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 recognition 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 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 the 11 November 2021.

The condensed consolidated financial statements for the year ended September 2021 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.

Going concern

The group incurred a profit of US$13 million for the year ended September 2021 (2020: Loss of US$135 million) which includes a fair value loss of US$31 million relating to the financial instruments (refer to note 8). The group’s performance for the year was adversely impacted by the continued Covid-19 pandemic and the economic after-effect. 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 new covenants applicable from December 2021 as previously advised provide good headroom and will be monitored continuously.

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⁾ Relates to delivery costs netted off against revenue.

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

Reconciliation of EBITDA excluding special items to profit for the period and operating profit excluding special items to operating profit

Special items cover those items which management believe are material by nature or amount to the operating results and require separate disclosure.

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

Plantations are stated at fair value less cost to sell.

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.

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.

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 following inputs, 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 and current interest-bearing borrowings approximate their fair values.

Since the 2020 financial year-end, the ZAR has strengthened by approximately 13% 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 a R1.8 billion (US$123 million) senior, unsecured, convertible bonds due in 2025. 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 ZAR321 million (US$22 million) and was subsequently revalued to US$51 million at the date of shareholder approval with US$31 million recognised in profit or loss as finance costs for the year ended September 2021. Following shareholder approval, the derivative liability met the definition of equity and was reclassified to equity, net of tax and will not be revalued any further. Interest-bearing borrowings increased by ZAR1,479 million (US$101 million), which excludes the derivative liability, following the issuance of the convertible bond.

In March 2021, the group raised an aggregate principal amount of €400 million (US$472 million) in new senior unsecured notes due 2028 at a coupon of 3.625% per annum and the proceeds from these notes were used to redeem the full amount of the group’s €350 million (US$413 million) senior, unsecured notes due 2023 as the group exercised its option to early redeem these notes.

Ordinary shareholders’ interest

The group issued 14.1 million ordinary shares in July 2021 amounting to US$26 million to settle just over 26% of its subsidiary’s convertible bond initial offering of ZAR1.8 billion.

Inventories, trade and other receivables and trade and other payables

The increase in inventories, trade and other receivables and trade and other payables is largely attributable to seasonal working capital movements.

Other non-current assets and liabilities

The group remeasured its post-employment benefit funds as at September 2021 resulting in actuarial gains of US$92 million.

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

In October 2021, the group agreed to purchase a group annuity contract that will transfer approximately US$500 million of the North American region’s pension obligations and related plan assets to an insurance company.

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.