The strong cash generation and substantial debt reduction in FY2022 has fundamentally repositioned the business and created a more resilient balance sheet that can withstand any potential headwinds in our markets and provides a flexible platform for future growth. We recognise that a disciplined approach to capital allocation is a necessity in times of macro-economic uncertainty and our net debt target of approximately US$1 billion and maintaining the net debt to EBITDA ratio of 1.5 times through the cycle are our guiding principles for all discretionary capital allocation.

Our first priority for capital is to maintain our licence to operate as we must comply with all legislation in the regions in which we operate. This periodically requires us to allocate capital for certain environmental and regulatory compliance initiatives. We also recognise that climate change, water scarcity, waste/pollution and biodiversity loss represent both physical and transitional risks to our business. We have a duty of care to minimise our impact on the environment and stakeholder expectations in this regard continue to mount. To this end, we have recently committed to science-based decarbonisation, which we anticipate will require a capital outlay of approximately US$70 million per annum to achieve our 2030 targets. Maintaining our existing operations is also a high-level priority and we consider our annual maintenance capex as a strategic investment in our existing assets to ensure future safe and efficient operations. We estimate that this first level capital priority to sustain our operations will require in the region of US$350 million per annum.

Our second tier of capital allocation priorities is to improve the profitability of the business. There are a number of opportunities to improve profitably through smaller investments in efficiency enhancements, which improve our cost position and give us quick returns on our investment. We are also continuously striving to reduce our exposure to graphic paper markets and have an ongoing strategic programme to identify modest investment opportunities to modify and optimise our graphic paper assets to shift production to higher-margin packaging and speciality paper products. Our next priority for capital allocation is to return value to our shareholders. Our healthier balance sheet and large cash reserves means that we are now in a position to resume sustainable dividends. However, we acknowledge that there are significant uncertainties that lie ahead in 2023 and are thus taking a conservative approach with our dividend ratio and aim to increase dividends over the next few years to a cover of three times.

Our stronger balance sheet now enables us to move into phase two of our Thrive25 strategy to focus on further growth in our higher-margin segments. We are excited about these opportunities and recently announced an investment to convert and expand the Somerset PM2 from coated paper to SBS paperboard. The project will be funded through free cash flow from operations, thus maintaining our net debt target. Following its completion, this expansion will increase our packaging and speciality paper capacity and is anticipated to boost our ROCE.

Overall, we expect de-gearing and debt reduction to continue in FY2023 as we receive the proceeds from the sale of three of our European mills. We will continue to look for opportunities to deliver the growth and returns envisaged in our Thrive25 strategy and entrench our leading position in our selected markets.

Our graphic papers segment delivered a record EBITDA in 2022. The extremely tight market conditions that led to this extraordinary achievement were driven primarily by significant capacity closures in the last three years. Combined with a stronger than anticipated rebound in economic activity post-Covid-19 and constrained global logistics, we experienced strong demand from our customers and were able to implement multiple price increases over the course of the year, which boosted margins substantially. We do not believe that these conditions are sustainable and the underlying demand for graphic paper continues to decline at a rate of approximately 5% to 6% per annum. Nevertheless, 2022 has demonstrated that the graphic papers segment has the potential to be profitable and generate substantial cash if supply and demand are in balance.

A key element of our Thrive25 strategy is to reduce our exposure to declining graphic paper markets and we made great progress against this objective with the sale of three of our European graphic paper assets (Kirkniemi, Stockstadt and Maastricht Mills). For the most part, the product categories served by these assets (coated mechanical and uncoated woodfree paper) are not a core focus for Sappi and this divestment allows us to consolidate our portfolio and concentrate on commercial print where we are a leader and have competitive advantage. The sale removes approximately 1.2 million tons of lower-margin graphic paper capacity from our portfolio. The remaining graphic paper assets in our portfolio are competitive and can generate favourable returns in a balanced marketplace. The conversion and expansion of Somerset PM2 will remove another 240,000 tons of graphic paper capacity and increase our packaging capacity by 470,000 tpa. In addition, the modest investments at Gratkorn Mill to produce label paper will over the next few years swing a further 200,000 tpa from coated woodfree to speciality paper. We will continue to optimise our graphic papers business to contain costs and improve productivity and are confident that we will be able to reduce graphic papers to less than a third of our sales volumes in the next five years while growing our packaging and speciality papers portfolio.

We continue to evaluate our graphic paper machines globally for potential conversion opportunities to packaging and speciality paper grades. Our aim is to create the flexibility to allocate capacity between graphic paper, where volume is declining, to packaging and speciality paper grades, where demand is growing and margins are higher. This helps to maintain our graphic paper operating rates, maximise cash generation and establish Sappi as a premium global supplier of packaging and speciality papers, while maintaining a strong position in graphic papers.

The strong economic recovery post-Covid-19 has created havoc with global supply chains over the last two years. Severe port congestion and resultant berthing delays essentially locked up inventories on vessels outside ports creating an artificial shortage of goods, which set in motion a wave of inflation across the globe. Geopolitical turmoil in Europe in 2022 further exacerbated the already uncertain macro-economic environment and inflation escalated to unprecedented highs. Our variable manufacturing and delivery costs at a group level increased 35% y-o-y with every input category rising substantially. On the back of constrained raw materials availability, security of supply and aggressive cost mitigation became strategic imperatives. The arduous environment demanded agility and flexibility from our procurement, operations and sales teams as customer pressure mounted and our orderbooks reached record highs. Innovation springs from adversity and our teams stepped up to the challenge. We qualified alternate raw material suppliers, modified product recipes, optimised delivery modes and implemented product surcharges where appropriate to offset rising costs. The intensified level of global co-operation truly embodied our ‘OneSappi’ ethos and core values of doing business safely, with integrity and courage, making smart decisions that we execute with speed.

