Chief Financial Officer's Report

Section 5 – Balance sheet

This section provides a comprehensive review of the group's assets, liabilities and equity position.

Summarised balance sheet
(US$ million) 2018      2017   
Property, plant and equipment 3,010      2,681   
Plantations 466      458   
Net working capital 493      436   
Other assets 323      254   
Net post-employment liabilities (261)     (309)  
Other liabilities (516)     (451)  
Employment of capital 3,515      3,069   
Equity 1,947      1,747   
Net debt 1,568      1,322   
Capital employed 3,515      3,069   

Sappi has 18 production facilities in eight countries, capable of producing approximately 3.7 million tons of pulp and 5.7 million tons of paper. For more information on our mills, their production capacities and products, see Where we operate.

During 2018, capital expenditure for property, plant and equipment was US$541 million. The capacity replacement value of property, plant and equipment for insurance purposes has been assessed at approximately US$21 billion.

Property, plant and equipment

The cost and depreciation related to our property are set out in the table below.

Book value of property, plant and equipment (US$ million) 2018     2017  
Cost 9,077     8,681  
Accumulated depreciation and impairment 6,067     6,000  
Net book value 3,010     2,681  

We regard ownership of our plantations in South Africa as a key strategic resource as it gives us access to low cost fibre for pulp production and ensures continuity of supply on an important raw material input source.

We currently have access to approximately 516,000 hectares of land of which approximately 379,000 hectares are planted with pine and eucalyptus. These plantations provide approximately 65% of the wood requirements for our Southern Africa mills.

During the year, there were market price increases coupled with higher average fair value rates. These increases were offset by the rising cost of fuel and an increase in the discount rate. As we manage our plantations on a sustainable basis, the growth for the year was offset by timber felled during the year.

Our plantations are valued on the balance sheet at fair value less the estimated costs of delivery, including harvesting and transport costs. In notes 2.3.4 and 11 to the financial statements, we provide more detail on our accounting policies for plantations, how we manage our plantations as well as the major assumptions used in the calculation of fair value.

Working capital

The component parts of our working capital at the 2018 and 2017 fiscal year-ends are shown in the table below:

Net working capital

(US$ million) 2018      2017   
Inventories 741      636   
Trade and other receivables 767       668   
Trade and other payables and provisions (1,015)     (868)  
Net working capital 493      436   

Optimising working capital remains a key focus area for us and appropriate targets are incorporated into the management incentive schemes for all businesses. The working capital investment is seasonal and typically peaks during the third quarter of each financial year.

Net working capital increased to US$493 million in 2018 from US$436 million in 2017. The material movements in working capital are discussed below:

  • Inventories increased by US$105 million, caused mainly by higher purchased pulp prices. This was partially offset by a favourable currency translation impact of US$13 million
  • Receivables increased by US$99 million following higher net selling prices and increased volumes in the fourth quarter. This was partially offset by a favourable currency translation impact of US$9 million, and
  • Payables increased by US$147 million. The increase in payables is largely due to a favourable currency translation impact of US$21 million, increased raw material prices and higher accruals for capital expenditure.
Post-employment liabilities

We operate various defined benefit pension/lump sum plans, post-employment healthcare subsidies and other employee benefits in the various countries in which we operate. A summary of defined benefit assets and liabilities (pension and post-employment healthcare subsidies) is as follows:

Defined benefit liabilities (US$ million) 2018      2017   
Defined benefit obligation (1,431)     (1,448)  
Fair value of plan assets 1,170      1,139   
Net balance sheet liability (261)     (309)  
Cash contributions to defined benefit plans/ subsidies   40        39   
Income statement charge (credit) to profit or loss*   18        30   
Cash contributions deemed ‘catch-up’** 19      18   
* The income statement charge in 2018 is lower than in 2017 due to a net negative past service cost recognised in profit and loss.
** ‘Catch-up’ is cash contributions paid to defined benefit plans in excess of current service cost.

Gross liabilities from all our plans (funded plans and unfunded) reduced by US$17 million compared with last year. The main cause of the overall decrease was slightly higher discount rates due to rising yields in respective bond markets, a net negative past service cost and net reductions in longevity provisions.

