OUR
PRODUCT REVIEW

Dissolving
wood pulp

Packaging and
speciality
papers

Graphic papers


With 16% share of the DWP market and producing close to 1.4 million tons per annum, our dissolving wood pulp brand Verve is a truly sustainable brand.

We continue to invest in all three of our world-class production sites – further entrenching our leadership position as a trusted source for responsible and sustainable DWP.

Our dissolving wood pulp (DWP) brand, Verve, is a significant participant in this market. With 16% share of the DWP market and capable of producing 1.4 million tons per annum, Verve is a truly sustainable brand. From textiles to pharmaceuticals and food applications, Sappi has the expertise, technology and track record to meet almost any challenge from these DWP market segments.

In FY19, 19% of Sappi's sales were dissolving wood pulp

DWP is a highly purified form of cellulose extracted from sustainably grown and responsibly managed trees using unique cellulose chemistry technology. The majority of DWP is used to make textiles, such as viscose and lyocell, where DWP is converted to viscose and lyocell staple fibres. From there, the fibres are spun into yarns and ultimately textiles, providing naturally soft, smooth and breathable fabrics. Cellulosic fibre far exceeds cotton and polyester when it comes to sustainability – what consumers want, and our environment needs, are goods that are renewable, biodegradable and have superior resource efficiency, and that is where cellulosic fibres differentiate themselves from the alternatives.

DWP can also be processed into products used in food and beverages, health and hygiene, wrapping and packaging, pharmaceuticals and many more applications that touch our daily lives.

Demand for DWP used in textiles, particularly for viscose and lyocell fibres, is both the largest and fastest growing sector, while end markets and demand growth for other applications are smaller and have lower growth rates. Based on the growth rate in the overall textile market, driven by factors such as population growth, rising urbanisation, wealth and the shift towards more comfortable, environmentally friendly natural fibres, we expect long-term growth in demand of approximately 6% per annum for DWP.

We continue to invest in our three world-class production sites – further entrenching our leadership as a trusted source for responsible and sustainable dissolving wood pulp.

Market prices for DWP are influenced by viscose staple fibre (VSF) and other textile market dynamics, paper pulp market pricing which can also influence swing mills as well as general macro-economic uncertainties pertaining to the ongoing United States/China trade dispute and subsequent US$/RMB exchange rate fluctuations.

Our markets in 2019 and outlook for 2020

FY19 marked a period where a substantial portion of the integrated VSF and DWP capacity disrupted market dynamics; installed VSF capacity now exceeds global demand by approximately 25%. This surplus of new low-cost VSF capacity has disrupted the market, lowering operating rates and resulting in VSF and DWP prices reaching historical lows. Over FY19, the index price for DWP declined by over US$300 per ton. We believe current pricing is below the cash cost of production for a significant proportion of global supply and therefore unsustainable over a prolonged period. Underlying demand for DWP is still growing at rates consistent with our long-term forecasts of around 6%. A recovery in DWP prices is therefore likely to be prompted by a recovery in VSF prices which in turn have been depressed by excess VSF capacity and a weak Chinese textile market.

Despite these low prices, EBITDA was similar to the prior year. EBITDA margins for this segment declined from 29% to 28% on lower US Dollar prices, offset by a weaker Rand/Dollar exchange rate and increased sales volumes. We believe DWP prices in the coming year will be lower than the historical trend price, and that profitability for this segment will therefore be below that of the prior year.

Volumes increased 7%, or 86,000 tons, from last year as we used the expanded production capacity at our three sites after debottlenecking projects. Our 110,000 ton expansion project at Saiccor Mill remains on track for a late FY20 start-up. The project is expected to yield long-term safety, efficiency and reliability improvements and reflects our ongoing focus on productivity and operational efficiencies. This investment is a key part of our strategic vision as we expand into fast-growing, highermargin segments.

In 2020, a year expected to be characterised by macro-economic uncertainty and disruptive market dynamics, we aim to remain focused on meeting and exceeding the needs of our customers. We will capitalise on our competitive advantages: our world-class and sustainably managed plantations, geographic positioning and sterling reputation as a reliable partner to bring our customers sustainable products that create shared value for everyone.