Globally, our variable costs are still at very high levels and some categories continue to rise. However, with supply chains easing and demand for commodities softening, we expect that costs will begin to turn in 2023. Pulp prices have started reducing in China and we anticipate that North America and Europe pricing will follow shortly. Energy/gas costs in Europe also started to decline in the first quarter of FY2023, which will benefit our European business.

In 2018, we successfully converted PM1 at the Somerset Mill. The investment decision perfectly positioned Sappi to meet the sharp increase in demand for high-quality folding carton and food service paperboard products in North America. The mill generated record sales volumes and EBITDA in FY2021 while achieving the full run rate on PM1 and repeated the performance in FY2022 with another record performance. The PM1 hybrid machine has the flexibility to produce 350,000 tpa of SBS paperboard and coated graphic paper products. End-use markets for the packaging grades include folding carton for luxury beverages, cosmetics and perfumes, health and beauty care and consumer electronics, as well as foodservice board for disposable cups, plates and fast-food packaging.

The demand for Sappi’s foodservice board grades is particularly robust as the industry responds to customer requests for more sustainable and environmentally friendly packaging solutions. Furthermore, demand is expected to accelerate in the next few years as legislation banning the use of polystyrene foam packaging took effect in several US states in 2022 and will likely extend to additional states in future. Our customers are actively seeking to grow their volumes with Sappi as their preferred independent supplier. We have therefore made the decision to convert and expand the PM2 machine at Somerset Mill to 470,000 tpa of SBS. The PM2 conversion project will take three years and start-up is expected to take place in early calendar 2025.

Although the graphic paper assets in North America are currently running full, the market is expected to continue to decline. The 2025 timeline of the conversion is aligned with the graphic paper market decline trajectory. In addition, the hybrid capability of PM1 is a considerable strategic advantage as we will be able to optimise our graphic paper and paperboard mix across the three Somerset Mill paper machines to ensure that our operating rates are maximised during the ramp up of PM2. The technical risk associated with the project is relatively low as the new equipment that will be installed is similar to that on PM1 and the know-how already exists to operate and produce high-quality SBS from this type of machine. We will work closely with our customers to secure sales volumes and expedite product qualifications.

The project is aligned with our Thrive25 strategy to reduce exposure to graphic paper markets and is more than just a conversion, as the capacity of the machine will be doubled. This is therefore a significant growth project for our packaging and speciality papers segment and returns on the investment are expected to exceed a 20% internal rate of return (IRR).

The physical impacts of climate change are already having a direct impact on our business. Changing weather patterns and more extreme weather events are occurring in every region in which we operate. In the past few years, we have experienced disruptions to our operations and supply chains as a result of drought, wildfires, acute cold events and flooding. In 2022 the catastrophic flooding that devastated the KwaZulu-Natal region of South Africa interrupted operations at our three mills in the region. Although the damage to our assets was fortunately relatively minor, the impact on our communities and employees was significant. Critical infrastructure surrounding our operations including road, rail and port assets were severely impacted and we were forced to close our mills for several days and a large quantity of inventory was damaged at a port warehouse. In total we lost 24,000 tons of production and 32,000 tons of inventory. After insurance proceeds, the event cost the business US$18 million.

We consider climate change to be one of the most urgent risks facing society and our operations today. Decarbonisation is thus both a moral and strategic obligation for our business. Sappi has a long track record of investing in our operations to reduce our GHG emissions and the board’s support of our science-based decarbonisation targets reinforces our ongoing commitment to climate action. The SBTi has confirmed that our well below 2° targets are in accordance with the Paris Agreement. Validation of our targets is a concrete demonstration to our increasingly sustainability conscious stakeholders that we are committed to doing our fair share to reduce global warming and contributing to a thriving world.

Achieving our science-based decarbonisation trajectory will be a key enabler for future-proofing our business as we focus our growth strategy on circular, nature based solutions for a low-carbon economy. In the long-term, we anticipate that decarbonisation investments will reduce costs, spur innovation, provide resilience against regulation and boost investor confidence. We have developed a clear roadmap and capital allocation strategy to achieve our 2030 targets and we have also committed to using our influence to encourage our major suppliers to set their own science-based targets.

We acknowledge that decarbonisation of our South African assets will be more challenging. Our mills in this region are still reliant on coal-based power for a significant proportion of their energy requirements. The South African energy landscape is heavily dependent on coal, which is an abundant resource in the country. While Sappi has a relatively high level of renewable energy integration within the context of the region due to our black liquor and biomass fuel sources, we are not fully self-reliant. We thus need to purchase energy from the national utility provider, Eskom, which is predominantly based on coal. There is currently very little renewable energy available for purchase within the country and therefore our decarbonisation roadmap for the region assumes that we will have to invest in our own renewable energy assets. We are actively investigating opportunities for investment in solar, wind and biomass power assets and will furthermore collaborate and explore opportunities for purchasing renewable energy from any new independent power producers that are established. Within the context of the national dependency on coal and high levels of unemployment and social inequality, we recognise that a just transition is critical for South Africa. We will therefore use our influence to collaborate with other business leaders, communities and government stakeholders to advocate for a just transition where no-one is left behind.