, four of the five sites recorded their best ever safety performance but several slip/trip/fall injuries in the first quarter of the year were responsible for the overall LTIFR deterioration in the region. The issues were successfully addressed through employee engagement and probing of cultural factors as part of the incident investigations and the safety performance in the remainder of the year was back in line with previous excellent standards. Sappi Europe’s safety performance was disappointing with the majority of the injuries occurring at three sites. A ‘Safety Instruction Handbook’ covering all aspects of safety from values, tools, management and behaviours was developed and rolled out together with a standardised audit system. The European leadership remain steadfastly committed to zero injuries and a communication campaign emphasising that “nothing is so important it cannot be done safely” is underway.
Market demand across Sappi’s major product segments improved steadily during the year as global economic activity resumed. Highlights for the year included the recovery of profitability in the pulp segment driven by buoyant demand and significantly better market prices, combined with an excellent performance of the North American region, which delivered its highest EBITDA ex SI in over a decade. The investments of recent years into packaging and speciality papers, including the Matane Pulp Mill investment, reaped rewards as the segment achieved record profitability and sales volumes increased by 21%. However, profitability of the European business was hindered by strict Covid-19 lockdowns, which suppressed economic recovery across the value chain and spiralling costs.
A rapid rebound in global trade following the resumption of economic activity after the first wave of the Covid-19 pandemic amplified existing logistics challenges around the world. Demand for shipping accelerated dramatically as organisations attempted to restock inventories, which led to widespread supply chain constraints including 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, the high demand for raw materials and commodities, coupled with long lead times, 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 the 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 and closed the year at US$1,000 per ton at the end of September 2021. Sappi customer demand was robust, and EBITDA ex SI 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 approximately 100,000 tons at year end which reduced EBITDA ex SI 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 will be completed in the first quarter of FY2022.
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 speciality papers sales volumes was hampered by weaker demand for certain non-essential 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 ex SI for the segment increased from US$179 million to US$214 million.
Global demand for graphic paper grades improved progressively 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 graphic paper production curtailment in the European operations. Despite overall graphic papers segment sales volumes increasing 3% compared to the previous year, EBITDA ex SI deteriorated from US$131 million to US$120 million driven primarily by substantial cost inflation in purchased pulp, chemicals, energy and delivery costs.
(1) Market price for imported hardwood DP into China issued daily by the CCF Group.
Strategic review
Fiscal 2021 was the first year of our Thrive25 strategy. The five-year strategy leverages the power of OneSappi to drive real and sustained value creation. An integral component of the Thrive25 vision is recognition that society in general and our people, in particular, expect us to play a role beyond making and selling. Within this context, we have created a purpose statement as part of our new strategy that articulates our ambition to create a brighter future for the world and our business.
The Thrive25 purpose statement and strategy are fully aligned with our business strategy.
Through collaboration and innovation, we will grow profitably, using our strength as a sustainable and diversified global woodfibre group, focused on DP, graphic papers, packaging and speciality papers, and biomaterials.
Our Thrive25 strategy encompasses the following four main objectives:
- Grow our business – Committing to core business segments while investing in innovation, growth opportunities, and ongoing customer relationships.
- Sustain our financial health – Reducing and managing our debt, growing EBITDA ex SI, maximising product value, optimising processes globally, and strategically disposing of non-core assets.
- Drive operational excellence – Strengthening our safety-first culture and reducing resource use while enhancing efficiency and making smart data investments.
- Enhance trust – Improving our understanding of and proactively partnering with, clients and communities, driving sustainability solutions, and meeting the changing needs of every employee at Sappi.
In 2020 the Covid-19 pandemic triggered the deepest global recession in decades as economic activity faltered when governments enforced strict restrictions on movement to curb the transmission of the virus. The subsequent implementation of health and safety protocols and vaccination programmes enabled economic activity to resume. However, the emergence of more transmissible variants of the virus resulted in a series of Covid-19 waves in 2021 which continued to fuel economic uncertainty and volatility as countries moved in and out of lockdown restrictions.
The impact of the pandemic on our results in the second half of FY2020 was catastrophic and necessitated a shift in strategic focus to the preservation of liquidity.
Significant production curtailments were necessary to manage inventories in response to dramatic reductions in sales across all product segments. During FY2021, market demand across Sappi’s major product segments improved progressively as global economic activity resumed, which prompted a shift in the strategic focus to returning the business to profitability and mitigation of supply-chain disruptions and cost inflation.
