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Sappi Limited - 3rd Quarter Results And Nine Months Ended June 2006
SAPPI LIMITED
(Registration number 1936/008963/06)
Issuer Code: SAVVI
JSE Code: SAP
ISIN Code: ZAE000006284
3RD QUARTER RESULTS AND NINE MONTHS ENDED JUNE 2006
* Headline loss 20 US cents per share; net loss 23 US cents per share
* Unfavourable plantation fair value adjustment - 7 US cents per share
* Input cost pressure
* Strong demand continues
* Prices increase in USA; flat in Europe
* Weaker rand benefits SA businesses
* Saiccor expansion approved
SUMMARY
Quarter Nine months
ended ended
June March June June June
2006 2006 2005** 2006 2005**
Sales (US$ million) 1,214 1,256 1,144 3,645 3,630
Operating (loss) profit
(US$ million) (34) 59 (188) 74 (121)
Operating (loss) profit
to sales (%) (2.8) 4.7 (16.4) 2.0 (3.3)
EBITDA (US$ million) * 82 176 (71) 421 246
EBITDA to sales (%) * 6.8 14.0 (6.2) 11.6 6.8
Operating (loss) profit to
average net assets (%) * (3.4) 5.9 (17.6) 2.4 (3.7)
Headline EPS (US cents) * (20) 5 (5) (14) 25
EPS (US cents) (23) 4 (78) (19) (69)
Return on average
equity (ROE) (%) * (14.6) 2.4 (40.3) (4.0) (11.6)
Net debt (US$ million) * 2,222 2,172 2,114 2,222 2,114
Net debt to total
capitalisation (%) * 47.4 44.3 44.0 47.4 44.0
* Refer to Supplemental Information for the definition of the term.
** Comparative amounts have been restated to take into account the effect of
the adoption of International Financial Reporting Standards (Refer to
note 2).
Comment
Demand for our fine paper continued to grow strongly in the quarter with
sales volume increasing 8% compared to a year earlier, representing some
recovery of market shares. Apparent consumption in the USA grew 13% and in
Europe grew 2% compared to the same period last year. Demand in Europe was
slower than the prior quarter, which is typical at this time of year and
prices remained flat compared to the prior quarter and to the year earlier.
In North America prices are improving but our average price realisation
reflects a lower increase as a result of the inclusion of a higher proportion
of pulp and publication paper in our mix.
We reported at the end of the previous quarter that in order to restore
margins to an acceptable level we would change a number of business
practices. These include pricing policy, distribution and terms of doing
business. There is already evidence of some improvement and we expect
continued improvement in the coming quarters.
The Forest Products business had strong demand for its products but sales
were constrained by poor production and major maintenance events. The
relatively weaker rand is expected to result in less competition from imports
for our South African businesses and export earnings should rise accordingly.
Net sales for the group of US$1.2 billion were up 6.1% compared to a year
earlier mainly as a result of an increase in the average price realised in
South Africa and the regional mix.
Although the rate of increase of raw material and energy costs slowed, the
unfavourable impact of wood, chemical and energy prices compared to the prior
quarter was US$3 million and US$34 million compared to a year earlier. Rising
pulp prices had a further US$6 million impact on costs compared to a year
earlier; however, as we sell slightly more pulp than we purchase, our sales
benefit.
Our South African businesses benefited from the weaker rand towards the end
of the quarter but for the first time since the introduction of plantation
fair value accounting (IAS41), the non-cash plantation fair value adjustment
(net after fellings) was unfavourable. This represented a US$22 million
charge compared to gains of US$60 million last quarter and US$8 million a
year earlier. This reflects the mark-to-market of increases in the energy
cost to bring wood to market over our entire plantation investment. Major
boiler repairs at Ngodwana resulted in significant additional purchased fuel
and electricity costs, and a severe hailstorm at Stanger caused damage to the
roof and inventory. The combined negative effect of these events was US$9
million.
In addition, the direct cost of major planned maintenance shuts was
approximately US$20 million in the quarter compared to US$4 million last
quarter and US$19 million a year earlier.
Our operating loss for the quarter after these impacts was US$34 million
compared to a loss of US$188 million last year, which included the US$180
million charge for the impairment of Muskegon Mill.
SG&A costs this quarter were significantly higher than comparative periods
due to the timing of various grant receipts and fee payments. Year to date
SG&A costs are largely in line with previous years.
Net finance costs were US$35 million compared to US$31 million last quarter;
US$2 million of the difference was a result of lower net foreign exchange
gains. In the comparable quarter last year finance costs were reduced by an
adjustment for the fair value of financial instruments of US$19 million.
The headline loss per share for the quarter was 20 US cents and the net loss
per share was 23 US cents. The primary reason for the difference was further
asset impairment at previously impaired sites and asset write-offs.
Cash flow and debt
Cash generated by operations was US$85 million for the quarter before US$18
million of foreign currency related non-cash adjustments, compared to US$93
million a year ago. Working capital reduced US$16 million as a result of
increased payables in the quarter. We aim to reduce working capital
substantially in the final quarter.
During the quarter, net interest payments were US$48 million compared to
US$23 million in the previous quarter.The payments included a semi-annual
interest payment on the US$750 million bonds.
Capital expenditure continued to be tightly controlled and was US$74 million,
about 77% of depreciation, for the quarter compared to US$83 million a year
earlier. We utilised US$59 million cash this quarter and expect to at least
reverse this in the final quarter.
