Chief Financial Officer's Report

Section 2 – Financial performance – Group

The discussion in this section focuses on the group financial performance in 2018 compared with 2017. A detailed discussion, in local currencies, of each of our three operating regions follows in section 3.

Income statement

Our group financial results can be summarised as follows:

(US$ million) 2018      2017  %
change 
 
Sales volume (metric tons ’000) 7,591      7,410   
  US$ 
million 
    US$ 
million 

change 
 
Sales revenue 5,806      5,296  10   
Variable manufacturing and delivery costs   (3,521)       (3,147)   12   
Fixed costs (1,767)     (1,601) 10   
Sundry items1 (38)     (22) 73   
Operating profit excluding special items   480        526    (9)  
Special items     –  –   
Operating profit 489      526  (7)  
Net finance costs (68)     (80) (15)  
Taxation (98)     (108) (9)  
Net profit 323      338  (4)  
EPS excluding special items (US cents)   60        64    (6)  
1 Sundry items include all income and costs not directly related to manufacturing operations such as debtor securitisation costs, commissions paid and received and results of equity accounted investments.
Sales volume

In 2018, sales volume increased by 181,000 tons, or 2%, compared with 2017. The regional contributions to sales volume are shown below:

Sales volume (metric tons '000) 2018     2017 %
change
 
North America 1,371     1,359  
Europe 3,366     3,343  
Southern Africa 2,854     2,708  
Group 7,591     7,410  
Printing and writing papers 4,150     4,270 (3)  
Specialities and packaging papers 1,009     854 18   
Dissolving wood pulp 1,198     1,184  
Forestry 1,234     1,102 12   

In North America, increases in specialities and packaging papers and dissolving wood pulp (DWP) sales volumes were offset by reduced printing and writing papers volumes due to the conversion of PM1 at Somerset Mill.

European volumes increased by 1% with good growth in the mechanical coated paper and specialities and packaging papers segments. The growth in sales volumes was offset by lower demand in the coated woodfree paper market.

Volumes in Southern Africa increased by 5% mainly due to growth in the specialities and packaging papers and forestry volumes. DWP volumes were marginally lower, impacted by production problems during the earlier part of the fiscal.

Sales volume to capacity (%) 2018     2017  
Europe 93     94  
North America 93     97  
Southern Africa 95     95  
Sappi group 93     95  
Sales revenue

Sales revenue increased by 10% from US$5.3 billion in 2017 to US$5.8 billion in 2018. The increase was due to the higher sales volumes discussed above, higher sales prices and improved sales mix.

Variable and delivery costs

Variable and delivery costs increased by US$374 million, or 12%, from 2018. Higher sales volumes and an increase in purchased pulp, energy, delivery and chemical prices contributed to the increase in costs.

The net pulp purchases and sales of the Sappi group are detailed in the graph below.

Sappi group pulp balance (US$ million)
Sappi group pulp balance (US$ million)

The table below reflects the breakdown of variable and delivery costs by type.

Variable manufacturing and delivery costs (US$ million) 2018     2017 %
change
 
Wood 598     603 (1)  
Energy 411     372 10  
Chemicals 851     787 8  
Pulp and other 1,171     944 24  
Delivery 490     441 11  
Sappi group 3,521     3,147 12  
Fixed costs

Fixed costs increased by US$166 million, or 10%, from fiscal 2017. This increase was mainly due to a higher depreciation charge (US$19 million) as a result of the increased capital spend, the acquisition of the Cham Paper Group business (US$26 million) and the stronger Rand and Euro resulting in an increase in US Dollar costs (US$28 million). Excluding the currency impact fixed cost increased by US$138 million.

Details of the make-up of fixed costs are provided in the table below.

Fixed costs (US$ million) 2018     2017 %
change
 
Personnel 1,043     930 12  
Maintenance 235     212 11  
Depreciation 274     255 7  
Other 215     204 5  
Sappi group 1,767     1,601 10  
EBITDA and operating profit excluding special items

EBITDA excluding special items decreased to US$762 million, 3% lower than the previous year. On a like-for-like basis the decline in EBITDA was US$3 million (2017 benefited by approximately US$20 million due to an additional accounting week). Operating profit excluding special items declined from US$526 million last year to US$480 million in 2018.

The EBITDA bridge reflected in the graph below shows the impact on profitability from higher sales volumes, higher sales prices, improved sales mix and favourable exchange rate movements, which were offset by increased variable and fixed cost.

Reconciliation of EBITDA excluding special items: 2018 compared to 20171 (US$ million)
Reconciliation of EBITDA excluding special items: 2018 compared to 20171 (US$ million)
1 All variances were calculated excluding Sappi Forests.
2 Exchange rate’ reflects translation and transactional effect on consolidation.

