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SAPPI LIMITED - Second quarter results for the period ended March 2015

Release Date: 14/05/2015 09:00
Code(s): SAP     PDF:  
Wrap Text
Second quarter results for the period ended March 2015

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

SECOND QUARTER RESULTS
for the period ended March 2015

2nd 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.

*Sales by source

North America           26%
Europe                  50%
Southern Africa         24%

*Sales by product

Coated paper            59%   
Uncoated paper           6%
Speciality paper        10%
Commodity paper          7%
Dissolving wood pulp    16%
Paper pulp               1% 
Other                    1%

*Sales by destination

North America           23%
Europe                  42%
Southern Africa         12%
Asia and other          23%

**Net operating assets

North America           29%      
Europe                  36%
Southern Africa         35%

*   for the period ended March 2015
**  as at March 2015

Highlights for the quarter

- Profit for the period US$56 million (Q2 2014 US$32 million)

- EPS excluding special items 11 US cents (Q2 2014 5 US cents)

- EBITDA excluding special items US$170 million (Q2 2014 US$171 million)

- Net debt US$1,916 million (Q2 2014 US$2,248 million)

- Successful refinancing of 2018 and 2019 bonds

                                                    Quarter ended               Half-year ended   
                                       Mar 2015        Mar 2014   Dec 2014    Mar 2015   Mar 2014   
Key figures: (US$ million)                                                                          
Sales                                     1,338           1,573      1,377       2,715      3,072   
Operating profit excluding                                                                          
special items(1)                            104              95         74         178        155   
Special items – (gains) losses(2)          (68)             (4)          5        (63)       (14)   
EBITDA excluding special items(1)           170             171        145         315        318   
Profit for the period                        56              32         24          80         50   
Basic earnings per share (US cents)          11               6          5          15         10   
Net debt(3)                               1,916           2,248      2,040       1,916      2,248   
Key ratios: (%)                                                                                     
Operating profit excluding special                                                                  
items to sales                              7.8             6.0        5.4         6.6        5.0   
Operating profit excluding special                                                                  
items to capital employed (ROCE)(4)        13.5            11.0        9.7        11.8        9.1   
EBITDA excluding special items                                                                      
to sales                                   12.7            10.9       10.5        11.6       10.4   
Return on average equity (ROE)(4)          20.4            11.3        9.1        14.7        8.7   
Net debt to total capitalisation(4)        62.8            66.2       65.8        62.8       66.2   
Net asset value per share (US cents)        216             219        202         216        219   

(1)  Refer to note 10 to the group results for the reconciliation of EBITDA excluding special items and operating profit
     excluding special items to segment operating profit, and profit for the period.
(2)  Refer to note 10 to the group results for details on special items.
(3)  Refer to supplemental information for the reconciliation of net debt to interest-bearing borrowings.
(4)  Refer to supplemental information for the definition of the term.

Commentary on the quarter
Operating performance in the quarter was in line with our expectations and the equivalent quarter last
year. The group generated EBITDA, excluding special items, of US$170 million, operating profit excluding
special items of US$104 million and profit for the period of US$56 million.

The Specialised Cellulose business continued to generate solid returns during the quarter, with EBITDA,
excluding special items, of US$65 million. US Dollar prices for dissolving wood pulp declined compared to
the prior quarter due to excess market supply as well as low prices and margins in the viscose staple fibre
sector. However, the weaker Rand/Dollar exchange rate enabled the South African mills to maintain Rand
pricing and margins.

The European business increased profitability but its performance was impacted adversely by higher
costs of raw materials due to the weaker Euro/US Dollar exchange rate and particularly weak demand in
January. Export paper prices benefited from the weaker Euro.

The North American business was boosted by higher coated paper prices and returned to an operating
profit in the quarter. This improvement was achieved despite severe weather in the northeast of the United
States, which impacted both logistics and production at the Somerset Mill.

The paper business in South Africa improved operating performance further in this quarter, with increased
sales volumes and prices offsetting increased variable costs.

During the quarter we repaid our 2018 and 2019 bonds through the issue of a new EUR450 million seven-
year bond, with a coupon of 3.375%, and through a drawing from the European revolving credit facility.
That facility was also renewed and increased to EUR465 million (previously EUR350 million).

