To view the PDF file, sign up for a MySharenet subscription.

SAPPI LIMITED - Second quarter results for the period ended March 2019

Release Date: 09/05/2019 09:00
Code(s): SAP     PDF:  
 
Wrap Text
Second quarter results for the period ended March 2019

SAPPI LIMITED
Registration number: 1936/008963/06 
JSE code: SAP                       
ISIN code: ZAE000006284             
Issuer code: SAVVI                  

Second quarter results for the period ended March 2019 

2nd quarter results
Sappi is a global diversified woodfibre company focused on providing dissolving wood pulp, packaging and 
speciality 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 products are used worldwide mainly by converters to create viscose fibre for fashionable
clothing and textiles, as well as other consumer products; quality packaging and speciality 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
Europe                  51
Southern Africa         24

Sales by destination* (%)
North America           23
Europe                  46
Southern Africa         10
Asia and other          21

Sales by product* (%)
Coated paper            51
Commodity paper          6
Uncoated paper           6    
Dissolving wood pulp    20
Speciality paper        16
Other                    1   

Net operating assets** (%)
North America           28
Europe                  37
Southern Africa         35

* For the period ended March 2019. ** As at March 2019.


Highlights for the quarter

- EBITDA excluding special items US$187 million 
  (Q2 2018 US$211 million)

- Profit for the period US$72 million 
  (Q2 2018 US$102 million)
  
- EPS excluding special items 13 US cents 
  (Q2 2018 17 US cents)

- Net debt US$1,680 million 
  (Q2 2018 US$1,632 million)

                                                       Quarter ended                 Half-year ended
                                              Mar 2019    Mar 2018    Dec 2018    Mar 2019     Mar 2018    
Key figures: (US$ million)                                                                                 
Sales                                            1,503       1,496       1,418       2,921        2,826    
Operating profit excluding special items(1)        117         142         128         245          247    
Special items - loss (gain)(2)                       -         (12)          5           5          (23)    
EBITDA excluding special items(1)                  187         211         197         384          383    
Profit for the period                               72         102          81         153          165    
Basic earnings per share (US cents)                 13          19          15          28           31    
EPS excluding special items (US cents)(3)           13          17          16          29           31    
Net debt(3)                                      1,680       1,632       1,557       1,680        1,632    
Key ratios: (%)                                                                                            
Operating profit excluding special 
items to sales                                     7.8         9.5         9.0         8.4          8.7    
Operating profit excluding special items 
to capital employed (ROCE)(3)                     13.1        16.8        14.7        13.6         14.8    
EBITDA excluding special items to sales           12.4        14.1        13.9        13.2         13.6    
Net debt to EBITDA excluding special items         2.1         2.2         2.0         2.1          2.2    
Interest cover(3)                                 10.5        11.0        10.9        10.5         11.0    
Net asset value per share (US cents)(3)            366         365         353         366          365    
(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
Graphic paper markets were much weaker than expected during the quarter, with demand in our major product categories 
down between 8% and 13% in Europe and North America. Consequently, we were compelled to take production downtime of 
85,000 tons across our paper machines in these regions. Also, raw material costs, particularly pulp, continued to be 
elevated, packaging and specialities markets were inconsistent and the ramp-up of recently converted paper packaging
machines was ongoing. Against this difficult backdrop, the group generated EBITDA excluding special items of 
US$187 million, 11% below that of the equivalent quarter last year. Profit for the period decreased from 
US$102 million to US$72 million due to the lower operating profit, higher depreciation charge and profit on 
the sale of property included in the prior year. 

Dissolving wood pulp (DWP) sales volumes increased following the debottlenecking of the Saiccor and 
Ngodwana mills in the past year, and a strong operating performance from the DWP mills. Lower viscose staple 
fibre (VSF) prices, due to an oversupplied market, contributed towards Chinese DWP market prices declining 
throughout the quarter. The weaker Rand/US Dollar exchange rate and the quarter lag in contracted pricing 
benefited the South African DWP business, resulting in higher Rand prices for the quarter. Demand from our 
major customers remained healthy. 

Packaging and specialities markets were mixed, with solid containerboard demand in addition to a recovery in the
consumer packaging market offset by continued weakness in the self-adhesives and release paper segment. 
Packaging and specialities sales volumes for the group were 18% higher year-on-year.

Ongoing weak demand for graphics papers in European and export markets due to general economic uncertainty, the 
impact from higher selling prices and the related commercial downtime, lowered margins in the European business 
despite higher selling prices.

