SAPPI LIMITED - Third quarter results for the period ended June 2018

Release Date: 13/08/2018 09:00
Code(s): SAP
 
Wrap Text
Third quarter results for the period ended June 2018

SAPPI LIMITED
Registration number: 1936/008963/06  
JSE code: SAP  
ISIN code: ZAE000006284 
Issuer code: SAVVI  

Investing in growth
Third quarter results for the period ended June 2018

3rd quarter results
Sappi is a global diversified woodfibre company focused on providing dissolving wood pulp, specialities and packaging
papers, printing and writing papers as well as biomaterials and biochemicals to our direct and indirect customer base
across more than 150 countries.

Our dissolving wood pulp (specialised cellulose) products are used worldwide mainly by converters to create viscose
fibre for fashionable clothing and textiles, as well as other consumer products; quality specialities and packaging papers
are used in the manufacture of such products as soup sachets, luxury carry bags, cosmetic and confectionery packaging,
boxes for agricultural products for export, tissue wadding for household tissue products and casting release papers used
by suppliers to the fashion, textiles, automobile and household industries; our market-leading range of printing and
writing papers are used by printers in the production of books, brochures, magazines, catalogues, direct mail and many
other print applications; biomaterials include nanocellulose, fibre composites and lignosulphonate; biochemicals include
second generation sugars.

The wood and pulp needed for our products are either produced within Sappi or bought from accredited suppliers. Sappi
sells almost as much as it buys.

Sales by source* 
North America           25%
Southern Africa         24%
Europe                  51%

Sales by destination*
North America           23%
Southern Africa         10%
Europe                  45%
Asia and other          22%

Sales by product*
Coated paper            56%
Uncoated paper           5%
Speciality paper        13%
Commodity paper          7%
Dissolving wood pulp    18%
Other                    1%

Net operating assets**
North America           28%
Southern Africa         34%
Europe                  38%

*  For the period ended June 2018.
** As at June 2018.


Highlights for the quarter
- EBITDA excluding special items US$155 million (Q3 2017: US$155 million)    
- Profit for the period US$51 million (Q3 2017: US$58 million)              
- EPS excluding special items 10 US cents (Q3 2017: 11 US cents)             
- Net debt US$1,603 million (Q3 2017: US$1,318 million)                      


                                                                Quarter ended                        Nine months ended
                                                    Jun 2018      Jun 2017     Mar 2018            Jun 2018       Jun 2017    
Key figures: (US$ million)                                                                                                    
Sales                                                  1,445         1,260        1,496               4,271          3,885    
Operating profit excluding special items(1)               85            93          142                 332            374    
Special items - loss (gain)(2)                             1             3          (12)                (22)            (1)    
EBITDA excluding special items(1)                        155           155          211                 538            564    
Profit for the period                                     51            58          102                 216            236    
Basic earnings per share (US cents)                        9            11           19                  40             44    
EPS excluding special items (US cents)(3)                 10            11           17                  41             44    
Net debt(3)                                            1,603         1,318        1,632               1,603          1,318    
Key ratios: (%)                                                                                                               
Operating profit excluding special items to sales        5.9           7.4          9.5                 7.8            9.6    
Operating profit excluding special items to capital                                                             
employed (ROCE)(3)                                       9.7          12.8         16.8                13.6           17.4    
EBITDA excluding special items to sales                 10.7          12.3         14.1                12.6           14.5    
Net debt to EBITDA excluding special items               2.1           1.7          2.2                 2.1            1.7    
Interest cover(3)                                       11.0           8.4         11.0                11.0            8.4    
Net asset value per share (US cents)(3)                  342           304          365                 342            304    
(1) Refer to note 2 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 2 to the group results for details on special items.
(3) Refer to supplemental information for the definition of the term.


Commentary on the quarter

Operating performance in the quarter was in line with previous guidance, and the group generated EBITDA excluding
special items of US$155 million. The strong performance of our European operations was offset by a number of non-recurring
operational and production issues in our South African and North American businesses. Profit for the period declined from
US$58 million to US$51 million due to an increased depreciation expense following the higher capital expenditure
activity.