Within the context of ongoing economic uncertainties and the priority to restore the business to profitability, we re-evaluated the timelines of our Thrive25 strategy. While the four strategic pillars remain relevant for our five-year vision, our strategic imperative over the next two years is to deleverage the business and reduce absolute debt.
Phase 1 (2021-2022) – Deleveraging the business
The priority in the first phase is to strengthen the balance sheet by reducing debt and maximising cash generation. During this period, we will drive further margin improvement and ensure that all approved capital projects are completed on time and within budget. We will also begin investigating new growth opportunities for the next phase.
Phase 2 (2022+) – Invest for profit growth
During the second phase, we will begin the investment roll out into new growth opportunities, make decisions on larger expansions and conversions and execute our sustainability strategy.
Initiatives and actions undertaken in FY2021 to support our strategic objectives are outlined below.
Grow our business
In the first phase of our Thrive25 strategy, as we deleverage the business, there are no new major capital projects planned. The 2021 focus for growing the business was therefore on completion of the 110,000 ton Saiccor Mill expansion project and growing the packaging and speciality papers volumes from our recently converted assets in Europe and North America.
The Saiccor Mill expansion project was impacted negatively by the Covid-19
pandemic. The ongoing travel restrictions due to Covid-19 prevented original
equipment vendors from travelling to South Africa and resulted in significant delays
to the project schedule and commissioning timeline. The civil unrest in July 2021
necessitated a complete shutdown of the site and added to the delays. The hot
commissioning of the plant began in the fourth quarter and will be completed during
the first quarter of FY2022. We expect the ramp up to full operating rate will take a
number of months and therefore full cost savings and environmental benefits of the
project will likely only be realised from the second half of 2022. We anticipate
demand for DP in 2022 will be strong and with pricing significantly above the
long-term average, every effort will be made to expedite the ramp-up.
The strategic decision taken to reduce exposure to graphic papers through
diversification into packaging and speciality papers continued to yield benefits
through the year. Sales volumes grew by 21%, and EBITDA ex SI in this segment
reached a new record high, contributing 40% of the group EBITDA ex SI (vs 18% in FY2019). The underlying demand for packaging and speciality paper grades
remained resilient despite the negative impact of Covid-19 on the demand for
non-essential luxury goods. The gratifying growth in sales volumes was primarily
driven by the ramp up of the Somerset Mill PM1 conversion in North America, which
achieved target run rate during the period. Strong demand for our packaging grades
in the US allowed for product mix enhancement and optimisation at both a product
and customer level, which facilitated growth in EBITDA ex SI margins in the region. In
FY2022, we will continue to optimise margins by shifting into more high-end label
and packaging markets while expanding on our base folding carton business. In
Europe, packaging and speciality paper sales volumes grew by 10% despite a
relatively slower economic recovery from Covid-19 and we expect further growth
during FY2022 as retail and consumer activity increases. New product introductions
such as our containerboard Fusion Nature range and Parade Label Pro will enable us
to further expand our European portfolio of packaging and speciality papers. In
South Africa, containerboard demand continues to grow, driven by robust fruit
exports, and in FY2022 we will optimise our customer portfolio to focus on
supporting the growth in the domestic market.
We are committed to reducing our exposure to the graphic paper market and will
continue to explore opportunities to utilise our graphic paper assets to produce
packaging and speciality paper grades without significant capital investment.
Sappi Biotech made pleasing progress in growing lignin and commercialising our
Symbio fibre composite and Valida fibrillated cellulose product offerings. In FY2021,
commercialisation of Symbio gained traction with uptake by a major automotive
manufacturer in the US, while various other brand owners have the product in their
pre-commercial qualification phase. Our Valida pilot plant is running at capacity with
repeat orders in diverse application fields such as concrete, cosmetics, personal
care, paint and coatings, where it is valued as a dispersant, suspension stabiliser and
rheology modifier. Our lignin business continued with its expansion trajectory in
FY2021 and for the third year in a row, growth exceeded 30%. We have made
considerable progress in moving beyond traditional commodity markets such as
dust suppression and concrete admixtures to higher value markets. As part of Sappi
Biotech’s ongoing strategy to enter adjacent markets, the development of our lignin
product for the animal feed industry culminated in the launch of our Sappi Pelletin
product in this market with first sales reported in 2020.
Sustain our financial
health
The strategic imperative to deleverage
the business was a key focus in the
current year. The net debt to EBITDA
ex SI leverage ratio decreased from a
peak of 6.5 in the second quarter to
3.7 as EBITDA ex SI recovered steadily
quarter-on-quarter. The leverage ratio
remains significantly above our target
of two times, and therefore the
imperative for FY2022 remains
deleveraging the business and utilising
the cash generated in the year to
reduce our absolute debt.
