Wrap Text
Third quarter results for the period ended June 2014
Sappi
(Registration number 1936/008963/06)
Issuer Code: SAVVI
JSE Code: SAP
ISIN: ZAE000006284
Third Quarter
results for the
period ended
June 2014
3rd quarter results
Sappi works closely with
customers, both direct
and indirect, in over 100
countries to provide
them with relevant and
sustainable paper, paper-
pulp and dissolving wood
pulp products and related
services and innovations.
Our market-leading range of
paper products includes: coated
fine papers used by printers,
publishers and corporate
end-users in the production of
books, brochures, magazines,
catalogues, direct mail and
many other print applications;
casting release papers used by
suppliers to the fashion, textiles,
automobile and household
industries; and in our Southern
African region, newsprint,
uncoated graphic and business
papers, premium-quality
packaging papers, paper-grade
pulp and dissolving wood pulp.
Our dissolving wood pulp
products are used worldwide
by converters to create
viscose fibre, acetate tow,
pharmaceutical products as well
as a wide range of consumer
products.
The pulp needed for our
products is either produced
within Sappi or bought from
accredited suppliers. Across the
group, Sappi is close to 'pulp
neutral', meaning that we sell
almost as much pulp as we buy.
We are the market leader in specialised cellulose used widely in the
Viscose Staple Fibre (VSF) segment. We are ideally positioned to take
advantage of increased demand.
Highlights for the quarter
- Continued year-on-year improvement in quarterly performance
- Usutu and Nijmegen Mill transactions completed
- Specialised Cellulose business remains sold out
- EPS 3 US cents (Q3 2013 loss of 9 US cents)
- EBITDA excluding special items USD140 million (Q3 2013 USD88 million)
- Net debt USD2,286 million (Q3 2013 USD2,331 million)
Quarter ended Nine months ended
Restated(1) Restated(1)
Jun 2014 Jun 2013 Mar 2014 Jun 2014 Jun 2013
Key figures: (USD million)
Sales 1,484 1,417 1,573 4,556 4,395
Operating profit excluding special
items(2) 67 5 95 222 113
Special items – (gains) losses(3) (2) 19 (4) (16) (16)
EBITDA excluding special items(2) 140 88 171 458 373
Profit (loss) for the period 17 (47) 32 67 (33)
Basic earnings (loss) per share
(US cents) 3 (9) 6 13 (6)
Net debt(4) 2,286 2,331 2,248 2,286 2,331
Key ratios: (%)
Operating profit excluding special
items to sales 4.5 0.4 6.0 4.9 2.6
Operating profit excluding special
items to capital employed (ROCE)(5) 7.8 0.5 11.0 8.7 4.2
EBITDA excluding special items
to sales 9.4 6.2 10.9 10.1 8.5
Return on average equity (ROE)(5) 5.9 (13.5) 11.3 7.8 (3.1)
Net debt to total capitalisation(5) 66.3 63.5 66.2 66.3 63.5
Net asset value per share (US cents) 222 257 219 222 257
(1) Restated for the adoption of IAS 19 (Revised) Employee Benefits and IFRS 10 Consolidated Financial Statements. Refer to
note 2 to the group results for more detail.
(2) Refer to note 11 to the group results for the reconciliation of EBITDA excluding special items and operating profit excluding
special items to segment operating profit (loss), and profit (loss) for the period.
(3) Refer to note 11 to the group results for details on special items.
(4) Refer to supplemental information for the reconciliation of net debt to interest-bearing borrowings.
(5) Refer to supplemental information for the definition of the term.
Commentary on the quarter
The group continued the trend of improving year-on-year performance, with EBITDA excluding special
items of USD140 million, operating profit excluding special items of USD67 million and profit for the period
of USD17 million.
The European business had a solid quarter in a seasonally slow period, with lower variable and fixed costs
arising from cost cutting initiatives offsetting weaker graphic paper prices. Demand for coated woodfree
paper was stable, but coated mechanical paper continues to be weak.
The North American business was impacted by a number of planned and unplanned outages at the
pulp mills, as well as a continuation of the weak pricing in the coated paper markets. Price increases for
coated woodfree web paper were announced during the quarter and this will bring some relief to a difficult
market in the fourth financial quarter.
The Southern African paper business improved on the prior quarter performance due to lower fixed costs
whilst variable costs were negatively impacted by the weaker Rand.
The Specialised Cellulose business had a reasonable quarter, impacted by the planned annual
maintenance shut at the Cloquet Mill. As expected, dissolving wood pulp prices experienced increased
downward pressure due to weaker viscose staple fibre prices. Strong shipment volumes contributed
towards an EBITDA excluding special items of USD70 million.
Finance costs of USD42 million were slightly below those of the restated equivalent period last year.
Earnings per share for the quarter were 3 US cents (including a gain of 1 US cent in respect of special
items), compared to a loss of 9 US cents (including a charge of 3 US cents in respect of special items)
in the restated equivalent quarter last year.