Dissolving wood pulp (DWP) demand and pricing remained healthy, albeit that net sales pricing was slightly below that
of a year ago. During the quarter, all three of our DWP mills underwent scheduled maintenance shuts as well as some
additional debottlenecking. However, the shuts at Saiccor and Ngodwana both ran longer than planned and, combined with additional
production and commissioning issues on start-up, impacted production volumes by approximately 30,000 tons for the quarter. 

Demand for specialities and packaging papers continued to grow across the various product segments, with our production 
capacity being the limiting factor to sales in some markets. EBITDA margins declined slightly from the comparative quarter
last year, mainly as a result of the pricing for start-up volumes at Somerset and a lag in implementing selling price
increases in Europe to offset higher raw material cost. This lag is due to the contract terms of much of the specialities
business in Europe. The consolidated Cham Paper assets were included for the full quarter following their acquisition at
the end of February 2018.

An improvement in demand for coated mechanical paper in the European paper business and higher average graphic paper
prices led to improved profitability, offsetting increased variable costs, particularly paper pulp and a softer coated
woodfree market.

The North American graphic paper business continued to benefit from the tight market conditions, with increased sales
pricing. The conversion of Somerset PM1 to packaging grades overran to schedule and this negatively impacted sales
volumes of both graphic and packaging grades in the quarter as well as costs.
Higher packaging and paper sales volumes and prices in South Africa were unable to fully offset the impact of lower
DWP sales volumes and prices as well as the stronger Rand/Dollar exchange rate relative to a year ago.
Earnings per share excluding special items were 10 US cents, slightly lower than the 11 US cents generated in the
equivalent quarter last year.

Cash flow and debt
Net cash utilised was US$41 million, compared to the US$30 million generated in the equivalent quarter last year. The
cash utilisation was due to higher capital expenditure, offset by a decrease in working capital. Capital expenditure 
of US$188 million related mainly to the paper machine conversion at Somerset and debottlenecking of DWP production at 
the Ngodwana and Saiccor mills.

Cash taxes paid for the quarter were US$6 million, compared to net tax refunds of US$4 million in the comparative
period last year.

Despite the net cash utilised in the quarter, the net debt decreased by US$29 million from the prior quarter to
US$1,603 million as a result of the weaker Euro/Dollar and Rand/Dollar exchange rates which impacted the translation of Euro
and Rand denominated debt.

Liquidity comprised cash on hand of US$317 million and US$686 million available from the group's undrawn committed
revolving credit facilities.

Operating review for the quarter

Europe
                                                                               Quarter ended
€ million                                              Jun 2018    Mar 2018     Dec 2017   Sept 2017   Jun 2017    
Sales                                                       636         616          571         583        554    
Operating profit excluding special items                     31          37           31          35         23    
Operating profit excluding special items to sales (%)       4.9         6.0          5.4         6.0        4.2    
EBITDA excluding special items                               60          64           59          63         51    
EBITDA excluding special items to sales (%)                 9.4        10.4         10.3        10.8        9.2    
RONOA pa (%)                                                9.3        11.7         10.6        12.2        8.2    
                                                      

The overall performance of the European business in a seasonally slow quarter was strong, especially given the
variable cost pressures arising from higher paper pulp prices.

Graphic paper sales volumes were down marginally year-on-year, with strong coated mechanical paper sales offsetting
the declines in coated woodfree paper volumes. Demand for mechanical paper was driven by supply tightness in the wider
publishing paper segment, as well as higher coated woodfree reel prices. A series of coated woodfree paper price increases
led to average net selling prices that were up 7% year-on-year, with mechanical coated paper prices up 3% over the same
period. 

The Cham Paper integration progressed smoothly and the financial performance was ahead of the expectations at the time
of acquisition. Excluding the impact of additional volumes from Cham, sales volumes grew 9% in the speciality paper
business compared to the equivalent quarter last year. Sales price increases in this segment lagged cost increases due to
the duration of contracts typical in this market. 

Variable costs increased by 6% year-on-year, driven by significant increases in pulp prices. Lower latex and energy
costs mitigated the impact somewhat. Fixed costs were 8% higher due to a higher headcount post the Cham Paper acquisition
and additional maintenance expenses in the quarter.

