Wrap Text
Third quarter results for the period ended June 2018
SAPPI LIMITED
Registration number: 1936/008963/06
JSE code: SAP
ISIN code: ZAE000006284
Issuer code: SAVVI
Investing in growth
Third quarter results for the period ended June 2018
3rd 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 56%
Uncoated paper 5%
Speciality paper 13%
Commodity paper 7%
Dissolving wood pulp 18%
Other 1%
Net operating assets**
North America 28%
Southern Africa 34%
Europe 38%
* For the period ended June 2018.
** As at June 2018.
Highlights for the quarter
- EBITDA excluding special items US$155 million (Q3 2017: US$155 million)
- Profit for the period US$51 million (Q3 2017: US$58 million)
- EPS excluding special items 10 US cents (Q3 2017: 11 US cents)
- Net debt US$1,603 million (Q3 2017: US$1,318 million)
Quarter ended Nine months ended
Jun 2018 Jun 2017 Mar 2018 Jun 2018 Jun 2017
Key figures: (US$ million)
Sales 1,445 1,260 1,496 4,271 3,885
Operating profit excluding special items(1) 85 93 142 332 374
Special items - loss (gain)(2) 1 3 (12) (22) (1)
EBITDA excluding special items(1) 155 155 211 538 564
Profit for the period 51 58 102 216 236
Basic earnings per share (US cents) 9 11 19 40 44
EPS excluding special items (US cents)(3) 10 11 17 41 44
Net debt(3) 1,603 1,318 1,632 1,603 1,318
Key ratios: (%)
Operating profit excluding special items to sales 5.9 7.4 9.5 7.8 9.6
Operating profit excluding special items to capital
employed (ROCE)(3) 9.7 12.8 16.8 13.6 17.4
EBITDA excluding special items to sales 10.7 12.3 14.1 12.6 14.5
Net debt to EBITDA excluding special items 2.1 1.7 2.2 2.1 1.7
Interest cover(3) 11.0 8.4 11.0 11.0 8.4
Net asset value per share (US cents)(3) 342 304 365 342 304
(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 in line with previous guidance, and the group generated EBITDA excluding
special items of US$155 million. The strong performance of our European operations was offset by a number of non-recurring
operational and production issues in our South African and North American businesses. Profit for the period declined from
US$58 million to US$51 million due to an increased depreciation expense following the higher capital expenditure
activity.
Dissolving wood pulp (DWP) demand and pricing remained healthy, albeit that net sales pricing was slightly below that
of a year ago. During the quarter, all three of our DWP mills underwent scheduled maintenance shuts as well as some
additional debottlenecking. However, the shuts at Saiccor and Ngodwana both ran longer than planned and, combined with additional
production and commissioning issues on start-up, impacted production volumes by approximately 30,000 tons for the quarter.
Demand for specialities and packaging papers continued to grow across the various product segments, with our production
capacity being the limiting factor to sales in some markets. EBITDA margins declined slightly from the comparative quarter
last year, mainly as a result of the pricing for start-up volumes at Somerset and a lag in implementing selling price
increases in Europe to offset higher raw material cost. This lag is due to the contract terms of much of the specialities
business in Europe. The consolidated Cham Paper assets were included for the full quarter following their acquisition at
the end of February 2018.
An improvement in demand for coated mechanical paper in the European paper business and higher average graphic paper
prices led to improved profitability, offsetting increased variable costs, particularly paper pulp and a softer coated
woodfree market.
The North American graphic paper business continued to benefit from the tight market conditions, with increased sales
pricing. The conversion of Somerset PM1 to packaging grades overran to schedule and this negatively impacted sales
volumes of both graphic and packaging grades in the quarter as well as costs.
Higher packaging and paper sales volumes and prices in South Africa were unable to fully offset the impact of lower
DWP sales volumes and prices as well as the stronger Rand/Dollar exchange rate relative to a year ago.
Earnings per share excluding special items were 10 US cents, slightly lower than the 11 US cents generated in the
equivalent quarter last year.
Cash flow and debt
Net cash utilised was US$41 million, compared to the US$30 million generated in the equivalent quarter last year. The
cash utilisation was due to higher capital expenditure, offset by a decrease in working capital. Capital expenditure
of US$188 million related mainly to the paper machine conversion at Somerset and debottlenecking of DWP production at
the Ngodwana and Saiccor mills.
