Sappi First quarter results for the period ended December 2020


Condensed group income statement

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      Reviewed
Quarter ended
US$ million Note   Dec 2020     Dec 2019
Sales     1,163     1,302
Cost of sales     1,061     1,145
Gross profit     102     157
Selling, general and administrative expenses     85     92
Other operating expenses     1     12
Share of profit (loss) from equity-accounted investees         (2)
Operating profit (loss) 3   16     55
Net finance costs     34     20
   Finance costs     24     22
   Finance income     (3)     (2)
   Net fair value loss on financial instruments 8   13    
Profit (Loss) before taxation     (18)     35
Taxation     (1)     11
Profit (Loss) for the period     (17)     24
Basic earnings per share (US cents) 4   (3)     4
Weighted average number of shares in issue (millions)     546.4     543.6
Diluted earnings per share (US cents) 4   (3)     4
Weighted average number of shares on fully diluted basis (millions)     546.8     544.7

Condensed group statement of other comprehensive income

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        Reviewed
Quarter ended
  US$ million Note   Dec 2020     Dec 2019
Profit (Loss) for the period     (17)     24
Other comprehensive income, net of tax            
  Items that may be reclassified subsequently to profit or loss     173     97
  Exchange differences on translation of foreign operations 8   170     92
  Movements in hedging reserves     2     7
  Tax effect on above items     1     (2)
Total comprehensive income for the period     156     121

Condensed group balance sheet

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      Reviewed
US$ million Note   Dec 2020     Sept 2020
Assets            
Non-current assets     4,239     3,891
Property, plant and equipment     3,339     3,103
Right-of-use assets     115     101
Plantations  5   497     419
Deferred tax assets     64     59
Goodwill and intangible assets     122     113
Equity accounted investees     12     11
Other non-current assets     90     85
Current assets     1,773     1,564
Inventories     767     673
Trade and other receivables     581     584
Derivative financial assets     3     3
Taxation receivable     6     19
Cash and cash equivalents 8   410     279
Assets held for sale     6     6
Total assets     6,012     5,455
Equity and liabilities            
Shareholders’ equity            
Ordinary shareholders’ interest     1,790     1,632
Non-current liabilities     2,959     2,700
Interest-bearing borrowings 8   2,038     1,861
Lease liabilities     95     81
Deferred tax liabilities     349     304
Defined benefit and other liabilities     466     445
Derivative financial liabilities     11     9
Current liabilities     1,263     1,123
Interest-bearing borrowings     308     270
Lease liabilities     25     24
Trade and other payables     865     797
Provisions     12     19
Derivative financial liabilities 8   41     2
Taxation payable     12     11
Total equity and liabilities     6,012     5,455
Number of shares in issue at balance sheet date (millions)     547.4     546.1

Condensed group statement of cash flows

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  Reviewed
Quarter ended
US$ million Dec 2020     Dec 2019
Profit (Loss) for the period (17)     24
Adjustment for:        
   Depreciation, fellings and amortisation 99     94
   Taxation (1)     11
   Net finance costs 34     20
   Defined post-employment benefits paid (7)     (8)
   Plantation fair value adjustments (23)     (25)
   Net restructuring provisions     1
   Other non-cash items 13     19
Cash generated from operations 98     136
Movement in working capital 11     (76)
Finance costs paid (34)     (35)
Finance income received 3     2
Taxation (paid) refund 11     (32)
Cash generated from operating activities 89     (5)
Cash utilised in investing activities (89)     (273)
Capital expenditure (82)     (112)
Acquisition of subsidiary     (158)
Other non-current asset movements (7)     (3)
Net cash (utilised) generated     (278)
Cash effects of financing activities 104     147
Proceeds from interest-bearing borrowings 372     181
Repayment of interest-bearing borrowings (261)     (29)
Lease repayments (7)     (5)
Net movement in cash and cash equivalents 104     (131)
Cash and cash equivalents at beginning of period 279     393
Translation effects 27     8
Cash and cash equivalents at end of period 410     270

