Wrap Text
Second quarter results for the period ended March 2018
SAPPI LIMITED
Registration number: 1936/008963/06
JSE code: SAP
ISIN code: ZAE000006284
Issuer code: SAVVI
Investing in growth
Second quarter results for the period ended March 2018
2nd quarter results
Sappi is a global diversified woodfibre company focused on providing dissolving wood pulp, specialities and packaging
papers, printing and writing papers as well as biomaterials and biochemicals to our direct and indirect customer base
across more than 150 countries.
Our dissolving wood pulp (specialised cellulose) products are used worldwide mainly by converters to create viscose
fibre for fashionable clothing and textiles, as well as other consumer products; quality specialities and packaging papers
are used in the manufacture of such products as soup sachets, luxury carry bags, cosmetic and confectionery packaging,
boxes for agricultural products for export, tissue wadding for household tissue products and casting release papers used
by suppliers to the fashion, textiles, automobile and household industries; our market-leading range of printing and
writing papers are used by printers in the production of books, brochures, magazines, catalogues, direct mail and many
other print applications; biomaterials include nanocellulose, fibre composites and lignosulphonate; biochemicals include
second generation sugars.
The wood and pulp needed for our products are either produced within Sappi or bought from accredited suppliers. Sappi
sells almost as much as it buys.
Sales by source*
North America 25%
Southern Africa 24%
Europe 51%
Sales by destination*
North America 23%
Southern Africa 10%
Europe 45%
Asia and other 22%
Sales by product*
Coated paper 57%
Uncoated paper 5%
Speciality paper 12%
Commodity paper 7%
Dissolving wood pulp 18%
Other 1%
Net operating assets**
North America 25%
Southern Africa 36%
Europe 39%
* For the period ended March 2018.
** As at March 2018.
Highlights for the quarter
- EBITDA excluding special items US$211 million (Q2 2017 US$208 million)
- Profit for the period US$102 million (Q2 2017 US$88 million)
- EPS excluding special items 17 US cents (Q2 2017 17 US cents)
- Acquisition of Cham speciality paper business completed
- Net debt US$1,632 million (Q2 2017 US$1,329 million)
Quarter ended Half-year ended
Mar 2018 Mar 2017 Dec 2017 Mar 2018 Mar 2017
Key figures: (US$ million)
Sales 1,496 1,316 1,330 2,826 2,625
Operating profit excluding special items(1) 142 145 105 247 281
Special items - (gains) losses(2) (12) 3 (11) (23) (4)
EBITDA excluding special items(1) 211 208 172 383 409
Profit for the period 102 88 63 165 178
Basic earnings per share (US cents) 19 16 12 31 33
EPS excluding special items (US cents)(3) 17 17 14 31 33
Net debt(3) 1,632 1,329 1,349 1,632 1,329
Key ratios: (%)
Operating profit excluding special items to sales 9.5 11.0 7.9 8.7 10.7
Operating profit excluding special items to capital employed (ROCE)(3) 16.8 20.5 14.1 14.8 19.8
EBITDA excluding special items to sales 14.1 15.8 12.9 13.6 15.6
Net debt to EBITDA excluding special items 2.2 1.7 1.8 2.2 1.7
Interest cover(3) 11.0 7.7 9.9 11.0 7.7
Net asset value per share (US cents)(3) 365 290 338 365 290
(1) Refer to note 2 to the group results for the reconciliation of EBITDA excluding special items and operating profit excluding special
items to segment operating profit, and profit for the period.
(2) Refer to note 2 to the group results for details on special items.
(3) Refer to supplemental information for the definition of the term.
Commentary on the quarter
Operating performance in the quarter was ahead of expectations and the group generated EBITDA excluding special items
of US$211 million, an improvement over the same quarter in 2017. Profit for the period increased from US$88 million to
US$102 million due to positive special items in the quarter mainly related to a profit on sale of the corporate office
building in South Africa.
Demand for dissolving wood pulp (DWP) remained strong and pricing improved steadily during the quarter. However, average
US Dollar prices for the quarter were still below those of the equivalent quarter a year ago. Viscose staple fibre (VSF)
prices remained under pressure due to the commencement of significant additional VSF capacity in China, despite higher
prices for competing textiles such as cotton and polyester. Demand and pricing for kraft pulp continued to be strong
and helped underpin DWP pricing.