US coated paper market conditions weakened considerably during the quarter as a result of weaker end-use demand 
and a customer inventory correction following a series of selling price increases implemented in 2018. DWP sales 
volumes rose year-on-year, while average US Dollar net sales prices were flat. Somerset PM1 continued to ramp 
up paperboard production, and total packaging and specialities sales were 77% up on last year.

The South African business delivered another excellent performance, with increased DWP sales volumes and higher
average net selling prices for all major product categories more than offsetting higher energy and fibre cost 
pressures.

Earnings per share excluding special items was 13 US cents, a decrease from the 17 US cents generated in the
equivalent quarter last year. Special items were neutral for the quarter.

Cash flow and debt
Net cash utilised for the quarter was US$148 million primarily as a result of the 2018 dividend payment of 
US$92 million, an increase in working capital due to the timing of month end and self-funded capital expenditure 
relating mainly to the Saiccor expansion and the Lanaken conversion projects.

Cash taxes for the quarter were US$43 million, a decrease of US$7 million compared to the equivalent quarter 
last year.

Net debt of US$1,680 million rose US$48 million year-on-year as a result of the cash utilised in the quarter as
mentioned above, offset by the benefits of a weaker Euro/US Dollar exchange rate on the translation of Euro 
denominated debt.

Liquidity comprised cash on hand of US$720 million and US$658 million available from the undrawn committed revolving
credit facilities in South Africa and Europe. The cash on hand was inflated at quarter end by the proceeds of a new
seven-year Euro 450 million bond issued during March to repay the Euro 450 million bond maturing in 2022 in full 
post-quarter end.

Operating review for the quarter

Europe
                                                             Quarter ended
€ million                           Mar 2019     Dec 2018      Sept 2018      Jun 2018      Mar 2018    
Sales                                    675          642            671           636           616    
Operating profit excluding                     
special items                             24           30             38            31            37    
Operating profit excluding                     
special items to sales (%)               3.6          4.7            5.7           4.9           6.0    
EBITDA excluding special items            50           59             71            60            64    
EBITDA excluding special                       
items to sales (%)                       7.4          9.2           10.6           9.4          10.4    
RONOA pa (%)                             6.9          8.8           11.3           9.3          11.7    

The European business was affected by the ongoing weakness in graphic paper markets. The reduction in demand moved
below the long-term trend because of a general economic slowdown in the region combined with the impact from a series 
of selling price increases implemented in 2018. Higher net selling prices were insufficient to offset weaker graphic 
paper sales volumes and higher variable costs.

Industry shipments of coated woodfree and coated mechanical paper declined 11% and 9% respectively during the quarter,
with both domestic and export markets under pressure. Consequently, we took 46,000 tons of production downtime on our
paper machines to manage inventory levels and match production to demand. Average net selling prices for the graphics
grades were 9% higher year-on-year.

The packaging and specialities paper business increased volumes by 25% compared to the prior year primarily due to a
full quarter of volumes from the Cham Paper acquisition which was concluded at the end of February 2018 and the ramp-up
of Maastricht during the quarter. The economic situation also impacted certain products in this segment, resulting in
lower sales. Demand for flexible packaging volumes recovered during the quarter, however, the self-adhesives market 
remains weak due to tepid demand in the automotive sector. Average net selling prices were 9% higher than the 
previous year. 

Variable costs in Euro were 12% higher year-on-year, driven primarily by softwood and hardwood pulp costs that were
24% and 9% higher respectively. However, pulp, energy and chemical costs declined compared to the prior quarter. 
Fixed costs were 6% higher, mainly due to the inclusion of Cham Paper fixed costs for a full quarter. 

Operating review for the quarter continued

North America
                                                             Quarter ended
US$ million                         Mar 2019     Dec 2018      Sept 2018      Jun 2018      Mar 2018    
Sales                                    378          351            388           339           363    
Operating profit (loss) excluding              
special items                             10            9             31             1            18    
Operating profit (loss) excluding              
special items to sales (%)               2.6          2.6            8.0           0.3           5.0    
EBITDA excluding special items            31           29             51            20            37    
EBITDA excluding special                       
items to sales (%)                       8.2          8.3           13.1           5.9          10.2    
RONOA pa (%)                             3.4          3.2           10.9           0.4           6.8    

Improved DWP and packaging sales volumes and higher graphic paper sales prices were insufficient to offset weak
graphic paper demand and input cost pressures, resulting in an operating profit that declined year-on-year.

Coated paper demand in the US market weakened further during the quarter, with the latest industry statistics showing
a 9.5% demand decline through the first two months of the quarter, a situation which was exacerbated for domestic
producers by an increase in imports. Factors which contributed to the weak demand included a series of selling price 
increases implemented in 2018 which resulted in an inventory build by customers throughout the year and affected 
downstream demand. We took 39,000 tons of production downtime in the quarter to manage inventory levels and match 
production to demand. 