Condensed group statement of changes in equity

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  Reviewed
Quarter ended
US$ million Dec 2020     Dec 2019
Balance – beginning of period 1,632     1,948
Profit (Loss) for the period (17)     24
Other comprehensive income for the period 173     97
Share-based payment reserve 2     3
Balance – end of period 1,790     2,071
Comprising        
Ordinary share capital and premium 834     866
Non-distributable reserves 119     110
Foreign currency translation reserves (212)     (164)
Hedging reserves (40)     (36)
Retained earnings 1,089     1,295
Total equity 1,790     2,071

Notes to the condensed group results

1. Basis of preparation

The condensed consolidated interim financial statements for the quarter ended December 2020 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.

The preparation of these condensed consolidated financial statements was supervised by the Chief Financial Officer, G T Pearce, CA(SA) and were authorised for issue on 3 February 2021.

The condensed consolidated interim financial statements for the quarter ended December 2019 and December 2020 have been reviewed in accordance with the International Standard on Review Engagements 2410 by the group's auditors, KPMG Inc. Their review report, which includes an unmodified review conclusion, is available for inspection at the company's registered office together with the financial statements identified in the auditor's report. 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.

Going concern

The group incurred a loss of US$17 million for the quarter ended December 2020 (2019: Profit of US$24 million) which includes a fair value loss of US$13 million relating to financial instruments (refer note 8). The group's performance for the quarter was adversely impacted by the continued Covid-19 pandemic and the economic after effect which may continue for the remainder of the 2021 financial year due to the uncertainty around the pandemic. The group has agreed a covenant suspension period for the measurement of the financial covenants applicable to its debt facilities until September 2021 with the first measurement due at the end of December 2021. The impact of Covid-19 on its results and future covenant compliance are continuously assessed and monitored by the group.

As a result, the group continues to focus on the preservation of liquidity and cash flow, and implement various cost saving measures across all operations, curtail excess production and where possible defer non-essential capital expenditure and apply measures to optimise working capital. The directors have reviewed the group's financial position, existing borrowing facilities and cash on hand, and are satisfied that the group will continue as a going concern for the foreseeable future.

2. Segment information

  Quarter ended  
Metric tons (000’s) Dec 2020     Dec 2019  
Sales volume          
North America 421     377  
Europe 658     795  
South Africa – Pulp and paper 296     338  
                       Forestry 308     331  
Total 1,683     1,841  
Which consists of:          
   Dissolving pulp 298     324  
   Packaging and specialities 307     235  
   Graphics 770     951  
   Forestry 308     331  
  Reviewed
Quarter ended
 
US$ million Dec 2020     Dec 2019  
Sales          
North America 384     370  
Europe 574     685  
South Africa – Pulp and paper 205     241  
                       Forestry 17     20  
Delivery costs revenue adjustment(2) (17)     (14)  
Total 1,163     1,302  
Which consists of:          
   Dissolving pulp 193     218  
   Packaging and specialities 327     268  
   Graphics 643     810  
   Forestry 17     20  
   Delivery costs revenue adjustment(2) (17)     (14)  
Operating profit (loss) excluding special items          
North America (2)     1  
Europe     37  
South Africa 17     22  
   Unallocated and eliminations(1) 1     2  
Total 16     62  
Which consists of:          
   Dissolving pulp 15     9  
   Packaging and specialities 8     16  
   Graphics (8)     35  
      Unallocated and eliminations(1) 1     2  
Special items – (gains) losses          
North America     5  
Europe 1     2  
South Africa (1)      
   Unallocated and eliminations(1)      
Total     7  
Operating profit (loss) by segment          
North America (2)     (4)  
Europe (1)     35  
South Africa 18     22  
   Unallocated and eliminations(1) 1     2  
Total 16     55  
EBITDA excluding special items          
North America 27     25  
Europe 35     69  
South Africa 35     42  
   Unallocated and eliminations(1) 1     3  
Total 98     139  
Which consists of:          
   Dissolving pulp 31     25  
   Packaging and specialities 35     36  
   Graphics 31     75  
      Unallocated and eliminations(1) 1     3  

(1) Includes the group's treasury operations and insurance captive.
(2) Relates to delivery costs netted off against revenue.

