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SAPPI LIMITED - Third quarter results for the period ended June 2014

Release Date: 31/07/2014 09:00
Code(s): SAP     PDF:  
Wrap Text
Third quarter results for the period ended June 2014

Sappi
(Registration number 1936/008963/06)
Issuer Code: SAVVI
JSE Code: SAP
ISIN: ZAE000006284

Third Quarter
results for the
period ended
June 2014

3rd quarter results

Sappi works closely with
customers, both direct
and indirect, in over 100
countries to provide
them with relevant and
sustainable paper, paper-
pulp and dissolving wood
pulp products and related
services and innovations.

Our market-leading range of
paper products includes: coated
fine papers used by printers,
publishers and corporate
end-users in the production of
books, brochures, magazines,
catalogues, direct mail and
many other print applications;
casting release papers used by
suppliers to the fashion, textiles,
automobile and household
industries; and in our Southern
African region, newsprint,
uncoated graphic and business
papers, premium-quality
packaging papers, paper-grade
pulp and dissolving wood pulp.

Our dissolving wood pulp
products are used worldwide
by converters to create
viscose fibre, acetate tow,
pharmaceutical products as well
as a wide range of consumer
products.

The pulp needed for our
products is either produced
within Sappi or bought from
accredited suppliers. Across the
group, Sappi is close to 'pulp
neutral', meaning that we sell
almost as much pulp as we buy.

We are the market leader in specialised cellulose used widely in the
Viscose Staple Fibre (VSF) segment. We are ideally positioned to take
advantage of increased demand.

Highlights for the quarter

- Continued year-on-year improvement in quarterly performance

- Usutu and Nijmegen Mill transactions completed

- Specialised Cellulose business remains sold out

- EPS 3 US cents (Q3 2013 loss of 9 US cents)

- EBITDA excluding special items USD140 million (Q3 2013 USD88 million)

- Net debt USD2,286 million (Q3 2013 USD2,331 million)

                                               Quarter ended              Nine months ended
                                                 Restated(1)                            Restated(1)
                                       Jun 2014     Jun 2013    Mar 2014    Jun 2014       Jun 2013
Key figures: (USD million)  
Sales                                    1,484         1,417       1,573       4,556          4,395
Operating profit excluding special
items(2)                                    67             5          95         222            113
Special items – (gains) losses(3)          (2)            19         (4)        (16)           (16)
EBITDA excluding special items(2)          140            88         171         458            373
Profit (loss) for the period                17          (47)          32          67           (33)
Basic earnings (loss) per share
(US cents)                                   3           (9)           6          13            (6)
Net debt(4)                              2,286         2,331       2,248       2,286          2,331
Key ratios: (%)
Operating profit excluding special
items to sales                             4.5           0.4         6.0         4.9            2.6
Operating profit excluding special
items to capital employed (ROCE)(5)        7.8           0.5        11.0         8.7            4.2
EBITDA excluding special items
to sales                                   9.4           6.2        10.9        10.1            8.5
Return on average equity (ROE)(5)          5.9        (13.5)        11.3         7.8          (3.1)
Net debt to total capitalisation(5)       66.3          63.5        66.2        66.3           63.5
Net asset value per share (US cents)       222           257         219         222            257

(1) Restated for the adoption of IAS 19 (Revised) Employee Benefits and IFRS 10 Consolidated Financial Statements. Refer to
    note 2 to the group results for more detail.
(2) Refer to note 11 to the group results for the reconciliation of EBITDA excluding special items and operating profit excluding
    special items to segment operating profit (loss), and profit (loss) for the period.
(3) Refer to note 11 to the group results for details on special items.
(4) Refer to supplemental information for the reconciliation of net debt to interest-bearing borrowings.
(5) Refer to supplemental information for the definition of the term.

Commentary on the quarter

The group continued the trend of improving year-on-year performance, with EBITDA excluding special
items of USD140 million, operating profit excluding special items of USD67 million and profit for the period
of USD17 million.

The European business had a solid quarter in a seasonally slow period, with lower variable and fixed costs
arising from cost cutting initiatives offsetting weaker graphic paper prices. Demand for coated woodfree
paper was stable, but coated mechanical paper continues to be weak.

The North American business was impacted by a number of planned and unplanned outages at the
pulp mills, as well as a continuation of the weak pricing in the coated paper markets. Price increases for
coated woodfree web paper were announced during the quarter and this will bring some relief to a difficult
market in the fourth financial quarter.

The Southern African paper business improved on the prior quarter performance due to lower fixed costs
whilst variable costs were negatively impacted by the weaker Rand.

The Specialised Cellulose business had a reasonable quarter, impacted by the planned annual
maintenance shut at the Cloquet Mill. As expected, dissolving wood pulp prices experienced increased
downward pressure due to weaker viscose staple fibre prices. Strong shipment volumes contributed
towards an EBITDA excluding special items of USD70 million.

Finance costs of USD42 million were slightly below those of the restated equivalent period last year.

Earnings per share for the quarter were 3 US cents (including a gain of 1 US cent in respect of special
items), compared to a loss of 9 US cents (including a charge of 3 US cents in respect of special items)
in the restated equivalent quarter last year.