Net debt was US$2.2 billion at quarter end, up US$50 million on the previous
quarter. Net debt to total capitalisation increased to 47% from 44% at March.
During the quarter we issued ZAR1 billion (approximately US$140 million) of 7
year notes in the South African markets to repay short term debt. The issue
was
oversubscribed.
Operating Review for the Quarter
Sappi Fine Paper
Quarter ended
June 2006 June 2005 %
US$ million US$ million change
Sales 968 905 7.0
Operating loss * (18) (210) -
Operating loss to sales (%) (1.9) (23.2) -
EBITDA * 62 (125) -
EBITDA to sales (%) 6.4 (13.8) -
RONOA pa (%) (2.3) (24.3) -
March 2006
US$ million
Sales 1,018
Operating loss * (6)
Operating loss to sales (%) (0.6)
EBITDA * 75
EBITDA to sales (%) 7.4
RONOA pa (%) (0.8)
* Includes pre tax charge of US$180 million in respect of Muskegon Mill
asset impairment in June 2005.
Sales increased 7% for the quarter compared to a year earlier. While we are
seeing improved pricing in the USA, particularly for web products, prices in
Europe have remained flat. Our efforts in both markets to improve margin
management continue.
Cost pressures, particularly wood, energy and chemicals continue to squeeze
our margins. The rate of increase in the quarter slowed compared to the
recent trend.
Europe
Quarter ended
June 2006 June 2005 % change % change
US$ million US$ million (US$) (Euro)
Sales 536 498 7.6 8.6
Operating
profit (loss) 1 (12) - -
Operating
profit (loss)
to sales (%) 0.2 (2.4) - -
EBITDA 47 37 27.0 28.1
EBITDA to sales
(%) 8.8 7.4 - -
RONOA pa (%) 0.2 (2.6) - -
March 2006
US$ million
Sales 569
Operating profit (loss) 6
Operating profit (loss) to sales (%) 1.1
EBITDA 53
EBITDA to sales (%) 9.3
RONOA pa (%) 1.4
Our sales volume grew 7% in the quarter compared to a year ago resulting in a
recovery of market share lost during our strong stand on prices last year.
Price realisation in the quarter was flat and continued input cost pressure
squeezed our margins resulting in small operating profit of US$1 million.
We took commercial downtime during the quarter. The mills operated well with
efficient management of fixed costs and raw material usage.
North America
Quarter ended
June 2006 June 2005* %
US$ million US$ million change
Sales 354 338 4.7
Operating loss (14) (199) -
Operating loss to sales (%) (4.0) (58.9) -
EBITDA 16 (166) -
EBITDA to sales (%) 4.5 (49.1) -
RONOA pa (%) (4.9) (56.9) -
March 2006
US$ million
Sales 367
Operating loss (10)
Operating loss to sales (%) (2.7)
EBITDA 19
EBITDA to sales (%) 5.2
RONOA pa (%) (3.4)
* Includes pre tax charge of US$180 million in respect of Muskegon Mill
asset impairment in June 2005.
The quarter ended strongly with improved mill output, improved prices and
improving margin management. The quarter"s result, however, was an operating
loss of US$14 million.
Mill performances improved during the quarter but Muskegon efficiency levels
are still well short of our targets. The streamlining of our product range
and improved mill scheduling have helped restore our service levels and we
expect further improvements in the months ahead.
The direct cost of major maintenance shuts in the quarter was US$6 million.
We continue to work towards achieving new labour agreements at our US mills.
Offers are on the table at our two mills in Maine, and we are still in
discussions at our Muskegon and Cloquet mills. We are hopeful that the offers
will be voted on by our employees in the near future.
Fine Paper South Africa
Quarter ended
June 2006 June 2005 % change % change
US$ million US$ million (US$) (Rands)
Sales 78 69 13.0 14.7
Operating (loss)
profit (5) 1 - -
Operating (loss)
profit to sales (%) (6.4) 1.4 - -
EBITDA (1) 4 - -
EBITDA to sales (%) (1.3) 5.8 - -
RONOA pa (%) (11.9) 2.0 - -
March 2006
US$ million
Sales 82
Operating (loss) profit (2)
Operating (loss) profit to sales (%) (2.4)
EBITDA 3
EBITDA to sales (%) 3.7
RONOA pa (%) (4.6)
Sales volumes and prices improved during the quarter but cost pressure
including higher pulp costs and the storm damage at Stanger mill resulted in
an operating loss in the quarter.
Forest Products
Quarter ended
June 2006 June 2005 % change % change
US$ million US$ million (US$) (Rands)
Sales 246 239 2.9 4.4
Operating (loss)
profit (16) 23 - -
Operating (loss)
profit to sales (%) (6.5) 9.6 - -
EBITDA 20 55 (63.6) (63.1)
EBITDA to sales (%) 8.1 23.0 - -
RONOA pa (%) (4.7) 6.8 - -
March 2006
US$ million
Sales 238
Operating (loss) profit 69
Operating (loss) profit to sales (%) 29.0
EBITDA 105
EBITDA to sales (%) 44.1
RONOA pa (%) 19.2
Demand for our products was strong in the quarter; however our sales of kraft
products were unfavourably impacted by poor operating efficiency at Ngodwana
and Tugela mills. Saiccor"s production was lower than planned as a result of
the tie-in of debottlenecking capital work. Efficiency levels have improved
and Saiccor"s output is now ahead of plan. Demand for Saiccor"s chemical
cellulose is strong and the mill is expected to run at operating rates
anticipated by the capital work.