Cash taxes paid for the quarter were US$6 million, compared to net tax refunds of US$4 million in the comparative
period last year.
Despite the net cash utilised in the quarter, the net debt decreased by US$29 million from the prior quarter to
US$1,603 million as a result of the weaker Euro/Dollar and Rand/Dollar exchange rates which impacted the translation of Euro
and Rand denominated debt.
Liquidity comprised cash on hand of US$317 million and US$686 million available from the group's undrawn committed
revolving credit facilities.
Operating review for the quarter
Europe
Quarter ended
€ million Jun 2018 Mar 2018 Dec 2017 Sept 2017 Jun 2017
Sales 636 616 571 583 554
Operating profit excluding special items 31 37 31 35 23
Operating profit excluding special items to sales (%) 4.9 6.0 5.4 6.0 4.2
EBITDA excluding special items 60 64 59 63 51
EBITDA excluding special items to sales (%) 9.4 10.4 10.3 10.8 9.2
RONOA pa (%) 9.3 11.7 10.6 12.2 8.2
The overall performance of the European business in a seasonally slow quarter was strong, especially given the
variable cost pressures arising from higher paper pulp prices.
Graphic paper sales volumes were down marginally year-on-year, with strong coated mechanical paper sales offsetting
the declines in coated woodfree paper volumes. Demand for mechanical paper was driven by supply tightness in the wider
publishing paper segment, as well as higher coated woodfree reel prices. A series of coated woodfree paper price increases
led to average net selling prices that were up 7% year-on-year, with mechanical coated paper prices up 3% over the same
period.
The Cham Paper integration progressed smoothly and the financial performance was ahead of the expectations at the time
of acquisition. Excluding the impact of additional volumes from Cham, sales volumes grew 9% in the speciality paper
business compared to the equivalent quarter last year. Sales price increases in this segment lagged cost increases due to
the duration of contracts typical in this market.
Variable costs increased by 6% year-on-year, driven by significant increases in pulp prices. Lower latex and energy
costs mitigated the impact somewhat. Fixed costs were 8% higher due to a higher headcount post the Cham Paper acquisition
and additional maintenance expenses in the quarter.
North America
Quarter ended
US$ million Jun 2018 Mar 2018 Dec 2017 Sept 2017 Jun 2017
Sales 339 363 342 357 314
Operating profit (loss) excluding special items 1 18 (1) 27 (2)
Operating profit (loss) excluding special items to sales (%) 0.3 5.0 (0.3) 7.6 (0.6)
EBITDA excluding special items 20 37 18 47 17
EBITDA excluding special items to sales (%) 5.9 10.2 5.3 13.2 5.4
RONOA pa (%) 0.4 6.8 (0.4) 10.7 (0.8)
Profitability in the North American business improved marginally over the prior year, with gains in coated paper
pricing largely offset by increased variable costs, primarily purchased pulp, as well as higher fixed costs due in part to
the conversion work on Somerset PM1 which was completed during the quarter. In total, the conversion project negatively
impacted the quarter's result by US$8 million.
The US graphic paper market continued to be tightly supplied, and our average coated paper sales prices increased 12%
year-on-year. Sales volumes were 6% lower than the equivalent quarter last year as a result of the lost production from
Somerset PM1 and our strategic shift towards packaging. Inventory levels were low at quarter-end.
The Cloquet Mill increased DWP production, at the expense of paper pulp, in line with customer demand. The positive
impact of a 12% increase in DWP sales volume during the quarter was negated somewhat by higher average purchased pulp
costs. Average DWP sales prices were lower than the prior year.
The project to convert Somerset PM1 from purely graphics paper grades to both graphics and paperboard grades was
completed to design product specification; however, both capital cost and timing overran, which has resulted in delayed
qualification and first quality sales from the machine. The legacy specialities and packaging business experienced a good
quarter with increased sales volumes and pricing, particularly in the coated-one-side (C1S) category.
Variable costs were 10% higher year-on-year, driven mainly by purchased pulp and to a lesser extent the PM1 conversion
and ramp-up. Fixed costs were also impacted by the conversion project at Somerset, particularly those related to
personnel and maintenance.
