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').
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