Cash flow and debt
Net cash utilised in the quarter was USD44 million, compared to net cash utilised of USD157 million in
the equivalent quarter last year. The decrease in cash utilisation was mainly as a result of reduced capital
expenditure and an improved operating performance. Capital expenditure in the quarter declined to
USD57 million compared to USD174 million a year ago, reflecting the completion of the expenditure on the
dissolving wood pulp projects.
Net debt of USD2,286 million increased by USD38 million compared to the prior quarter, mainly as a result
of increased working capital. Proceeds from the sale of the Usutu assets for ZAR1 billion were received
after quarter-end and will be utilised to reduce debt.
Liquidity comprises cash on hand of USD248 million and USD572 million available from the undrawn
committed credit facilities in South Africa and Europe.
Operating review for the quarter
Europe
Restated(1) Restated(1)
Quarter Quarter Quarter Quarter Quarter
ended ended ended ended ended
Jun 2014 Mar 2014 Dec 2013 Sept 2013 Jun 2013
EUR million EUR million EUR million EUR million EUR million
Sales 543 603 581 591 574
Operating profit (loss)
excluding special items 12 14 3 (9) (12)
Operating profit (loss)
excluding special items
to sales (%) 2.2 2.3 0.5 (1.5) (2.1)
EBITDA excluding special
items 39 48 38 27 24
EBITDA excluding special
items to sales (%) 7.2 8.0 6.5 4.6 4.2
RONOA pa (%) 4.0 4.6 1.0 (2.8) (3.5)
(1) The group adopted IAS 19 (Revised) Employee Benefits for the year ended September 2014. Refer to note 2 to the group results for
more detail.
During this seasonally slow quarter, albeit stronger than expected, overall sales volumes were
approximately 2% lower year-on-year, with growth in speciality paper volumes and stable coated
woodfree volumes. The coated mechanical market remains weak, both domestically and globally.
Average net sales prices in Euro were lower across all products compared to the equivalent quarter in
the prior year, but were flat compared to the prior quarter. Savings in variable, fixed and logistics costs
enabled the business to improve the year-on-year performance despite the lower sales prices. The
weaker profitability compared to the prior quarter is largely due to seasonally lower sales volumes.
An agreement was reached to dispose of the Nijmegen Mill to an affiliate of the American Industrial
Acquisition Corporation (AIAC) on 16 June 2014. The mill will now manufacture packaging paper and will
no longer be engaged in the coated graphic paper business beyond a six-month transition arrangement
for 52,000 tonnes.
North America
Restated(1) Restated(1)
Quarter Quarter Quarter Quarter Quarter
ended ended ended ended ended
Jun 2014 Mar 2014 Dec 2013 Sept 2013 Jun 2013
USD million USD million USD million USD million USD million
Sales 380 382 365 366 324
Operating (loss) profit
excluding special items (9) 5 (3) 27 (2)
Operating (loss) profit
excluding special items
to sales (%) (2.4) 1.3 (0.8) 7.4 (0.6)
EBITDA excluding special
items 10 22 17 47 16
EBITDA excluding special
items to sales (%) 2.6 5.8 4.7 12.8 4.9
RONOA pa (%) (3.5) 1.9 (1.2) 10.4 (0.8)
(1) The group adopted IAS 19 (Revised) Employee Benefits for the year ended September 2014. Refer to note 2 to the group results for
more detail.
The graphic paper markets continued to be characterised by weak pricing during the quarter, whilst our
volumes were flat year-on-year. Price increases for web products were announced during the quarter and
should improve our results going forward.
Dissolving wood pulp profitability was negatively impacted by the planned annual maintenance shut at
Cloquet as well as higher logistics costs incurred during the quarter.
The specialities business is experiencing improved sales to Europe, which is offsetting weaker Chinese
markets.
Variable costs were higher than those of the equivalent quarter a year ago as a result of higher wood and
paper pulp costs, but also as a result of some unscheduled outages at both the Cloquet and Somerset
pulp mills.
During the quarter, a reorganisation plan was announced that has resulted in the reduction of
approximately 50 salaried positions and 60 hourly paid positions across the region.
Southern Africa
Restated(1) Restated(1) Restated(1)
Quarter Quarter Quarter Quarter Quarter
ended ended ended ended ended
Jun 2014 Mar 2014 Dec 2013 Sept 2013 Jun 2013
ZAR million ZAR million ZAR million ZAR million ZAR million
Sales 3,781 3,942 3,488 3,779 3,255
Operating profit excluding
special items 653 765 568 509 192
Operating profit excluding
special items to sales (%) 17.3 19.4 16.3 13.5 5.9
EBITDA excluding special
items 810 897 761 709 364
EBITDA excluding special
items to sales (%) 21.4 22.8 21.8 18.8 11.2
RONOA pa (%) 16.2 18.6 14.1 12.8 4.8
(1) The group adopted IAS 19 (Revised) Employee Benefits and IFRS 10 Consolidated Financial Statements for the year ended
September 2014. Refer to note 2 to the group results for more detail.
The performance of the Southern African business improved compared to the equivalent quarter last year;
a quarter impacted by the conversion to dissolving wood pulp at Ngodwana. The increased dissolving
wood pulp sales from Ngodwana, higher average Rand pricing for dissolving wood pulp and improved
profitability from the paper packaging business all contributed to the improvement.