Earnings per share for the quarter were 11 US cents, compared with 6 US cents (including a gain of 1 US
cent in respect of special items) in the equivalent quarter last year.

Special items for the quarter included a gain of US$57 million resulting from the transfer of the Sappi Dutch
pension fund to a general fund and a positive plantation fair value pricing adjustment of US$18 million for
the South African plantations. These benefits were offset by once-off finance charges of US$63 million
relating to the refinancing of the 2018 and 2019 bonds. The finance charges included breakage fees,
accelerated amortisation of costs and unwinding of an interest rate swap. The cash impact of the
refinancing was a negative US$53 million.

Cash flow and debt
Net cash generation for the quarter of US$82 million was lower than the net cash generated of US$132
million in the equivalent quarter last year as a result of lower working capital inflows due to inventory
increases during the period. Capital expenditure in the quarter was US$46 million and mainly related to
maintenance and efficiency projects.

Net debt of US$1,916 million declined by US$124 million from the prior quarter, as a result of the cash generated
from operations, lower working capital and favourable exchange rates on the translation of our debt.

Liquidity comprises cash on hand of US$399 million and US$480 million from the committed revolving
credit facilities in South Africa and Europe.

Operating review for the quarter                                                
Europe                                                                                                 
                                             Quarter     Quarter     Quarter     Quarter     Quarter   
                                               ended       ended       ended       ended       ended   
                                            Mar 2015    Dec 2014   Sept 2014    Jun 2014    Mar 2014   
                                         EUR million EUR million EUR million EUR million EUR million   
Sales                                            590         547         561         543         603   
Operating profit excluding special items          24          12          26          12          14   
Operating profit excluding special items                                                               
to sales (%)                                     4.1         2.2         4.6         2.2         2.3   
EBITDA excluding special items                    54          42          58          39          48   
EBITDA excluding special items                                                                         
to sales (%)                                     9.2         7.7        10.3         7.2         8.0   
RONOA pa (%)                                     8.0         4.0         8.6         4.0         4.6   

Compared to the equivalent quarter last year, the European business benefited from higher average coated
woodfree sales prices, lower fixed costs post the disposal of the Nijmegen Mill last year and the transfer
of the Sappi Dutch pension fund. Demand was particularly weak in January and there were declines in
domestic prices for graphic paper during the quarter.

Paper export prices and margins are benefiting from the weaker Euro/US Dollar exchange rate, which to
date, has largely offset the associated increase in variable costs, particularly for paper pulp, arising from the
currency move. Logistics costs increased due to increased export sales and increased freight rates.

The specialities business recorded price and volume gains compared to both the prior quarter and the
equivalent quarter last year as we further optimise the business post the conversion at Alfeld. In addition,
we recently launched a trial of a new folding boxboard product at our Maastricht Mill to expand our
packaging offering further.

North America                                                                                             
                                        Quarter       Quarter       Quarter       Quarter       Quarter   
                                          ended         ended         ended         ended         ended   
                                       Mar 2015      Dec 2014     Sept 2014      Jun 2014      Mar 2014   
                                    US$ million   US$ million   US$ million   US$ million   US$ million   
Sales                                       342           353           390           380           382   
Operating profit (loss) excluding                                                                         
special items                                 7           (4)            25           (9)             5   
Operating profit (loss) excluding                                                                         
special items to sales (%)                  2.0         (1.1)           6.4         (2.4)           1.3   
EBITDA excluding special items               26            15            43            10            22   
EBITDA excluding special items                                                                            
to sales (%)                                7.6           4.2          11.0           2.6           5.8   
RONOA pa (%)                                2.7         (1.6)           9.8         (3.5)           1.9   

The North American business returned to profitability following the extended outage at the Somerset Mill
in the prior quarter, benefiting from higher coated prices, improved coated sales mix and lower variable
costs. The northeast United States experienced historically severe weather conditions during the quarter,
negatively affecting productivity and the transport of goods.

Dissolving wood pulp sales volumes were lower than both the prior quarter and the equivalent quarter last
year as we maximised own-make fibre production for the paper machines at Cloquet in order to improve
profitability.