DWP sales volumes increased year-on-year due to good customer demand, while net sales prices were constant. 

The ramp-up of Somerset PM1 paperboard grades progressed, with commercial paperboard sales volumes 68% higher than the
prior quarter. Much of this volume is lower margin food service board rather than the SBS board which will ultimately
fill most of this machine capacity as qualification and customer acceptance processes are completed. These markets
require complex and lengthy qualification processes, which impacted machine optimisation and efficiency and therefore
profitability.

Variable costs, which were 12% higher year-on-year, were impacted negatively by high paper pulp costs and to a lesser
extent wood, chemicals and energy. Paper pulp list prices declined during the quarter, alleviating some of the pressure
on purchased paper pulp arising from the additional DWP production. Fixed costs remain well managed and were 2% higher.

Southern Africa
                                                             Quarter ended        
ZAR million                         Mar 2019     Dec 2018      Sept 2018      Jun 2018      Mar 2018    
Sales                                  5,234        4,981          5,103         4,383         4,548    
Operating profit excluding                    
special items                          1,121        1,217          1,081           553           950    
Operating profit excluding                    
special items to sales (%)              21.4         24.4           21.2          12.6          20.9    
EBITDA excluding special items         1,374        1,446          1,344           742         1,168    
EBITDA excluding special                      
items to sales (%)                      26.3         29.0           26.3          16.9          25.7    
RONOA pa (%)                            21.1         24.0           22.4          11.9          20.9    

Improved average net selling prices and DWP sales volumes contributed to a stronger operating performance for the
Southern African business.

DWP sales volumes increased compared to both comparative quarters, while a weaker Rand/US Dollar exchange rate
benefited Rand selling prices. 

Packaging sales volumes were below those of last year following a seasonal shift in containerboard sales volumes to
the prior quarter. Sales prices improved for all major packaging categories, and matched variable cost pressures.
Newsprint and office paper sales volumes were flat year-on-year, however, sales price increases in this segment 
lagged variable cost rises, leading to reduced margins.

Fixed costs rose 5% year-on-year, while variable costs were 15% higher driven by energy, wood and pulp costs.

Directorate
The board is pleased to announce the appointment of Mr James Lopez as independent non-executive director with 
effect from 01 March 2019.

Outlook 
DWP demand from our major customers remains healthy. The expanded production capacity, following the debottlenecking
of Saiccor and Ngodwana in 2018, is fully sold. Our DWP contract sales prices lag Chinese market prices by a
quarter and therefore the decline in market prices over the past few months along with planned maintenance 
downtime at all three of our DWP mills will impact margins and profitability in the third quarter. 

Packaging and speciality markets, with the exception of release and self-adhesive papers, are growing. Raw material
prices remain a concern for non-integrated mills, however, pulp and chemical costs have started to decline recently. 
The ramp-up and product mix optimisation process continues at Somerset and Maastricht as qualification and customer
acceptance work is completed. Demand for South African packaging products is expected to be strong.

Graphic paper markets remain weak, and despite expected closures or conversions by competitors, it may take the
remainder of the calendar year before sufficient capacity is removed to allow operating rates and margins to recover. 
Some relief may be expected from lower input costs going forward as paper pulp and some chemical prices have reduced 
in recent months. The conversion of Lanaken PM8 to coated woodfree from coated mechanical will be completed during 
the third quarter, with some negative impact on production and fixed costs due to machine downtime in the interim.

Capital expenditure for the remainder of 2019 is expected to be approximately US$370 million as we continue the
transition towards growing and higher margin segments. Major projects include the 110kt expansion project at 
Saiccor and the conversion of Lanaken PM8 from coated mechanical to coated woodfree paper production as well 
as the recently completed pulp mill debottlenecking at Cloquet. 

Given the current weak market conditions for graphic paper, DWP pricing pressure from oversupplied VSF markets 
and our more conservative outlook on the global economy, the second half and full year profitability are now 
expected to be below that of last year. 