Cash flow and debt

Net cash utilised in the quarter was USD44 million, compared to net cash utilised of USD157 million in
the equivalent quarter last year. The decrease in cash utilisation was mainly as a result of reduced capital
expenditure and an improved operating performance. Capital expenditure in the quarter declined to
USD57 million compared to USD174 million a year ago, reflecting the completion of the expenditure on the
dissolving wood pulp projects.

Net debt of USD2,286 million increased by USD38 million compared to the prior quarter, mainly as a result
of increased working capital. Proceeds from the sale of the Usutu assets for ZAR1 billion were received
after quarter-end and will be utilised to reduce debt.

Liquidity comprises cash on hand of USD248 million and USD572 million available from the undrawn
committed credit facilities in South Africa and Europe.

Operating review for the quarter

Europe

                                                                Restated(1)   Restated(1)
                             Quarter      Quarter      Quarter      Quarter       Quarter
                               ended        ended        ended        ended         ended
                            Jun 2014     Mar 2014     Dec 2013    Sept 2013      Jun 2013
                           EUR million    EUR million    EUR million    EUR million     EUR million
Sales                            543          603          581          591           574
Operating profit (loss)
excluding special items           12           14            3          (9)          (12)
Operating profit (loss)
excluding special items
to sales (%)                     2.2          2.3          0.5        (1.5)         (2.1)
EBITDA excluding special
items                             39           48           38           27            24
EBITDA excluding special
items to sales (%)               7.2          8.0          6.5          4.6           4.2
RONOA pa (%)                     4.0          4.6          1.0        (2.8)         (3.5)

(1) The group adopted IAS 19 (Revised) Employee Benefits for the year ended September 2014. Refer to note 2 to the group results for
    more detail.

During this seasonally slow quarter, albeit stronger than expected, overall sales volumes were
approximately 2% lower year-on-year, with growth in speciality paper volumes and stable coated
woodfree volumes. The coated mechanical market remains weak, both domestically and globally.

Average net sales prices in Euro were lower across all products compared to the equivalent quarter in
the prior year, but were flat compared to the prior quarter. Savings in variable, fixed and logistics costs
enabled the business to improve the year-on-year performance despite the lower sales prices. The
weaker profitability compared to the prior quarter is largely due to seasonally lower sales volumes.

An agreement was reached to dispose of the Nijmegen Mill to an affiliate of the American Industrial
Acquisition Corporation (AIAC) on 16 June 2014. The mill will now manufacture packaging paper and will
no longer be engaged in the coated graphic paper business beyond a six-month transition arrangement
for 52,000 tonnes.

North America
                                                                       Restated(1)    Restated(1)
                               Quarter        Quarter       Quarter        Quarter        Quarter
                                 ended          ended         ended          ended          ended
                              Jun 2014       Mar 2014      Dec 2013      Sept 2013       Jun 2013
                           USD million    USD million   USD million    USD million    USD million
 Sales                             380            382           365            366            324
 Operating (loss) profit
 excluding special items           (9)              5           (3)             27            (2)
 Operating (loss) profit
 excluding special items
 to sales (%)                    (2.4)            1.3         (0.8)            7.4          (0.6)
 EBITDA excluding special
 items                             10              22            17             47             16
 EBITDA excluding special
 items to sales (%)               2.6             5.8           4.7           12.8            4.9
 RONOA pa (%)                   (3.5)             1.9         (1.2)           10.4          (0.8)

(1) The group adopted IAS 19 (Revised) Employee Benefits for the year ended September 2014. Refer to note 2 to the group results for
    more detail.

The graphic paper markets continued to be characterised by weak pricing during the quarter, whilst our
volumes were flat year-on-year. Price increases for web products were announced during the quarter and
should improve our results going forward.

Dissolving wood pulp profitability was negatively impacted by the planned annual maintenance shut at
Cloquet as well as higher logistics costs incurred during the quarter.

The specialities business is experiencing improved sales to Europe, which is offsetting weaker Chinese
markets.

Variable costs were higher than those of the equivalent quarter a year ago as a result of higher wood and
paper pulp costs, but also as a result of some unscheduled outages at both the Cloquet and Somerset
pulp mills.

During the quarter, a reorganisation plan was announced that has resulted in the reduction of
approximately 50 salaried positions and 60 hourly paid positions across the region.

Southern Africa
                                                         Restated(1)  Restated(1)  Restated(1)
                                 Quarter       Quarter       Quarter      Quarter      Quarter
                                   ended         ended         ended        ended        ended
                                Jun 2014      Mar 2014      Dec 2013    Sept 2013     Jun 2013
                             ZAR million   ZAR million   ZAR million  ZAR million  ZAR million
 Sales                             3,781         3,942         3,488        3,779        3,255
 Operating profit excluding
 special items                       653           765           568          509          192
 Operating profit excluding
 special items to sales (%)         17.3          19.4          16.3         13.5          5.9
 EBITDA excluding special
 items                               810           897           761          709          364
 EBITDA excluding special
 items to sales (%)                 21.4          22.8          21.8         18.8         11.2
 RONOA pa (%)                       16.2          18.6          14.1         12.8          4.8

(1) The group adopted IAS 19 (Revised) Employee Benefits and IFRS 10 Consolidated Financial Statements for the year ended
    September 2014. Refer to note 2 to the group results for more detail.