Compared to the prior quarter, lower average Rand pricing as well as increased variable costs were
responsible for the reduction in profitability.
Variable costs, particularly for wood and pulp, were negatively impacted by the weaker Rand while fixed
costs were in line with last year following cost containment actions.
Directorate
As previously announced on 30 June 2014, Ralph Boëttger relinquished his position as CEO and
Director due to a serious illness. As of 01 July 2014, Steve Binnie, previously the CFO, has succeeded
Mr Boëttger as CEO. Glen Pearce, previously CFO of Sappi Europe, has succeeded Mr Binnie as CFO
and has joined the Sappi Limited board of directors as an Executive Director.
Outlook
The stronger than expected coated woodfree paper market, coupled with excellent ongoing cost control
and focus, has led to steady progress in the European business, an important cash contributor to the
group. Two important capital projects at Gratkorn and Kirkniemi are underway, allowing us to make further
headway in improving the financial performance of this business.
The North American business has experienced an extremely difficult year with cost and price pressures
in graphic paper, inclement weather and some operational challenges. There are early signs that the
graphic paper business will see improved returns with good volumes and higher pricing going forward.
Management focus on cost and operations will aid further improvement.
The South African paper packaging business continues to benefit from healthy demand due to a good
fruit export season.
Due to the competitive nature of the dissolving wood pulp market and weak viscose staple fibre pricing,
we are experiencing continued pressure on our prices. However, demand remains strong and our mills are
essentially sold out for the remainder of the year.
Capital expenditure for the full year is expected to remain below USD300 million and with the proceeds of
the Usutu sale and positive cash generation expected in the fourth quarter, we anticipate net debt to end
the year close to USD2 billion.
The fourth quarter is a seasonally stronger quarter and we believe that the results for the quarter
will continue the trend of improved year-on-year quarterly performance which we have experienced
throughout 2014.
On behalf of the board
S R Binnie G Pearce 31 July 2014
Director Director
Forward-looking statements
Certain statements in this release that are neither reported financial results nor other historical information,
are forward-looking statements, including but not limited to statements that are predictions of or indicate
future earnings, savings, synergies, events, trends, plans or objectives. The words "believe", "anticipate",
"expect", "intend", "estimate", "plan", "assume", "positioned", "will", "may", "should", "risk" and other
similar expressions, which are predictions of or indicate future events and future trends and which do not
relate to historical matters, and may be used to identify forward-looking statements. You should not rely
on forward-looking statements because they involve known and unknown risks, uncertainties and other
factors which are in some cases beyond our control and may cause our actual results, performance or
achievements to differ materially from anticipated future results, performance or achievements expressed
or implied by such forward-looking statements (and from past results, performance or achievements).
Certain factors that may cause such differences include but are not limited to:
- the highly cyclical nature of the pulp and paper industry (and the factors that contribute to such
cyclicality, such as levels of demand, production capacity, production, input costs including raw
material, energy and employee costs, and pricing);
- the impact on our business of the global economic downturn;
- unanticipated production disruptions (including as a result of planned or unexpected power outages);
- changes in environmental, tax and other laws and regulations;
- adverse changes in the markets for our products;
- the emergence of new technologies and changes in consumer trends including increased preferences
for digital media;
- consequences of our leverage, including as a result of adverse changes in credit markets that affect
our ability to raise capital when needed;
- adverse changes in the political situation and economy in the countries in which we operate or the
effect of governmental efforts to address present or future economic or social problems;
- the impact of restructurings, investments, acquisitions, dispositions and other strategic initiatives
(including related financing), any delays, unexpected costs or other problems experienced in
connection with dispositions or with integrating acquisitions or implementing restructuring or strategic
initiatives (including our announced dissolving wood pulp conversion projects), and achieving expected
savings and synergies; and
- currency fluctuations.
We undertake no obligation to publicly update or revise any of these forward-looking statements, whether
to reflect new information or future events or circumstances or otherwise.