On behalf of the board
S R Binnie
Director

G T Pearce
Director

09 May 2019

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 a 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 and 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 2019      Mar 2018      Mar 2019       Mar 2018    
Sales                                                      1,503         1,496         2,921          2,826    
Cost of sales                                              1,290         1,244         2,486          2,365    
Gross profit                                                 213           252           435            461    
Selling, general and administrative expenses                  87           106           187            200    
Other operating expenses                                      10            (7)           10             (6)    
Share of profit from equity investments                       (1)           (1)           (2)            (3)    
Operating profit                                 3           117           154           240            270    
Net finance costs                                             20            21            37             36    
  Net interest expense                                        21            23            40             39    
  Interest capitalised                                         -            (1)            -             (1)    
  Net foreign exchange gain                                   (1)           (1)           (3)            (2)    
                                                                                                               
Profit before taxation                                        97           133           203            234    
Taxation                                                      25            31            50             69    
Profit for the period                                         72           102           153            165    
Basic earnings per share (US cents)              4            13            19            28             31    
Weighted average number of shares                                                              
in issue (millions)                                        542.7         538.7         541.3          537.2    
Diluted earnings per share (US cents)            4            13            19            28             30    
Weighted average number of shares on                                                           
fully diluted basis (millions)                             549.3         549.4         548.8          549.2    


Condensed group statement of other comprehensive income
                                                                                           Reviewed
                                                             Quarter ended              Half-year ended
US$ million                                             Mar 2019      Mar 2018      Mar 2019       Mar 2018    
Profit for the period                                         72           102           153            165    
Other comprehensive income, net of tax                                                                         
  Items that will not be reclassified                                                          
  subsequently to profit or loss                               -             -             -            (19)    
  Tax rate change(1)                                           -             -             -            (19)    
  Items that may be reclassified                                                               
  subsequently to profit or loss                              (3)           43           (25)           149    
  Exchange differences on translation                                                          
  of foreign operations                                        2            44           (17)           141    
  Movements in hedging reserves                               (6)           (3)          (10)             9    
  Tax effect of above items                                    1             2             2             (1)    
                                                                                                               
Total comprehensive income for the period                     69           145           128            295    
(1) For the half-year ended March 2018, there were tax rate changes in various countries resulting in a 
    US$17 million taxation charge recorded through the income statement and US$19 million through 
    other comprehensive income.


Condensed group balance sheet                                   
                                                                                        Reviewed
US$ million                                                         Note      Mar 2019            Sept 2018    
ASSETS                                                                                                         
Non-current assets                                                               3,747                3,766    
Property, plant and equipment                                                    2,990                3,010    
Plantations                                                            5           466                  466    
Deferred tax assets                                                                 99                  106    
Goodwill and intangible assets                                                      60                   63    
Equity-accounted investees                                                          32                   33    
Other non-current assets                                                           100                   88    
Current assets                                                                   2,278                1,904    
Inventories                                                                        804                  741    
Trade and other receivables                                                        737                  767    
Derivative financial assets                                                          6                   21    
Taxation receivable                                                                 11                   12    
Cash and cash equivalents                                                          720                  363    
                                                                                                               
Total assets                                                                     6,025                5,670    
EQUITY AND LIABILITIES                                                                                         
Shareholders' equity                                                                                           
Ordinary shareholders' interest                                                  1,987                1,947    
Non-current liabilities                                                          2,482                2,550    
Interest-bearing borrowings                                                      1,759                1,818    
Deferred tax liabilities                                                           337                  335    
Other non-current liabilities                                                      386                  397    
Current liabilities                                                              1,556                1,173    
Interest-bearing borrowings                                                        641                   97    
Overdrafts                                                                           -                   16    
Trade and other payables                                                           870                1,009    
Provisions                                                                           7                    6    
Derivative financial liabilities                                                     6                    6    
Taxation payable                                                                    32                   39    
Total equity and liabilities                                                     6,025                5,670    
Number of shares in issue at balance                            
sheet date (millions)                                                            542.7                539.3    