The performance of the Southern African business improved compared to the equivalent quarter last year;
a quarter impacted by the conversion to dissolving wood pulp at Ngodwana. The increased dissolving
wood pulp sales from Ngodwana, higher average Rand pricing for dissolving wood pulp and improved
profitability from the paper packaging business all contributed to the improvement.

Compared to the prior quarter, lower average Rand pricing as well as increased variable costs were
responsible for the reduction in profitability.

Variable costs, particularly for wood and pulp, were negatively impacted by the weaker Rand while fixed
costs were in line with last year following cost containment actions.

Directorate

As previously announced on 30 June 2014, Ralph Boëttger relinquished his position as CEO and
Director due to a serious illness. As of 01 July 2014, Steve Binnie, previously the CFO, has succeeded
Mr Boëttger as CEO. Glen Pearce, previously CFO of Sappi Europe, has succeeded Mr Binnie as CFO
and has joined the Sappi Limited board of directors as an Executive Director.

Outlook

The stronger than expected coated woodfree paper market, coupled with excellent ongoing cost control
and focus, has led to steady progress in the European business, an important cash contributor to the
group. Two important capital projects at Gratkorn and Kirkniemi are underway, allowing us to make further
headway in improving the financial performance of this business.

The North American business has experienced an extremely difficult year with cost and price pressures
in graphic paper, inclement weather and some operational challenges. There are early signs that the
graphic paper business will see improved returns with good volumes and higher pricing going forward.
Management focus on cost and operations will aid further improvement.

The South African paper packaging business continues to benefit from healthy demand due to a good
fruit export season.

Due to the competitive nature of the dissolving wood pulp market and weak viscose staple fibre pricing,
we are experiencing continued pressure on our prices. However, demand remains strong and our mills are
essentially sold out for the remainder of the year.

Capital expenditure for the full year is expected to remain below USD300 million and with the proceeds of
the Usutu sale and positive cash generation expected in the fourth quarter, we anticipate net debt to end
the year close to USD2 billion.

The fourth quarter is a seasonally stronger quarter and we believe that the results for the quarter
will continue the trend of improved year-on-year quarterly performance which we have experienced
throughout 2014.

On behalf of the board


S R Binnie                                  G Pearce                                    31 July 2014
Director                                    Director

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. The words "believe", "anticipate",
"expect", "intend", "estimate", "plan", "assume", "positioned", "will", "may", "should", "risk" and other
similar expressions, which are predictions of or indicate future events and future trends and which do not
relate to historical matters, and may be used to identify forward-looking statements. You should not rely
on forward-looking statements because they involve known and unknown risks, uncertainties and other
factors which are in some cases beyond our control and may cause our actual results, performance or
achievements to differ materially from anticipated future results, performance or achievements expressed
or implied by such forward-looking statements (and from past results, performance or achievements).
Certain factors that may cause such differences 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);

-  the impact on our business of the global economic downturn;

-  unanticipated production disruptions (including as a result of planned or unexpected power outages);

-  changes in environmental, tax and other laws and regulations;

-  adverse changes in the markets for our products;

-  the emergence of new technologies and changes in consumer trends including increased preferences
   for digital media;

-  consequences of our leverage, including as a result of adverse changes in credit markets that affect
   our ability to raise capital when needed;

-  adverse changes in the political situation and economy in the countries in which we operate or the
   effect of governmental efforts to address present or future economic or social problems;

-  the impact of restructurings, investments, acquisitions, dispositions and other strategic initiatives
   (including related financing), any delays, unexpected costs or other problems experienced in
   connection with dispositions or with integrating acquisitions or implementing restructuring or strategic
   initiatives (including our announced dissolving wood pulp conversion projects), and achieving expected
   savings and synergies; and

-  currency fluctuations.

We undertake 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.

Condensed group income statement

                                                                                           Restated
                                                              Restated          Nine           Nine
                                                Quarter        Quarter        months         months
                                                  ended          ended         ended          ended
                                               Jun 2014       Jun 2013      Jun 2014       Jun 2013
                                      Note  USD million    USD million   USD million    USD million
Sales                                             1,484          1,417         4,556          4,395
Cost of sales                                     1,325          1,330         4,044          3,908
Gross profit                                        159             87           512            487
Selling, general and administrative
expenses                                             94             95           283            290
Other operating (income) expenses                   (2)             8            (3)             73
Share of profit from equity
investments                                         (2)            (2)           (6)            (5)
Operating profit (loss)                 3            69           (14)           238            129
Net finance costs                                    42             47           138            139
  Net interest expense                               43             47           140            139
  Net foreign exchange (gain) loss                  (1)              1           (4)              1
  Net fair value (gain) loss on
  financial instruments                               –            (1)             2            (1)
Profit (loss) before taxation                        27           (61)           100           (10)
Taxation                                             10           (14)            33             23
Profit (loss) for the period                         17           (47)            67           (33)
Basic earnings (loss) per share
(US cents)                                            3            (9)            13            (6)
Weighted average number of
shares in issue (millions)                        522.6          521.5         522.3          521.3
Diluted earnings (loss) per share
(US cents)                                            3            (9)            13            (6)
Weighted average number of
shares on fully diluted basis
(millions)                                        526.7          521.5         525.6          521.3