The release business continued to be impacted by weaker than expected sales in the coated fabrics
segment in China, and the weaker Euro/US Dollar exchange rate negatively impacted US Dollar pricing for
sales into Europe.

Variable costs compared to both the prior quarter and prior year were lower, with lower chemical and
energy prices offsetting high wood costs. Lower fibre costs, from own-make Cloquet pulp production,
have also contributed favourably to the result.

Southern Africa                                                                                            
                                         Quarter       Quarter       Quarter       Quarter       Quarter   
                                           ended         ended         ended         ended         ended   
                                        Mar 2015      Dec 2014     Sept 2014      Jun 2014      Mar 2014   
                                     ZAR million   ZAR million   ZAR million   ZAR million   ZAR million   
Sales                                      3,817         3,812         3,972         3,781         3,942   
Operating profit excluding                                                                                 
special items                                772           706           634           653           765   
Operating profit excluding special                                                                         
items to sales (%)                          20.2          18.5          16.0          17.3          19.4   
EBITDA excluding special items               947           863           827           810           897   
EBITDA excluding special items                                                                             
to sales (%)                                24.8          22.6          20.8          21.4          22.8   
RONOA pa (%)                                20.4          19.1          16.7          16.2          18.6   

The Southern African business continued to deliver strong earnings. The exchange rate gains on export
sales and fixed cost savings contributed positively to the improvement.

Dissolving wood pulp sales volumes were impacted negatively by 7,000 tons for the quarter as a result of
the boiler tube leak at the Ngodwana Mill in December. Dissolving wood pulp pricing was supported by the
weaker exchange rate, with pricing in Rand higher than the prior quarter and the corresponding quarter
last year, despite lower US Dollar prices.

The South African paper business continued to progress with increased volumes, pricing and lower
logistics and fixed costs more than offsetting increased variable costs. Strong fruit export sales which have
benefited from the weaker Rand are boosting demand for our virgin fibre packaging grades.

Outlook
Graphic paper markets, particularly for coated mechanical, remain difficult and continued cost pressure
from higher paper pulp and wood prices are placing margins under pressure. Lower oil and energy costs
are providing some relief. Coated woodfree paper price increases in the US market have widened the
gap with European pricing levels; however, no significant increase in imports into the US market has been
experienced to date.

Textile prices, particularly for those of cotton and viscose, appear to have stabilised over the past few
months, after a long period of decline. Dissolving wood pulp prices have followed a similar trend. We
remain well positioned to meet the changing market needs. The weaker Rand/US Dollar exchange rate will
support the profitability of this business.

Capital expenditure in 2015 is expected to be approximately US$280 million and is focused largely on
maintenance projects and efficiency improvement investments at our Kirkniemi and Gratkorn mills.

We estimate that, post the refinancing of our 2018 and 2019 bonds, reduction in debt and movements in
currencies, net finance costs will be approximately US$110 million per annum. At current exchange rates,
we expect to reduce net debt levels further by year-end.

The third quarter is seasonally weaker in both North America and Europe. The pulp mill upgrade at
Gratkorn and regular annual maintenance shuts in all three regions will negatively impact the results of the
third quarter by approximately US$21 million when compared to the equivalent quarter last year.

We expect operating performance for the year will be broadly similar to 2014 despite a number of
significant once-off impacts from various capital projects. At current exchange rates, the
translation of Euro and Rand results to US Dollar may have an impact on group results. Nevertheless,
earnings per share excluding special items are expected to be substantially better than that of the prior year.

On behalf of the board

S R Binnie                                 G T Pearce                                  14 May 2015
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 a 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 and other
  strategic initiatives 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

                                                  Reviewed       Reviewed        Reviewed       Reviewed
                                                   Quarter        Quarter       Half-year      Half-year
                                                     ended          ended           ended          ended
                                                  Mar 2015       Mar 2014        Mar 2015       Mar 2014
                                          Note US$ million    US$ million     US$ million    US$ million