Demand for specialities and packaging papers continued to be healthy across all major product segments and EBITDA
margins improved to 15% in this quarter. The acquisition of the specialities paper business of the Cham Paper Group
was completed at the end of February 2018 and the integration of the mills into our European operations is progressing
smoothly.
The European business experienced a good quarter despite the impact of a stronger Euro on export sales prices and
continued paper pulp cost pressure. Further selling price increases were implemented during the quarter to counteract
these pressures. Sales volumes were aided by tightening paper markets across a number of paper grades and geographies
due to machine and mill closures or conversions.
In North America, a series of paper price increases over the past nine months and higher sales volumes led to improved
overall results. These positives were partially offset by the start of the planned major shut for the conversion of PM1
at Somerset Mill during the quarter, which reduced productivity and operating performance.
In the South African business, higher packaging sales volumes and sales price increases for various packaging and
paper grades were unable to fully offset the impact of lower DWP pricing and the stronger Rand/Dollar exchange rate.
Earnings per share excluding special items were 17 US cents, equal to that generated in the equivalent quarter last
year.
Cash flow and debt
Net cash utilised for the quarter was US$225 million which included the acquisition of the speciality paper business
of the Cham Paper Group for US$132 million as well as the increased capital expenditure related mainly to the paper
machine conversion projects and the DWP debottlenecking in South Africa.
Cash taxes for the quarter were US$50 million, an increase of US$18 million compared to the equivalent quarter last
year. This increase relates to a South African Revenue Service tax assessment on transfer pricing in prior periods.
Net debt of US$1,632 million was up US$303 million year-on-year as a result of the cash utilised in the quarter as
mentioned above, together with the translation of Euro denominated debt.
Liquidity comprised cash on hand of US$459 million and US$731 million available from the undrawn committed revolving
credit facilities in Southern Africa and Europe.
Operating review for the quarter
Europe
Quarter ended
€ million Mar 2018 Dec 2017 Sept 2017 Jun 2017 Mar 2017
Sales 616 571 583 554 581
Operating profit excluding special items 37 31 35 23 29
Operating profit excluding special items to sales (%) 6.0 5.4 6.0 4.2 5.0
EBITDA excluding special items 64 59 63 51 56
EBITDA excluding special items to sales (%) 10.4 10.3 10.8 9.2 9.6
RONOA pa (%) 11.7 10.6 12.2 8.2 10.3
The European business delivered a strong performance, with the successful implementation of coated paper price increases
and growing specialities and packaging sales volumes leading to an improved result compared to both the prior quarter
and the equivalent quarter last year.
European and export graphic paper markets continue to be stable, allowing for the implementation of coated paper price
increases that have offset much of the rise in paper pulp costs.
The specialities and packaging paper business experienced sales growth of 12% over the prior year, excluding the sales
from the inclusion of the specialities business of the Cham Paper Group for one month. Price increases on some
speciality products were implemented during the quarter to offset the impact of the stronger Euro/US Dollar exchange rate;
however, they continued to be below that of the prior year.
Variable costs rose 5% compared to last year, led by sharp increases in both purchased softwood and hardwood paper
pulp pricing. Lower latex, wood and energy prices provided some relief.
North America
Quarter ended
US$ million Mar 2018 Dec 2017 Sept 2017 Jun 2017 Mar 2017
Sales 363 342 357 314 335
Operating profit (loss) excluding special items 18 (1) 27 (2) 14
Operating profit (loss) excluding special items to sales (%) 5.0 (0.3) 7.6 (0.6) 4.2
EBITDA excluding special items 37 18 47 17 34
EBITDA excluding special items to sales (%) 10.2 5.3 13.2 5.4 10.1
RONOA pa (%) 6.8 (0.4) 10.7 (0.8) 5.8
The North American business benefited from increased sales volumes in all product categories and higher graphic paper
prices when compared to the equivalent quarter last year. The improved performance was achieved despite the US$5 million
impact of lost production due to the commencement of the PM1 conversion at Somerset Mill during March.