Condensed group income statement
Restated
Restated Nine Nine
Quarter Quarter months months
ended ended ended ended
Jun 2014 Jun 2013 Jun 2014 Jun 2013
Note USD million USD million USD million USD million
Sales 1,484 1,417 4,556 4,395
Cost of sales 1,325 1,330 4,044 3,908
Gross profit 159 87 512 487
Selling, general and administrative
expenses 94 95 283 290
Other operating (income) expenses (2) 8 (3) 73
Share of profit from equity
investments (2) (2) (6) (5)
Operating profit (loss) 3 69 (14) 238 129
Net finance costs 42 47 138 139
Net interest expense 43 47 140 139
Net foreign exchange (gain) loss (1) 1 (4) 1
Net fair value (gain) loss on
financial instruments – (1) 2 (1)
Profit (loss) before taxation 27 (61) 100 (10)
Taxation 10 (14) 33 23
Profit (loss) for the period 17 (47) 67 (33)
Basic earnings (loss) per share
(US cents) 3 (9) 13 (6)
Weighted average number of
shares in issue (millions) 522.6 521.5 522.3 521.3
Diluted earnings (loss) per share
(US cents) 3 (9) 13 (6)
Weighted average number of
shares on fully diluted basis
(millions) 526.7 521.5 525.6 521.3
Condensed group statement of comprehensive income
Restated Restated
Quarter Quarter Nine Nine
ended ended months months
Jun 2014 Jun 2013 Jun 2014 Jun 2013
USD million USD million USD million USD million
Profit (loss) for the period 17 (47) 67 (33)
Other comprehensive income loss,
net of tax
Items that will not be reclassified
subsequently to profit or loss – 19 – 29
Actuarial gains on post-employmen
benefit funds – 28 – 43
Tax effect of above item – (9) – (14)
Items that must be reclassified
subsequently to profit or loss (4) (78) (56) (190)
Exchange differences on translation
of foreign operations 2 (76) (57) (184)
Movements in hedging reserves (4) 1 3 (4)
Movement on available for sale
financial assets (2) – (2) –
Tax effect of above items – (3) – (2)
Total comprehensive income (loss)
for the period 13 (106) 11 (194)
Condensed group balance sheet
Reviewed
Restated
Jun 2014 Sept 2013
USD million USD million
ASSETS
Non-current assets 3,625 3,787
Property, plant and equipment 2,960 3,078
Plantations 455 464
Deferred tax assets 98 92
Other non-current assets 112 153
Current assets 1,868 1,940
Inventories 735 728
Trade and other receivables 870 748
Taxation receivable 15 18
Cash and cash equivalents 248 352
Assets held for sale – 94
Total assets 5,493 5,727
EQUITY AND LIABILITIES
Shareholders' equity
Ordinary shareholders' interest 1,160 1,144
Non-current liabilities 3,205 3,371
Interest-bearing borrowings 2,354 2,499
Deferred tax liabilities 288 267
Other non-current liabilities 563 605
Current liabilities 1,128 1,212
Interest-bearing borrowings 180 99
Overdrafts – 1
Other current liabilities 931 1,094
Taxation payable 17 12
Liabilities associated with assets held for sale – 6
Total equity and liabilities 5,493 5,727
Number of shares in issue at balance sheet date (millions) 522.7 521.5
Condensed group statement of cash flows
Restated
Restated Nine Nine
Quarter Quarter months months
ended ended ended ended
Jan 2014 Jun 2013 Jun 2014 Jun 2013
USD million USD million USD million USD million
Profit (loss) for the period 17 (47) 67 (33)
Adjustment for:
Depreciation, fellings and amortisation 89 100 281 310
Taxation 10 (14) 33 23
Net finance costs 42 47 138 139
Defined post-employment benefits paid (19) (22) (57) (54)
Plantation fair value adjustments (21) (10) (70) (151)
Asset (impairment reversals) impairments – (1) (3) 46
Net restructuring provisions and loss on
disposal of assets and businesses (4) 2 (3) 15
Other non-cash items 4 6 20 31
Cash generated from operations 118 61 406 326
Movement in working capital (29) 8 (119) (128)
Net finance costs paid (50) (57) (136) (144)
Taxation paid (4) (2) (1) (15)
Cash generated from operating
activities 35 10 150 39
Cash utilised in investing activities (79) (167) (195) (397)
Capital expenditure (57) (174) (190) (449)
Cash flows on disposal of assets and
businesses (22) 7 (10) 50
Other movements – – 5 2
Net cash utilised (44) (157) (45) (358)
Cash effects of financing activities (13) (7) (60) (42)
Net movement in cash and cash
equivalents (57) (164) (105) (400)
Cash and cash equivalents at beginning
of period 307 361 352 604
Translation effects (2) 5 1 (2)
Cash and cash equivalents at end
of period 248 202 248 202
Condensed group statement of changes in equity
Restated
Nine Nine
months months
ended ended
Jun 2014 Jun 2013
USD million USD million
Balance – beginning of period 1,144 1,525
Total comprehensive income (loss) for the period 11 (194)
Share-based payment reserve 5 9
Balance – end of period 1,160 1,340
Notes to the condensed group results
1. Basis of preparation
The condensed consolidated interim financial results for the nine months ended June 2014 have been
prepared in accordance with the Listings Requirements of the JSE Limited, the framework concepts
and the measurement and recognition requirements of International Financial Reporting Standards
and the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and,
the Financial Reporting Pronouncements as issued by Financial Reporting Standards Council and
must contain the information required by IAS 34, Interim Financial Reporting. The accounting policies
applied in the preparation of these interim financial statements are consistent with those applied in the
previous annual financial statements, other than for the adoption of IFRS 10 Consolidated Financial
Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities, IFRS 13
Fair Value Measurement, IAS 19 (Revised) Employee Benefits, IAS 27 Separate Financial Statements,
IAS 28 Investments in Associates and Joint Ventures and various other improvements. The adoption
of these accounting standards did not have a material impact on the group results other than as
described in note 2 below.
The preparation of this condensed consolidated interim financial information was supervised by the
Chief Financial Officer, G Pearce CA(SA).
The results are unaudited.