We are your value-creating partner, offering an extensive range of innovative products and services.

With our broad and innovative portfolio of premium products, we have the right solutions to meet our customers' needs, and we offer a broad range of paper based sustainable solutions as an alternative to fossil-fuel based, non-renewable packaging in many of our product segments.

Both legislative edicts and consumer pressure are forcing companies to rethink their packaging needs. Governments, retailers and brand owners all over the world are demanding paper based packaging solutions for their products, and eco-conscious consumers and shoppers are pressuring brand owners for more biodegradable, recyclable and compostable packaging, all reflecting a more circular economy. We estimate the increasing need for more sustainable and environmentally friendly packaging solutions will lead to demand growth of 3% to 6% per year, globally, across the spectrum of our products.

The evolution of our focus from graphic papers to packaging and speciality papers derives from the suitability of many of our graphic paper machines for conversion to packaging grades that require some form of coating. Ahead of commissioning the various conversion projects, we carefully analysed our assets, specifically their production capabilities for packaging and speciality grades, and how those capabilities matched their expected cost of production, the cost to serve customers, historical demand growth, forecasts for the future, as well as competitive threats – choosing only those mills/products/projects where we believed we held a significant advantage. With the construction complete, and our ramp-ups progressing, we are winning new business with customers with a compelling value proposition, propensity for innovation and superlative service record. We aim to create solutions that solve our customers' most critical challenges, helping them grow their sales, lower cost, improve their sustainability metrics and minimise their risk.

We work in partnerships based on trust and respect. As such, we place great value on reliability. Our superior logistics network, financial stability, global availability and consistent premium quality are vital to our customers. That is why we manage well what we can control, always aiming to exceed our customers' expectations, making sure we optimise the full value chain, leveraging the strengths and flexibility of our network.

In FY19, 22% of Sappi's sales came from packaging and speciality papers, up from 19% last year

Sappi offers products and solutions in many different segments including:

  • Flexible packaging can be coated or uncoated, for food and non-food applications, such as sachets, pouches and wrappers
  • Label papers for pressure-sensitive applications as well as for wet glue and wet strength labels
  • Functional papers that offer highly efficient paper based solutions with integrated functionality, like paper with barriers against mineral oil residuals, oxygen, water vapour and grease as well as sealing properties
  • Containerboard including liner and fluting, for corrugated boxes. Sappi's products are found in applications like consumer packaging, shelf-ready packaging and transport packaging for agricultural and industrial uses.
  • Paperboard such as solid bleached board and folding boxboard for luxury packaging with more graphic applications. Packaging for cosmetic, perfume, confectionery and premium beverages uses our products
  • Release liner with silicon base papers and glassine papers for self-adhesive applications, such as graphic art applications with outdoor advertisements, adhesive tapes and office materials
  • Technical papers for interleaving and thermal coating. Examples include tickets for boarding passes and concert/stadium tickets
  • Casting and release papers used by suppliers to the fashion, textiles, automobile and household industries. It is used in the manufacture of synthetic leather and decorative laminate products, creating textures that make designs come to life
  • Dye sublimation papers – a coated sublimation paper for digital transfer printing with water based dye sublimation inks. Designed for the transfer of an image onto various polyester materials, such as banners, flags, snowboards, gadgets (mugs, mouse pads, etc) apparel and home textiles
  • Digital imaging papers for large-format inkjet printing. Posters, for indoor/outdoor applications, and technical printing in the construction industry (CAD/engineering)
  • Tissue paper used for toilet tissue, kitchen towels, serviettes, and medical and industrial wipes.

With our broad and innovative portfolio of premium products, we have the right solutions to meet our customers' needs. We offer a broad range of paper based sustainable solutions as an alternative to fossil fuel based, non-renewable packaging in many of our product segments.

We manufacture from a suite of machines in Europe, North America and South Africa, ensuring scale-based efficiencies and security of supply. Our South African operations mainly focus on the local containerboard market.