The US coated paper market continued to experience tight supply conditions, and coated paper prices have risen 5% over
the prior year as the July and November price increases were further realised during the quarter. Sales volumes have
also been positively impacted, increasing by 2% compared to the equivalent quarter last year.
As demand for DWP continues to grow we have swung more of the Cloquet Mill production capacity to DWP at the expense
of paper pulp production. The positive impact of additional DWP sales volumes has been negated somewhat by higher average
purchased paper pulp costs. Average DWP sales prices were higher than the prior quarter, but remained below those of
last year.
The packaging paper business experienced good year-on-year volume growth of 46% but had lower pricing due to product
mix. The release paper business had a slight decline in volume while pricing was largely in line with last year.
Variable costs were negatively impacted by higher purchased paper pulp, chemicals and energy prices, all of which have
risen year-on-year and quarter-on-quarter.
Southern Africa
Quarter ended
ZAR million Mar 2018 Dec 2017 Sept 2017 Jun 2017 Mar 2017
Sales 4,548 4,291 4,879 4,432 4,818
Operating profit excluding special items 950 940 1,106 918 1,317
Operating profit excluding special items to sales (%) 20.9 21.9 22.7 20.7 27.3
EBITDA excluding special items 1,168 1,144 1,344 1,102 1,489
EBITDA excluding special items to sales (%) 25.7 26.7 27.5 24.9 30.9
RONOA pa (%) 20.9 21.3 26.0 21.5 30.5
Improved sales volumes could not offset the impact of the stronger Rand/US Dollar exchange rate and the US Dollar DWP
prices, which despite rising during the quarter, were below those of a year ago.
DWP sales volumes were slightly less than those of the equivalent quarter last year due to supply disruptions as a result
of a local power utility outage, but higher than those of the prior quarter. Lower average US Dollar prices coupled with
a stronger Rand/US Dollar exchange rate led to average sales prices that were 10% below those of a year ago.
Packaging sales volumes improved, with citrus industry growth more than offsetting the impact of the drought on agricultural
packaging demand in the Western Cape. Printing and packaging paper prices rose year-on-year and this, along with tight cost
control, resulted in improved profitability for the paper business.
Directorate
Dr Deenadayalen (Len) Konar, independent non-executive director, retired from the board at the end of January 2018.
Dr Konar was appointed to the board in March 2002 and was appointed to the audit committee in 2002 and to the nomination
and governance committee in 2008. He served as chair of the audit committee since 2007.
Outlook
Demand for DWP remains good, and Chinese market prices have remained relatively stable. VSF prices currently remain
under pressure due to low industry operating rates following significant capacity additions in the last few years. Third
quarter average realised DWP prices should be in line with those of the second quarter, while volumes will be lower due
to scheduled annual maintenance shuts at Cloquet, Ngodwana and Saiccor.
Graphic paper operating rates remain healthy in Europe, and further price increases have been implemented since quarter
end to mitigate the impact of the continuing rise in paper pulp prices. The ongoing integration of the mills acquired
from the Cham Paper Group is expected to deliver the anticipated synergies.
In the United States we will continue with the downtime on PM1 at Somerset Mill in order to complete the conversion
project at the mill. Further coated paper price increases implemented since January will be realised in the third quarter
and this will help negate the aforementioned impact as well as anticipated higher pricing for purchased pulp and
chemicals.
Speciality and packaging paper demand continues to grow as customers and consumers switch to paper-based packaging rather
than plastics. The acquisition of the specialities business of the Cham Paper Group and the technology acquired with the
purchase of Rockwell Solutions in 2017 positions us well for growth in this market.
Capital expenditure in 2018 is expected to be approximately US$500 million as currency movements and the acceleration
of various conversion and debottlenecking projects will inflate the total expenditure for the year. The conversions at
Maastricht and Somerset mills, the Saiccor, Ngodwana and Cloquet DWP debottlenecking projects and the expansion of
Saiccor are projects focused on higher margin growth segments including DWP and speciality packaging.
The group's third quarter operating performance is expected to be in line with that of the prior year as the impact of
the stronger Rand and the various capital projects under way offset the improved graphic paper markets.