Condensed group statement of comprehensive income

                                                              Restated                     Restated
                                                Quarter        Quarter          Nine           Nine
                                                  ended          ended        months         months
                                               Jun 2014       Jun 2013      Jun 2014       Jun 2013
                                            USD million    USD million   USD million    USD million
Profit (loss) for the period                         17           (47)            67           (33)
Other comprehensive income loss,
net of tax
 Items that will not be reclassified
 subsequently to profit or loss                       –             19             –             29
 Actuarial gains on post-employmen
 benefit funds                                        –             28             –             43
 Tax effect of above item                             –            (9)             –           (14)
 Items that must be reclassified
 subsequently to profit or loss                     (4)           (78)          (56)          (190)
 Exchange differences on translation
 of foreign operations                                2           (76)          (57)          (184)
 Movements in hedging reserves                      (4)              1             3            (4)
 Movement on available for sale
 financial assets                                   (2)              –           (2)             –
 Tax effect of above items                            –            (3)             –            (2)
Total comprehensive income (loss)
for the period                                       13          (106)            11          (194)

Condensed group balance sheet

                                                                             Reviewed
                                                                             Restated
                                                               Jun 2014     Sept 2013
                                                            USD million   USD million
ASSETS
Non-current assets                                                3,625         3,787
 Property, plant and equipment                                    2,960         3,078
 Plantations                                                        455           464
 Deferred tax assets                                                 98            92
 Other non-current assets                                           112           153
Current assets                                                    1,868         1,940
 Inventories                                                        735           728
 Trade and other receivables                                        870           748
 Taxation receivable                                                 15            18
 Cash and cash equivalents                                          248           352
 Assets held for sale                                                 –            94
Total assets                                                      5,493         5,727
EQUITY AND LIABILITIES
Shareholders' equity
 Ordinary shareholders' interest                                  1,160         1,144
Non-current liabilities                                           3,205         3,371
 Interest-bearing borrowings                                      2,354         2,499
 Deferred tax liabilities                                           288           267
 Other non-current liabilities                                      563           605
Current liabilities                                               1,128         1,212
 Interest-bearing borrowings                                        180            99
 Overdrafts                                                           –             1
 Other current liabilities                                          931         1,094
 Taxation payable                                                    17            12
 Liabilities associated with assets held for sale                     –             6
Total equity and liabilities                                      5,493         5,727
Number of shares in issue at balance sheet date (millions)        522.7         521.5

Condensed group statement of cash flows
                                                                                       Restated
                                                             Restated         Nine         Nine
                                                 Quarter      Quarter       months       months
                                                   ended        ended        ended        ended
                                                Jan 2014     Jun 2013     Jun 2014     Jun 2013
                                             USD million  USD million  USD million  USD million
 Profit (loss) for the period                         17         (47)           67         (33)
 Adjustment for:
   Depreciation, fellings and amortisation            89          100          281          310
   Taxation                                           10         (14)           33           23
   Net finance costs                                  42           47          138          139
   Defined post-employment benefits paid            (19)         (22)         (57)         (54)
   Plantation fair value adjustments                (21)         (10)         (70)        (151)
   Asset (impairment reversals) impairments            –          (1)          (3)           46
   Net restructuring provisions and loss on
   disposal of assets and businesses                 (4)            2          (3)           15
   Other non-cash items                                4            6           20           31
 Cash generated from operations                      118           61          406          326
 Movement in working capital                        (29)            8        (119)        (128)
 Net finance costs paid                             (50)         (57)        (136)        (144)
 Taxation paid                                       (4)          (2)          (1)         (15)
 Cash generated from operating
 activities                                           35           10          150           39
 Cash utilised in investing activities              (79)        (167)        (195)        (397)
   Capital expenditure                              (57)        (174)        (190)        (449)
   Cash flows on disposal of assets and
   businesses                                       (22)            7         (10)           50
   Other movements                                     –            –            5            2
 Net cash utilised                                  (44)        (157)         (45)        (358)
 Cash effects of financing activities               (13)          (7)         (60)         (42)
 Net movement in cash and cash
 equivalents                                        (57)        (164)        (105)        (400)
 Cash and cash equivalents at beginning
 of period                                           307          361          352          604
 Translation effects                                 (2)            5            1          (2)
 Cash and cash equivalents at end
 of period                                           248          202          248          202

Condensed group statement of changes in equity
                                                                                       Restated
                                                                              Nine         Nine
                                                                            months       months
                                                                             ended        ended
                                                                          Jun 2014     Jun 2013
                                                                       USD million  USD million
 Balance – beginning of period                                               1,144        1,525
 Total comprehensive income (loss) for the period                               11        (194)
 Share-based payment reserve                                                     5            9
 Balance – end of period                                                     1,160        1,340

Notes to the condensed group results

1.  Basis of preparation
    The condensed consolidated interim financial results for the nine months ended June 2014 have been
    prepared in accordance with the Listings Requirements of the JSE Limited, the framework concepts
    and the measurement and recognition requirements of International Financial Reporting Standards
    and the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and,
    the Financial Reporting Pronouncements as issued by Financial Reporting Standards Council and
    must contain the information required by IAS 34, Interim Financial Reporting. The accounting policies
    applied in the preparation of these interim financial statements are consistent with those applied in the
    previous annual financial statements, other than for the adoption of IFRS 10 Consolidated Financial
    Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities, IFRS 13
    Fair Value Measurement, IAS 19 (Revised) Employee Benefits, IAS 27 Separate Financial Statements,
    IAS 28 Investments in Associates and Joint Ventures and various other improvements. The adoption
    of these accounting standards did not have a material impact on the group results other than as
    described in note 2 below.