Sales                                                1,338          1,573           2,715          3,072
Cost of sales                                        1,138          1,380           2,362          2,719
Gross profit                                           200            193             353            353
Selling, general and administrative
expenses                                                84             95             168            189
Other operating (income) expenses                     (53)              1            (51)            (1)
Share of profit from equity investments                (3)            (2)             (5)            (4)
Operating profit                             2         172             99             241            169
Net finance costs                                       97             48             134             96
 Net interest expense                                   86             49             126             97
 Net foreign exchange gain                             (4)            (2)             (6)            (3)
 Net fair value loss on financial
 instruments                                            15              1              14              2
Profit before taxation                                  75             51             107             73
Taxation                                                19             19              27             23
Profit for the period                                   56             32              80             50
Basic earnings per share 
(US cents)                                              11              6              15             10
Weighted average number of shares
in issue (millions)                                  525.7          522.5           525.1          522.1
Diluted earnings per share
(US cents)                                              11              6              15             10
Weighted average number of shares
on fully diluted basis (millions)                    531.5          525.6           530.4          524.8

Condensed group statement of comprehensive income

                                                  Reviewed       Reviewed        Reviewed       Reviewed
                                                   Quarter        Quarter       Half-year      Half-year
                                                     ended          ended           ended          ended
                                                  Mar 2015       Mar 2014        Mar 2015       Mar 2014
                                               US$ million    US$ million     US$ million    US$ million
   
Profit for the period                                   56             32              80             50
Other comprehensive (loss) income,   
net of tax   
 Items that will not be reclassified   
 subsequently to profit or loss                       (10)              –            (10)              –
 Actuarial losses on post-employment   
 benefit funds                                        (10)              –            (10)              –
 Tax effect of above item                                –              –               –              –
 Items that must be reclassified   
 subsequently to profit or loss                         26           (10)              14           (52)
 Exchange differences on translation of   
 foreign operations                                     28            (5)              20           (59)
 Movements in hedging reserves                         (3)            (6)             (7)              7
 Movement on available for sale financial   
 assets                                                  –              1               –              –
 Tax effect of above items                               1              –               1              –
Total comprehensive income (loss)   
for the period                                          72             22              84            (2)

Condensed group balance sheet
                  
                                                                                 Reviewed       Reviewed
                                                                                 Mar 2015      Sept 2014
                                                                              US$ million    US$ million
                   
ASSETS                   
Non-current assets                                                                  3,286          3,505
 Property, plant and equipment                                                      2,591          2,841
 Plantations                                                                          422            430
 Deferred tax assets                                                                  138            138
 Other non-current assets                                                             135             96
Current assets                                                                      1,705          1,960
 Inventories                                                                          682            687
 Trade and other receivables                                                          614            731
 Taxation receivable                                                                   10             14
 Cash and cash equivalents                                                            399            528
Total assets                                                                        4,991          5,465
EQUITY AND LIABILITIES                   
Shareholders' equity                   
 Ordinary shareholders' interest                                                    1,135          1,044
Non-current liabilities                                                             2,795          3,198
 Interest-bearing borrowings                                                        2,086          2,311
 Deferred tax liabilities                                                             265            272
 Other non-current liabilities                                                        444            615
Current liabilities                                                                 1,061          1,223
 Interest-bearing borrowings                                                          229            163
 Other current liabilities                                                            801          1,035
 Taxation payable                                                                      31             25
Total equity and liabilities                                                        4,991          5,465
Number of shares in issue at balance sheet date (millions)                          525.9          524.2

Condensed group statement of cash flows

                                                  Reviewed       Reviewed        Reviewed       Reviewed
                                                   Quarter        Quarter       Half-year      Half-year
                                                     ended          ended           ended          ended
                                                  Mar 2015       Mar 2014        Mar 2015       Mar 2014
                                               US$ million    US$ million     US$ million    US$ million
Profit for the period                                   56             32              80             50
Adjustment for:
  Depreciation, fellings and amortisation               80             90             165            192
  Taxation                                              19             19              27             23
  Net finance costs                                     97             48             134             96
  Defined post-employment benefits paid               (17)           (21)            (31)           (38)
  Plantation fair value adjustments                   (34)           (23)            (52)           (49)
  Net restructuring provisions                           2              2               3              3
  Non-cash employee benefit liability settlement      (70)              –            (70)              –
  Other non-cash items                                   3              5              17             11
Cash generated from operations                         136            152             273            288
Movement in working capital                             23             59           (113)           (90)
Net finance costs paid                                (38)           (30)            (90)           (86)
Taxation (paid) refunded                               (1)              4             (4)              3
Cash generated from operating activities               120            185              66            115
Cash utilised in investing activities                 (38)           (53)           (105)          (116)
  Capital expenditure                                 (46)           (62)           (114)          (133)
  Net proceeds on disposal of assets
  and businesses                                         –              6               –             12
  Other movements                                        8              3               9              5
Net cash generated (utilised)                           82            132            (39)            (1)
Cash effects of financing activities                    28            (4)            (33)           (47)
Net movement in cash and cash 
equivalents                                            110            128            (72)           (48)
Cash and cash equivalents at beginning 
of period                                              329            178             528            352
Translation effects                                   (40)              1            (57)              3
Cash and cash equivalents at end of period             399            307             399            307