In 2020 we proactively negotiated the
suspension of the measurement of our
revolving credit facility (RCF)-linked
financial covenants through to
September 2021 (with the first
measurement due in December 2021)
in order to see us through the worst of
the Covid-19 impact on our business
and financial metrics. In 2021, we
negotiated new leverage covenants
(net debt: EBITDA ex SI) with our
banking group. The leverage covenant
for December 2021 is 5.50 and will
reduce quarterly to 4.50 in
December 2022 and 4.25 in
March 2023. The interest coverage
covenant will be reinstated at its
previous level of 2.50 times. With the
leverage ratio of 3.7 at year end, we
have sufficient headroom when the
covenants are reinstated in
December 2021.
In the first financial quarter of 2021,
Sappi Southern Africa Limited issued
five-year convertible bonds with a
principal amount of ZAR1.8 billion.
Shareholder approval to convert the
bonds into ordinary shares of Sappi
Limited was received at the AGM on
03 February 2021. The net proceeds
from the bonds were used to fund the
remaining capital expenditure required
for the expansion of the Saiccor Mill.
During 2021 favourable market conditions provided the group with the opportunity
to refinance the €350 million 2023 bonds at par. Strong investor demand provided
the opportunity to upsize the replacement 2028 bond to €400 million at a coupon
3.625%. The additional proceeds were used to repay the partly drawn RCF in
Europe. We have no significant maturities due before 2026 and we are comfortable
with the maturity profile of our debt.
Capital expenditure in FY2022 is estimated to be US$395 million and includes
approximately US$30 million for completion of the Saiccor Mill expansion,
US$80 million for cost optimisation and quality improvement projects and
US$75 million for sustainability projects.
Drive operational excellence
Reducing both variable and fixed costs throughout the business is integral both
to maintaining or improving margins and to the sustainability of our operations.
This is especially true in commodity businesses where we faced declining demand,
such as graphic papers. In the past year, we set ourselves a target of a US$70
million reduction in third-party expenditure compared to 2020 through efficiency
and raw material usage improvements as well as delivering savings through various
procurement initiatives. We are pleased to report that savings of US$98 million
were realised, which helped offset the significant increase in purchased pulp,
chemicals and energy costs. In 2022 we are targeting a further US$42 million
in variable cost savings.
The sustainability capital projects for FY2022 include the conversion of the calcium
cooking line at Saiccor Mill to the more sustainable magnesium bisulphite
technology as well as decarbonisation investments in Europe to convert boilers at
Gratkorn and Kirkniemi Mills from coal to biomass and an electric boiler at
Maastricht Mill. This Saiccor Mill calcium conversion will reduce the need for
coal-based power generation at the mill, significantly reducing the carbon footprint,
and will additionally facilitate considerable variable cost savings. One of the more
significant cost and quality optimisation projects for FY2022 is an upgrade of the
kraft liner board machine at Ngodwana Mill which will improve the quality of the
product and allow the mill to remain competitive against imported grades. The
South African containerboard market is growing at a rate of 5% per annum on the
back of increasing fruit exports and this is seen as a strategic investment to retain
our customer footprint in preparation for further potential expansions in this product
segment. The cost and quality capital also includes an allocation for information
technology projects which are critical for addressing both the risk and opportunities
offered by Industry 4.0 and will support the various advanced analytics projects
across all three regions which are focused on improving operating efficiencies.
Enhance trust
Under our Thrive25 strategy, one of our strategic fundamentals is to ‘enhance trust’.
We aim to meet the challenges of a constantly changing business environment
by building mutual trust and proactively partnering with employees, clients and
communities to drive sustainability solutions and create shared value. Our Thrive25 people strategy focuses on leadership and creating a culture that enhances
OneSappi; builds capability for current and future requirements; and strengthens
employee engagement. In FY2021 we completed an employee engagement survey,
identified areas for improvement and developed appropriate action plans. Values and
ethics are critical for driving operational performance and developing stakeholder
trust. We place a high premium on adherence to sustainable business practices and
ethical behaviour as encapsulated in our Supplier Code of Conduct and in FY2021
we made good progress towards our supplier engagement target. Furthermore,
we have partnered with EcoVadis and will utilise their technology platform and
methodology to assess the sustainability performance of our suppliers.