On behalf of the board
S R Binnie
Director
G T Pearce
Director
9 May 2018
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, identify
forward-looking statements. In addition, this document includes forward looking statements relating to our potential
exposure to various types of market risks, such as interest rate risk, foreign exchange rate risk and commodity price
risk. 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 adverse changes in global economic conditions;
- 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 restructurings or other strategic initiatives, 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
Reviewed
Quarter ended Half-year ended
US$ million Note Mar 2018 Mar 2017 Mar 2018 Mar 2017
Sales 1,496 1,316 2,826 2,625
Cost of sales 1,244 1,094 2,365 2,176
Gross profit 252 222 461 449
Selling, general and administrative expenses 106 81 200 163
Other operating (income) expenses (7) 1 (6) 5
Share of profit from equity investments (1) (2) (3) (4)
Operating profit 3 154 142 270 285
Net finance costs 21 24 36 49
Net interest expense 23 27 39 54
Interest capitalised (1) - (1) -
Net foreign exchange gain (1) (3) (2) (5)
Profit before taxation 133 118 234 236
Taxation 31 30 69 58
Profit for the period 102 88 165 178
Basic earnings per share (US cents) 4 19 16 31 33
Weighted average number of shares in issue (millions) 538.7 534.5 537.2 533.0
Diluted earnings per share (US cents) 4 19 16 30 33
Weighted average number of shares on fully diluted basis (millions) 549.4 548.0 549.2 545.9
Condensed group statement of comprehensive income
Reviewed
Quarter ended Half-year ended
US$ million Mar 2018 Mar 2017 Mar 2018 Mar 2017
Profit for the period 102 88 165 178
Other comprehensive income (loss), net of tax
Items that will not be reclassified subsequently to profit or loss - - (19) -
Actuarial gains (losses) on post-employment benefit funds - - - -
Tax effect resulting from change in tax rates - - (19) -
Items that may or are reclassified subsequently to profit or loss 43 15 149 48
Exchange differences on translation of foreign operations 44 16 141 49
Movements in hedging reserves (3) (2) 9 (1)
Tax effect of above items 2 1 (1) -
Total comprehensive income (loss) for the period 145 103 295 226
Condensed group balance sheet
Reviewed Audited
US$ million Note Mar 2018 Sept 2017
ASSETS
Non-current assets 3,837 3,378
Property, plant and equipment 2,993 2,681
Plantations 5 549 458
Deferred tax assets 93 123
Goodwill and intangible assets 94 39
Equity-accounted investees 38 26
Other non-current assets 70 51
Current assets 1,971 1,869
Inventories 752 636
Trade and other receivables 734 668
Derivative financial instruments 18 3
Taxation receivable 8 12
Cash and cash equivalents 459 550
Total assets 5,808 5,247
EQUITY AND LIABILITIES
Equity
Ordinary shareholders' interest 1,968 1,747
Non-current liabilities 2,724 2,457
Interest-bearing borrowings 1,940 1,739
Deferred tax liabilities 342 295
Other non-current liabilities 442 423
Current liabilities 1,116 1,043
Interest-bearing borrowings 145 133
Overdrafts 6 -
Trade and other payables 908 858
Provisions 5 10
Derivative financial instruments 7 5
Taxation payable 45 37
Total equity and liabilities 5,808 5,247
Number of shares in issue at balance sheet date (millions) 538.9 535.0
Condensed group statement of cash flows
Reviewed
Quarter ended Half-year ended
US$ million Mar 2018 Mar 2017 Mar 2018 Mar 2017
Profit for the period 102 88 165 178
Adjustment for:
Depreciation, fellings and amortisation 88 80 168 163
Taxation 31 30 69 58
Net finance costs 21 24 36 49
Defined post-employment benefits paid (12) (12) (22) (21)
Plantation fair value adjustments (25) (16) (57) (42)
Net restructuring provisions (2) - (2) -
Profit on disposal and written off assets (9) - (9) -
Other non-cash items - 9 8 20
Cash generated from operations 194 203 356 405
Movement in working capital (35) (26) (118) (123)
Net finance costs paid (15) (24) (21) (41)
Taxation paid (50) (32) (44) (66)
Dividend paid (81) (59) (81) (59)
Cash generated from operating activities 13 62 92 116
Cash utilised in investing activities (238) (42) (331) (79)
Capital expenditure (119) (45) (207) (82)
Proceeds on disposal of assets 10 1 10 3
Acquisition of subsidiary (132) - (132) -
Other movements 3 2 (2) -
Net cash (utilised) generated (225) 20 (239) 37
Cash effects of financing activities 60 (10) 118 (16)
Proceeds from interest-bearing borrowings 64 (9) 122 5