Southern Africa
Quarter ended
ZAR million Jun 2018 Mar 2018 Dec 2017 Sept 2017 Jun 2017
Sales 4,383 4,548 4,291 4,879 4,432
Operating profit excluding special items 553 950 940 1,106 918
Operating profit excluding special items to sales (%) 12.6 20.9 21.9 22.7 20.7
EBITDA excluding special items 742 1,168 1,144 1,344 1,102
EBITDA excluding special items to sales (%) 16.9 25.7 26.7 27.5 24.9
RONOA pa (%) 11.9 20.9 21.3 26.0 21.5
The Southern African results were impacted by a stronger Rand/Dollar exchange rate compared to a year ago and dissolving
wood pulp sales volumes which were 3% below those of the equivalent quarter last year. Fixed costs were also higher
due to scheduled annual maintenance which ran longer than planned at both Saiccor and Ngodwana.
DWP production and sales volumes were impacted by the extended maintenance shuts, which included various smaller
debottlenecking and equipment upgrade projects. Closing inventory levels of DWP were very low and will impact fourth
quarter sales. Average US Dollar sales prices were 3% lower than the equivalent quarter last year, which along with a
stronger Rand/Dollar exchange rate led to a 7% reduction in Rand pricing.
The paper business had a solid quarter, with a slight improvement in sales volumes and higher selling prices
offsetting increased variable costs.
Variable costs, particularly wood, pulp and chemicals, increased year-on-year as did fixed costs.
Outlook
The DWP market remains tightly supplied, with limited new capacity in the medium term. Market prices are expected to
remain stable at current levels given historically high paper pulp prices that are supporting DWP pricing and viscose
staple fibre prices that remain under pressure from new capacity entering the market. Fourth quarter average realised
DWP prices should be in line with those of the third quarter.
Graphic paper operating rates in both Europe and North America remain healthy, and further price increases have been
implemented since quarter-end to mitigate higher input costs. The low graphic paper inventory levels in the North
American business will impact sales volumes in the fourth quarter.
Demand growth for most of the speciality and packaging grades we produce continues to be above long-term averages,
and, where applicable, price increases have been implemented to offset rising input costs. Trial runs of the packaging
grades on Somerset PM1 have continued, and the machine is producing to a high quality. We expect to start commercial
sales of first quality paperboard in the fourth quarter. Following the completion of the conversion projects at
Somerset and Maastricht mills during the year we anticipate significantly improved packaging sales volumes in the
coming financial year.
Capital expenditure in the last quarter is expected to be approximately US$180 million. This includes expenditure in
preparation for the expansion at Saiccor, the completion of the DWP debottlenecking at Ngodwana and Saiccor, and
expenditure related to the Somerset PM1 conversion overrun. We currently estimate the additional cost at Somerset Mill
to be in the order of US$35-50 million above the initial capital expenditure projection.
We expect to reduce net debt further in the coming quarter through positive cash generation, and based on current market
conditions, including the current Rand/Dollar exchange rate, we expect the group's fourth quarter operating performance to
be similar to that of last year, despite the lost production volumes in the third quarter and the resultant low inventory
levels as described previously.