Condensed group statement of changes in equity
                                                                                 Reviewed       Reviewed
                                                                                Half-year      Half-year
                                                                                    ended          ended
                                                                                 Mar 2015       Mar 2014
                                                                              US$ million    US$ million
Balance – beginning of period                                                       1,044          1,144
Total comprehensive income (loss) for the period                                       84            (2)
Transfers from the share purchase trust                                                 9              5
Transfers of vested share options                                                     (6)            (5)
Share-based payment reserve                                                             4              4
Balance – end of period                                                             1,135          1,146

Notes to the condensed group results
1.   Basis of preparation
     The condensed consolidated interim financial statements for the quarter and half-year ended
     March 2015 have been prepared in accordance with the Listings Requirements of the JSE Limited,
     International Financial Reporting Standard, IAS 34 Interim Financial Reporting, the SAICA Financial
     Reporting Guides as issued by the Accounting Practices Committee and Financial Pronouncements
     as issued by Financial Reporting Standards Council and the requirements of the Companies Act of
     South Africa. The accounting policies applied in the preparation of these interim financial statements
     are in terms of International Financial Reporting Standards and are consistent with those applied in
     the previous annual financial statements.

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

     The interim financial statements for the quarter and half-year ended March 2015 have been reviewed in accordance 
     with the International Standard on Review Engagements 2410 by the group's auditors, Deloitte & Touche. 
     Their unmodified review report is available for inspection at the company's registered office. 
     The auditor's report does not necessarily report on all of the information contained in this 
     announcement/financial results. Shareholders are therefore advised that in order to obtain a full 
     understanding of the nature of the auditor's engagement they should obtain a copy of the auditor's 
     report together with the accompanying financial information from the issuer's registered office. 
     Any reference to future financial performance included in this announcement, has not been reviewed 
     or reported on by the company's auditors.

                                                       Reviewed      Reviewed        Reviewed      Reviewed
                                                        Quarter       Quarter       Half-year     Half-year
                                                          ended         ended           ended         ended
                                                       Mar 2015      Mar 2014        Mar 2015      Mar 2014
                                                    US$ million   US$ million     US$ million   US$ million

2.   Operating profit
     Included in operating profit are the
     following items:
     Depreciation and amortisation                           66            76             137           163
     Fair value adjustment on plantations
     (included in cost of sales)
        Changes in volume
         Fellings                                            14            14              28            29
         Growth                                            (16)          (18)            (33)          (36)
                                                            (2)           (4)             (5)           (7)
        Plantation price fair value adjustment             (18)           (5)            (19)          (13)
                                                           (20)           (9)            (24)          (20)
     Net restructuring provisions raised                      2             2               3             3
     Profit on disposal of property, plant and
     equipment                                                –             –               –           (1)
     Profit on disposal of assets held for sale               –           (1)               –           (1)
     Asset impairment reversals                               –           (1)               –           (3)
     Employee benefit liability settlement                 (70)            –             (70)             –
     Black Economic Empowerment charge                        1             1               1             1