Repayment of interest-bearing borrowings (4) (1) (4) (21)
Net movement in cash and cash equivalents (165) 10 (121) 21
Cash and cash equivalents at beginning of period 618 681 550 703
Translation effects 6 12 30 (21)
Cash and cash equivalents at end of period 459 703 459 703
Condensed group statement of changes in equity
Reviewed
Half-year ended
US$ million Mar 2018 Mar 2017
Balance - beginning of period 1,747 1,378
Total comprehensive income for the period 295 226
Shareholders for dividend (81) (59)
Transfers from the share purchase trust 3 4
Transfers of vested share options (1) (2)
Share-based payment reserve 5 4
Balance - end of period 1,968 1,551
Notes to the condensed group results
1. Basis of preparation
The condensed consolidated interim financial statements for the quarter and half-year ended March 2018 are prepared
in accordance with International Financial Reporting Standards, IAS 34 Interim Financial Reporting, the SAICA Financial
Reporting Guides as issued by the Financial Reporting Standards Council and the requirements of the Companies Act of
South Africa. The accounting policies applied in the preparation of these interim financial statements are in terms of
International Financial Reporting Standards and are consistent with those applied in the previous annual financial
statements.
The preparation of these condensed consolidated interim financial statements was supervised by the Chief Financial Officer,
G T Pearce, CA(SA).
The condensed consolidated interim financial statements for the half-year ended March 2018 have been reviewed in accordance
with the International Standard on Review Engagements 2410 by the group's auditors, KPMG Inc. Their unmodified review report
is available for inspection at the company's registered office. The auditor's report does not necessarily report on all of
the information contained in this announcement/financial results. Shareholders are therefore advised that in order to obtain
a full understanding of the nature of the auditor's engagement they should obtain a copy of the auditor's report together with
the accompanying financial information from the issuer's registered office. Any reference to future financial performance
included in this announcement, has not been reviewed or reported on by the company's auditors.
2. Segment information
The group's reportable segments comprise the geographic regions of North America, Europe and Southern Africa and have remained
unchanged from the prior year. The group has however changed the financial information by major product category, as reviewed
by the chief operating decision maker during the quarter ended December 2017. Accordingly, the group has restated the financial
information presented by major product category for the quarter and half-year ended March 2018.
Quarter ended Half-year ended
Metric tons (000's) Mar 2018 Mar 2017 Mar 2018 Mar 2017
Sales volume
North America 347 329 690 682
Europe 847 839 1,669 1,706
Southern Africa - Pulp and paper 413 408 796 772
Forestry 254 262 502 506
Total 1,861 1,838 3,657 3,666
Which consists of:
Specialised cellulose 302 303 589 584
Specialities and packaging papers 231 209 429 390
Printing and writing papers 1,074 1,064 2,137 2,186
Forestry 254 262 502 506
Reviewed
Quarter ended Half-year ended
US$ million Mar 2018 Mar 2017 Mar 2018 Mar 2017
Sales
North America 363 335 705 689
Europe 756 619 1,429 1,270
Southern Africa - Pulp and paper 359 347 658 636
Forestry 18 15 34 30
Total 1,496 1,316 2,826 2,625
Which consists of:
Specialised cellulose 279 283 520 530
Specialities and packaging papers 254 208 450 387
Printing and writing papers 945 810 1,822 1,678
Forestry 18 15 34 30
Operating profit (loss) excluding special items
North America 18 14 17 22
Europe 45 31 82 74
Southern Africa 79 99 148 183
Unallocated and eliminations(1) - 1 - 2
Total 142 145 247 281
Which consists of:
Specialised cellulose 69 99 131 181
Specialities and packaging papers 25 23 41 38
Printing and writing papers 48 22 75 60
Unallocated and eliminations(1) - 1 - 2
Special items - (gains) losses
North America - - 2 -
Europe (1) 1 1 1
Southern Africa (13) - (29) (7)
Unallocated and eliminations(1) 2 2 3 2
Total (12) 3 (23) (4)
Segment operating profit (loss)
North America 18 14 15 22
Europe 46 30 81 73
Southern Africa 92 99 177 190
Unallocated and eliminations(1) (2) (1) (3) -
Total 154 142 270 285
(1) Includes the group's treasury operations and our insurance captive.