On behalf of the board
S R Binnie
Director
G T Pearce
Director
8 August 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
Quarter ended Nine months ended
US$ million Note Jun 2018 Jun 2017 Jun 2018 Jun 2017
Sales 1,445 1,260 4,271 3,885
Cost of sales 1,270 1,089 3,635 3,265
Gross profit 175 171 636 620
Selling, general and administrative expenses 93 82 293 245
Other operating expenses (income) (2) 1 (8) 6
Share of profit from equity investments - (2) (3) (6)
Operating profit 3 84 90 354 375
Net finance costs 18 16 54 65
Net interest expense 19 20 58 74
Interest capitalised (1) - (2) -
Net foreign exchange gain - (4) (2) (9)
Profit before taxation 66 74 300 310
Taxation 15 16 84 74
Profit for the period 51 58 216 236
Basic earnings per share (US cents) 9 11 40 44
Weighted average number of shares in
issue (millions) 538.9 534.8 537.8 533.6
Diluted earnings per share (US cents) 9 11 39 43
Weighted average number of shares on fully
diluted basis (millions) 550.0 550.1 549.5 547.3
Condensed group statement of other comprehensive income
Quarter ended Nine months ended
US$ million Jun 2018 Jun 2017 Jun 2018 Jun 2017
Profit for the period 51 58 216 236
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 must be reclassified subsequently to profit or loss (180) 15 (31) 63
Exchange differences on translation of foreign operations (168) 3 (27) 52
Movements in hedging reserves (14) 12 (5) 11
Tax effect of above items 2 - 1 -
Total comprehensive income (loss) for the period (129) 73 166 299
Condensed group balance sheet
Note Audited
US$ million Jun 2018 Sept 2017
ASSETS
Non-current assets 3,689 3,378
Property, plant and equipment 2,926 2,681
Plantations 5 481 458
Deferred tax assets 92 123
Goodwill and intangible assets 87 39
Equity-accounted investees 34 26
Other non-current assets 69 51
Current assets 1,778 1,869
Inventories 735 636
Trade and other receivables 703 668
Derivative financial instruments 8 3
Taxation receivable 15 12
Cash and cash equivalents 317 550
Total assets 5,467 5,247
EQUITY AND LIABILITIES
Shareholders' equity
Ordinary shareholders' interest 1,842 1,747
Non-current liabilities 2,544 2,457
Interest-bearing borrowings 1,816 1,739
Deferred tax liabilities 306 295
Other non-current liabilities 422 423
Current liabilities 1,081 1,043
Interest-bearing borrowings 98 133
Overdrafts 6 -
Trade and other payables 916 858
Provisions 4 10
Derivative financial instruments 11 5
Taxation payable 46 37
Total equity and liabilities 5,467 5,247
Number of shares in issue at balance sheet date (millions) 539.1 535.0
Condensed group statement of cash flows
Quarter ended Nine months ended
US$ million Jun 2018 Jun 2017 Jun 2018 Jun 2017
Profit for the period 51 58 216 236
Adjustment for:
Depreciation, fellings and amortisation 87 76 255 239
Taxation 15 16 84 74
Net finance costs 18 16 54 65
Defined post-employment benefits paid (11) (12) (33) (33)
Plantation fair value adjustments (25) (17) (82) (59)
Asset impairment reversal (3) - (3) -
Net restructuring provisions - 1 (2) 1
Profit (loss) on disposal of property, plant and equipment 1 - (8) -
Other non-cash items 8 1 16 21
Cash generated from operations 141 139 497 544
Movement in working capital 33 (7) (85) (130)
Net finance costs paid (21) (20) (42) (61)
Taxation paid (6) 4 (50) (62)
Dividend paid - - (81) (59)
Cash generated from operating activities 147 116 239 232
Cash utilised in investing activities (188) (86) (519) (165)
Capital expenditure (188) (78) (395) (160)
Proceeds on disposal of assets 1 - 11 3
Acquisition of subsidiary - - (132) -
Other movements (1) (8) (3) (8)
Net cash (utilised) generated (41) 30 (280) 67
Cash effects of financing activities (71) (314) 47 (330)
Proceeds from interest-bearing borrowings (6) 131 116 136
Repayment of interest-bearing borrowings (65) (445) (69) (466)
Net movement in cash and cash equivalents (112) (284) (233) (263)
Cash and cash equivalents at beginning of period 459 703 550 703
Translation effects (30) 27 - 6
Cash and cash equivalents at end of period 317 446 317 446
Condensed group statement of changes in equity
Nine months ended
US$ million Jun 2018 Jun 2017
Balance - beginning of period 1,747 1,378
Total comprehensive income for the period 166 299
Shareholders for dividend (81) (59)
Transfers from the share purchase trust 3 4
Transfers of vested share options (1) (2)
Share-based payment reserve 8 7
Balance - end of period 1,842 1,627
Notes to the condensed group results
1. Basis of preparation
The condensed consolidated interim financial statements for the quarter and nine months ended June 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 results are unaudited.
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 nine months ended June 2017.