    The preparation of this condensed consolidated interim financial information was supervised by the
    Chief Financial Officer, G Pearce CA(SA).

    The results are unaudited.

2. Restatement
   Adoption of IAS 19 (Revised) Employee Benefits
   This standard, which is required to be applied retrospectively, was adopted by the group for the year
   ended September 2014. As a result of the change, the group now determines the net interest expense
   (income) for the period by applying the discount rate used to measure the defined benefit obligation at
   the beginning of the annual period, adjusted for any changes as a result of contributions and benefit
   payments, to the net defined benefit liability (asset). Previously, the group determined interest income on
   plan assets based on the assets long-term rate of expected return. The group also reclassified the net
   interest expense (income) from operating profit (loss) to finance costs as an accounting policy choice.

   The impact on profit or loss and other comprehensive loss for the quarter ended June 2013 is as
   follows:

                                                             As
                                                        previously
                                                          reported     Adjustment       Restated
                                                       USD million    USD million    USD million
   Condensed group income statement
   Cost of sales                                             1,327              3          1,330
   Net finance costs                                            42              5             47
   Taxation                                                   (11)            (3)           (14)
   Loss for the period                                        (42)            (5)           (47)
   Earnings per share
   Basic loss per share (US cents)                             (8)            (1)            (9)
   Diluted loss per share (US cents)                           (8)            (1)            (9)
   Condensed group statement of comprehensive
   income
     Items that will not be reclassified subsequently
     to profit or loss                                          14              5             19
     Actuarial gains on post-employment benefit funds           20              8             28
     Tax effect of above item                                  (6)            (3)            (9)
   
   The impact on profit or loss and other comprehensive loss for the reviewed nine months ended
   June 2013 is as follows:
                                                                 As
                                                         previously
                                                           reported    Adjustment        Restated
                                                        USD million   USD million     USD million
  Condensed group income statement
  Cost of sales                                               3,900             8           3,908
  Net finance costs                                             124            15             139
  Taxation                                                       31           (8)              23
  Loss for the period                                          (18)          (15)            (33)
  Earnings per share
  Basic loss per share (US cents)                               (3)           (3)             (6)
  Diluted loss per share (US cents)                             (3)           (3)             (6)
  Condensed group statement of comprehensive
  income
    Items that will not be reclassified subsequently
    to profit or loss                                            14            15              29
    Actuarial gains on post-employment benefit funds             20            23              43
    Tax effect of above item                                    (6)           (8)            (14)

  Adoption of IFRS 10 Consolidated Financial Statements
  
  IFRS 10 provides a single consolidation model that identifies control as the basis for consolidation
  for all types of entities. An investor controls an investee when the investor is exposed or has rights
  to variable returns from its involvement with the investee and has the ability to affect those returns
  through its power over the investee.
  
  Additionally, specified assets or a portion of an investee that are considered to be a deemed separate
  entity should be consolidated provided that those assets are in substance ring-fenced from other
  creditors. Following a recent interpretation of a discussion paper issued by the Financial Services
  Board in South Africa (which states that, although the insurance industry is governed by contractual
  arrangements, cell captives are not legally ring-fenced in the event of liquidation), the group
  consequently deconsolidated its assets with its South African insurer.

  The impact of this change on the reviewed 2013 financial results is as follows:
 
                                                               As
                                                       previously
                                                         reported       Adjustment        Restated
                                                      USD million      USD million     USD million
  Condensed group balance sheet
  Other non-current assets                                    120               33             153
  Cash and cash equivalents                                   385             (33)             352
  Net debt                                                  2,214               33           2,247

  There is no impact on profit or loss and cash flows for the quarter and nine months ended June 2013.

3. Operating profit (loss)
                                                                                            Restated
                                                                  Restated         Nine         Nine
                                                      Quarter      Quarter       months       months
                                                        ended        ended        ended        ended
                                                     Jun 2014     Jun 2013     Jun 2014     Jun 2013
                                                  USD million  USD million  USD million  USD million
     Included in operating profit (loss) are the
     following non-cash items:
       Depreciation and amortisation                       73           83          236          260
       Fair value adjustment on plantations
       (included in cost of sales)
          Changes in volume
           Fellings                                        16           17           45           50
           Growth                                        (16)         (21)         (52)         (58)
                                                            –          (4)          (7)          (8)
        Plantation price fair value adjustment            (5)           11         (18)         (93)
                                                          (5)            7         (25)        (101)
     Included in other operating (income)
     expenses are the following:
         Net restructuring provisions and loss
         on disposal of assets and businesses             (4)            2          (3)          15
         Asset (impairment reversals)
         impairments                                        –          (1)          (3)          46
         Black Economic Empowerment
         charge                                             1            1            2           3