Condensed group statement of cash flows
                                                                                          Reviewed
                                                       Quarter ended                   Half-year ended
US$ million                                      Mar 2019         Mar 2018         Mar 2019        Mar 2018    
Profit for the period                                  72              102              153             165    
Adjustment for:                                                                                                
Depreciation, fellings and amortisation                88               88              174             168    
Taxation                                               25               31               50              69    
Net finance costs                                      20               21               37              36    
Defined post-employment benefits paid                 (12)             (12)             (22)            (22)    
Plantation fair value adjustments                     (29)             (25)             (49)            (57)    
Asset impairments                                      11                -               11               -    
Asset impairment reversals                             (8)               -               (8)              -    
Net restructuring provisions                            -               (2)               -              (2)    
(Profit) loss on disposal and                  
written off assets                                      3               (9)               3              (9)    
Other non-cash items(1)                                12                -               30               8    
Cash generated from operations                        182              194              379             356    
Movement in working capital                           (80)             (35)            (167)           (118)    
Net finance costs paid                                (20)             (15)             (25)            (21)    
Taxation (paid) refund                                (43)             (50)             (46)            (44)    
Dividend paid                                         (92)             (81)             (92)            (81)    
Cash generated from operating activities              (53)              13               49              92    
Cash utilised in investing activities                 (95)            (238)            (204)           (331)    
Capital expenditure                                   (95)            (119)            (201)           (207)    
Proceeds on disposal of assets                          1               10                1              10    
Acquisition of subsidiary                               -             (132)               -            (132)    
Other non-current asset movements                      (1)               3               (4)             (2)    
Net cash (utilised) generated                        (148)            (225)            (155)           (239)    
Cash effects of financing activities                  531               60              533             118    
Proceeds from interest-bearing borrowings             552               64              558             122    
Repayment of interest-bearing borrowings              (21)              (4)             (25)             (4)    
Net movement in cash and cash equivalents             383             (165)             378            (121)    
Cash and cash equivalents at                   
beginning of period                                   350              618              363             550    
Translation effects                                   (13)               6              (21)             30    
Cash and cash equivalents at end of period            720              459              720             459    
(1) Other non-cash items for the half-year ended March 2019 primarily relate to non-cash movements in the 
    defined benefit liabilities and plan assets of US$17 million (2018: US$8 million).


Condensed group statement of changes in equity
                                                                                         Reviewed                        
                                                                                      Half-year ended                        
US$ million                                                                    Mar 2019            Mar 2018    
Balance - beginning of period                                                     1,947               1,747    
Total comprehensive income for the period                                           128                 295    
Shareholders for dividend                                                           (92)                (81)    
Transfers from the share purchase trust                                               -                   3    
Transfers of vested share options                                                     -                  (1)    
Share-based payment reserve                                                           4                   5    
Balance - end of period                                                           1,987               1,968    
Comprising                                                                                                     
Ordinary share capital and premium                                                  838               1,025    
Non-distributable reserves                                                          133                 144    
Foreign currency translation reserves                                              (176)               (162)    
Hedging reserves                                                                    (37)                (27)    
Retained earnings                                                                 1,229                 988    
Total equity                                                                      1,987               1,968    


Notes to the condensed group results

1.  Basis of preparation
    The condensed consolidated interim financial statements for the quarter and half-year ended March 2019 
    are prepared in accordance with the International Financial Reporting Standards, IAS 34 Interim Financial 
    Reporting, the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and 
    Financial Pronouncements as issued by 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 as issued by the IASB 
    and are consistent with those applied in the previous annual financial statements except those new 
    standards adopted and set out below under "adoption of accounting standards in the current year".

    The preparation of these condensed consolidated interim financial statements was supervised by the 
    Chief Financial Officer, G T Pearce, CA(SA) and were authorised for issue on 9 May 2019.

    The condensed consolidated interim financial statements for the half-year ended March 2019 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.

    Adoption of accounting standards in the current year
    The group has adopted the following standards and amendments to standards during the current year, 
    all of which had no material impact on the group's reported results or financial position:

    IFRS 9 Financial Instruments
    IFRS 9 sets out a new classification and measurement approach for financial assets that reflects the 
    business model in which the assets are managed and their cash flow characteristics. The three principal 
    classification categories for financial assets are: measured at amortised cost, fair value through profit 
    or loss and fair value through other comprehensive income. The new classification did not have a 
    significant impact compared to the previous accounting for financial assets under IAS 39. IFRS 9 
    eplaced the "incurred loss" model in IAS 39 with a forward-looking "expected credit loss" (ECL) model.
    The group applied the practical expedient in IFRS 9 to calculate the ECL on trade receivables using a 
    provision matrix. The application of the ECL model did not result in a material impact compared to the 
    previous accounting under IAS 39. With respect to hedging, a new non-distributable equity reserve was 
    created called "cost of hedging reserve". This reserve is used to separate all time value of money and 
    forward-point valuations on hedged instruments, as required per IFRS 9. This resulted in an increase to 
    retained earnings and a decrease to this "cost of hedging reserve" of US$4 million on adoption of IFRS 9.    

    IFRS 15 Revenue from Contracts with Customers
    Revenue is derived principally from the sale of goods to customers and is measured at the fair value of 
    the amount received or receivable after the deduction of trade and settlement discounts, rebates and 
    customer returns. For the majority of local and regional sales, transfer occurs at the point of 
    offloading the shipment into the customer's warehouse whereas for the majority of export sales, transfer 
    occurs when the goods have been loaded onto the relevant carrier unless the contract of sale specifies 
    different terms.