Quarter ended Nine months ended
Metric tons (000's) Jun 2018 Jun 2017 Jun 2018 Jun 2017
Sales volume
North America 318 316 1,008 998
Europe 833 795 2,502 2,501
Southern Africa - Pulp and paper 383 387 1,179 1,159
Forestry 380 306 882 812
Total 1,914 1,804 5,571 5,470
Which consists of:
Specialised cellulose 277 275 866 859
Specialities and packaging papers 289 224 718 614
Printing and writing papers 968 999 3,105 3,185
Forestry 380 306 882 812
Segment information continued
Quarter ended Nine months ended
US$ million Jun 2018 Jun 2017 Jun 2018 Jun 2017
Sales
North America 339 314 1,044 1,003
Europe 759 610 2,188 1,880
Southern Africa - Pulp and paper 325 319 983 955
Forestry 22 17 56 47
Total 1,445 1,260 4,271 3,885
Which consists of:
Specialised cellulose 245 252 765 782
Specialities and packaging papers 327 215 777 602
Printing and writing papers 851 776 2,673 2,454
Forestry 22 17 56 47
Operating profit (loss) excluding special items
North America 1 (2) 18 20
Europe 37 25 119 99
Southern Africa 44 70 192 253
Unallocated and eliminations(1) 3 - 3 2
Total 85 93 332 374
Which consists of:
Specialised cellulose 46 73 177 254
Specialities and packaging papers 18 14 59 52
Printing and writing papers 18 6 93 66
Unallocated and eliminations(1) 3 - 3 2
Special items - (gains) losses
North America 1 - 3 -
Europe (2) 2 (1) 3
Southern Africa (6) (2) (35) (9)
Unallocated and eliminations(1) 8 3 11 5
Total 1 3 (22) (1)
Segment operating profit (loss)
North America - (2) 15 20
Europe 39 23 120 96
Southern Africa 50 72 227 262
Unallocated and eliminations(1) (5) (3) (8) (3)
Total 84 90 354 375
(1) Includes the group's treasury operations and our insurance captive.
Segment information continued
Quarter ended Nine months ended
US$ million Jun 2018 Jun 2017 Jun 2018 Jun 2017
EBITDA excluding special items
North America 20 17 75 79
Europe 71 55 218 189
Southern Africa 59 84 240 294
Unallocated and eliminations(1) 5 (1) 5 2
Total 155 155 538 564
Which consists of:
Specialised cellulose 60 85 218 291
Specialities and packaging papers 33 24 98 81
Printing and writing papers 57 47 217 190
Unallocated and eliminations(1) 5 (1) 5 2
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 believe are material by nature or amount to the operating
results and require separate disclosure.
EBITDA excluding special items 155 155 538 564
Depreciation and amortisation (70) (62) (206) (190)
Operating profit excluding special items 85 93 332 374
Special items - gains (losses) (1) (3) 22 1
Plantation price fair value adjustment 8 2 30 14
Acquisition costs - - (2) -
Net restructuring provisions - (1) 2 (1)
Profit on disposal and written off assets (1) - 8 -
Asset impairment reversal 3 - 3 -
Black Economic Empowerment charge - - (1) (1)
Fire, flood, storm and other events (11) (4) (18) (11)
Segment operating profit 84 90 354 375
Net finance costs (18) (16) (54) (65)
Profit before taxation 66 74 300 310
Taxation (15) (16) (84) (74)
Profit for the period 51 58 216 236
(1) Includes the group's treasury operations and our insurance captive.
Segment information continued
Nine months ended
US$ million Jun 2018 Jun 2017
Segment assets
North America 1,141 997
Europe 1,556 1,293
Southern Africa 1,380 1 300
Unallocated and eliminations(1) 4 8
Total 4,081 3,598
Reconciliation of segment assets to total assets
Segment assets 4,081 3,598
Deferred taxation 92 153
Cash and cash equivalents 317 446
Trade and other payables 916 757
Provisions 4 10
Derivative financial instruments 11 1
Taxation payable 46 53
Total assets 5,467 5,018
(1) Includes the group's treasury operations and our insurance captive.