Reviewed
Quarter ended Half-year ended
US$ million Mar 2018 Mar 2017 Mar 2018 Mar 2017
EBITDA excluding special items
North America 37 34 55 62
Europe 78 59 147 134
Southern Africa 97 112 181 210
Unallocated and eliminations(1) (1) 3 - 3
Total 211 208 383 409
Which consists of:
Specialised cellulose 83 111 158 206
Specialities and packaging papers 38 32 65 57
Printing and writing papers 91 62 160 143
Unallocated and eliminations(1) (1) 3 - 3
Reconciliation of EBITDA excluding special items
and operating profit excluding special items to
segment operating profit and profit for the period
Special items cover those items which management
believes are material by nature or amount to the
operating results and require separate disclosure.
EBITDA excluding special items 211 208 383 409
Depreciation and amortisation (69) (63) (136) (128)
Operating profit excluding special items 142 145 247 281
Special items - gains (losses) 12 (3) 23 4
Plantation price fair value adjustment 6 1 22 12
Acquisition costs (2) - (2) -
Net restructuring provisions 2 - 2 -
Profit on disposal and written off assets 9 - 9 -
Black Economic Empowerment charge (1) (1) (1) (1)
Fire, flood, storm and other events (2) (3) (7) (7)
Segment operating profit 154 142 270 285
Net finance costs (21) (24) (36) (49)
Profit before taxation 133 118 234 236
Taxation (31) (30) (69) (58)
Profit for the period 102 88 165 178
(1) Includes the group's treasury operations and our insurance captive.
Reviewed
Half-year ended
US$ million Mar 2018 Mar 2017
Segment assets
North America 1,090 989
Europe 1,652 1,194
Southern Africa 1,545 1,277
Unallocated and eliminations(1) 4 55
Total 4,291 3,515
Reconciliation of segment assets to total assets
Segment assets 4,291 3,515
Deferred taxation 93 147
Cash and cash equivalents 459 703
Trade and other payables 908 711
Provisions 5 11
Derivative financial instruments 7 6
Taxation payable 45 25
Total assets 5,808 5,118
(1) Includes the group's treasury operations and our insurance captive.
3. Operating profit
Reviewed
Quarter ended Half-year ended
US$ million Mar 2018 Mar 2017 Mar 2018 Mar 2017
Included in operating profit are the following items:
Depreciation and amortisation 69 63 136 128
Fair value adjustment on plantations (included in cost of sales)
Changes in volume
Fellings 19 17 32 35
Growth (19) (15) (35) (30)
- 2 (3) 5
Plantation price fair value adjustment (6) (1) (22) (12)
(6) 1 (25) (7)
Net restructuring provisions (2) - (2) -
Profit on disposal of property, plant and equipment (9) - (9) -
4. Earnings per share
Reviewed
Quarter ended Half-year ended
US$ million Mar 2018 Mar 2017 Mar 2018 Mar 2017
Basic earnings per share (US cents) 19 16 31 33
Headline earnings per share (US cents) 18 16 30 33
EPS excluding special items (US cents) 17 17 31 33
Weighted average number of shares in issue (millions) 538.7 534.5 537.2 533.0
Diluted earnings per share (US cents) 19 16 30 33
Diluted headline earnings per share (US cents) 17 16 29 33
Weighted average number of shares on fully diluted basis (millions) 549.4 548.0 549.2 545.9
Calculation of headline earnings
Profit for the period 102 88 165 178
Profit on disposal of property, plant and equipment (9) - (9) -
Tax effect of above items 3 - 3 -
Headline earnings 96 88 159 178
Calculation of earnings excluding special items
Profit for the period 102 88 165 178
Special items after tax (8) 3 (16) (2)
Special items (12) 3 (23) (4)
Tax effect 4 - 7 2
Tax special items - - 19 -
Earnings excluding special items 94 91 168 176
5. 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), 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.