2. Restatement
Adoption of IAS 19 (Revised) Employee Benefits
This standard, which is required to be applied retrospectively, was adopted by the group for the year
ended September 2014. As a result of the change, the group now determines the net interest expense
(income) for the period by applying the discount rate used to measure the defined benefit obligation at
the beginning of the annual period, adjusted for any changes as a result of contributions and benefit
payments, to the net defined benefit liability (asset). Previously, the group determined interest income on
plan assets based on the assets long-term rate of expected return. The group also reclassified the net
interest expense (income) from operating profit (loss) to finance costs as an accounting policy choice.
The impact on profit or loss and other comprehensive loss for the quarter ended June 2013 is as
follows:
As
previously
reported Adjustment Restated
USD million USD million USD million
Condensed group income statement
Cost of sales 1,327 3 1,330
Net finance costs 42 5 47
Taxation (11) (3) (14)
Loss for the period (42) (5) (47)
Earnings per share
Basic loss per share (US cents) (8) (1) (9)
Diluted loss per share (US cents) (8) (1) (9)
Condensed group statement of comprehensive
income
Items that will not be reclassified subsequently
to profit or loss 14 5 19
Actuarial gains on post-employment benefit funds 20 8 28
Tax effect of above item (6) (3) (9)
The impact on profit or loss and other comprehensive loss for the reviewed nine months ended
June 2013 is as follows:
As
previously
reported Adjustment Restated
USD million USD million USD million
Condensed group income statement
Cost of sales 3,900 8 3,908
Net finance costs 124 15 139
Taxation 31 (8) 23
Loss for the period (18) (15) (33)
Earnings per share
Basic loss per share (US cents) (3) (3) (6)
Diluted loss per share (US cents) (3) (3) (6)
Condensed group statement of comprehensive
income
Items that will not be reclassified subsequently
to profit or loss 14 15 29
Actuarial gains on post-employment benefit funds 20 23 43
Tax effect of above item (6) (8) (14)
Adoption of IFRS 10 Consolidated Financial Statements
IFRS 10 provides a single consolidation model that identifies control as the basis for consolidation
for all types of entities. An investor controls an investee when the investor is exposed or has rights
to variable returns from its involvement with the investee and has the ability to affect those returns
through its power over the investee.
Additionally, specified assets or a portion of an investee that are considered to be a deemed separate
entity should be consolidated provided that those assets are in substance ring-fenced from other
creditors. Following a recent interpretation of a discussion paper issued by the Financial Services
Board in South Africa (which states that, although the insurance industry is governed by contractual
arrangements, cell captives are not legally ring-fenced in the event of liquidation), the group
consequently deconsolidated its assets with its South African insurer.
The impact of this change on the reviewed 2013 financial results is as follows:
As
previously
reported Adjustment Restated
USD million USD million USD million
Condensed group balance sheet
Other non-current assets 120 33 153
Cash and cash equivalents 385 (33) 352
Net debt 2,214 33 2,247
There is no impact on profit or loss and cash flows for the quarter and nine months ended June 2013.
3. Operating profit (loss)
Restated
Restated Nine Nine
Quarter Quarter months months
ended ended ended ended
Jun 2014 Jun 2013 Jun 2014 Jun 2013
USD million USD million USD million USD million
Included in operating profit (loss) are the
following non-cash items:
Depreciation and amortisation 73 83 236 260
Fair value adjustment on plantations
(included in cost of sales)
Changes in volume
Fellings 16 17 45 50
Growth (16) (21) (52) (58)
– (4) (7) (8)
Plantation price fair value adjustment (5) 11 (18) (93)
(5) 7 (25) (101)
Included in other operating (income)
expenses are the following:
Net restructuring provisions and loss
on disposal of assets and businesses (4) 2 (3) 15
Asset (impairment reversals)
impairments – (1) (3) 46
Black Economic Empowerment
charge 1 1 2 3
4. Headline earnings (loss) per share
Headline earnings (loss) per share
(US cents) 9 (9) 17 (1)
Weighted average number of shares in
issue (millions) 522.6 521.5 522.3 521.3
Diluted headline earnings (loss) per share
(US cents) 9 (9) 17 (1)
Weighted average number of shares on
fully diluted basis (millions) 526.7 521.5 525.6 521.3
Calculation of headline earnings (loss)
Profit (loss) for the period 17 (47) 67 (33)
Asset (impairment reversals)
impairments – (1) (3) 46
Loss (profit) on disposal of assets and
businesses 27 – 25 (1)
Tax effect of above items 1 1 1 (15)
Headline earnings (loss) 45 (47) 90 (3)
5. Capital commitments
Reviewed
Jun 2014 Sept 2013
USD million USD million
Contracted 146 62
Approved but not contracted 142 195
288 257
6. Contingent liabilities
Guarantees and suretyships 30 33
Other contingent liabilities 19 11
49 44
7. Plantations
Plantations are stated at fair value less estimated cost to sell at the harvesting stage. In arriving at
plantation fair values, the key assumptions are estimated prices less cost of delivery, discount rates
(pre-tax weighted average cost of capital), and volume and growth estimations.