    The adoption of IFRS 15 resulted in the group recognising revenue from delivery activities as a separate 
    performance obligation when control of the goods pass to customers at the point when the goods have been 
    loaded onto the relevant carrier for export sales. Given that the group is acting as an agent in these 
    activities, revenue is recognised when the delivery is arranged which is considered to be at the point 
    of loading of the goods resulting in no significant timing differences compared to revenue recognition 
    under IAS 18. The related delivery costs have been set off against this revenue based on agent 
    accounting principles whereas these were previously included in cost of sales. Refer to note 2 for the 
    quantitative impact of this adjustment. The group elected to adopt IFRS 15 on a cumulative effect method.

2.  Segment information
                                                   Quarter ended                Half-year ended
    Metric tons (000's)                       Mar 2019       Mar 2018       Mar 2019       Mar 2018    
    Sales volume                                                                                       
    North America                                  350            347            671            690    
    Europe                                         842            847          1,651          1,669    
    Southern Africa - Pulp and paper               418            413            814            796    
                      Forestry                     306            254            623            502    
    Total                                        1,916          1,861          3,759          3,657    
    Which consists of:                                                                                 
      Dissolving wood pulp                         350            302            647            589    
      Packaging and specialities papers            273            231            525            429    
      Printing and writing papers                  987          1,074          1,964          2,137    
      Forestry                                     306            254            623            502    

                                                                                   Reviewed
                                                   Quarter ended                Half-year ended
    US$ million                               Mar 2019       Mar 2018       Mar 2019       Mar 2018    
    Sales                                                                                              
    North America                                  378            363            729            705    
    Europe                                         767            756          1,499          1,429    
    Southern Africa - Pulp and paper               355            359            684            658    
                      Forestry                      18             18             37             34    
    Delivery costs revenue adjustment(2)           (15)             -            (28)              -    
    Total                                        1,503          1,496          2,921          2,826    
    Which consists of:                                                                                 
    Dissolving wood pulp                           308            279            571            520    
    Packaging and specialities papers              312            254            594            450    
    Printing and writing papers                    880            945          1,747          1,822    
    Forestry                                        18             18             37             34    
    Delivery costs revenue adjustment(2)           (15)             -            (28)             -    
    (2) Relates to delivery costs netted off against revenue. Refer to note 1, IFRS 15 adoption.

                                                                                  Reviewed
                                                    Quarter ended               Half-year ended
    US$ million                               Mar 2019       Mar 2018       Mar 2019       Mar 2018    
    Operating profit (loss) excluding                                                  
    special items                                                                      
    North America                                   10             18             19             17    
    Europe                                          27             45             61             82    
    Southern Africa                                 80             79            165            148    
      Unallocated and eliminations(1)                -              -              -              -    
    Total                                          117            142            245            247    
    Which consists of:                                                                                 
      Dissolving wood pulp                          77             69            154            131    
      Packaging and specialities papers             10             25             23             41    
      Printing and writing papers                   30             48             68             75    
       Unallocated and eliminations(1)               -              -              -              -    
    Special items - (gains) losses                                                                     
    North America                                   13              -             13              2    
    Europe                                           1             (1)             5              1    
    Southern Africa                                (14)           (13)           (17)           (29)    
      Unallocated and eliminations(1)                -              2              4              3    
    Total                                            -            (12)             5            (23)    
    Segment operating profit (loss)                                                                    
    North America                                   (3)            18              6             15    
    Europe                                          26             46             56             81    
    Southern Africa                                 94             92            182            177    
      nallocated and eliminations(1)                 -             (2)            (4)            (3)    
    Total                                          117            154            240            270    
    EBITDA excluding special items                                                                     
    North America                                   31             37             60             55    
    Europe                                          57             78            124            147    
    Southern Africa                                 98             97            199            181    
      Unallocated and eliminations(1)                1             (1)             1              -    
    Total                                          187            211            384            383    
    Which consists of:                                                                                 
      Dissolving wood pulp                          92             83            183            158    
      Packaging and specialities papers             29             38             59             65    
      Printing and writing papers                   65             91            141            160    
       Unallocated and eliminations(1)               1             (1)             1              -    
    (1) Includes the group's treasury operations and our insurance captive.