3. Operating profit
Quarter ended Nine months ended
US$ million Jun 2018 Jun 2017 Jun 2018 Jun 2017
Included in operating profit are the following items:
Depreciation and amortisation 70 62 206 190
Fair value adjustment on plantations (included in cost of sales)
Changes in volume
Fellings 17 14 49 49
Growth (17) (15) (52) (45)
- (1) (3) 4
Plantation price fair value adjustment (8) (2) (30) (14)
(8) (3) (33) (10)
Net restructuring provisions - 1 2 1
Profit on disposal of property, plant and equipment (1) - 8 -
Asset impairment reversals 3 - 3 -
4. Earnings per share
Quarter ended Nine months ended
US$ million Jun 2018 Jun 2017 Jun 2018 Jun 2017
Basic earnings per share (US cents) 9 11 40 44
Headline earnings per share (US cents) 9 11 38 44
EPS excluding special items (US cents) 10 11 41 44
Weighted average number of shares in issue (millions) 538.9 534.8 537.8 533.6
Diluted earnings per share (US cents) 9 11 39 43
Diluted headline earnings per share (US cents) 9 11 38 43
Weighted average number of shares on fully diluted basis (millions) 550.0 550.1 549.5 547.3
Calculation of headline earnings
Profit for the period 51 58 216 236
Profit on disposal of property, plant and equipment 1 - (8) -
Asset impairment reversals (3) - (3) -
Tax effect of above items (1) - 2 -
Headline earnings 48 58 207 236
Calculation of earnings excluding special items
Profit for the period 51 58 216 236
Special items after tax 1 2 (15) -
Special items 1 3 (22) (1)
Tax effect - (1) 7 1
Tax special items - - 19 -
Earnings excluding special items 52 60 220 236
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.
Audited
US$ million Jun 2018 Sept 2017
Fair value of plantations at beginning of year 458 441
Gains arising from growth 52 58
Fire, flood, storm and other events - (5)
In-field inventory (3) 1
Gain arising from fair value price changes 30 21
Harvesting - agriculture produce (fellings) (49) (63)
Translation difference (7) 5
Fair value of plantations at end of period 481 458
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)
Fair value Audited
US$ million hierarchy Jun 2018 Sept 2017
Investment funds(2) Level 1 7 7
Derivative financial assets Level 2 8 3
Derivative financial liabilities Level 2 11 5
Contingent consideration liability(3) Level 3 13 13
(1) The fair value of the financial instruments is 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
Audited
US$ million Jun 2018 Sept 2017
Contracted 345 253
Approved but not contracted 411 219
756 472
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
Inventories, trade and other receivables and trade and other payables
The increase in inventories, trade and other receivables and trade and other payables is largely
attributable to seasonal working capital movements.
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$88 million for the nine months ended June 2018 (September 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 management's 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.
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 4/2018, issued by the South African Institute of Chartered Accountants in
April 2018, 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.
Supplemental information continued
(this information has not been audited or reviewed)
Summary Rand convenience translation
Quarter ended Nine months ended
Jun 2018 Jun 2017 Jun 2018 Jun 2017
Key figures: (ZAR million)
Sales 18,252 16,614 54,351 52,267
Operating profit excluding special items(1) 1,074 1,226 4,225 5,032
Special items - (gains) losses(1) 13 40 (280) (13)
EBITDA excluding special items(1) 1,958 2,044 6,846 7,588
Profit for the period 644 765 2,749 3,175
Basic earnings per share (SA cents) 120 143 511 595
Net debt(1) 22,005 17,207 22,005 17,207
Key ratios: (%)
Operating profit excluding special items to sales 5.9 7.4 7.8 9.6
Operating profit excluding special items to capital employed (ROCE)(1) 9.6 12.7 12.7 17.5
EBITDA excluding special items to sales 10.7 12.3 12.6 14.5
(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.
Supplemental information continued
(this information has not been audited or reviewed)
Exchange rates
Jun Mar Dec Sept Jun
2018 2018 2017 2017 2017
Exchange rates:
Period end rate: US$1 = ZAR 13.7275 11.8385 12.3724 13.5561 13.0551
Average rate for the quarter: US$1 = ZAR 12.6312 11.9577 13.6220 13.1761 13.1857
Average rate for the year to date: 12.7255 12.7723 13.6220 13.3813 13.4536
US$1 = ZAR
Period end rate: €1 = US$ 1.1685 1.2323 1.1998 1.1814 1.1426
Average rate for the quarter: €1 = US$ 1.1920 1.2286 1.1778 1.1756 1.1011
Average rate for the year to date: €1 = US$ 1.1995 1.2032 1.1778 1.1055 1.0827
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
13 August 2018
This report is available on the
Sappi website: www.sappi.com
Date: 13/08/2018 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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