Fair value of plan assets rose by US$31 million over the year due to favourable investment returns of assets in our funded plans from outperforming equity markets.
Included in the liability and asset movements above is a US$3 million gain resulting from movements relative to the reporting currency.

The reduction in liabilities and increase in assets both contributed to a reduction in the net overall net liability by US$48 million as at September 2018. A reconciliation of the movement in the balance sheet over the year is shown graphically below and disclosed in more detail in note 28 of the annual financial statements.

Sappi Limited defined benefit pensions balance sheet movement (US$ million)   Sappi Limited post-retirement medical aid subsidy balance sheet movement (US$ million)
Sappi Limited defined benefit pensions balance sheet movement (US$ million)   Sappi Limited post-retirement medical aid subsidy balance sheet movement (US$ million)

Year-on-year, equity increased by US$200 million to US$1,947 million as summarised below:

Equity reconciliation (US$ million) 2018     
Equity as at September 2017 1,747     
Profit for the year  323     
Dividend paid (81)    
Share-based payments 15     
Movement in hedging reserves    
Foreign currency movements (61)    
Equity as at September 2018 1,947     

The US$200 million increase was the result of the profit for the year of US$323 million offset by dividends paid and foreign currency movements.


Debt is a major source of funding for the group. In the management of debt, we focus on net debt, which is the sum of current and non-current interest-bearing borrowings and bank overdrafts, net of cash and cash equivalents.

Debt funding structure

The Sappi group principally takes up debt in two legal entities. Sappi Southern Africa Limited issues debt in the local South African market for its own funding requirements and Sappi Papier Holding GmbH (SPH), which is the international holding company, issues debt in the international money and capital markets to fund our non-South African businesses. SPH’s long-term debt is supported by a Sappi Limited guarantee and the financial covenants on certain of its debt are based on the ratios of the consolidated Sappi Limited group. The covenants applicable to the debt of these two entities and their respective credit ratings are discussed below.

The diagram below depicts our debt funding structure.

* Sappi Limited provides guarantees for long-term non-South African debt.

Below we highlight the main financing activities that occurred during the year:

  • The previous €465 million SPH Revolving Credit Facility maturing in 2020 was renewed with a new €525 million Revolving Credit Facility maturing in 2023.
  • The conversion project at the Somerset Mill is financed with a €150 million term loan. The facility was arranged with the OeKB (Öesterreichische Kontrollbank, an Austrian development bank). This long-term facility is structured as a seven-year term facility with drawings taking place in line with the progress of the project and is now fully drawn.
  • The purchase price for the Cham Paper Group acquisition was funded from cash resources at SPH.
  • The SSA05 ZAR500 million bond in South Africa was repaid from local cash resources.
  • A new biomass project at the Ngodwana Mill in South Africa achieved financial closing during the year. This project will use biomass from the Ngodwana Mill to provide electricity to the South African electricity provider, Eskom. The ZAR1.8 billion (approximately. US$127 million) project is structured on a project finance basis with two local banks and various equity partners. Construction has commenced and the construction period will be approximately 30 months. The contract with Eskom is to supply electricity for an initial period of 20 years.
Structure of net debt and liquidity

We consider the liquidity position to be sufficient, with cash holdings exceeding short-term obligations by US$250 million at fiscal year-end. In addition, Sappi has US$680 million of unutilised committed credit facilities, including the Revolving Credit Facility at SPH of €525 million (US$609 million).

The structure of our net debt at September 2018 and 2017 is summarised below:

(US$ million) 2018      2017   
Long-term debt 1,818      1,739   
Senior unsecured debt 1,471      1,436   
Securitisation funding 376      364   
Less: Short-term portion (29)     (61)  
Net short-term debt/(cash) (250)     (417)  
Overdrafts and short-term loans 84      72   
Short-term portion of long-term debt 29      61   
Less: Cash (363)     (550)  
Net debt 1,568      1,322   
Movement in net debt

The movement of our net debt from fiscal 2017 to fiscal 2018 is explained in the table below:

(US$ million) 2018     
Net debt as at September 2017 1,322     
Net cash utilised 122     
Cham Paper Group acquisition price 132     
Acquired debt, Cham Paper Group 12     
Currency and other movements (20)    
Net debt as at September 2018 1,568     
Group debt profile

We show the major components and maturities of our net debt at September 2018 below. These are split between our debt in South Africa and our debt outside South Africa.