4. Headline earnings (loss) per share
   Headline earnings (loss) per share
   (US cents)                                              9          (9)           17          (1)
   Weighted average number of shares in 
   issue (millions)                                    522.6        521.5        522.3        521.3
   Diluted headline earnings (loss) per share 
   (US cents)                                              9          (9)           17          (1)
   Weighted average number of shares on 
   fully diluted basis (millions)                      526.7        521.5        525.6        521.3
   Calculation of headline earnings (loss) 
        Profit (loss) for the period                      17         (47)           67         (33)
        Asset (impairment reversals) 
        impairments                                        –          (1)          (3)           46
        Loss (profit) on disposal of assets and 
        businesses                                        27            –           25          (1)
        Tax effect of above items                          1            1            1         (15)
   Headline earnings (loss)                               45         (47)           90          (3)

5. Capital commitments
                                                                                            Reviewed
                                                                             Jun 2014      Sept 2013
                                                                          USD million    USD million
     Contracted                                                                   146             62
     Approved but not contracted                                                  142            195
                                                                                  288            257

6. Contingent liabilities
   Guarantees and suretyships                                                      30             33
   Other contingent liabilities                                                    19             11
                                                                                   49             44

7. Plantations
   Plantations are stated at fair value less estimated cost to sell at the harvesting stage. In arriving at
   plantation fair values, the key assumptions are estimated prices less cost of delivery, discount rates
   (pre-tax weighted average cost of capital), and volume and growth estimations.

   Expected future price trends and recent market transactions involving comparable plantations are also
   considered in estimating fair value. Mature timber that is expected to be felled within 12 months from
   the end of the reporting period are valued using unadjusted current market prices. Immature timber
   and mature timber that is to be felled in more than 12 months from the reporting date are valued using
   a 12 quarter rolling historical average price which, taking the length of the growth cycle of a plantation
   into account, is considered reasonable.

   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
                                                                               Jun 2014    Sept 2013
                                                                            USD million  USD million
     Fair value of plantations at beginning of year                                 464          555
     Additions                                                                        –            4
     Gains arising from growth                                                       50           79
     Fire, flood, storms and related events                                           –          (4)
     In-field inventory                                                             (1)            1
     Gain arising from fair value price changes                                       6           87
     Harvesting – agriculture produce (fellings)                                   (43)         (66)
     Transferred to assets held for sale                                              –         (93)
     Translation difference                                                        (21)         (99)
     Fair value of plantations at end of the period                                 455          464

   At September 2013, plantations amounting to USD86 million were disclosed as assets held for sale.
   In accordance with IAS 41 Agriculture, these plantations were carried at fair value. Before the disposal
   of the plantations in the current period, gains arising from growth amounted to USD2 million, the price
   fair value adjustment amounted to USD12 million and timber worth USD2 million was felled in these
   plantations.

8. Financial instruments
   The group's financial instruments that are measured at fair value on a recurring basis consist of cash
   and cash equivalents, derivative financial instuments and available for sale financial assets. 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)
                                                                                           Restated
                                                             Fair value      Jun 2014     Sept 2013
                                                             hierarchy    USD million   USD million
     Available for sale assets                                  Level 1            10            11
     Available for sale assets                                  Level 2             –            40
     Derivative financial assets                                Level 2            17            21
     Derivative financial liabilities                           Level 2           110           101

   (1)    The fair value of the financial instruments are equal to their carrying value.

   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 move of
   the interest rate curves, by the volatility of the applied credit spreads, and by any changes of 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 value of assets and liabilities (excluding plantations) which are held for sale, are
   considered to be below their net recoverable amount.

   The carrying amounts of other financial instruments which include accounts receivable, certain
   investments, accounts payable and current interest-bearing borrowings approximate their fair values.

9. Material balance sheet movements
   Property, plant and equipment
   The estimated useful life of the group's pulp mill equipment was extended from 20 to 30 years and, as
   such, the depreciation charge decreased by approximately USD15 million on a comparative basis for
   the nine months ended June 2014.

   Other non-current assets and other non-current liabilities
   A qualifying insurance asset was purchased in respect of the South African post-retirement medical
   aid liability using available non-current assets.

   Cash and cash equivalents, and other current liabilities
   Cash and cash equivalents decreased due to the payment of trade creditors, capital accruals related
   to our dissolving wood pulp projects and the utilisation of restructuring provisions. Restructuring
   provisions no longer required related to our Nijmegen mill was released following its disposal.

   Interest-bearing borrowings
   Interest-bearing borrowings decreased due to the repayment of certain loans in South Africa and a
   reduction in the usage of the group's offshore securitisation programme. Additionally, USD100 million
   was reclassified to short-term as it falls due within the next 12 months.

10. Sale of subsidiary Usutu Forests Products Company Limited
    The conditions precedent related to the group's announced sale in July 2013 of its' shares in Usutu
    Forest Products Company Limited as well as the shareholder loan claim against Usutu to Montigny
    Investments Limited were completed in June 2014. The total proceeds of USD98 million (ZAR1 billion)
    include a vendor loan note of USD9 million (ZAR90 million) which is repayable over 6 years at prime
    plus 2%. Proceeds of USD89 million were received in July 2014. The disposal group, which consisted
    mainly of plantations, was held within the group's South African operations. These assets were
    classified as held for sale. The vendor receivable is included in trade and other receivables.