Expected future price trends and recent market transactions involving comparable plantations are also
considered in estimating fair value. Mature timber that is expected to be felled within 12 months from
the end of the reporting period are valued using unadjusted current market prices. Immature timber
and mature timber that is to be felled in more than 12 months from the reporting date are valued using
a 12 quarter rolling historical average price which, taking the length of the growth cycle of a plantation
into account, is considered reasonable.
The fair value of plantations is a Level 3 measure in terms of the fair value measurement hierarchy as
established by IFRS 13 Fair Value Measurement.
Reviewed
Jun 2014 Sept 2013
USD million USD million
Fair value of plantations at beginning of year 464 555
Additions – 4
Gains arising from growth 50 79
Fire, flood, storms and related events – (4)
In-field inventory (1) 1
Gain arising from fair value price changes 6 87
Harvesting – agriculture produce (fellings) (43) (66)
Transferred to assets held for sale – (93)
Translation difference (21) (99)
Fair value of plantations at end of the period 455 464
At September 2013, plantations amounting to USD86 million were disclosed as assets held for sale.
In accordance with IAS 41 Agriculture, these plantations were carried at fair value. Before the disposal
of the plantations in the current period, gains arising from growth amounted to USD2 million, the price
fair value adjustment amounted to USD12 million and timber worth USD2 million was felled in these
plantations.
8. Financial instruments
The group's financial instruments that are measured at fair value on a recurring basis consist of cash
and cash equivalents, derivative financial instuments and available for sale financial assets. These have
been categorised in terms of the fair value measurement hierarchy as established by IFRS 13 Fair
Value Measurement per the table below.
Fair value(1)
Restated
Fair value Jun 2014 Sept 2013
hierarchy USD million USD million
Available for sale assets Level 1 10 11
Available for sale assets Level 2 – 40
Derivative financial assets Level 2 17 21
Derivative financial liabilities Level 2 110 101
(1) The fair value of the financial instruments are equal to their carrying value.
There have been no transfers of financial assets or financial liabilities between the categories of the fair
value hierarchy.
The fair value of all external over-the-counter derivatives is calculated based on the discount
rate adjustment technique. The discount rate used is derived from observable rates of return for
comparable assets or liabilities traded in the market. The credit risk of the external counterparty is
incorporated into the calculation of fair values of financial assets and own credit risk is incorporated in
the measurement of financial liabilities. The change in fair value is therefore impacted by the move of
the interest rate curves, by the volatility of the applied credit spreads, and by any changes of the credit
profile of the involved parties.
There are no financial assets and liabilities that have been remeasured to fair value on a non-recurring
basis. The carrying value of assets and liabilities (excluding plantations) which are held for sale, are
considered to be below their net recoverable amount.
The carrying amounts of other financial instruments which include accounts receivable, certain
investments, accounts payable and current interest-bearing borrowings approximate their fair values.
9. Material balance sheet movements
Property, plant and equipment
The estimated useful life of the group's pulp mill equipment was extended from 20 to 30 years and, as
such, the depreciation charge decreased by approximately USD15 million on a comparative basis for
the nine months ended June 2014.
Other non-current assets and other non-current liabilities
A qualifying insurance asset was purchased in respect of the South African post-retirement medical
aid liability using available non-current assets.
Cash and cash equivalents, and other current liabilities
Cash and cash equivalents decreased due to the payment of trade creditors, capital accruals related
to our dissolving wood pulp projects and the utilisation of restructuring provisions. Restructuring
provisions no longer required related to our Nijmegen mill was released following its disposal.
Interest-bearing borrowings
Interest-bearing borrowings decreased due to the repayment of certain loans in South Africa and a
reduction in the usage of the group's offshore securitisation programme. Additionally, USD100 million
was reclassified to short-term as it falls due within the next 12 months.
10. Sale of subsidiary Usutu Forests Products Company Limited
The conditions precedent related to the group's announced sale in July 2013 of its' shares in Usutu
Forest Products Company Limited as well as the shareholder loan claim against Usutu to Montigny
Investments Limited were completed in June 2014. The total proceeds of USD98 million (ZAR1 billion)
include a vendor loan note of USD9 million (ZAR90 million) which is repayable over 6 years at prime
plus 2%. Proceeds of USD89 million were received in July 2014. The disposal group, which consisted
mainly of plantations, was held within the group's South African operations. These assets were
classified as held for sale. The vendor receivable is included in trade and other receivables.
11. Segment information
Nine Nine
Quarter Quarter months months
ended ended ended ended
Jun 2014 Jun 2013 Jun 2014 Jun 2013
Metric tons Metric tons Metric tons Metric tons
(000's) (000's) (000's) (000's)
Sales volume
North America 362 297 1,079 963
Europe 783 796 2,492 2,527
Southern Africa – Pulp and paper 423 405 1,253 1,172
Forestry 275 309 849 888
Total 1,843 1,807 5,673 5,550
Which consists of:
Specialised cellulose 305 183 886 542
Paper 1,263 1,315 3,938 4,120
Forestry 275 309 849 888
Restated
Restated Nine Nine
Quarter Quarter months months
ended ended ended ended
Jun 2014 Jun 2013 Jun 2014 Jun 2013
USD million USD million USD million USD million
Sales
North America 380 324 1,127 1,011
Europe 745 749 2,362 2,372
Southern Africa – Pulp and paper 341 324 1,014 953
Forestry 18 20 53 59
Total 1,484 1,417 4,556 4,395
Which consists of:
Specialised cellulose 258 157 755 458
Paper 1,208 1,240 3,748 3,878
Forestry 18 20 53 59
Operating profit (loss) excluding
special items
North America (9) (2) (7) 30
Europe 16 (16) 39 4
Southern Africa 62 20 189 72
Unallocated and eliminations (1) (2) 3 1 7
Total 67 5 222 113
Which consists of:
Specialised cellulose 55 39 181 110
Paper 14 (37) 40 (4)
Unallocated and eliminations(1) (2) 3 1 7
(1) Includes the group's treasury operations and the self-insurance captive.