US$ million
  Maturity (Sappi fiscal years)  
    2019  2020 2021 2022 Thereafter   
Southern Africa                    
Bank debt 28  7.85% Variable     28        
2020 bond 53  8.06% Fixed     53        
Gross debt 81                   
Less: Cash (72)         (72)          
Net SA debt       (72) 81 0 0  
Non-Southern African                    
Securitisation (US$) 134  3.53% Variable     134        
Securitisation (EUR) 242  1.38% Variable     242        
OeKB term loan 1 71  1.25% Fixed   24  24 24      
OeKB term loan 2 174  2.20% Fixed     21 21 21 111   
Other bank debt 95  0.43% Variable   90  2.9 1.4 0.6  
2022 bonds (EUR) 522  3.38% Fixed         522.4    
2023 bonds (EUR) 406  4.00% Fixed           406   
2032 bonds (US$) 221  7.50% Fixed           221   
IFRS adjustments (16)               (16)  
Gross debt 1,850                   
Less: Cash (291)         (291)          
Net non-SA debt 1,559        (178) 423 46 544 724   
Net group debt 1,568        (250) 504 46 544 724   

The majority of our non-South African long-term debt is guaranteed by Sappi Limited, the group holding company.

A diagram of the debt maturity profile for Sappi fiscal years is shown below:

Debt maturity profile for Sappi fiscal years (US$ million)
Debt maturity profile for Sappi fiscal years (US$ million)
Non-South African covenants

Financial covenants apply to US$245 million of our non-South African bank debt, the €525 million revolving credit facility and our securitisation borrowings.

The covenants are described below and are calculated on a rolling last four quarter basis and require to be met at the end of each quarter:

  • The ratio of group net debt to EBITDA be not greater than 3.75-to-1, and
  • The ratio of group EBITDA to net interest expense be not less than 2.50-to-1.

The table below shows that at September 2018 we were well in compliance with these covenants.

Non-South African covenants 2018     2017  
Net debt to EBITDA 2.07     <3.75  
EBITDA to net interest 11.18     >2.50  

In addition to the financial covenants referred to above, our bonds and certain of our bank facilities contain customary affirmative and negative covenants restricting, among other things, the granting of security, incurrence of debt, the provision of loans and guarantees, mergers and disposals and certain restricted payments. As regards dividend payments, in terms of the international bond indentures, any cash dividends paid may not exceed 50% of net profit excluding special items after tax and certain other adjustments, calculated on a cumulative basis.

South African covenants

Separate covenants also apply to the revolving credit facility of our Southern African business.

These covenants are calculated on a rolling last four quarter basis and require that at the end of March and September, with regard to Sappi Southern Africa Limited and its subsidiaries:

  • The ratio of net debt to equity is not at the end of March and September greater than 65%, and
  • At the financial year-end, the ratio of EBITDA to net interest paid for the year is not less than 2-to-1.

Below we show that for the year ended September 2018 the South African financial covenants were comfortably met.

South African covenants 2018     2017  
Net debt to equity 0.62%     <65%  
EBITDA to net interest Net interest
Credit ratings
Global Credit Ratings: South African national rating  

Sappi Southern Africa Limited:

  • A+(za)/A1+(za)/Positive Outlook (May 2018)

Sappi corporate family rating:

  • Ba2/NP/Positive Outlook (June 2018)

SPH debt rating:

  • 2022/2023 Bonds and RCF: Ba2/Positive Outlook (May 2018)
  • 2032 Bonds: B1
S&P Global Ratings  

Corporate credit rating:

  • BB/B/Stable Outlook (June 2018)

SPH debt rating:

  • 2022/2023/2032 Bonds and RCF: BB Stable Outlook (June 2018)