Usutu mill returned to profitability during the quarter as a result of a
concerted profit improvement programme and was bolstered by strong pricing
and currency.
Average softwood pulp prices (NBSK) were up about US$40 compared to the prior
quarter and hardwood pulp prices increased by US$25 per ton. This will have a
flow through effect in the quarter ahead and should be bolstered by the
currency moves.
Operating profit was reduced by the plantation fair value adjustment of US$22
million and major maintenance and exceptional repair costs of US$18 million,
resulting in an operating loss of US$16 million.
The rand rate was weaker during the quarter at R6.47 to the US dollar
compared to R6.18 in the March quarter and R6.37 a year earlier. The rate is
currently approximately R7.00. The weaker rate will improve export revenues
and help reduce import competition in the domestic markets.
Work will begin on the project to expand chemical cellulose production at our
Saiccor mill in the fourth quarter and is expected to be completed in the
third quarter 2008.
The project will expand capacity by 300,000 tons, 75,000 tons of which will
replace existing higher cost capacity. It will also substantially improve the
environmental impact of the mill.
The estimated cost of the combined project is US$460 million.
Outlook
Our short term goal is to return to reasonable profitability next year and we
have identified the steps we believe can deliver this. We are confident that
our North American and Southern African businesses will return to operating
profitability next quarter. For Europe we are making progress with cost
reduction but are unlikely to see much of the effect of price improvements we
need before the end of the third calendar quarter. We may also incur some
one-off costs to effect cost improvements in the next six months in Europe.
The improvement of the group"s cash flow remains a priority. The freeze
implemented in April on capital projects except those needed for maintenance
of the business and short payback items will continue, providing us with the
flexibility to undertake step change projects from time to time such as the
Saiccor expansion. We plan to manage the Saiccor expansion and some lesser
projects without increasing group debt.
The change in our marketing and control policies is beginning to work. We aim
to achieve a meaningful average price increase in Europe towards the end of
the summer.
We expect the group to return to profitability in the next quarter, excluding
fair value adjustments, and thereafter to move towards attaining our longer
term objectives.
On behalf of the Board
E van As W Pfarl
Director Director 3 August 2006
FORWARD-LOOKING STATEMENTS
Certain statements in this release that are neither reported financial
results nor other historical information, are forward-looking statements,
including but not limited to statements that are predictions of or indicate
future earnings, savings, synergies, events, trends, plans or objectives.
Undue reliance should not be placed on such statements because, by their
nature, they are subject to known and unknown risks and uncertainties and can
be affected by other factors, that could cause actual results and company
plans and objectives to differ materially from those expressed or implied in
the forward-looking statements (or from past results). Such risks,
uncertainties and factors include, but are not limited to the highly cyclical
nature of the pulp and paper industry (and the factors that contribute to
such cyclicality, such as levels of demand, production capacity, production,
input costs including raw material, energy and employee costs, and pricing),
adverse changes in the markets for the group"s products, consequences of
substantial leverage, changing regulatory requirements, unanticipated
production disruptions, economic and political conditions in international
markets, the impact of investments, acquisitions and dispositions (including
related financing), any delays, unexpected costs or other problems
experienced with integrating acquisitions and achieving expected savings and
synergies and currency fluctuations. The company undertakes no obligation to
publicly update or revise any of these forward-looking statements, whether to
reflect new information or future events or circumstances or otherwise.
FINANCIAL RESULTS
for the quarter and nine months ended June 2006
GROUP INCOME STATEMENT
Restated
Reviewed Reviewed
Quarter Quarter
ended ended
June 2006 June 2005 %
US$ million US$ million change
Sales 1,214 1,144 6.1
Cost of sales 1,143 1,070
Gross profit 71 74 (4.1)
Selling, general and
administrative expenses 97 81
(26) (7)
Other expenses 8 181
Operating (loss) profit (34) (188) 81.9
Net finance costs 35 9
Net paid 35 31
Capitalised - -
Net foreign exchange
gains (1) (3)
Change in fair value of
financial instruments 1 (19)
Loss before tax (69) (197) 65.0
Taxation - current 1 3
- deferred (17) (23)
Net loss (53) (177) 70.1
Loss per share
(US cents) (23) (78)
Weighted average
number of shares
in issue (millions) 226.3 225.7
Diluted loss per share
(US cents) (23) (78)
Weighted average
number of shares
on fully diluted
basis (millions) 228.4 226.6
Restated
Reviewed Reviewed
Nine months Nine months
ended ended
June 2006 June 2005 %
US$ million US$ million change
Sales 3,645 3,630 0.4
Cost of sales 3,283 3,263
Gross profit 362 367 (1.4)
Selling, general and
administrative expenses 267 259
95 108
Other expenses 21 229
Operating (loss) profit 74 (121)
Net finance costs 93 54
Net paid 100 95
Capitalised (1) (1)
Net foreign exchange
gains (5) (6)
Change in fair value of
financial instruments (1) (34)
Loss before tax (19) (175) 89.1
Taxation - current 16 23
- deferred 9 (43)
Net loss (44) (155) 71.6
Loss per share
(US cents) (19) (69)
Weighted average
number of shares
in issue (millions) 226.1 225.8
Diluted loss per share
(US cents) (19) (69)
Weighted average
number of shares
on fully diluted
basis (millions) 227.9 226.8
Note: Refer to notes to the group results for Headline earnings and
calculation thereof.