    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.
                                                                                   Reviewed
                                                   Quarter ended                Half-year ended
    US$ million                               Mar 2019       Mar 2018       Mar 2019       Mar 2018    
    EBITDA excluding special items                 187            211            384            383    
    Depreciation and amortisation                  (70)           (69)          (139)          (136)    
    Operating profit excluding                                                          
    special items                                  117            142            245            247    
      Special items - gains (losses)                 -             12             (5)            23    
       Plantation price fair value adjustment       10              6             13             22    
       Acquisition costs                             -             (2)             -             (2)    
       Net restructuring provisions                  -              2              -              2    
       Profit (loss) on disposal and                                                    
       written off assets                           (3)             9             (3)             9    
       Asset impairments                           (11)             -            (11)             -    
       Asset impairment reversals                    8              -              8              -    
       Black Economic Empowerment charge             -             (1)             -             (1)    
       Fire, flood, storm and other events          (4)            (2)           (12)            (7)    
                                                                                                       
    Segment operating profit                       117            154            240            270    
    Net finance costs                              (20)           (21)           (37)           (36)    
    Profit before taxation                          97            133            203            234    
    Taxation                                       (25)           (31)           (50)           (69)    
    Profit for the period                           72            102            153            165    

                                                                                   Reviewed
                                                                                Half-year ended
    US$ million                                                             Mar 2019       Mar 2018    
    Segment assets                                                                                     
    North America                                                              1,184          1,090    
    Europe                                                                     1,586          1,652    
    Southern Africa                                                            1,502          1,545    
    Unallocated and eliminations(1)                                               19              4    
    Total                                                                      4,291          4,291    
    Reconciliation of segment assets to total assets                                                   
    Segment assets                                                             4,291          4,291    
    Deferred tax assets                                                           99             93    
    Cash and cash equivalents                                                    720            459    
    Trade and other payables                                                     870            908    
    Provisions                                                                     7              5    
    Derivative financial instruments                                               6              7    
    Taxation payable                                                              32             45    
    Total assets                                                               6,025          5,808    
    (1) Includes the group's treasury operations and our insurance captive.

3.  Operating profit
                                                                                    Reviewed
                                                  Quarter ended                 Half-year ended
    US$ million                               Mar 2019       Mar 2018       Mar 2019       Mar 2018    
    Included in operating profit                                                       
    are the following items:                                                           
    Depreciation and amortisation                   70             69            139            136    
    Fair value adjustment on plantations                                               
    (included in cost of sales)                                                        
    Changes in volume                                                                                  
      Fellings                                      18             19             35             32    
      Growth                                       (19)           (19)           (36)           (35)    
                                                    (1)             -             (1)            (3)    
    Plantation price fair value adjustment         (10)            (6)           (13)           (22)    
                                                   (11)            (6)           (14)           (25)    
    Net restructuring provisions                     -             (2)             -             (2)    
    (Profit) loss on disposal and                                                      
    written off assets                               3             (9)             3             (9)    
    Asset impairment reversals                      (8)             -             (8)             -    
    Asset impairments                               11              -             11              -    

4.  Earnings per share
                                                                                    Reviewed  
                                                  Quarter ended                 Half-year ended              
    US$ million                               Mar 2019       Mar 2018       Mar 2019       Mar 2018     
    Basic earnings per share (US cents)             13             19             28             31    
    Headline earnings per share (US cents)          14             18             29             30    
    EPS excluding special items (US cents)          13             17             29             31    
    Weighted average number of                                                          
    shares in issue (millions)                   542.7          538.7          541.3          537.2    
    Diluted earnings per share (US cents)           13             19             28             30    
    Diluted headline earnings                                                           
    per share (US cents)                            14             17             29             29    
    Weighted average number of shares                                                   
    on fully diluted basis (millions)            549.3          549.4          548.8          549.2    
    Calculation of headline earnings                                                                   
    Profit for the period                           72            102            153            165    
    (Profit) loss on disposal and                                                       
    written off assets                               3             (9)             3             (9)    
    Asset impairment reversals                      (8)             -             (8)             -    
    Asset impairments                               11              -             11              -    
    Tax effect of above items                       (2)             3             (2)             3    
    Headline earnings                               76             96            157            159    
    Calculation of earnings                                                             
    excluding special items                                                             
    Profit for the period                           72            102            153            165    
    Special items after tax                          -             (8)             5            (16)    
    Special items                                    -            (12)             5            (23)    
    Tax effect                                       -              4              -              7    
    Tax special items                                -              -              -             19    
    Earnings excluding special items                72             94            158            168    

5.  Plantations
    Plantations are stated at fair value less 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 and volume and growth estimations.                                       

    Mature timber that is expected to be felled within 12 months from the end of the reporting period 
    is valued using unadjusted current market prices. Mature timber that is to be felled in more than 
    12 months from the reporting date is valued using a 12 quarter rolling historical average price. 
    Immature timber is valued using a discounted cash flow method taking into account the growth cycle 
    of a plantation.                                        