3.   Headline earnings per share
     Headline earnings per share (US cents)                  11             6              15             9
     Weighted average number of shares in 
     issue (millions)                                     525.7         522.5           525.1         522.1
     Diluted headline earnings per share 
     (US cents)                                              11             6              15             9
     Weighted average number of shares on 
     fully diluted basis (millions)                       531.5         525.6           530.4         524.8
     Calculation of headline earnings 
       Profit for the period                                 56            32              80            50
       Asset impairment reversals                             –           (1)               –           (3)
       Profit on disposal of property, 
       plant and equipment                                    –             –               –           (1)
       Profit on disposal of assets held for sale             –           (1)               –           (1)
       Tax effect of above items                              –             –               –             –
     Headline earnings                                       56            30              80            45

                                                                                     Reviewed      Reviewed
                                                                                     Mar 2015     Sept 2014
                                                                                  US$ million   US$ million
                                             
4.   Capital commitments                                             
      Contracted                                                                           93           104
      Approved but not contracted                                                         107           126
                                                                                          200           230
                                              
5.   Contingent liabilities                                              
      Guarantees and suretyships                                                           12            23
      Other contingent liabilities                                                         16            26
                                                                                           28            49

6.   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      Reviewed
                                                                                    Half-year          Year
                                                                                        ended         ended
                                                                                     Mar 2015     Sept 2014
                                                                                  US$ million   US$ million
                                 
     Fair value of plantations at beginning of year                                       430           464
     Gains arising from growth                                                             33            65
     In-field inventory                                                                   (2)           (1)
     Gain arising from fair value price changes                                            19             7
     Harvesting – agriculture produce (fellings)                                         (28)          (57)
     Translation difference                                                              (30)          (48)
     Fair value of plantations at end of period                                           422           430

7.   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)
                                                        Reviewed         Reviewed     
                                        Fair value      Mar 2015        Sept 2014
                                        hierarchy    US$ million      US$ million
     
     Available for sale assets          Level 1                9               10
     Derivative financial assets        Level 2               59               13
     Derivative financial liabilities   Level 2                6               59

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

8.   Material balance sheet movements
     Since the 2014 financial year-end, the ZAR and Euro have weakened by approximately 7% and 14%
     respectively to the US Dollar, the group's presentation currency, resulting in a similar decrease of the
     group's assets and liabilities held in the aforementioned functional currencies on translation to the
     presentation currency.

     Trade and other receivables, cash and cash equivalents and other current liabilities
     The decrease in cash and cash equivalents is largely attributable to working capital movements.

     Interest-bearing borrowings
     In March 2015, the group placed an aggregate principal amount of US$490 million (EUR450 million)
     senior secured notes due 2022 at a coupon of 3.375% per annum. In addition, the group increased
     its US$381 million (EUR350 million) to revolving credit facility to US$506 million (EUR465 million) and
     extended the maturity date to March 2020. The proceeds of the new notes together with cash
     on hand and drawings of US$109 million (EUR100 million) under the US$506 million (EUR465 million) 
     revolving credit facility were used to early redeem Sappi's US$272 million (EUR250 million) senior secured 
     notes due 2018 and the US$300 million senior secured notes due 2019. As a result of the early redemption, 
     once-off charges of US$63 million were recorded in net finance costs (of which US$10 million was non-cash) 
     which includes the pre-arranged call premiums on early redemption of the notes and the unwinding of an
     interest rate currency swap.

     Other non-current liabilities
     During the quarter the group transferred one of its European defined pension funds to an industry-
     wide pension fund which resulted in a net liability derecognition of US$64 million (EUR59 million).

9.   Post-balance sheet event
     The remaining US$37 million (ZAR450 million) of our US$62 million (ZAR750 million) public bond due
     April 2015 were redeemed on maturity from existing cash resources.
     The outstanding US$7 million (ZAR90 million) vendor loan note arising on the disposal of Usutu Forest
     Products Company Limited to Montigny Investments Limited in June 2014 was received.