GROUP BALANCE SHEET
Restated
Reviewed Reviewed
June 2006 Sept 2005
US$ million US$ million
ASSETS
Non-current assets 4,118 4,244
Property, plant and equipment 3,215 3,333
Plantations 575 604
Deferred taxation 71 70
Other non-current assets 257 237
Current assets 1,476 1,645
Inventories 755 711
Trade and other receivables 552 567
Cash and cash equivalents 169 367
Total assets 5,594 5,889
EQUITY AND LIABILITIES
Shareholders" equity
Ordinary shareholders" interest 1,354 1,589
Non-current liabilities 2,578 2,547
Interest-bearing borrowings 1,637 1,600
Deferred taxation 356 367
Other non-current liabilities 585 580
Current liabilities 1,662 1,753
Interest-bearing borrowings 746 616
Bank overdraft 8 159
Other current liabilities 792 858
Taxation payable 116 120
Total equity and liabilities 5,594 5,889
Number of shares in issue at balance sheet date
(millions) 226.5 225.9
GROUP CASH FLOW STATEMENT
Restated Restated
Reviewed Reviewed Reviewed Reviewed
Quarter Quarter Nine months Nine months
ended ended ended ended
June 2006 June 2005 June 2006 June 2005
US$ million US$ million US$ million US$ million
Operating
(loss) profit (34) (188) 74 (121)
Depreciation,
fellings and
other
amortisation 116 117 347 367
Other non-cash
items
(including
impairment
charges) (15) 164 (115) 161
Cash generated
by operations 67 93 306 407
Movement in
working capital 16 97 (97) (110)
Net finance
costs (48) (33) (116) (100)
Taxation paid - (1) (12) (40)
Dividends paid - - (68) (68)
Cash retained
from operating
activities 35 156 13 89
Cash effects of
investing
activities (94) (64) (246) (270)
(59) 92 (233) (181)
Cash effects of
financing
activities 31 (150) 34 (129)
Net movement in
cash and cash
equivalents (28) (58) (199) (310)
GROUP STATEMENT OF RECOGNISED INCOME AND EXPENSE
Restated Restated
Reviewed Reviewed Reviewed Reviewed
Quarter Quarter Nine months Nine months
ended ended ended ended
June 2006 June 2005 June 2006 June 2005
US$ million US$ million US$ million US$ million
Pension fund
asset not
recognised (2) - (6) -
Actuarial
losses on
pension and
other post
employment
benefit
liabilities (5) - (5) -
Deferred
taxation on
above items - - 1 -
Valuation
allowance
against
deferred tax
asset
on actuarial
losses - - - (62)
Exchange
differences on
translation of
foreign
operations (142) (102) (122) (38)
Net expense
recorded
directly in
equity (149) (102) (132) (100)
Net loss for
the period (53) (177) (44) (155)
Total
recognised
expense for the
period (202) (279) (176) (255)
NOTES TO THE GROUP RESULTS
1. Basis of preparation
The condensed quarterly financial statements have been prepared in accordance
with International Financial Reporting Standards (IFRS). Sappi is reporting
under IFRS for the first time for the year ending September 2006. The date of
first transition to IFRS is October 2004 and comparative results have been
restated accordingly. The condensed consolidated interim financial statements
do not include all of the information required for full annual financial
statements.
These quarterly results have been prepared in accordance with IAS 34 (Interim
financial reporting). The accounting policies used in the preparation of the
quarterly results are compliant with IFRS and consistent with those used in
the annual financial statements for September 2005, except as disclosed
below.
The preliminary results for the quarter have been reviewed in terms of
International Standards on Review Engagements by the group"s auditors,
Deloitte & Touche. Their unqualified review report includes an emphasis of
matter that amendments to the interpretive guidance issued between the date
of this announcement and the finalisation of the financial statements for the
year ending September 2006, may result in changes to the restatements
published.
This report is available for inspection at the company"s registered offices.
2. Effect of the first time adoption of IFRS
As discussed in Note 1, the group has adopted International Financial
Reporting Standards (IFRS) in preparing its consolidated financial statements
for the year ending September, 2006. For purposes of these interim financial
statements, the group has developed accounting policies based on IFRS issued
to date that will be effective at our reporting date of September, 2006. IFRS
1, First-time Adoption of International Financial Reporting Standards,
requires that an entity develop accounting policies based on the standards
and related interpretations effective at the reporting date of its first IFRS
financial statements. IFRS 1 also requires that those policies be applied as
of the date of transition to IFRS and throughout all periods presented in the
first IFRS financial statements. The accounting policies used in these
financial statements are subject to change up to the reporting date of our
first IFRS financial statements. Management does not believe the final
accounting policies will change materially from those utilised in the
preparation of the accompanying interim financial statements.
The following exemptions in accordance with IFRS 1 were considered:
- Business Combinations - IFRS 3
The group has elected not to retrospectively apply the requirements of IFRS 3
for Business Combinations that occurred prior to October 2004.
