Notes to the condensed group results

1. Basis of preparation

The condensed consolidated financial statements are prepared in accordance with the requirements of the JSE Limited Listings Requirements for preliminary reports and the requirements of the Companies Act of South Africa. The Listings Requirements require preliminary reports to be prepared in accordance with the framework concepts and the measurement and recognitions requirements of International Financial Reporting Standards (IFRS) and the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Pronouncements as issued by Financial Reporting Standards Council and to also, as a minimum, contain the information required by IAS 34 Interim Financial Reporting. The accounting policies applied in the preparation of the condensed consolidated financial statements are in terms of IFRS and are consistent with those applied in the previous consolidated annual financial statements.

The preparation of these condensed consolidated financial statements was supervised by the Chief Financial Officer, G T Pearce, CA(SA).

The condensed consolidated financial statements for the year ended September 2018 have been reviewed by KPMG Inc., who expressed an unmodified review conclusion. The auditor’s report does not necessarily report on all of the information contained in these 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.

2. Segment information

The group’s reportable segments comprise the geographic regions of North America, Europe and Southern Africa and have remained unchanged from the prior year. The group has, however, changed the financial information by major product category, as reviewed by the chief operating decision maker during the quarter ended December 2017. Accordingly, the group has restated the financial information presented by major product category for the quarter and year ended September 2017.

  Quarter ended   Year ended  
Metric tons (000’s) Reviewed
Sep 2018
  Audited
Sep 2018
  Sep 2018   Sep 2018  
Sales volume                
North America 363   361   1,371   1,359  
Europe 864   842   3,366   3,343  
Southern Africa – Pulp and paper 441   447   1,620   1,606  
Forestry 352   290   1,234   1,102  
Total 2,020   1,940   7,591   7,410  
Which consists of:                
   Dissolving wood pulp 332   325   1,198   1,184  
   Specialities and packaging papers 291   240   1,009   854  
   Printing and writing papers 1,045   1,085   4,150   4,270  
   Forestry 352   290   1,234   1,102  

  Quarter ended   Year ended  
US$ million Sep 2018   Sep 2017   Reviewed
Sep 2018
  Audited
Sep 2017
 
Sales                
North America 388   357   1,432   1,360  
Europe 782   684   2,970   2,564  
Southern Africa – Pulp and paper 345   352   1,328   1,307  
Forestry 20   18   76   65  
Total 1,535   1,411   5,806   5,296  
Which consists of:                
   Dissolving wood pulp 278   277   1,043   1,059  
   Specialities and packaging papers 310   231   1,087   833  
   Printing and writing papers 927   885   3,600   3,339  
   Forestry 20   18   76   65  
Operating profit (loss) excluding special items                
North America 31   27   49   47  
Europe 44   41   163   140  
Southern Africa 78   84   270   337  
   Unallocated and eliminations(1) (5)     (2)   2  
Total 148   152   480   526  
Which consists of:                
   Dissolving wood pulp 74   80   251   334  
   Specialities and packaging papers 19   24   78   76  
   Printing and writing papers 60   48   153   114  
      Unallocated and eliminations(1)  (5)     (2)   2  
Special items – (gains) losses                
North America (1)     2    
Europe (2)   1   (3)   4  
Southern Africa 10   (1)   (25)   (10)  
      Unallocated and eliminations(1) 6   1   17   6  
Total 13   1   (9)    
Segment operating profit (loss)                
North America 32   27   47   47  
Europe 46   40   166   136  
Southern Africa 68   85   295   347  
      Unallocated and eliminations(1) (11)   (1)   (19)   (4)  
Total 135   151   489   526  
EBITDA excluding special items                
North America 51   47   126   126  
Europe 81   73   299   262  
Southern Africa 97   102   337   396  
      Unallocated and eliminations(1) (5)   (1)     1  
Total 224   221   762   785  
Which consists of:                
Dissolving wood pulp 88   95   306   386  
Specialities and packaging papers
40   36   138   117  
Printing and writing papers 101   91   318   281  
      Unallocated and eliminations(1) (5)   (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.