11. Segment information
                                                                                    Nine          Nine
                                                    Quarter        Quarter        months        months
                                                      ended          ended         ended         ended
                                                   Jun 2014       Jun 2013      Jun 2014      Jun 2013
                                                Metric tons    Metric tons   Metric tons   Metric tons
                                                    (000's)        (000's)       (000's)       (000's)
    Sales volume
    North America                                       362            297         1,079           963
    Europe                                              783            796         2,492         2,527
    Southern Africa –           Pulp and paper          423            405         1,253         1,172
                                Forestry                275            309           849           888
    Total                                             1,843          1,807         5,673         5,550
    Which consists of:
     Specialised cellulose                              305            183           886           542
     Paper                                            1,263          1,315         3,938         4,120
     Forestry                                           275            309           849           888

                                                                                              Restated
                                                                  Restated          Nine          Nine
                                                    Quarter        Quarter        months        months
                                                      ended          ended         ended         ended
                                                   Jun 2014       Jun 2013      Jun 2014      Jun 2013
                                                USD million    USD million   USD million   USD million
    Sales
    North America                                       380            324         1,127         1,011
    Europe                                              745            749         2,362         2,372
    Southern Africa –           Pulp and paper          341            324         1,014           953
                                Forestry                 18             20            53            59
    Total                                             1,484          1,417         4,556         4,395
    Which consists of:
     Specialised cellulose                              258            157           755           458
     Paper                                            1,208          1,240         3,748         3,878
     Forestry                                            18             20            53            59

    Operating profit (loss) excluding
    special items
    North America                                       (9)            (2)           (7)            30
    Europe                                               16           (16)            39             4
    Southern Africa                                      62             20           189            72
     Unallocated and eliminations (1)                   (2)              3             1             7
    Total                                                67              5           222           113
    Which consists of:
     Specialised cellulose                               55             39           181           110
     Paper                                               14           (37)            40           (4)
      Unallocated and eliminations(1)                   (2)              3             1             7

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

                                                                                               Restated
                                                                  Restated          Nine           Nine
                                                    Quarter        Quarter        months         months
                                                      ended          ended         ended          ended
                                                   Jun 2014       Jun 2013      Jun 2014       Jun 2013
                                                USD million    USD million   USD million    USD million
 Special items – (gains) losses
 North America                                            3            (1)             2            (4)
 Europe                                                 (5)              3           (4)              7
 Southern Africa                                          –             14          (14)           (30)
  Unallocated and eliminations(1)                         –              3             –             11
 Total                                                  (2)             19          (16)           (16)
 Segment operating profit (loss)
 North America                                         (12)            (1)           (9)             34
 Europe                                                  21           (19)            43            (3)
 Southern Africa                                         62              6           203            102
  Unallocated and eliminations(1)                       (2)              –             1            (4)
 Total                                                   69           (14)           238            129

 EBITDA excluding special items
 North America                                           10             16            49             88
 Europe                                                  54             31           172            147
 Southern Africa                                         77             38           235            131
  Unallocated and eliminations(1)                       (1)              3             2              7
 Total                                                  140             88           458            373
 Which consists of:
  Specialised cellulose                                  70             51           226            139
  Paper                                                  71             34           230            227
   Unallocated and eliminations(1)                      (1)              3             2              7

 Segment assets
 North America                                        1,022          1,027         1,022          1,027
 Europe                                               1,703          1,793         1,703          1,793
 Southern Africa                                      1,505          1,641         1,505          1,641
  Unallocated and eliminations(1)                      (31)           (12)          (31)           (12)
 Total                                                4,199          4,449         4,199          4,449

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

Reconciliation of EBITDA excluding special items and operating profit excluding special
items to segment operating profit (loss) and profit (loss) for the period

Special items cover those items which management believe are material by nature or amount to the
operating results and require separate disclosure.
                                                                                               Restated
                                                                  Restated          Nine           Nine
                                                    Quarter        Quarter        months         months
                                                      ended          ended         ended          ended
                                                   Jun 2014       Jun 2013      Jun 2014       Jun 2013
                                                USD million    USD million   USD million    USD million
 EBITDA excluding special items                         140             88           458            373
   Depreciation and amortisation                       (73)           (83)         (236)          (260)
 Operating profit excluding special
 items                                                   67              5           222            113
   Special items – gains (losses)                         2           (19)            16             16
    Plantation price fair value
    adjustment                                            5           (11)            18             93
    Net restructuring provisions and
    loss on disposal of assets and
    businesses                                            4            (2)           (3)           (15)
    Asset impairment reversals 
    (impairments)                                         –              1             3           (46)
    Black Economic Empowerment
    charge                                              (1)            (1)           (2)            (3)
    Fire, flood, storm and related
    events                                              (6)            (6)           (6)           (13)
 Segment operating profit (loss)                         69           (14)           238            129
  Net finance costs                                    (42)           (47)         (138)          (139)
 Profit (loss) before taxation                           27           (61)           100           (10)
  Taxation                                             (10)            14           (33)           (23)
 Profit (loss) for the period                            17           (47)            67           (33)

 Reconciliation of segment assets
 to total assets
 Segment assets                                       4,199          4,449         4,199          4,449
   Deferred taxation                                     98            120            98            120
   Cash and cash equivalents(1)                         248            202           248            202
   Other current liabilities                            931            883           931            883
   Taxation payable                                      17             13            17             13
   Liabilities associated with assets
   held for sale                                          –              5             –              5
 Total assets                                         5,493          5,672         5,493          5,672

(1) The comparative period has been restated for the adoption of IFRS 10 Consolidated Financial Statements by an amount of
    USD34 million. Refer to note 2 for more detail.