- Share based payments - IFRS 2
The group has applied the share based payment exemption therefore IFRS 2 is
only applicable to equity instruments granted after 7 November 2002 that were
not vested by 1 January 2005. Liabilities arising from cash-settled share-
based payments settled after 1 January 2005 are subject to IFRS 2. For
instruments vesting on or after 1 January 2005, Sappi has recognised a charge
in the income statement and set up a separate category in shareholders"
equity for all share options and awards, based on the fair value of the
awards as calculated at the grant date.
- The effects of changes in foreign exchange rates - IAS 21
Sappi has elected to apply the exemption in IFRS 1 which allows the
cumulative translation differences of all foreign operations to be reset to
zero by transfer to distributable reserve at the date of transition to IFRS
which is October 2004.
Adjustments on adoption of IFRS
The adoption of IFRS led to changes in the Group"s financial position,
financial performance and cash flows. The significant differences between
previously reported SA GAAP financial statements and IFRS are as follows:
- Employee benefits - IAS 19
Previously unrecognised actuarial employee benefit losses were recognised at
October 2004, resulting in an increase in pension and other post employment
benefits liabilities and a corresponding reduction in equity and deferred tax
liability. These adjustments also led to a reduction in employee benefit
expense in profit for the period. Sappi has elected to adopt the policy of
recognising actuarial gains and losses in the period in which they occur. The
gains and losses are recognised outside of profit for the period in the
statement of recognised income and expense (SORIE). Items processed through
SORIE are tax effected through SORIE. Part of the first-time adoption of this
method of accounting included a historic analysis of all pension fund
movements to determine the portion of our deferred tax balances that relate
to SORIE.
- Share based payments - IFRS 2
Sappi has recognised a charge in the income statement and established a
separate category in shareholders" equity for all share options and awards,
based on the fair value of the awards as calculated at the grant date. The
cost of the share options and grants are reflected in the income statement
over the vesting period. This IFRS change had no impact on the comparative
total shareholders" equity as a Share Based Payment Reserve is created with
the equal and opposite amount included in retained earnings.
- Financial instruments - IAS 39
A significant portion of our securitised receivables are now reflected on our
balance sheet, increasing trade and other receivables by US$268 million and
short term debt by US$346 million and decreasing other payables by US$78
million at September 2005. The related expense is no longer reflected in
S,G&A but is included under finance costs. This caused an increase in finance
costs and decrease in S,G&A of US$15 million for the year ended September
2005 (June 2005: US$12 million).
Cash flow hedges on inter-company loans, accounted for in equity, no longer
qualify for hedge accounting under IAS 39. As a result these instruments are
now recognised at fair value through profit and loss.
- The effects of changes in foreign exchange rates - IAS 21
Sappi has elected to apply the exemption in IFRS 1 which allows the
cumulative translation differences of all foreign operations to be reduced to
zero at the date of transition to IFRS which is October 2004. The Foreign
Currency Translation Reserve (Non Distributable Reserve) was transferred to
retained earnings. This IFRS change has no impact on total shareholders"
equity.
There are no other accounting policy changes relevant to the first time
adoption of IFRS.
- Circular 9/2006 Transactions giving rise to adjustments to
sales/purchases
The South African Institute of Chartered Accountants recently issued a
circular on the treatment of settlement discount in accordance with IFRS.
This circular clarifies the following IFRS interpretations:
- Settlement/cash discounts allowed should be estimated at the time of
sale
- and presented as a reduction in sales.
- Settlement/cash discounts received should be deducted from the cost of
inventories, or cost of sales.
Management has evaluated the impact of the above interpretations on the
group"s results and the impact was found to be minimal. The results have been
adjusted accordingly for this circular.
RECONCILIATION OF PREVIOUS SA GAAP TO IFRS FOR SHAREHOLDERS" EQUITY
Reviewed Reviewed Reviewed
Year Nine months IFRS
ended ended transition
Sept 2005 June 2005 Oct 2004
US$ million US$ million US$ million
Total equity presented under SA
GAAP 1,881 1,867 2,157
Impact on retained earnings:
Recognition of previously
unrecognised
actuarial losses - IAS 19 (340) (284) (300)
Deferred taxation impact of IAS
19 change 43 34 93
Share based payments - IFRS 2 (20) (17) (9)
Release of cash flow hedge
reserve - IAS 39 14 11 (2)
Foreign Currency Translation
Reserve reset to zero
at October 2004 244 244 244
Share based payment reserve -
IFRS 2 20 17 9
Hedging Reserves - IAS 39 (13) (10) 2
Foreign Currency Translation
Reserve (240) (243) (244)
Total equity and reserves
presented under IFRS 1,589 1,619 1,950
RECONCILIATION OF PREVIOUS SA GAAP TO IFRS FOR NET (LOSS) PROFIT
Reviewed Reviewed
Year Nine months
ended ended
Sept 2005 June 2005
US$ million US$ million
Net loss under SA GAAP (213) (180)
Reduction in expense due to recognition of
actuarial
gains and losses - IAS 19 23 17
Deferred taxation impact of IAS 19 1 3
Share based payment expense - IFRS 2 (10) (8)
Gains from cash flow hedges that do not qualify
for
hedge accounting - IAS 39 22 18
Deferred taxation impact of IAS 39 (7) (5)
Net loss under IFRS (184) (155)
IFRS cash flow statement impact
The reduction in employee benefit expense resulted in an increase in
operating profit and a corresponding decrease in non-cash items. Share based
payment costs led to a decrease in operating profit and an increase in non-
cash items.