Restated
Restated Nine Nine
Quarter Quarter months months
ended ended ended ended
Jun 2014 Jun 2013 Jun 2014 Jun 2013
USD million USD million USD million USD million
Special items – (gains) losses
North America 3 (1) 2 (4)
Europe (5) 3 (4) 7
Southern Africa – 14 (14) (30)
Unallocated and eliminations(1) – 3 – 11
Total (2) 19 (16) (16)
Segment operating profit (loss)
North America (12) (1) (9) 34
Europe 21 (19) 43 (3)
Southern Africa 62 6 203 102
Unallocated and eliminations(1) (2) – 1 (4)
Total 69 (14) 238 129
EBITDA excluding special items
North America 10 16 49 88
Europe 54 31 172 147
Southern Africa 77 38 235 131
Unallocated and eliminations(1) (1) 3 2 7
Total 140 88 458 373
Which consists of:
Specialised cellulose 70 51 226 139
Paper 71 34 230 227
Unallocated and eliminations(1) (1) 3 2 7
Segment assets
North America 1,022 1,027 1,022 1,027
Europe 1,703 1,793 1,703 1,793
Southern Africa 1,505 1,641 1,505 1,641
Unallocated and eliminations(1) (31) (12) (31) (12)
Total 4,199 4,449 4,199 4,449
(1) Includes the group's treasury operations and the self-insurance captive.
Reconciliation of EBITDA excluding special items and operating profit excluding special
items to segment operating profit (loss) and profit (loss) for the period
Special items cover those items which management believe are material by nature or amount to the
operating results and require separate disclosure.
Restated
Restated Nine Nine
Quarter Quarter months months
ended ended ended ended
Jun 2014 Jun 2013 Jun 2014 Jun 2013
USD million USD million USD million USD million
EBITDA excluding special items 140 88 458 373
Depreciation and amortisation (73) (83) (236) (260)
Operating profit excluding special
items 67 5 222 113
Special items – gains (losses) 2 (19) 16 16
Plantation price fair value
adjustment 5 (11) 18 93
Net restructuring provisions and
loss on disposal of assets and
businesses 4 (2) (3) (15)
Asset impairment reversals
(impairments) – 1 3 (46)
Black Economic Empowerment
charge (1) (1) (2) (3)
Fire, flood, storm and related
events (6) (6) (6) (13)
Segment operating profit (loss) 69 (14) 238 129
Net finance costs (42) (47) (138) (139)
Profit (loss) before taxation 27 (61) 100 (10)
Taxation (10) 14 (33) (23)
Profit (loss) for the period 17 (47) 67 (33)
Reconciliation of segment assets
to total assets
Segment assets 4,199 4,449 4,199 4,449
Deferred taxation 98 120 98 120
Cash and cash equivalents(1) 248 202 248 202
Other current liabilities 931 883 931 883
Taxation payable 17 13 17 13
Liabilities associated with assets
held for sale – 5 – 5
Total assets 5,493 5,672 5,493 5,672
(1) The comparative period has been restated for the adoption of IFRS 10 Consolidated Financial Statements by an amount of
USD34 million. Refer to note 2 for more detail.
