Chief Financial Officer's Report

Section 3 – Financial performance – Regional

Below, we discuss the performance of the regional businesses. The discussion is based on performance in local currencies as we believe this facilitates a better understanding of the revenue and costs in the European and Southern African operations.

North America
(metric tons '000) 2018     2017 %
change
 
Sales volume 1,371     1,359 1  
  US$ 
million 
2018 
    US$ 
million 
2017 
%
change
  US$ 
per ton 
2018 
    US$ 
per ton 
2017 

change 
 
Sales 1,432      1,360  5   1,044      1,001   
Variable manufacturing and delivery costs (856)     (814) 5   (624)     (599)  
Contribution 576      546  5   420      402   
Fixed costs (506)     (485) 4   (369)     (357)  
Sundry costs and consolidation entries (21)     (14) 50   (15)     (10) 50   
Operating profit excluding special items  49       47   4    36       35   3   
EBITDA excluding special items  126       126   0    92       93   (1)  

The conversion of PM1 at Somerset Mill to produce paperboard grades reduced available coated woodfree paper capacity and had a negative impact of approximately US$19 million on earnings for the year. Both DWP and packaging papers volumes increased year-on-year. Average net selling prices increased by 4% as supply tightened following capacity closures in the North American coated woodfree paper market. Variable costs increased by a similar percentage led by higher purchased paper pulp prices.

EBITDA of US$126 million was in line with the previous year.

Europe
(metric tons '000) 2018     2017 %
change
 
Sales volume 3,366     3,343 1  
  € 
million 
2018 
    € 
million 
2017 
%
change
  € 
per ton 
2018 
    € 
per ton 
2017 

change 
 
Sales 2,494      2,320  8   741      694   
Variable manufacturing and delivery costs (1,632)     (1,509) 8   (485)     (451)  
Contribution 862      811  6   256      243   
Fixed costs (712)     (673) 6   (212)     (201)  
Sundry costs and consolidation entries (13)     (11) 18   (3)     (4) (25)  
Operating profit excluding special items   137        127    8     41        38    8   
EBITDA excluding special items   254        239    6     75        71    6   

Fiscal 2018 includes seven months of the Cham Paper Group (CPG) operations. Excluding the CPG volumes, sales volumes were down on last year as the reductions in coated woodfree paper volumes exceeded growth in the specialities and packaging papers and coated mechanical paper volumes. There were several selling price increases during the year culminating in a 7% increase relative to last year.

The steep increase in purchased pulp prices, combined with increases in delivery and chemical costs (directly and indirectly linked to oil price increases), reduced margins during the earlier part of the year. Margins recovered during the third and fourth quarter following the successful implementation of selling price increases. The integration of CPG has progressed according to plan and the profitability from the newly acquired mills have exceeded expectations.

Southern Africa*
(metric tons '000) 2018     2017 %
change
 
Sales volume* 1,620     1,606 1  
  ZAR 
million 
2018 
    ZAR 
million 
2017 

change 
  ZAR 
per ton 
2018 
    ZAR 
per ton 
2017 

change 
 
Sales* 17,333      17,489  (1)   10,699      10,890  (2)  
Variable manufacturing and delivery costs  (10,415)      (9,769)  7     (6,429)      (6,083)  6   
Contribution 6,918      7,720  (10)   4,270      4,807  (11)  
Fixed costs (5,403)     (4,991)   (3,335)     (3,108)  
Sundry income and consolidation entries  2,009       1,781   13     1,240       1,109   12   
Operating profit excluding special items  3,524       4,510   (22)    2,175       2,808   (23)  
EBITDA excluding special items  4,398       5,299   (17)    2,715       3,300   (18)  

* Excludes Sappi Forests.

The relatively insignificant strengthening of the annual average rate of the Rand by 2,5%, hides the volatile movements during the fiscal period. DWP sales volumes were stable relative to last year with the increase experienced in the packaging papers segment. Packaging papers sales prices increased by 5% but, were offset by lower DWP selling prices, reducing the net selling price for the region by 2%. Increases in delivery, energy and wood costs reduced contribution per ton by 11%. Fixed costs were mainly influenced by wage inflationary increases at 7% for the year. The net result of the above is a reduction in EBITDA to ZAR4,398 million with annual operating profit of ZAR3,524 million.

The region’s capital expenditure focused on increasing DWP capacity during the year.

Major sensitivities

Some of the more important factors which impact the group’s EBITDA excluding special items, based on current anticipated revenue and cost levels, are summarised in the table below:

Sensitivities Change Europe

million
 North 
America 
US$ 
million 
Southern
Africa
ZAR
million
Translation 
impact*
US$ 
million 
Sappi 
group 
US$ 
million 
 
Net selling prices 1% 28 17  208 –  64   
Dissolving wood pulp prices   US$10   –   3    140   –    13   
Variable costs 1% 16 104 –  34   
Sales volume 1% 9 92 –  24   
Fixed costs 1% 7 50 –  16   
Paper pulp price US$10 6 7 –  11   
Oil price US$1 1 2 –   
ZAR/US$ (Weakening) 10 cents –  80 (3)  
EUR/US$ (Weakening) 10 cents (4) (27) (31)  

* Based on currency impact on translation of EBITDA.

The table demonstrates that EBITDA excluding special items is most sensitive to changes in the selling prices of our products.

The calculation of the impact of these sensitivities assumes all other factors remain constant and does not consider potential management interventions to mitigate negative impacts or enhance benefits.