The recognition of securitised debtors caused the relating costs to be
reflected under finance costs instead of included in operating profit. In
addition related movements are reflected in working capital and borrowings.
IFRS impact on net debt
In accordance with IAS 39 a significant portion of our securitised
receivables are now reflected on our balance sheet, increasing trade and
other receivables by US$268 million and short term debt by US$346 million and
decreasing other payables by US$78 million at September 2005.
This resulted in an increase in net debt of US$346 million from US$1,662
million to US$2,008 million at September 2005.
IFRS impact on contingent liabilities
In accordance with IAS 39 securitised receivables are now reflected on our
balance sheet. The contingent liabilities disclosed at September 2005
included certain guarantees related to the securitisation programme. The
amount disclosed for September 2005 has been amended accordingly to exclude
these guarantees as the liablity is now disclosed on balance sheet.
3. Reconciliation of movement in shareholders" equity
Restated
Reviewed Reviewed
Nine months Nine months
ended ended
June 2006 June 2005
US$ million US$ million
Balance - beginning of year as reported 1,881 2,157
IFRS adoption (refer note 2) (292) (207)
Recognition of previously unrecognised
actuarial losses - IAS 19 (340) (300)
Deferred taxation impact of IAS 19 change 43 93
Translation differences 5 -
Balance - beginning of year restated 1,589 1,950
Total recognised expense for the period (176) (255)
Dividends paid (68) (68)
Share buybacks net of transfers to participants
of the share purchase trust 2 (15)
Share based payment reserve 7 7
Balance - end of period 1,354 1,619
Restated Restated
Reviewed Reviewed Reviewed Reviewed
Quarter Quarter Nine months Nine months
ended ended ended ended
June 2006 June 2005 June 2006 June 2005
US$ million US$ million US$ million US$ million
4. Operating
profit
Included in
operating
profit are
the following
non-cash items:
Depreciation
and
amortisation
Depreciation of
property,
plant and
equipment 96 101 291 317
Other
amortisation - - 1 1
96 101 292 318
Impairment of
property, plant
and
equipment 3 177 8 219
Impairment of
other assets - 3 - 3
99 281 300 540
Fair value
adjustment
gains on
plantations
(included in
cost of sales)
Changes in
volume
Fellings 20 16 55 49
Growth (21) (16) (56) (49)
(1) - (1) -
Changes in fair
value 23 (8) (44) (25)
22 (8) (45) (25)
The above fair
value
adjustments
have
been offset by
silviculture
costs 11 12 33 34
5. Headline
earnings per
share
Headline
earnings per
share (US
cents) * (20) (5) (14) 25
Weighted
average number
of shares
in issue
(millions) 226.3 225.7 226.1 225.8
Diluted
headline
earnings per
share (US
cents) * (20) (5) (14) 25
Weighted
average number
of shares
on fully
diluted basis
(millions) 228.4 226.6 227.9 226.8
Calculation of
Headline
earnings *
Net loss (53) (177) (44) (155)
Profit (loss)
on disposal of
business
and property,
plant and
equipment - 1 (2) 1
Write-off of
assets 5 - 7 4
Impairment of
property, plant
and
equipment 3 165 8 207
Headline
earnings (45) (11) (31) 57
* Headline earnings disclosure is required by the JSE Limited.
Restated Restated
Reviewed Reviewed Reviewed Reviewed
Quarter Quarter Nine months Nine months
ended ended ended ended
June 2006 June 2005 June 2006 June 2005
US$ million US$ million US$ million US$ million
6. Capital
expenditure
Property, plant
and
equipment 74 83 213 221
Reviewed Reviewed
June 2006 Sept 2005
US$ million US$ million
7. Capital
commitments
Contracted but
not provided 116 115
Approved but
not contracted 135 198
251 313
8. Contingent
liabilities
Guarantees and
suretyships 48 56 *
Other
contingent
liabilities 11 11
* In accordance with IAS 39 securitised receivables are now reflected on our
balance sheet. The contingent liabilities disclosed at September 2005
included certain guarantees related to the securitisation programme. The
amount disclosed for September 2005 has been amended accordingly to exclude
these guarantees as the liablity is now disclosed on balance sheet.
SUPPLEMENTAL INFORMATION
Definitions
Average - averages are calculated as the sum of the opening and closing
balances for the relevant period divided by two
* EBITDA - earnings before interest (net finance costs), tax, depreciation
and amortisation
* EBITDA to sales - EBITDA divided by sales
Fellings - the amount charged against the income statement representing the
standing value of the plantations harvested
Headline earnings - as defined in Circular 7/2002 issued by the South African
Institute of Chartered Accountants, separates from earnings all items of a
capital nature. It is not necessarily a measure of sustainable earnings. It
is a listing requirement of the JSE Limited to disclose headline earnings per
share
NBSK - Northern Bleached Softwood Kraft pulp. One of the main varieties of
market pulp, mainly produced from spruce trees in Scandinavia, Canada and
north eastern USA. The NBSK is a benchmark widely used in pulp and paper
industry for comparative purposes
* Net assets - total assets less current liabilities
* Net asset value - shareholders" equity plus net deferred tax
* Net asset value per share - net asset value divided by the number of shares
in issue at balance sheet date
* Net debt - current and non-current interest-bearing borrowings, and bank
overdrafts (net of cash, cash equivalents and short-term deposits)
* Net debt to total capitalisation - Net debt divided by shareholders" equity
plus minority interest, non-current liabilities, current interest-bearing
borrowings and overdraft
* ROE - return on average equity. Net profit divided by average shareholders"
equity
* RONA - operating profit divided by average net assets
* RONOA - operating profit divided by average net operating assets. Net
operating assets are total assets (excluding deferred taxation and cash) less
current liabilities (excluding interest-bearing borrowings and bank
overdraft)
* SG&A - selling, general and administrative expenses
* Silviculture costs - growing and tending costs of trees in forestry
operations
* The above financial measures, other than headline earnings per share, 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.