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 believes are material by nature or amount to the operating results and require separate disclosure.

  Reviewed
Quarter ended
 
US$ million Dec 2020     Dec 2019  
EBITDA excluding special items 98     139  
Depreciation and amortisation (82)     (77)  
Operating profit excluding special items 16     62  
Special items – gains (losses)     (7)  
   Plantation price fair value adjustment 4     6  
   Acquisition costs     (5)  
   Net restructuring provisions     (1)  
   Fire, flood, storm and other events (4)     (7)  
Operating profit 16     55  
Net finance costs (34)     (20)  
Profit (Loss) before taxation (18)     35  
Taxation 1     (11)  
Profit (Loss) for the period (17)     24  
Net operating assets          
North America 1,255     1,311  
Europe 1,531     1,557  
South Africa 1,806     1,762  
   Unallocated and eliminations(1) 16     36  
Total 4,608     4,666  
Reconciliation of net operating assets to total assets          
Segment assets 4,608     4,666  
Deferred tax assets 64     109  
Cash and cash equivalents 410     270  
Trade and other payables 865     883  
Provisions 12     6  
Derivative financial instruments 41     7  
Taxation payable 12     33  
Total assets 6,012     5,974  

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

3. Operating profit (loss)

  Reviewed
Quarter ended
 
US$ million Dec 2020     Dec 2019  
Included in operating profit are the following items:          
Depreciation and amortisation 82     77  
Fair value adjustment on plantations (included in cost of sales)          
Changes in volume          
   Fellings 17     17  
   Growth (19)     (19)  
  (2)     (2)  
Plantation price fair value adjustment (4)     (6)  
  (6)     (8)  
Net restructuring provisions     1  

4. Earnings per share

  Reviewed
Quarter ended
 
US$ million Dec 2020     Dec 2019  
Basic earnings per share (US cents) (3)     4  
Headline earnings per share (US cents) (3)     4  
EPS excluding special items (US cents) (1)     6  
Weighted average number of shares in issue (millions) 546.4     543.6  
Diluted earnings per share (US cents) (3)     4  
Diluted headline earnings per share (US cents) (3)     4  
Weighted average number of shares on fully diluted basis (millions) 546.8     544.7  
Calculation of headline earnings          
Profit (Loss) for the period (17)     24  
Headline earnings (17)     24  
Calculation of earnings excluding special items          
Profit (Loss) for the period (17)     24  
Special items after tax     6  
   Special items     7  
   Tax effect     (1)  
Finance costs 13      
Earnings excluding special items (4)     30  

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 market 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 Dec 2020     Sept 2020  
Fair value of plantations at beginning of year 419     451  
Additions     2  
Gains arising from growth 19     72  
Fire, flood, storm and other events     (11)  
In-field inventory (2)     1  
Gain arising from fair value price changes 4     20  
Harvesting – agriculture produce (fellings) (17)     (63)  
Translation difference 74     (53)  
Fair value of plantations at end of period 497     419  

6. Financial instruments

The group's financial instruments that are measured at fair value on a recurring basis consist of derivative financial instruments and investments funds. 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)
Reviewed
 
US$ million Classification Fair value
hierarchy
Dec 2020     Sept 2020  
Investment funds(2) FV through OCI Level 1 6     6  
Derivative financial assets FV through PL Level 2 3     3  
Derivative financial liabilities FV through PL Level 3 52     11  

(1) The fair value of the financial instruments are equal to their carrying value.
(2) Included in other non-current assets.