10.  Segment information
                                                    Quarter        Quarter       Half-year      Half-year
                                                      ended          ended           ended          ended
                                                   Mar 2015       Mar 2014        Mar 2015       Mar 2014
                                                Metric tons    Metric tons     Metric tons    Metric tons
                                                    (000's)        (000's)         (000's)        (000's)
   
     Sales volume  
     North America                                      321            369             654            717
     Europe                                             828            873           1,603          1,709
     Southern Africa –          Pulp and paper          424            427             850            830
                                Forestry                233            317             461            574
     Total                                            1,806          1,986           3,568          3,830
     Which consists of:   
      Specialised cellulose                             267            295             567            581
      Paper                                           1,306          1,374           2,540          2,675
      Forestry                                          233            317             461            574
     
                                                   Reviewed       Reviewed        Reviewed       Reviewed
                                                    Quarter        Quarter       Half-year      Half-year
                                                      ended          ended           ended          ended
                                                   Mar 2015       Mar 2014        Mar 2015       Mar 2014
                                                US$ million    US$ million     US$ million    US$ million
     
     Sales
     North America                                      342            382             695            747
     Europe                                             670            827           1,354          1,617
     Southern Africa –         Pulp and paper           312            346             637            673
                               Forestry                  14             18              29             35
     Total                                            1,338          1,573           2,715          3,072
     Which consists of:  
      Specialised cellulose                             205            250             448            497
      Paper                                           1,119          1,305           2,238          2,540
      Forestry                                           14             18              29             35
     
     Operating profit excluding  
     special items  
     North America                                        7              5               3              2
     Europe                                              28             19              43             23
     Southern Africa                                     66             71             129            127
      Unallocated and eliminations(1)                     3              –               3              3
     Total                                              104             95             178            155
     Which consists of:  
      Specialised cellulose                              53             71             109            126
      Paper                                              48             24              66             26
        Unallocated and eliminations(1)                   3              –               3              3
     
     Special items – (gains) losses
     North America                                        –              –               –            (1)
     Europe                                            (56)              1            (55)              1
     Southern Africa                                   (19)            (4)            (15)           (14)
      Unallocated and eliminations(1)                     7            (1)               7              –
     Total                                             (68)            (4)            (63)           (14)
     
     Segment operating profit (loss)
     North America                                        7              5               3              3
     Europe                                              84             18              98             22
     Southern Africa                                     85             75             144            141
      Unallocated and eliminations(1)                   (4)              1             (4)              3
     Total                                              172             99             241            169
     
     EBITDA excluding special items           
     North America                                       26             22              41             39
     Europe                                              61             66             114            118
     Southern Africa                                     81             83             158            158
      Unallocated and eliminations (1)                    2              –               2              3
     Total                                              170            171             315            318
     Which consists of:               
      Specialised cellulose                              65             82             135            156
      Paper                                             103             89             178            159
        Unallocated and eliminations(1)                   2              –               2              3
      
     (1)     Includes the group's treasury operations and our insurance captive.
     
     Reconciliation of EBITDA excluding special items and operating profit excluding special
     items to segment operating profit and profit for the period
     Special items cover those items which management believe are material by nature or amount to the
     operating results and require separate disclosure.
     
                                                   Reviewed       Reviewed        Reviewed       Reviewed
                                                    Quarter        Quarter       Half-year      Half-year
                                                      ended          ended           ended          ended
                                                   Mar 2015       Mar 2014        Mar 2015       Mar 2014
                                                US$ million    US$ million     US$ million    US$ million
     
     EBITDA excluding special items                     170            171             315            318
      Depreciation and amortisation                    (66)           (76)           (137)          (163)
     Operating profit excluding
     special items                                      104             95             178            155
      Special items – gains (losses)                     68              4              63             14
        Plantation price fair value adjustment           18              5              19             13
        Net restructuring provisions raised             (2)            (2)             (3)            (3)
        Profit on disposal of property, plant
        and equipment                                     –              –               –              1
        Profit on disposal of assets held
        for sale                                          –              1               –              1
        Asset impairment reversals                        –              1               –              3
        Employee benefit liability settlement            57              –              57              –
        Black Economic Empowerment charge               (1)            (1)             (1)            (1)
        Fire, flood, storm and other events             (4)              –             (9)            –
     
     Segment operating profit                           172             99             241            169
      Net finance costs                                (97)           (48)           (134)           (96)
     Profit before taxation                              75             51             107             73
      Taxation                                         (19)           (19)            (27)           (23)
     Profit for the period                               56             32              80             50
     
                                                                                  Reviewed       Reviewed
                                                                                  Mar 2015       Mar 2014
                                                                               US$ million    US$ million
     