SUPPLEMENTAL INFORMATION
additional information
Restated Restated
Reviewed Reviewed Reviewed Reviewed
Quarter Quarter Nine months Nine months
ended ended ended ended
June 2006 June 2005 June 2006 June 2005
US$ million US$ million US$ million US$ million
Net loss to
EBITDA (1)
reconciliation
Net loss (53) (177) (44) (155)
Net finance
costs 35 9 93 54
Taxation -
current 1 3 16 23
- deferred (17) (23) 9 (43)
Depreciation 96 101 291 317
Amortisation
(including
fellings) 20 16 56 50
EBITDA (1) 82 (71) 421 246
Restated
Reviewed Reviewed
June 2006 Sept 2005
US$ million US$ million
Net debt (US$
million) (2) 2,222 2,008
Net debt to
total
capitalisation
(%) (2) 47.4 40.9
Net asset value
per share (US$)
(2) 7.24 8.35
(1)In connection with the U.S. Securities Exchange Commission ("SEC") rules
relating to "Conditions for Use of Non-GAAP Financial Measures", we have
reconciled EBITDA to net profit rather than operating profit.
As a result our definition retains other income/expenses as part of EBITDA.
We use EBITDA as an internal measure of performance and believe it is a
useful and commonly used measure of financial performance in addition to
operating profit and other profitability measures under IFRS. EBITDA is not a
measure of performance under IFRS. EBITDA should not be construed as an
alternative to operating profit as an indicator of the company"s operations
in accordance with IFRS. EBITDA is also presented to assist our shareholders
and the investment community in interpreting our financial results.
This financial measure is regularly used as a means of comparison of
companies in our industry by removing certain differences between companies
such as depreciation methods, financing structures and taxation regimes.
Different companies and analysts may calculate EBITDA differently, so making
comparisons among companies on this basis should be done very carefully.
(2) Refer to Supplemental Information for the definition of the term.
SUPPLEMENTAL INFORMATION
Regional information
Quarter Quarter
ended ended
June 2006 June 2005
Metric tons Metric tons %
(000"s) (000"s) change
Sales
Fine Paper
- North America 349 324 7.7
Europe 576 538 7.1
Southern Africa 79 68 16.2
Total 1,004 930 8.0
Forest Products
- Pulp and paper
operations 368 374 (1.6)
Forestry
operations 394 455 (13.4)
Total 1,766 1,759 0.4
Nine months Nine months
ended ended
June 2006 June 2005
Metric tons Metric tons %
(000"s) (000"s) change
Sales
Fine Paper
- North America 1,058 1,005 5.3
Europe 1,824 1,754 4.0
Southern Africa 237 215 10.2
Total 3,119 2,974 4.9
Forest Products
- Pulp and paper
operations 1,070 1,154 (7.3)
Forestry
operations 1,142 1,205 (5.2)
Total 5,331 5,333 (0.0)
Restated
Reviewed Reviewed
Quarter Quarter
ended ended
June 2006 June 2005 %
US$ million US$ million change
Sales
Fine Paper
- North America 354 338 4.7
Europe 536 498 7.6
Southern Africa 78 69 13.0
Total 968 905 7.0
Forest Products
- Pulp and paper
operations 224 217 3.2
Forestry
operations 22 22 -
Total 1,214 1,144 6.1
Restated
Reviewed Reviewed
Nine months Nine months
ended ended
June 2006 June 2005 %
US$ million US$ million change
Sales
Fine Paper
- North America 1,066 1,034 3.1
Europe 1,625 1,643 (1.1)
Southern Africa 238 224 6.3
Total 2,929 2,901 1.0
Forest Products
- Pulp and paper
operations 651 669 (2.7)
Forestry
operations 65 60 8.3
Total 3,645 3,630 0.4
Restated
Reviewed Reviewed
Quarter Quarter
ended ended
June 2006 June 2005 %
US$ million US$ million change
Operating profit
Fine Paper
- North America (14) (199) 93.0
Europe 1 (12) -
Southern Africa (5) 1 -
Total (18) (210) 91.4
Forest Products (16) 23 -
Corporate - (1) -
Total * (34) (188) 81.9
Earnings before interest, tax,
depreciation and amortisation
charges
Fine Paper
- North America 16 (166) -
Europe 47 37 27.0
Southern Africa (1) 4 -
Total 62 (125) -
Forest Products 20 55 (63.6)
Corporate - (1) -
Total * 82 (71) -
Net operating assets
Fine Paper
- North America 1,134 1,294 (12.4)
Europe 1,900 1,761 7.9
Southern Africa 158 172 (8.1)
Total 3,192 3,227 (1.1)
Forest Products 1,246 1,263 (1.3)
Corporate and other 9 53 (83.0)
Total 4,447 4,543 (2.1)
Restated
Reviewed Reviewed
Nine months Nine months
ended ended
June 2006 June 2005 %
US$ million US$ million change
Operating profit
Fine Paper
- North America (23) (211) 89.1
Europe 21 42 (50.0)
Southern Africa (7) 4 -
Total (9) (165) 94.5
Forest Products 90 48 87.5
Corporate (7) (4) (75.0)
Total * 74 (121) -
Earnings before interest, tax,
depreciation and amortisation
charges
Fine Paper
- North America 66 (106) -
Europe 161 190 (15.3)
Southern Africa 5 16 (68.8)
Total 232 100 132.0
Forest Products 195 150 30.0
Corporate (6) (4) (50.0)
Total * 421 246 71.1
Net operating assets
Fine Paper
- North America 1,134 1,294 (12.4)
Europe 1,900 1,761 7.9
Southern Africa 158 172 (8.1)
Total 3,192 3,227 (1.1)
Forest Products 1,246 1,263 (1.3)
Corporate and other 9 53 (83.0)
Total 4,447 4,543 (2.1)
* Operating profit and EBITDA for the nine months ended June 2005 reduced by
US$222 million in respect of asset impairments and asset impairment
reversals.