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.

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, trade and other receivables, certain investments, trade and other payables, bank overdrafts and current interest-bearing borrowings approximate their fair values.

7. Capital commitments

  Reviewed  
US$ million Dec 2020     Sept 2020  
Contracted 101     89  
Approved but not contracted 100     232  
  201     321  

8. Material balance sheet movements

Since the 2020 financial year-end, the ZAR has strengthened by approximately 15% against the US Dollar, the group's presentation currency. This has resulted in a similar increase of the group's South African assets and liabilities and equity, which are held in the aforementioned functional currency, on translation to the presentation currency at period end.

Cash and non-current interest-bearing borrowings and derivative liabilities

On 25 November 2020, Sappi Southern Africa Limited, a wholly owned subsidiary of Sappi Limited, issued US$123 million (ZAR1.8 billion) senior, unsecured, convertible bonds due in 2025. The bonds will, subject to certain conditions including shareholder approval, be convertible into ordinary shares of Sappi Limited. The bonds were issued at par and carry a fixed-term-interest-rate coupon of 5.25% per annum. The initial conversion price of ZAR33.16 was set at a premium of 32.5% above the reference share price of ZAR25.03. A derivative liability for the conversion option was initially recognised at US$22 million (ZAR321 million) and was revalued to US$36 million at the quarter ended December 2020 with US$13 million recognised in profit (loss) as finance costs. Following shareholder approval, this option meets the definition of equity and will be accounted within equity. Interest-bearing borrowings increased by US$101 million (ZAR1,479 million).

The fair value of the embedded derivative related to the bond was calculated using option pricing methodologies with the following key assumptions:

  Inception     Quarter end  
Implied volatility range 23% – 26%     23% – 26%  
Credit spread 5.10%     4.95%  
Reference share price R25.03     R32.51  

9. Related parties

There has been no material change, by nature or amount, in transactions with related parties since the 2020 financial year-end.

10. Events after balance sheet date

There have been no reportable events that occurred between the balance sheet date and the date of authorisation for issue of these financial statements.

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.

Supplemental information

(this information has not been audited or reviewed)

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

Covenant leverage ratio – Net debt divided by last 12 months EBITDA excluding special items as defined by our bank covenants

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 1/2019, issued by the South African Institute of Chartered Accountants in December 2019, 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 and lease liabilities, 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, lease liabilities and overdraft)

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 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 believes 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.

Summary Rand convenience translation

  Quarter ended
  Dec 2020     Dec 2019
Key figures: (ZAR million)        
Sales 18,278     19,171
Operating profit excluding special items(1) 251     913
Special items – (gains) losses(1)     103
EBITDA excluding special items(1) 1,540     2,047
Profit for the period (267)     353
Basic earnings per share (SA cents) (49)     65
Net debt(1) 29,966     26,886
Key ratios: (%)        
Operating profit excluding special items to sales 1.4     4.8
Operating profit excluding special items to capital employed (ROCE)(1) 1.7     6.7
EBITDA excluding special items to sales 8.4     10.7

(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:

Exchange rates

  Dec 2020     Sept 2020 Jun 2020 Mar 2020 Dec 2019
Exchange rates:              
Period end rate: US$1 = ZAR 14.5750     17.1311 17.2350 17.6300 14.0326
Average rate for the quarter: US$1 = ZAR 15.7164     16.9157 17.9747 15.2605 14.7241
Average rate for the year to date: US$1 = ZAR 15.7164     16.2265 15.9835 14.9919 14.7241
Period end rate: €1 = US$ 1.2206     1.1632 1.1219 1.1142 1.1177
Average rate for the quarter: €1 = US$ 1.1901     1.1674 1.1005 1.1033 1.1066
Average rate for the year to date: €1 = US$ 1.1901     1.1195 1.1035 1.1050 1.1066

 

Sappi share price – December 2018 to December 2020