Condensed group income statement
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
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
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
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
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 measures are used by the group for internal performance analysis
- the presentation by the group’s reported business segments of these measures facilitates comparability with other companies in our industry, although the group’s measures may not be comparable with similarly titled profit measurements reported by other companies
- it is useful in connection with discussion with the investment analyst community and debt rating agencies
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:
- assets and liabilities at rates of exchange ruling at period end
- income, expenditure and cash flow items at average exchange rates.
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