In January 2021, our South African Forestry division was awarded the first ever
Programme for the Endorsement of Forest Certification (PEFC) forest management
certificate in South Africa. This achievement indicates that Sappi Southern Africa's
forest management practices meet the requirements for sustainable forest management set out in the PEFC-endorsed
standard for South Africa,
the Sustainable African Forestry
Assurance Scheme (SAFAS). The
intense work in collaborating on the
development of the SAFAS system
will yield significant benefits outside of
our own forest certification as there is
now potential to make PEFC forest
certification accessible to South
Africa’s small landowners. This has
great promise for ensuring certification
not only delivers social and
environmental value, but also supports
socio-economic and development
priorities.
Through heightening our focus and
ambition on climate action, we seek
to increase our contribution to building
a resilient, thriving world and have
aligned our decarbonisation pathway
with climate science. In FY2021 we
submitted our 2030 GHG emission
reduction target to Science Based
Target initiative (SBTi) for validation
and also completed assessment of
our mill operations and forestry assets
following the TCFD recommendations
on climate-related disclosure.
Sustainability
Sustainability forms the foundation of
our Thrive25 strategy as we strive to be
a trusted, transparent and innovative
partner in building a biobased circular
economy. The alignment of our Thrive25 sustainability targets with the United
Nations Sustainable Development
Goals (SDGs) demonstrates our
commitment to ending poverty,
protecting the planet and ensuring that
all people enjoy peace and prosperity.
Sappi has always focused on the
sustainable management of our
operations, on increasing efficiency
and maximising value from our
sustainable natural resources but as
we look to the future, it is clear we have
an obligation to play a role beyond
making and selling. Working with nature
using renewable and sustainable wood
to produce circular, biobased products
can have a sustainable impact on
society and the planet and is the basis
of our ambition to build a thriving world
by unlocking the power of renewable
resources for the benefit of people,
communities and the planet.
In the past year we made great strides
in assessing our risk related to climate
change utilising the recommendations
of the TCFD, submitted our GHG
emissions reduction target to SBTi for
validation and placed increasing focus
on managing risk in our supply chains
via our Supplier Code of Conduct
roll-out and partnership with EcoVadis.
Looking forward
Strong demand in the global textile
and apparel sector coupled with low
inventories throughout the value chain
and elevated textile fibre prices (cotton,
polyester and VSF) are all contributing
to our positive outlook for DP in
FY2022. Furthermore, growing
consumer demand for nonwoven
hygiene products and a global shift
away from single use plastics creates an
opportunity for viscose based cellulosic
nonwoven products that drives further
positive sentiment for our DP business.
However, short-term DP demand in
China is impacted by the recent
implementation of energy savings
regulations imposing curtailments for
energy-intensive manufacturing
operations, which includes the textile
value chain. Consequently, the Chinese
DP market price dropped to US$940
per ton in October 2021. 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 market
as demand in South-East Asia, Europe,
North America and the near East
remains strong.
The recovery of demand for graphic
papers 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 speciality
papers 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 Mill
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.
Current liquidity headroom in the group
remains good, with cash deposits at the
end of the financial year of US$366 million
and committed revolving credit facilities
of approximately US$732 million.
The first measurement of our newly
negotiated covenants will now take
place at the end of December 2021.
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 ex SI. Taking these
factors into account, we anticipate a
further improvement in EBITDA ex SI
for the first quarter of FY2022 relative
to the fourth quarter of FY2021.
Appreciation
The Covid-19 pandemic continues to
impact on our employees, communities,
suppliers, customers, funders and
shareholders. In these uncertain
and difficult times, close relationships,
transparency and trust remain the
foundation of our collaborative approach
to seeking solutions to problems
and creating shared value for all of
our stakeholders. We thank you for
the faith you have shown in us during
these challenging times.
We are grateful for the support of
our customers in all of our different
markets, with whom we continue to
work together, providing relevant
products and services which provide
sustainable value. Our employees
embraced our Thrive25 purpose and
strategy and demonstrated incredible
resilience and agility. We thank them for
their unwavering dedication to our
OneSappi vision and adaptation to a
new way of working, which allowed us
to continue operations under the most
difficult circumstances and return the
business to profitability.
Our gratitude goes to the board for
their continued commitment to the
group, their valuable insights and
encouragement and for holding us
to the highest ethical standards.
Mrs Janice Stipp has indicated she
will not be making herself available
for re-election as an independent
non-executive director in 2022.
Mrs Stipp was appointed to the board
in June 2019 and served on the Audit
and Risk Committee. We would like to
thank her for the contribution which
she has made to the board since her
appointment.
In conclusion, we value the support
which our shareholders have provided
as we work to enhance sustainable
long-term shareholder returns. We look
forward to their participation at the
AGM on 09 February 2022.