Supplemental information (this information has not been audited or reviewed)
General definitions
Average – averages are calculated as the sum of the opening and closing balances for the relevant period
divided by two
Black Economic Empowerment – as envisaged in the Black Economic Empowerment (BEE) legislation
in South Africa
Black Economic Empowerment charge – represents the IFRS 2 non-cash charge associated with the
BEE transaction implemented in fiscal 2010
Fellings – the amount charged against the income statement representing the standing value of the
plantations harvested
NBSK – Northern Bleached Softwood Kraft pulp. One of the main varieties of market pulp, produced
from coniferous trees (ie spruce, pine) in Scandinavia, Canada and northern USA. The price of NBSK is a
benchmark widely used in the pulp and paper industry for comparative purposes
SG&A – selling, general and administrative expenses
Non-GAAP measures
The group believes that it is useful to report certain non-GAAP measures for the following reasons:
– these measures are used by the group for internal performance analysis;
– the presentation by the group's reported business segments of these measures facilitates
comparability with other companies in our industry, although the group's measures may not be
comparable with similarly titled profit measurements reported by other companies; and
– it is useful in connection with discussion with the investment analyst community and debt rating
agencies
These non-GAAP measures should not be considered in isolation or construed as a substitute for GAAP
measures in accordance with IFRS
Capital employed – shareholders' equity plus net debt
EBITDA excluding special items – earnings before interest (net finance costs), taxation, depreciation,
amortisation and special items
Headline earnings – as defined in circular 2/2013, reissued by the South African Institute of Chartered
Accountants in December 2013, which separates from earnings all separately identifiable
re-measurements. It is not necessarily a measure of sustainable earnings. It is a Listings Requirement
of the JSE Limited to disclose headline earnings per share
Net assets – total assets less total liabilities
Net asset value per share – net assets divided by the number of shares in issue at balance sheet date
Net debt – current and non-current interest-bearing borrowings, and bank overdraft (net of cash,
cash equivalents and short-term deposits)
Net debt to total capitalisation – net debt divided by capital employed
Net operating assets – total assets (excluding deferred taxation and cash) less current liabilities
(excluding interest-bearing borrowings and overdraft). Net operating assets equate to segment assets
ROCE – annualised return on average capital employed. Operating profit excluding special items divided
by average capital employed
ROE – annualised return on average equity. Profit for the period divided by average shareholders' equity
RONOA – return on average net operating assets. Operating profit excluding special items divided by
average segment assets
Special items – special items cover those items which management believe are material by nature or
amount to the operating results and require separate disclosure. Such items would generally include profit
or loss on disposal of property, investments and businesses, asset impairments, restructuring charges,
non-recurring integration costs related to acquisitions, financial impacts of natural disasters, non-cash
gains or losses on the price fair value adjustment of plantations and alternative fuel tax credits receivable
in cash
The above financial measures are presented to assist our shareholders and the investment community in interpreting our financial
results. These financial measures are regularly used and compared between companies in our industry
Supplemental information (this information has not been audited or reviewed)
Summary Rand convenience translation
Restated
Restated Nine Nine
Quarter Quarter months months
ended ended ended ended
Jun 2014 Jun 2013 Jun 2014 Jun 2013
Key figures: (ZAR million)
Sales 15,632 13,427 47,871 39,715
Operating profit excluding special items(1) 706 47 2,333 1,021
Special items – (gains) losses(1) (21) 180 (168) (145)
EBITDA excluding special items(1) 1,475 834 4,812 3,371
Profit (loss) for the period 179 (445) 704 (298)
Basic earnings (loss) per share (SA cents) 34 (85) 135 (57)
Net debt(1) 24,206 23,030 24,206 23,030
Key ratios: (%)
Operating profit excluding special items to
sales 4.5 0.4 4.9 2.6
Operating profit excluding special items to
capital employed (ROCE)(1) 7.8 0.5 8.8 4.1
EBITDA excluding special items to sales 9.4 6.2 10.1 8.5
Return on average equity (ROE)(1) 5.9 (13.4) 7.9 (3.1)
Net debt to total capitalisation(1) 66.3 63.5 66.3 63.5
(1) Refer to supplemental information for the definition of the term.
The above financial results have been translated into Rands from US Dollars as follows:
– assets and liabilities at rates of exchange ruling at period end; and
– income, expenditure and cash flow items at average exchange rates.
Reconciliation of net debt to interest-bearing borrowings
Restated(1)
Jun 2014 Sept 2013
USD million USD million
Interest-bearing borrowings 2,534 2,599
Non-current interest-bearing borrowings 2,354 2,499
Current interest-bearing borrowings 180 99
Overdrafts – 1
Cash and cash equivalents (248) (352)
Net debt 2,286 2,247
(1) Restated for the adoption of IFRS 10 Consolidated Financial Statements. Refer to note 2 for more detail.
Exchange rates
Jun Mar Dec Sept Jun
2014 2014 2013 2013 2013
Exchange rates:
Period end rate: USD1 = ZAR 10.5890 10.5760 10.5300 10.0930 9.8800
Average rate for the Quarter: USD1 = ZAR 10.5340 10.8443 10.1406 9.9931 9.4756
Average rate for the YTD: USD1 = ZAR 10.5072 10.4938 10.1406 9.2779 9.0364
Period end rate: EUR1 = USD 1.3649 1.3753 1.3742 1.3522 1.3010
Average rate for the Quarter: EUR1 = USD 1.3717 1.3705 1.3607 1.3248 1.3060
Average rate for the YTD: EUR1 = USD 1.3676 1.3656 1.3607 1.3121 1.3078
Notes:
Sappi has a
primary listing on
the JSE Limited
and a Level 1 ADR
programme that
trades in the over-
the-counter market
in the United States
South Africa: United States:
Computershare Investor ADR Depositary:
Services (Proprietary) Limited The Bank of New York Mellon
70 Marshall Street Investor Relations
Johannesburg 2001 PO Box 11258
PO Box 61051 Church Street Station
Marshalltown 2107 New York, NY 10286-1258
Tel +27 (0)11 370 5000 Tel +1 610 382 7836
this report is available on the Sappi website
www.sappi.com
31 July 2014
JSE Sponsor: UBS South Africa (Pty) Ltd
Date: 31/07/2014 09:00:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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