SUPPLEMENTAL INFORMATION
summary rand convenience translation
Restated
Quarter Quarter
ended ended
June June %
2006 2005 change
Sales (ZAR million) 7,849 7,292 7.6
Operating (loss) profit
(ZAR million) (220) (1,198) 81.6
Net loss (ZAR million) (343) (1,128) 69.6
EBITDA * (ZAR million) 530 (453) -
Operating (loss) profit
to sales (%) (2.8) (16.4)
EBITDA * to sales (%) 6.8 (6.2)
Operating (loss) profit to average
net assets (%) (3.3) (17.4)
EPS (SA cents) (149) (497) 70.0
Headline EPS (SA cents) * (129) (32) (303.1)
Net debt (ZAR million) *
Net debt to total
capitalisation (%) *
Cash generated by operations
(ZAR million) 433 593 (27.0)
Cash retained from operating
activities (ZAR million) 226 994 (77.3)
Net movement in cash and cash
equivalents (ZAR million) (181) (370) 51.1
Restated
Nine months Nine months
ended ended
June June %
2006 2005 change
Sales (ZAR million) 23,339 22,409 4.2
Operating (loss) profit
(ZAR million) 474 (747) -
Net loss (ZAR million) (282) (957) 70.5
EBITDA * (ZAR million) 2,696 1,519 77.5
Operating (loss) profit
to sales (%) 2.0 (3.3)
EBITDA * to sales (%) 11.6 6.8
Operating (loss) profit to average
net assets (%) 2.3 (3.5)
EPS (SA cents) (122) (426) 71.4
Headline EPS (SA cents) * (90) 154 -
Net debt (ZAR million) * 15,932 14,172 12.4
Net debt to total
capitalisation (%) * 47.4 44.0
Cash generated by operations
(ZAR million) 1,959 2,512 (22.0)
Cash retained from operating
activities (ZAR million) 83 549 (84.9)
Net movement in cash and cash
equivalents (ZAR million) (1,274) (1,914) 33.4
* Refer to Supplemental Information for the definition of the term.
exchange rates
June March Dec
2006 2006 2005
Exchange rates:
Period end rate: US $1 = ZAR 7.1700 6.1655 6.3275
Average rate for the Quarter: US $1 = ZAR 6.4658 6.1858 6.4795
Average rate for the YTD: US $1 = ZAR 6.4031 6.3334 6.4795
Period end rate: EUR 1 = US$ 1.2789 1.2119 1.1843
Average rate for the Quarter: EUR 1 = US$ 1.2570 1.1983 1.1915
Average rate for the YTD: EUR 1 = US$ 1.2191 1.1964 1.1915
Sept June
2005 2005
Exchange rates:
Period end rate: US $1 = ZAR 6.3656 6.7041
Average rate for the Quarter: US $1 = ZAR 6.5289 6.3738
Average rate for the YTD: US $1 = ZAR 6.2418 6.1732
Period end rate: EUR 1 = US$ 1.2030 1.2097
Average rate for the Quarter: EUR 1 = US$ 1.2139 1.2678
Average rate for the YTD: EUR 1 = US$ 1.2659 1.2811
The financial results of entities with reporting currencies other than the US
Dollar are translated into US Dollars as follows:
- Assets and liabilities at rates of exchange ruling at period end; and
- Income, expenditure and cash flow items at average exchange rates.
This report is available on the Sappi website www.sappi.com
Other interested parties can obtain printed copies of this report from:
South Africa:
Computershare Investor
Services 2004 Limited
70 Marshall Street
Johannesburg 2001
PO Box 61051
Marshalltown 2107
Tel +27 (0)11 370 5000
United States
ADR Depository:
The Bank of New York
Investor Relations
PO Box 11258
Church Street Station
New York, NY 10286-1258
Tel +1 610 382 7836
United Kingdom:
Capita Registrars
The Registry
34 Beckenham Road
Beckenham, Kent
BR3 4TU, DX 91750
Beckenham West
Tel +44 (0)208 639 2157
Date: 03/08/2006 09:00:16 AM Supplied by www.sharenet.co.za
Produced by the JSE SENS Department
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