We supply the agricultural sector with cartonboard to protect fresh produce as it is shipped from farms to tables locally and around the world. Our North American operations currently make functional packaging papers, label papers and, following our Somerset conversion, paperboard for folding cartons. Examples include perfume boxes, packaging for items like toys, small electronics, chocolates and other fast-moving consumer goods. The focus of our European operations in this segment is much more diverse and niche. Our portfolio has higher levels of specialisation and customisation than most other speciality paper producers. We are capable of engineering specific products for specific customers, particularly those who want more than just a package. We can coat paper to give it unprecedented functionality such as moisture controls, oxygen barriers, grease resistant barriers, vapour barriers and more. Our European operations are ideally located in a region leading the 'paper-for-plastic' packaging movement. Last year, the European Union introduced rules to reduce marine litter by banning certain single-use plastic items, like cutlery, straws and drink stirrers, alongside a measure that holds those plastic producers responsible for the cost of cleaning these items from European beaches. The industry will also be given incentives to develop less-polluting alternatives for these products. With a comprehensive product range on three continents, R&D centres in each region sharing best practices and new findings from new customers, our customers benefit from reliable supply from a broad geographic footprint, and a leader in innovation in the sector.

Our markets in 2019 and outlook for 2020

The review period was characterised by increased volumes and costs. Volumes were nearly 12% higher than last year as ongoing customer trials and qualifications turned into customer wins and subsequent volume commitments. Net sales were up 15% from last year. Despite the increase in volume, EBITDA margins declined from 12.7% last year to 9.8% in FY19. While our realised price per ton increased by some 3% through the year, our average cost per ton rose over 7% from last year, mainly due to purchased paper pulp. Increasing our level of pulp integration has been a group priority for some time. Accordingly, in November 2019, we purchased the Matane pulp mill in Quebec, Canada, which will increase pulp integration for the group. Pulp prices began declining in the second quarter of our fiscal with the benefit most evident in our fourth quarter, as we worked through higher-cost inventory in our supply chain. EBITDA margins rose to 13.7% in our fourth quarter, and given the Matane acquisition and lower market paper pulp prices, we believe margins will be better for this segment in FY20.

Along with higher EBITDA margins, we also believe FY20 will bring additional volume growth, aided by the shift from plastics to paper in various packaging and speciality categories. We expect continued success from conversion projects we completed in 2018. Customer qualifications and trial-runs of our new products prove we are capable of developing innovative and quality products that our customers can depend on.

Coated and uncoated papers designed to get the best results for you and your customers.

When companies build brands, picking the right paper can mean the difference between creating something average and something memorable.

At Sappi, we understand this difference and use our expertise to develop a variety of printing papers designed to meet specific needs, whether a high-end product with extra wow factor, a comprehensive solution that caters to numerous requirements or a paper that is more budget-friendly. Sappi delivers so that brands can have a more memorable impact.

Our markets in 2019 and outlook for 2020

Demand for graphic papers has been in secular decline in mature markets for several years, while growing in developing economies around the world. Taken together, global demand for graphic papers netted modest declines. In FY19 demand dropped relative to 2018 for all grades and in all regions. Having noticed this trend developing in our markets in 2017 and 2018, we converted the most ideal paper machines in our portfolio from graphic paper to packaging and speciality papers, where demand is growing world-wide. Our graphics business is declining and part of our strategy is to rationalise this business. For Sappi, this means maximising its significant cash flow generation, continuously improving our cost position, and optimising the use of our best-in-class production assets. Executing this strategic pillar means more funds available to invest in our other, faster-growing, higher-margin segments and ultimately returning cash to shareholders.

When companies build brands, picking the right paper can mean the difference between creating something average and something memorable.