US$ million Reviewed Audited
Mar 2018 Sept 2017
Fair value of plantations at beginning of year 458 441
Gains arising from growth 35 58
Fire, flood, storm and other events - (5)
In-field inventory (1) 1
Gain arising from fair value price changes 22 21
Harvesting - agriculture produce (fellings) (32) (63)
Translation difference 67 5
Fair value of plantations at end of period 549 458
6. Financial instruments
The group's financial instruments that are measured at fair value on a recurring basis consist of derivative financial
instruments, available-for-sale financial assets and a contingent consideration liability. 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)
US$ million Fair value Reviewed Audited
hierarchy Mar 2018 Sept 2017
Investment funds(2) Level 1 8 7
Derivative financial assets Level 2 18 3
Derivative financial liabilities Level 2 7 5
Contingent consideration liability(3) Level 3 13 13
(1) The fair value of the financial instruments are equal to their carrying value.
(2) Included in other non-current assets.
(3) Included in other non-current liabilities and trade and other payables.
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 movement of the interest rate curves, by the volatility of the applied credit spreads, and by any changes to the credit
profile of the involved parties.
The contingent consideration is based on a multiple of targeted future earnings, of which a 92% weighted average outcome has
been projected.
There are no financial assets and liabilities that have been remeasured to fair value on a non-recurring basis.
The carrying amounts of other financial instruments which include cash and cash equivalents, accounts receivable, certain
investments, accounts payable and current interest-bearing borrowings approximate their fair values.
7. Capital commitments
US$ million Reviewed Audited
Mar 2018 Sept 2017
Contracted 246 253
Approved but not contracted 244 219
490 472
8. Contingent liabilities
Other contingent liabilities 22 19
22 19
Other contingent liabilities mainly relate to environmental and other taxation queries in respect of certain group companies.
9. Material balance sheet movements
Since the 2017 financial year-end, the ZAR and Euro have strengthened by approximately 12.7% and 4.3% respectively to the US Dollar,
the group's presentation currency, resulting in a similar increase of the group's assets and liabilities held in the aforementioned
functional currencies on translation to the presentation currency.
Deferred tax assets
There were reductions in the corporate tax rate in various countries resulting in a decrease of US$36 million in our deferred tax
asset balance of which US$17 million was recorded through the income statement and US$19 million through other comprehensive income.
10. Acquisition
On 28 February 2018, Sappi acquired the speciality paper business of Cham Paper Group Holding AG (CPG) for CHF132 million
(US$139 million). The transaction includes all brands and know-how, the Carmignano and Condino mills in Italy, as well as their
digital imaging business and facility situated in Cham, Switzerland. The acquisition was financed from internal resources. The
acquisition increases Sappi's relevance in specialities and packaging papers, opening up new customers and markets to Sappi's
existing products and generating economies of scale and synergies. It will improve near-term profitability and serve as a platform
for organic growth, further acquisitions and will add €183 million of annual sales and approximately €20 million of annual EBITDA
before taking into account synergies.
Provisional fair values of assets acquired and liabilities assumed as at 28 February 2018 are as follows:
EURO US$
Property, plant and equipment 50 61
Trademarks 7 9
Inventories 25 31
Trade receivables 28 34
Prepayments and other debit balances 2 3
Cash and cash equivalents 6 7
Trade payables (23) (28)
Pension liabilities (3) (4)
Provisions (1) (2)
Other payables and accruals (9) (10)
Net deferred tax (liabilities) assets (1) (1)
Borrowings (5) (7)
Short-term loans (5) (6)
Net asset value acquired 71 87
Intangibles and goodwill 43 52
Purchase consideration 114 139
Less: Cash and cash equivalents acquired (6) (7)
Net cash outflow on acquisition 108 132
11. Related parties
There has been no material change, by nature or amount, in transactions with related parties since the 2017 financial
year-end other than purchases from The Boldt Company for engineering services which amounted to US$46 million for the
half-year ended March 2018 (Sept 2017: US$8 million).
12. Accounting standards, interpretations and amendments to existing standards that are not yet effective
There has been no significant change to managements estimates in respect of new accounting standards, amendments and
interpretations to existing standards that have been published which are not yet effective and which have not yet been
adopted by the group. Management is in the process of completing its assessments in this regard.