The tables below detail the EBITDA and operating profit excluding special items of the business for both 2018 and 2017 and the margins of each.

EBITDA excluding special items by region (US$ million) 2018     2017  
Europe 299     262  
North America 126     126  
Southern Africa 337     396  
Corporate and other     1  
Sappi group 762     785  
EBITDA margin by region (%)
Reconciliation of EBITDA excluding special items: 2018 compared to 20171 (US$ million)
EBITDA excluding special items by product category (US$ million) 2018     2017  
Dissolving wood pulp 306     386  
Specialities and packaging papers 138     117  
Printing and writing papers 318     281  
Other     1  
Sappi group 762     785  
Operating profit excluding special items by region (US$ million) 2018      2017  
Europe 163      140  
North America 49      47  
Southern Africa 270      337  
Corporate and other (2)     2  
Sappi group 480      526  
Operating profit margin by region (%)
Operating profit margin by region (%)
Operating profit excluding special items by product category (US$ million) 2018     2017  
Dissolving wood pulp 251      334  
Specialities and packaging papers 78      76  
Printing and writing papers 153      114  
Other (2)     2  
Sappi group 480      526  

The charts below illustrate that 68% of the group's EBITDA originates from growing markets in the DWP and specialities and packaging papers segments. The printing and writing papers segment, which contributes a third of the EBITDA remains an important strategic component of our business.

Operating profit excluding special items by segment (%)   EBITDA excluding special items by segment (%)  
Operating profit excluding special items by segment (%)   EBITDA excluding special items by segment (US cents)  

For information regarding the financial performance of the regions, please refer to section 3 of this report.

Key operating targets

Our financial targets and performance against them are dealt with in the Letter to shareholders.

Special items

Special items consist of those items which management believe are material, by nature or amount, to the results for the year and require separate disclosure. A breakdown of special items for 2018 and 2017 is reflected in the table below:

Special items – gain (loss) (US$ million) 2018      2017   
Plantation price fair value adjustment 27      21   
Acquisition costs (2)     –   
Net restructuring provisions (1)     (1)  
Profit (loss) on disposal and written off assets     (2)  
Asset (impairment) reversals     (6)  
Black economic empowerment charge (1)     (1)  
Fire, flood, storm and other events (21)     (11)  
Total     –   

The net impact of special items in 2018 was US$9 million. The major components are described below:

  • A positive non-cash US$27 million plantation price fair value adjustment was recognised following increases to the market price of timber
  • An asset impairment reversal of US$3 million was recorded in Southern Africa related to previously impaired project costs, and
  • Fire, flood, storm and other events includes turbine damage at our Saiccor, Alfeld and Stockstadt Mills amounting to US$13 million, unplanned downtime events at our Saiccor, Ngodwana, Somerset and Ehingen Mills amounting to US$10 million offset by a contingent consideration release of US$6 million.
Net finance costs
(US$ million) 2018      2017   
Net interest expense 76      92   
Interest capitalised (2)     –   
Net foreign exchange gains (6)     (12)  
Total 68      80   

Net finance costs were lower than the prior year, despite net debt increasing during the year as a result of the Cham Paper Group acquisition in February for US$132 million and increased capex expenditure. We also repaid US$38 million (ZAR500 million) of our South African bonds in April 2018 from available cash resources.

Taxation

A regional breakdown of the tax charge is provided below.

(US$ million) Profit
before tax
  Tax 
(charge)
relief 
    Effective 
tax rate % 
 
Europe 81   (4)     (5)  
North America 34   (12)     (36)  
Southern Africa 306   (82)     (27)  
Total 421   (98)     (23)  

In Europe, an increase in deferred tax assets and the utilisation of assessed losses reduced the effective rate to 5%.

The North American effective tax rate has largely been impacted by one-time adjustments recognised from the US Tax Reform (rate change from 35% to 21%).

The Southern African tax rate of 27% is lower than the statutory tax rate of 28% due to the impact of non-taxable items.

Net profit, earnings per share and dividends

After taking into account net finance costs and taxation, our net profit and earnings per share for 2018, with comparatives for 2017, were as follows:

(US$ million) 2018     2017  
Operating profit 489     526  
Net finance costs 68     80  
Profit before taxation 421     446  
Taxation 98     108  
Profit for the period 323     338  
Weighted average number of shares is issue (millions)   538.1       533.9  
Basic earnings per share (US cents) 60     63  

The directors have declared a dividend of 17 US cents, representing a three times earnings cover adjusted for non-cash items, and a 13% improvement on the 15 US cents declared last year. The group aims to declare ongoing annual dividends, and over time achieve a long-term average earnings to dividends ratio of three to one.