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

Black Economic Empowerment – as envisaged in the Black Economic Empowerment (BEE) legislation
in South Africa

Black Economic Empowerment charge – represents the IFRS 2 non-cash charge associated with the
BEE transaction implemented in fiscal 2010

Fellings – the amount charged against the income statement representing the standing value of the
plantations harvested

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

SG&A – selling, general and administrative expenses

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; and
– 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

Capital employed – shareholders' equity plus net debt

EBITDA excluding special items – earnings before interest (net finance costs), taxation, depreciation,
amortisation and special items

Headline earnings – as defined in circular 2/2013, reissued by the South African Institute of Chartered
Accountants in December 2013, which separates from earnings all separately identifiable
re-measurements. It is not necessarily a measure of sustainable earnings. It is a Listings Requirement
of the JSE Limited to disclose headline earnings per share

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 bank overdraft (net of cash,
cash equivalents and short-term deposits)

Net debt to total capitalisation – net debt divided by capital employed

Net operating assets – total assets (excluding deferred taxation and cash) less current liabilities
(excluding interest-bearing borrowings and overdraft). Net operating assets equate to segment assets

ROCE – annualised return on average capital employed. Operating profit excluding special items divided
by average capital employed

ROE – annualised return on average equity. Profit for the period divided by average shareholders' equity

RONOA – return on average net operating assets. Operating profit excluding special items divided by
average segment assets

Special items – special items cover those items which management believe 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

Supplemental information (this information has not been audited or reviewed)

Summary Rand convenience translation
                                                                                         Restated
                                                               Restated         Nine         Nine
                                                  Quarter       Quarter       months       months
                                                    ended         ended        ended        ended
                                                 Jun 2014      Jun 2013     Jun 2014     Jun 2013
  Key figures: (ZAR million)
  Sales                                            15,632        13,427       47,871       39,715
  Operating profit excluding special items(1)         706            47        2,333        1,021
  Special items – (gains) losses(1)                  (21)           180        (168)        (145)
  EBITDA excluding special items(1)                 1,475           834        4,812        3,371
  Profit (loss) for the period                        179         (445)          704        (298)
  Basic earnings (loss) per share (SA cents)           34          (85)          135         (57)
  Net debt(1)                                      24,206        23,030       24,206       23,030
  Key ratios: (%)
  Operating profit excluding special items to
  sales                                               4.5           0.4          4.9          2.6
  Operating profit excluding special items to
  capital employed (ROCE)(1)                          7.8           0.5          8.8          4.1
  EBITDA excluding special items to sales             9.4           6.2         10.1          8.5
  Return on average equity (ROE)(1)                   5.9        (13.4)          7.9        (3.1)
  Net debt to total capitalisation(1)                66.3          63.5         66.3         63.5

(1) Refer to supplemental information for the definition of the term.
The above financial results have been translated into Rands from 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.

Reconciliation of net debt to interest-bearing borrowings
                                                                                     Restated(1)
                                                                       Jun 2014        Sept 2013
                                                                    USD million      USD million
  Interest-bearing borrowings                                             2,534            2,599
    Non-current interest-bearing borrowings                               2,354            2,499
    Current interest-bearing borrowings                                     180               99
    Overdrafts                                                                –                1
  Cash and cash equivalents                                               (248)            (352)
  Net debt                                                                2,286            2,247

(1) Restated for the adoption of IFRS 10 Consolidated Financial Statements. Refer to note 2 for more detail.

Exchange rates
                                                Jun       Mar       Dec      Sept      Jun
                                               2014      2014      2013      2013     2013
 Exchange rates:
 Period end rate: USD1 = ZAR                10.5890   10.5760   10.5300   10.0930   9.8800
 Average rate for the Quarter: USD1 = ZAR   10.5340   10.8443   10.1406    9.9931   9.4756
 Average rate for the YTD: USD1 = ZAR       10.5072   10.4938   10.1406    9.2779   9.0364
 Period end rate: EUR1 = USD                1.3649     1.3753    1.3742    1.3522   1.3010
 Average rate for the Quarter: EUR1 = USD   1.3717     1.3705    1.3607    1.3248   1.3060
 Average rate for the YTD: EUR1 = USD       1.3676     1.3656    1.3607    1.3121   1.3078

Notes:

Sappi has a
primary listing on
the JSE Limited
and a Level 1 ADR
programme that
trades in the over-
the-counter market
in the United States

South Africa:                        United States:
Computershare Investor               ADR Depositary:
Services (Proprietary) Limited       The Bank of New York Mellon
70 Marshall Street                   Investor Relations
Johannesburg 2001                    PO Box 11258                        
PO Box 61051                         Church Street Station               
Marshalltown 2107                    New York, NY 10286-1258             
Tel +27 (0)11 370 5000               Tel +1 610 382 7836

this report is available on the Sappi website
www.sappi.com

31 July 2014
JSE Sponsor: UBS South Africa (Pty) Ltd
Date: 31/07/2014 09:00:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE'). 
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