13. Events after balance sheet date
On 16 April, Sappi Southern Africa Limited repaid its unsecured ZAR500 million (US$41 million) public bond due April 2018
from available cash resources.
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
Broad-based Black Economic Empowerment (BBBEE) charge - represents the IFRS 2 non-cash charge associated with the
BBBEE transaction implemented in fiscal 2010 in terms of BBBEE legislation in South Africa
Capital employed - shareholders' equity plus net debt
EBITDA excluding special items - earnings before interest (net finance costs), taxation, depreciation, amortisation
and special items
EPS excluding special items - earnings per share excluding special items and certain once-off finance and tax items
Fellings - the amount charged against the income statement representing the standing value of the plantations
harvested
Headline earnings - as defined in circular 2/2015, issued by the South African Institute of Chartered Accountants in
October 2015, which separates from earnings all separately identifiable remeasurements. It is not necessarily a measure
of sustainable earnings. It is a Listings Requirement of the JSE Limited to disclose headline earnings per share
Interest cover - last 12 months EBITDA excluding special items to net interest adjusted for refinancing costs
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
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, bank overdrafts less cash and cash equivalents
Net debt to EBITDA excluding special items - net debt divided by the last 12 months EBITDA excluding special items
Net operating assets - total assets (excluding deferred tax assets and cash) less current liabilities (excluding
interest-bearing borrowings and overdraft). Net operating assets equate to segment assets
Operating profit - a profit from business operations before deduction of net finance costs and taxes
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
ROCE - annualised return on average capital employed. Operating profit excluding special items divided by average
capital employed
RONOA - return on average net operating assets. Operating profit excluding special items divided by average net
operating assets
Special items - special items cover those items which management believes 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.
Summary Rand convenience translation
Quarter ended Half-year ended
Mar 2018 Mar 2017 Mar 2018 Mar 2017
Key figures: (ZAR million)
Sales 17,889 17,405 36,095 35,664
Operating profit excluding special items(1) 1,698 1,918 3,155 3,818
Special items - (gains) losses(1) (143) 40 (294) (54)
EBITDA excluding special items(1) 2,523 2,751 4,892 5,557
Profit for the period 1,220 1,164 2,107 2,418
Basic earnings per share (SA cents) 226 218 392 454
Net debt(1) 19,320 17,843 19,320 17,843
Key ratios: (%)
Operating profit excluding special items to sales 9.5 11.0 8.7 10.7
Operating profit excluding special items to capital employed (ROCE)(1) 16.6 20.0 15.0 19.9
EBITDA excluding special items to sales 14.1 15.8 13.6 15.6
(1) Refer to supplemental information for the definition of the term.
The above financial results have been translated into Rand from US Dollar as follows:
- assets and liabilities at rates of exchange ruling at period end; and
- income, expenditure and cash flow items at average exchange rates.
Exchange rates
Mar Dec Sept Jun Mar
2018 2017 2017 2017 2017
Exchange rates:
Period end rate: US$1 = ZAR 11.8385 12.3724 13.5561 13.0551 13.4259
Average rate for the quarter: US$1 = ZAR 11.9577 13.6220 13.1761 13.1857 13.2260
Average rate for the year to date: US$1 = ZAR 12.7723 13.6220 13.3813 13.4536 13.5861
Period end rate: €1 = US$ 1.2323 1.1998 1.1814 1.1426 1.0652
Average rate for the quarter: €1 = US$ 1.2286 1.1778 1.1756 1.1011 1.0656
Average rate for the year to date: €1 = US$ 1.2032 1.1778 1.1055 1.0827 1.0738
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
Computershare Investor Services (Pty) Ltd
Rosebank Towers, 15 Biermann Avenue
Rosebank 2196, South Africa
PO Box 61051, Marshalltown 2107, South Africa
www.computershare.com
United States ADR Depositary
The Bank of New York Mellon
Investor Relations
PO Box 11258
Church Street Station
New York, NY 10286-1258
Tel +1 610 382 7836
JSE Sponsor:
UBS South Africa (Pty) Ltd
This report is available on the
Sappi website: www.sappi.com
Date: 14/05/2018 09:00:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of
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