North America
                                                                            Quarter ended
US$ million                                                  Jun 2018   Mar 2018   Dec 2017   Sept 2017   Jun 2017  
Sales                                                             339        363        342         357        314  
Operating profit (loss) excluding special items                     1         18         (1)         27         (2) 
Operating profit (loss) excluding special items to sales (%)      0.3        5.0       (0.3)        7.6       (0.6) 
EBITDA excluding special items                                     20         37         18          47         17  
EBITDA excluding special items to sales (%)                       5.9       10.2        5.3        13.2        5.4  
RONOA pa (%)                                                      0.4        6.8       (0.4)       10.7       (0.8) 

Profitability in the North American business improved marginally over the prior year, with gains in coated paper
pricing largely offset by increased variable costs, primarily purchased pulp, as well as higher fixed costs due in part to
the conversion work on Somerset PM1 which was completed during the quarter. In total, the conversion project negatively
impacted the quarter's result by US$8 million.

The US graphic paper market continued to be tightly supplied, and our average coated paper sales prices increased 12%
year-on-year. Sales volumes were 6% lower than the equivalent quarter last year as a result of the lost production from
Somerset PM1 and our strategic shift towards packaging. Inventory levels were low at quarter-end.

The Cloquet Mill increased DWP production, at the expense of paper pulp, in line with customer demand. The positive
impact of a 12% increase in DWP sales volume during the quarter was negated somewhat by higher average purchased pulp
costs. Average DWP sales prices were lower than the prior year.

The project to convert Somerset PM1 from purely graphics paper grades to both graphics and paperboard grades was
completed to design product specification; however, both capital cost and timing overran, which has resulted in delayed
qualification and first quality sales from the machine. The legacy specialities and packaging business experienced a good
quarter with increased sales volumes and pricing, particularly in the coated-one-side (C1S) category.

Variable costs were 10% higher year-on-year, driven mainly by purchased pulp and to a lesser extent the PM1 conversion
and ramp-up. Fixed costs were also impacted by the conversion project at Somerset, particularly those related to
personnel and maintenance. 

Southern Africa
                                                                                 Quarter ended
ZAR million                                               Jun 2018    Mar 2018   Dec 2017   Sept 2017   Jun 2017    
Sales                                                        4,383       4,548      4,291       4,879      4,432    
Operating profit excluding special items                       553         950        940       1,106        918    
Operating profit excluding special items to sales (%)         12.6        20.9       21.9        22.7       20.7    
EBITDA excluding special items                                 742       1,168      1,144       1,344      1,102    
EBITDA excluding special items to sales (%)                   16.9        25.7       26.7        27.5       24.9    
RONOA pa (%)                                                  11.9        20.9       21.3        26.0       21.5    

The Southern African results were impacted by a stronger Rand/Dollar exchange rate compared to a year ago and dissolving 
wood pulp sales volumes which were 3% below those of the equivalent quarter last year. Fixed costs were also higher 
due to scheduled annual maintenance which ran longer than planned at both Saiccor and Ngodwana.

DWP production and sales volumes were impacted by the extended maintenance shuts, which included various smaller
debottlenecking and equipment upgrade projects. Closing inventory levels of DWP were very low and will impact fourth 
quarter sales. Average US Dollar sales prices were 3% lower than the equivalent quarter last year, which along with a 
stronger Rand/Dollar exchange rate led to a 7% reduction in Rand pricing. 
 
The paper business had a solid quarter, with a slight improvement in sales volumes and higher selling prices
offsetting increased variable costs.

Variable costs, particularly wood, pulp and chemicals, increased year-on-year as did fixed costs. 

Outlook
The DWP market remains tightly supplied, with limited new capacity in the medium term. Market prices are expected to
remain stable at current levels given historically high paper pulp prices that are supporting DWP pricing and viscose
staple fibre prices that remain under pressure from new capacity entering the market. Fourth quarter average realised 
DWP prices should be in line with those of the third quarter.

Graphic paper operating rates in both Europe and North America remain healthy, and further price increases have been
implemented since quarter-end to mitigate higher input costs. The low graphic paper inventory levels in the North
American business will impact sales volumes in the fourth quarter.