  Quarter ended   Year ended  
US$ million Sep 2018   Sep 2017   Reviewed
Sep 2018
  Audited
Sep 2017
 
EBITDA excluding special items 224   221   762   785  
Depreciation and amortisation (76)   (69)   (282)   (259)  
Operating profit excluding special items 148   152   480   526  
Special items – gains (losses) (13)   (1)   9    
   Plantation price fair value adjustment (3)   7   27   21  
   Acquisition costs     (2)    
   Net restructuring provisions (3)     (1)   (1)  
   Profit (loss) on disposal and written off assets (4)   (2)   4   (2)  
   Asset (impairment) reversal   (6)   3   (6)  
   Black Economic Empowerment charge     (1)   (1)  
   Fire, flood, storm and other events (3)     (21)   (11)  
Segment operating profit 135   151   489   526  
   Net finance costs (14)   (15)   (68)   (80)  
Profit before taxation 121   136   421   446  
   Taxation (14)   (34)   (98)   (108)  
Profit for the period 107   102   323   338  

(1) Includes the group’s treasury operations and our insurance captive.

  Year ended  
US$ million Reviewed
Sep 2018
  Audited
Sep 2017
 
Segment assets        
North America 1,137   1,026  
Europe 1,574   1,373  
Southern Africa 1,392   1,263  
   Unallocated and eliminations(1) 38   2  
Total 4,141   3,664  
Reconciliation of segment assets to total assets        
Segment assets 4,141   3,664  
   Deferred taxation 106   123  
   Cash and cash equivalents 363   550  
   Trade and other payables 1,009   858  
   Provisions 6   10  
   Derivative financial instruments 6   5  
   Taxation payable 39   37  
Total assets 5,670   5,247  

(1) Includes the group’s treasury operations and our insurance captive.

3. Operating profit

  Quarter ended   Year ended  
US$ million Sep 2018   Sep 2017   Reviewed
Sep 2018
  Audited
Sep 2017
 
Included in operating profit are the following items:                
Depreciation and amortisation 76   69   282   259  
Fair value adjustment on plantations (included in cost of sales)                
Changes in volume                
   Fellings 17   14   66   63  
   Growth (17)   (13)   (69)   (58)  
    1   (3)   5  
Plantation price fair value adjustment 3   (7)   (27)   (21)  
  3   (6)   (30)   (16)  
Net restructuring provisions 3     1   1  
(Profit) loss on disposal and write off of assets 4   2   (4)   2  
Asset impairment reversals   (2)   (3)   (2)  
Asset impairments   6     6  

4. Earnings per share

  Quarter ended   Year ended  
US$ million Sep 2018   Sep 2017   Reviewed
Sep 2018
  Audited
Sep 2017
 
Basic earnings per share (US cents) 20   19   60   63  
Headline earnings per share (US cents) 20   20   59   64  
EPS excluding special items (US cents) 19   19   60   64  
Weighted average number of shares in issue (millions) 539.1   534.9   538.1   533.9  
Diluted earnings per share (US cents) 19   19   59   62  
Diluted headline earnings per share (US cents) 20   19   58   63  
Weighted average number of shares on fully diluted basis (millions) 552.1   548.9   550.0   547.4  
Calculation of headline earnings                
   Profit for the period 107   102   323   338  
   (Profit) loss on disposal and written off assets 4   2   (4)   2  
   Asset impairment reversals   (2)   (3)   (2)  
   Asset impairments   6     6  
   Tax effect of above items (1)   (1)   1   (1)  
Headline earnings 110   107   317   343  
Calculation of earnings excluding special items                
   Profit for the period 107   102   323   338  
   Special items after tax 13   2   (2)   2  
      Special items 13   1   (9)    
      Tax effect   1   7   2  
   Tax special items (16)     3    
Earnings excluding special items 104   104   324   340  

5. Plantations

Plantations are stated at fair value less estimated cost to sell at the harvesting stage. In arriving at plantation fair values, the key assumptions are estimated prices less cost of delivery, pre-tax discount rates, 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.