    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
    US$ million                                                            Mar 2019       Sept 2018    
    Fair value of plantations at beginning of year                              466             458    
    Gains arising from growth                                                    36              69    
    In-field inventory                                                           (3)              1    
    Gain arising from fair value price changes                                   13              27    
    Harvesting - agriculture produce (fellings)                                 (35)            (66)    
    Translation difference                                                      (11)            (23)    
    Fair value of plantations at end of period                                  466             466    

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       Reviewed           Reviewed     
    US$ million                                         hierarchy       Mar 2019          Sept 2018    
    Investment funds(2)                                   Level 1              7                  7    
    Derivative financial assets                           Level 2              6                 21    
    Derivative financial liabilities                      Level 2              6                  6    
    Contingent consideration liability(3)                 Level 3              5                  7    
    (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 weighted 
    average outcome has been considered.

    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, bank overdrafts and current 
    interest-bearing borrowings approximate their fair values.

7.  Capital commitments                                                                                   
                                                                                  Reviewed
                                                                         Mar 2019         Sept 2018    
    Contracted                                                                255               293    
    Approved but not contracted                                               328               381    
                                                                              583               674    

8.  Material balance sheet movements                                                              
    Cash and interest-bearing borrowings                                                          
    On 26 March the group raised an aggregate principal amount of €450 million (US$505 million) in new 
    senior unsecured notes due 2026 at a coupon of 3.125% per annum. The proceeds from these notes were 
    used to redeem the full amount of the group's €450 million senior (US$505 million) unsecured notes 
    due 2022 on 10 April as the group exercised its option to early redeem these notes. The coupon on 
    the notes redeemed was 3.375%. The senior unsecured notes due 2022 of €450 million (US$505 million) 
    were reclassified to short term in the quarter in view of the impending repayment of the notes 
    shortly after quarter-end.

    Inventories and trade and other payables
    The increase in inventories and decrease in trade and other payables is largely attributable to 
    seasonal working capital movements.

9.  Related parties
    There has been no material change, by nature or amount, in transactions with related parties since 
    the 2018 financial year-end except for The Boldt Company which is no longer considered a related party.

10. 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
    their assessment of IFRS 16 Leases.

11. Events after the balance sheet date
    On 10 April the group redeemed its senior unsecured notes of €450 million (US$505 million) due 2022 
    as it exercised its option to early redeem these notes.


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 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
                                                          Quarter ended              Half-year ended
                                                     Mar 2019      Mar 2018      Mar 2019      Mar 2018    
Key figures: (ZAR million)                                                                                 
Sales                                                  21,073        17,889        41,381        36,095    
Operating profit excluding special items(1)             1,640         1,698         3,471         3,155    
Special items - (gains) losses(1)                           -          (143)           71          (294)    
EBITDA excluding special items(1)                       2,622         2,523         5,440         4,892    
Profit for the period                                   1,009         1,220         2,168         2,107    
Basic earnings per share (SA cents)                       186           226           401           392    
Net debt(1)                                            24,356        19,320        24,356        19,320    
Key ratios: (%)                                                                                            
Operating profit excluding special items to sales         7.8           9.5           8.4           8.7    
Operating profit excluding special items to                                                  
capital employed (ROCE)(1)                               12.7          16.6          13.5          15.0    
EBITDA excluding special items to sales                  12.4          14.1          13.1          13.6    
(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.                            

Supplemental information (this information has not been audited or reviewed)

Exchange rates                                                            
                                                 Mar        Dec       Sept        Jun        Mar    
                                                2019       2018       2018       2018       2018    
Exchange rates:                                                                         
Period end rate: US$1 = ZAR                  14.4975    14.4361    14.1473    13.7275    11.8385    
Average rate for the quarter: US$1 = ZAR     14.0203    14.3127    14.0615    12.6312    11.9577    
Average rate for the year to date:           14.1668    14.3127    13.0518    12.7255    12.7723    
US$1 = ZAR                                                                              
Period end rate: €1 = US$                     1.1218     1.1438     1.1609     1.1685     1.2323    
Average rate for the quarter:                 1.1360     1.1409     1.1626     1.1920     1.2286    
€1 = US$                                                                                
Average rate for the year to date: €1 = US$   1.1385     1.1409     1.1902     1.1995     1.2032    

Registration number: 1936/008963/06
JSE code: SAP
ISIN code: ZAE000006284
Issuer code: SAVVI

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: 09/05/2019 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
 the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct, 
indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on,
 information disseminated through SENS.

Email this JSE Sens Item to a Friend.

Share This Story