Demand growth for most of the speciality and packaging grades we produce continues to be above long-term averages,
and, where applicable, price increases have been implemented to offset rising input costs. Trial runs of the packaging
grades on Somerset PM1 have continued, and the machine is producing to a high quality. We expect to start commercial 
sales of first quality paperboard in the fourth quarter. Following the completion of the conversion projects at 
Somerset and Maastricht mills during the year we anticipate significantly improved packaging sales volumes in the 
coming financial year.

Capital expenditure in the last quarter is expected to be approximately US$180 million. This includes expenditure in
preparation for the expansion at Saiccor, the completion of the DWP debottlenecking at Ngodwana and Saiccor, and
expenditure related to the Somerset PM1 conversion overrun. We currently estimate the additional cost at Somerset Mill 
to be in the order of US$35-50 million above the initial capital expenditure projection.
 
We expect to reduce net debt further in the coming quarter through positive cash generation, and based on current market 
conditions, including the current Rand/Dollar exchange rate, we expect the group's fourth quarter operating performance to 
be similar to that of last year, despite the lost production volumes in the third quarter and the resultant low inventory 
levels as described previously.

On behalf of the board

S R Binnie
Director

G T Pearce
Director

8 August 2018


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, identify forward-looking
statements. In addition, this document includes forward-looking statements relating to our potential exposure to various
types of market risks, such as interest rate risk, foreign exchange rate risk and commodity price risk. 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 adverse changes in global economic conditions;
- 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 restructurings or 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
                                                                   Quarter ended           Nine months ended
US$ million                                           Note    Jun 2018     Jun 2017      Jun 2018     Jun 2017    
Sales                                                            1,445        1,260         4,271        3,885    
Cost of sales                                                    1,270        1,089         3,635        3,265    
Gross profit                                                       175          171           636          620    
Selling, general and administrative expenses                        93           82           293          245    
Other operating expenses (income)                                   (2)           1            (8)           6    
Share of profit from equity investments                              -           (2)           (3)          (6)    
Operating profit                                         3          84           90           354          375    
Net finance costs                                                   18           16            54           65    
  Net interest expense                                              19           20            58           74    
  Interest capitalised                                              (1)           -            (2)           -    
  Net foreign exchange gain                                          -           (4)           (2)          (9)    
Profit before taxation                                              66           74           300          310    
Taxation                                                            15           16            84           74    
Profit for the period                                               51           58           216          236    
Basic earnings per share (US cents)                                  9           11            40           44    
Weighted average number of shares in                                                              
issue (millions)                                                 538.9        534.8         537.8        533.6    
Diluted earnings per share (US cents)                                9           11            39           43    
Weighted average number of shares on fully
diluted basis (millions)                                         550.0        550.1         549.5        547.3    


Condensed group statement of other comprehensive income
                                                                   Quarter ended            Nine months ended
US$ million                                                   Jun 2018     Jun 2017      Jun 2018     Jun 2017    
Profit for the period                                               51           58           216          236    
Other comprehensive income (loss), net of tax                                                                     
  Items that will not be reclassified subsequently                                                    
  to profit or loss                                                  -            -           (19)           -    
  Actuarial gains (losses) on post-employment benefit funds          -            -             -            -    
  Tax effect resulting from change in tax rates                      -            -           (19)           -    
  Items that must be reclassified subsequently to profit or loss  (180)          15           (31)          63    
  Exchange differences on translation of foreign operations       (168)           3           (27)          52    
  Movements in hedging reserves                                    (14)          12            (5)          11    
  Tax effect of above items                                          2            -             1            -    
Total comprehensive income (loss) for the period                  (129)          73           166          299    


Condensed group balance sheet
                                                      Note                  Audited 
US$ million                                                   Jun 2018    Sept 2017 
ASSETS                                                                              
Non-current assets                                               3,689        3,378 
  Property, plant and equipment                                  2,926        2,681 
  Plantations                                            5         481          458 
  Deferred tax assets                                               92          123 
  Goodwill and intangible assets                                    87           39 
  Equity-accounted investees                                        34           26 
  Other non-current assets                                          69           51 
Current assets                                                   1,778        1,869 
  Inventories                                                      735          636 
  Trade and other receivables                                      703          668 
  Derivative financial instruments                                   8            3 
  Taxation receivable                                               15           12 
  Cash and cash equivalents                                        317          550 
Total assets                                                     5,467        5,247 
EQUITY AND LIABILITIES                                                              
Shareholders' equity                                                                
  Ordinary shareholders' interest                                1,842        1,747 
Non-current liabilities                                          2,544        2,457 
  Interest-bearing borrowings                                    1,816        1,739 
  Deferred tax liabilities                                         306          295 
  Other non-current liabilities                                    422          423 
Current liabilities                                              1,081        1,043 
  Interest-bearing borrowings                                       98          133 
  Overdrafts                                                         6            - 
  Trade and other payables                                         916          858 
  Provisions                                                         4           10 
  Derivative financial instruments                                  11            5 
  Taxation payable                                                  46           37 
Total equity and liabilities                                     5,467        5,247 
Number of shares in issue at balance sheet date (millions)       539.1        535.0 