US$ million Reviewed
Sep 2018
  Audited
Sep 2017
 
Fair value of plantations at beginning of year 458   441  
Gains arising from growth 69   58  
Fire, flood, storm and other events   (5)  
In-field inventory 1   1  
Gain arising from fair value price changes 27   21  
Harvesting – agriculture produce (fellings) (66)   (63)  
Translation difference (23)   5  
Fair value of plantations at end of period 466   458  

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)  
US$ million Fair value
hierarchy
  Reviewed
Sep 2018
  Audited
Sep 2017
 
Investment funds(2) Level 1   7   7  
Derivative financial assets Level 2   21   3  
Derivative financial liabilities Level 2   6   5  
Contingent consideration liability(3) Level 3   7   13  

(1) The fair value of the financial instruments is 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. During the year the fair value of the liability was remeasured and a gain of US$6 million was recognised.

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

US$ million Reviewed
Sep 2018
  Audited
Sep 2017
 
Contracted 293   253  
Approved but not contracted 381   219  
  674   472  

8. Material balance sheet movements

Property, plant and equipment, cash, inventories, trade and other receivables and trade and other payables

The increase in property, plant and equipment and decrease in cash is due to the major capital expansion projects undertaken by the group as well as the acquisition of a subsidiary. The increase in inventories, trade and other receivables and trade and other payables is largely attributable to seasonal working capital movements as well as the acquisition of a subsidiary.

9. Acquisition

On 28 February 2018, Sappi acquired the speciality paper business of Cham Paper Group Holding AG (CPG) for CHF132 million (US$139 million). The transaction includes all brands and know-how, the Carmignano and Condino mills in Italy, as well as their digital imaging business and facility situated in Cham, Switzerland. The acquisition was financed from internal resources. The acquisition increases Sappi’s relevance in specialities and packaging papers, opening up new customers and markets to Sappi’s existing products and generating economies of scale and synergies. It will improve nearterm profitability and serve as a platform for organic growth, further acquisitions and will add €183 million of annual sales and approximately €20 million of annual EBITDA before taking into account synergies.

The fair values of assets acquired and liabilities assumed as at 28 February 2018 were as follows:

US$ million EURO   US$  
Property, plant and equipment 81   98  
Intangible assets 32   39  
Inventories 25   31  
Trade receivables 28   36  
Prepayments and other assets 2   3  
Cash and cash equivalents 6   7  
Trade payables (23)   (29)  
Pension liabilities (4)   (5)  
Provisions (1)   (2)  
Other payables and accruals (9)   (11)  
Deferred tax liabilities (15)   (18)  
Non-current interest-bearing borrowings (5)   (7)  
Current interest-bearing borrowings (5)   (6)  
Net asset value acquired 112   136  
Goodwill 2   3  
Purchase consideration 114   139  
Less: Cash and cash equivalents acquired (6)   (7)  
Net cash outflow on acquisition 108   132  

CPG earned revenues of €118 million and profit after tax of €4 million since acquisition.

10. Related parties

There has been no material change, by nature or amount, in transactions with related parties since the 2017 financial year-end other than purchases from The Boldt Company (Boldt) for construction-related services which amounted to US$88 million for the year ended September 2018 (September 2017: US$8 million) largely related to the rebuild at our Somerset mill. The balance outstanding as at September 2018 is US$26 million (September 2017: US$Nil). There are ongoing disputes over amounts billed, and arbitration has been requested by Boldt.

11. 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. No material impact is expected in respect of the adoption of IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers. Management is in the process of completing its assessment of IFRS 16 Leases.

12. Events after balance sheet date

The directors have resolved to declare a gross dividend (number 88) out of income earned for the financial year ended September 2018 of 17 US cents per ordinary share in issue on the record date being 11 January 2019. The dividend is payable in ZAR at an exchange rate of ZAR 14.43176, being 245.33992 ZAR cents per share. Holders of Sappi “A” ordinary unlisted shares, issued in terms of the BBBEE scheme, are entitled to receive 8.5 US cents (ZAR 122.66996 cents per share) per share being 50% of the ordinary dividend declared.