In FY19, global industry statistics showed volume declines between 8% and 9% for both coated woodfree and coated mechanical papers. Our volumes from the segment were some 7% lower year-on-year due to increases in market share in coated woodfree paper. Despite the decline in market demand, average price realised were flat relative to 2018 as industry capacity closed in the United States and Europe and producers took downtime to manage inventories, keeping our major markets in balance. Input cost pressures eased in the second half as prices for paper pulp declined from their historical highs in late 2018 and early 2019. Our EBITDA margin declined relative to last year, from 8.8% to 7.4%, reflecting the decline in volumes and higher costs in the first half FY19.

In 2020, we expect to sell marginally lower volumes of graphic papers as we ramp up production and sales of packaging and speciality papers from our converted machines. We believe our cost position next year will be better than 2019. Prices for our main raw material – paper pulp – declined in the latter half of 2019 and, while forecasts vary, we see pulp market dynamics showing little reason for pulp prices to rise above their historical highs of last year.

In FY19, 64% of Sappi's sales were in four different grades of graphic papers discussed below:

Coated woodfree paper

Share of sales: 41%

Printers and publishers use coated woodfree paper for a variety of marketing promotions including brochures, catalogues, calendars, annual reports, direct mail, textbooks and magazines. Coated paper is brighter, smoother and tends to have greater opacity than uncoated grades. We manufacture coated woodfree paper in our North American and European businesses but sell to customers all over the world. In FY19, 41% of Sappi's sales were in this segment, typically through large paper merchants.

Demand trends: Global advertising expenditure is forecast to grow, but the print share of that spend is expected to decline. However, we believe there will always be a place for paper within the marketing mix. Globally, demand for coated woodfree paper is forecast to decline from around 22 million tons in 2019 to 18 million tons by 2023.

Sales: Sappi's net revenue from coated woodfree paper was 7% less than last year due to slack demand and the subsequent downtime taken during the year. Sales volumes declined around 10% in 2019, due to this downtime and our conversion projects away from graphic paper. Globally, demand for coated woodfree paper declined by 8.5%.

Coated mechanical paper

Share of sales: 10%

Coated mechanical paper is primarily used in magazines, catalogues, newspaper inserts and other advertising materials. In FY19, 10% of Sappi's sales constituted coated mechanical paper, all from our European business. Customers for this paper are typically large paper merchants, commercial printers and publishers of weekly and/or monthly magazine titles.

Demand trends: Demand for coated mechanical paper is more closely linked to demand for magazines. Readership, subscriptions, circulation, pagination and advertising revenue per page continue to decrease in larger markets as consumers opt for digital formats.

Sales: Sappi's net revenue from coated mechanical paper was 11% lower than last year, due to lower volumes as we took both marketrelated downtime and converted coated mechanical capacity into coated woodfree capacity. Volumes were around 12% lower than the prior period. This year, the global market contracted by 8.4%.

Uncoated woodfree paper

Share of sales: 6%

Uncoated woodfree paper is used for letterheads, business stationery and photocopy paper, with certain brands sold to converters for books, brochures, envelopes, pamphlets and magazines. Sappi makes and sells uncoated woodfree paper in our European and South African businesses. In FY19, 6% of Sappi's sales were uncoated woodfree paper. Our main customers in this sector are paper merchants and converters.

Demand trends: Demand for uncoated woodfree paper is expected to post modest declines of about 2% over the next few years. Like other graphic papers, demand continues to decline in most markets, with limited growth from emerging markets.

Sales: Our net revenue from uncoated woodfree paper was 9% higher than last year, reflecting increased volumes and prices in both Europe and South Africa. Globally, demand was relatively stable this financial year, with a modest decline of 1.4%.

Newsprint paper

Share of sales: 1%

Newsprint, 1% of Sappi's sales, is manufactured from mechanical and bleached chemical pulp, with uses including advertising inserts and newspapers. We manufacture and sell newsprint from our South African business.

Demand trends: Demand for newsprint is principally derived from newspaper circulation and overall retail advertising. As newspaper readership declines around the world, publishers are consolidating and many titles have closed. There are pockets of growth in advertising-financed daily newspapers typically found in large metropolitan cities.

Sales: Production problems limited our newsprint volumes this year, which were 4% behind last year although net revenues rose marginally. Globally, newsprint demand declined 11% versus 2018.