     Segment assets
     North America                                                                   1,049          1,063
     Europe                                                                          1,278          1,620
     Southern Africa                                                                 1,262          1,546
       Unallocated and eliminations(1)                                                  33           (32)
     Total                                                                           3,622          4,197
     Reconciliation of segment assets to total assets 
     Segment assets                                                                  3,622          4,197
       Deferred taxation                                                               138             94
       Cash and cash equivalents                                                       399            307
       Other current liabilities                                                       801            998
       Taxation payable                                                                 31              8
       Liabilities associated with assets held for sale                                  –              3
     Total assets                                                                    4,991          5,607
     
     (1)     Includes the group's treasury operations and our insurance captive.

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 charge – represents the IFRS 2 non-cash charge associated with the
BEE transaction implemented in fiscal 2010 in terms of Black Economic Empowerment (BEE) legislation in
South Africa

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

EPS excluding special items – earnings per share excluding special items and certain once-off finance
and tax 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 remeasurements.
It is not necessarily a measure of sustainable earnings. It is a Listings Requirement of the JSE Limited to
disclose headline earnings per share

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 overdrafts (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 tax assets 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                                                              
                                                     Quarter      Quarter     Half-year     Half-year   
                                                       ended        ended         ended         ended   
                                                    Mar 2015     Mar 2014      Mar 2015      Mar 2014   
Key figures: (ZAR million)                                                                              
Sales                                                 15,686       17,058        31,101        32,237   
Operating profit excluding special items(1)            1,219        1,030         2,039         1,627   
Special items – gains(1)                               (797)         (43)         (722)         (147)   
EBITDA excluding special items(1)                      1,993        1,854         3,608         3,337   
Profit for the period                                    657          347           916           525   
Basic earnings per share (SA cents)                      125           66           174           101   
Net debt(1)                                           23,078       23,775        23,078        23,775   
Key ratios: (%)                                                                                         
Operating profit excluding special items      
to sales                                                 7.8          6.0           6.6           5.0   
Operating profit excluding special items                                                                
to capital employed (ROCE)(1)                           13.4         11.3          11.6           9.3   
EBITDA excluding special items to sales                 12.7         10.9          11.6          10.4   
Return on average equity (ROE)(1)                       20.3         11.6          14.4           8.9   
Net debt to total capitalisation(1)                     62.8         66.2          62.8          66.2   

(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                               
                                                                               Mar 2015     Sept 2014   
                                                                            US$ million   US$ million   
Interest-bearing borrowings                                                       2,315         2,474   
 Non-current interest-bearing borrowings                                          2,086         2,311   
 Current interest-bearing borrowings                                                229           163   
Cash and cash equivalents                                                         (399)         (528)   
Net debt                                                                          1,916         1,946   

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

Exchange rates
                                                          Mar       Dec      Sept       Jun       Mar
                                                         2015      2014      2014      2014      2014

Exchange rates:
Period end rate: US$1 = ZAR                           12.0450   11.6001   11.2285   10.5890   10.5760
Average rate for the Quarter: US$1 = ZAR              11.7236   11.2122   10.7456   10.5340   10.8443
Average rate for the YTD: US$1 = ZAR                  11.4552   11.2122   10.5655   10.5072   10.4938
Period end rate: EUR1 = US$                            1.0889    1.2177    1.2685    1.3649    1.3753
Average rate for the Quarter: EUR1 = US$               1.1316    1.2504    1.3280    1.3717    1.3705
Average rate for the YTD: EUR1 = US$                   1.1910    1.2504    1.3577    1.3676    1.3656

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:
Computershare Investor
Services Proprietary Limited
70 Marshall Street
Johannesburg 2001
PO Box 61051
Marshalltown 2107
Tel +27 (0)11 370 5000

United States:
ADR Depositary:
The Bank of New York Mellon
Investor Relations
PO Box 11258
Church Street Station
New York, NY 10286-1258
Tel +1 610 382 7836

JSE Sponsor:
UBS South Africa (Pty) Ltd

This report is available on the
Sappi website: www.sappi.com

www.sappi.com
Tel +27 (0)11 407 8111
48 Ameshoff Street
Braamfontein
Johannesburg
SOUTH AFRICA
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