Condensed group statement of cash flows
                                                                     Quarter ended          Nine months ended
US$ million                                                   Jun 2018     Jun 2017      Jun 2018     Jun 2017    
Profit for the period                                               51           58           216          236    
Adjustment for:                                                                                                   
  Depreciation, fellings and amortisation                           87           76           255          239    
  Taxation                                                          15           16            84           74    
  Net finance costs                                                 18           16            54           65    
  Defined post-employment benefits paid                            (11)         (12)          (33)         (33)    
  Plantation fair value adjustments                                (25)         (17)          (82)         (59)    
  Asset impairment reversal                                         (3)           -            (3)           -    
  Net restructuring provisions                                       -            1            (2)           1    
  Profit (loss) on disposal of property, plant and equipment         1            -            (8)           -    
  Other non-cash items                                               8            1            16           21    
Cash generated from operations                                     141          139           497          544    
Movement in working capital                                         33           (7)          (85)        (130)    
Net finance costs paid                                             (21)         (20)          (42)         (61)    
Taxation paid                                                       (6)           4           (50)         (62)    
Dividend paid                                                        -            -           (81)         (59)    
Cash generated from operating activities                           147          116           239          232    
Cash utilised in investing activities                             (188)         (86)         (519)        (165)    
Capital expenditure                                               (188)         (78)         (395)        (160)    
Proceeds on disposal of assets                                       1            -            11            3    
Acquisition of subsidiary                                            -            -          (132)           -    
Other movements                                                     (1)          (8)           (3)          (8)    
Net cash (utilised) generated                                      (41)          30          (280)          67    
Cash effects of financing activities                               (71)        (314)           47         (330)    
Proceeds from interest-bearing borrowings                           (6)         131           116          136    
Repayment of interest-bearing borrowings                           (65)        (445)          (69)        (466)    
Net movement in cash and cash equivalents                         (112)        (284)         (233)        (263)    
Cash and cash equivalents at beginning of period                   459          703           550          703    
Translation effects                                                (30)          27             -            6    
Cash and cash equivalents at end of period                         317          446           317          446    


Condensed group statement of changes in equity
                                                                Nine months ended
US$ million                                                   Jun 2018     Jun 2017    
Balance - beginning of period                                    1,747        1,378    
Total comprehensive income for the period                          166          299    
Shareholders for dividend                                          (81)         (59)    
Transfers from the share purchase trust                              3            4    
Transfers of vested share options                                   (1)          (2)    
Share-based payment reserve                                          8            7    
Balance - end of period                                          1,842        1,627    


Notes to the condensed group results

1.  Basis of preparation
    The condensed consolidated interim financial statements for the quarter and nine months ended June 2018 
    are prepared in accordance with International Financial Reporting Standards, IAS 34 Interim Financial 
    Reporting, the SAICA Financial Reporting Guides as issued by the 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 these condensed consolidated interim financial statements was supervised by the Chief 
    Financial Officer, G T Pearce, CA(SA).

    The results are unaudited.

2.  Segment information
    The group's reportable segments comprise the geographic regions of North America, Europe and Southern 
    Africa and have remained unchanged from the prior year. The group has, however, changed the financial 
    information by major product category, as reviewed by the chief operating decision maker during the 
    quarter ended December 2017. Accordingly, the group has restated the financial information presented 
    by major product category for the quarter and nine months ended June 2017.

                                               Quarter ended          Nine months ended
    Metric tons (000's)                   Jun 2018     Jun 2017     Jun 2018    Jun 2017    
    Sales volume                                                                            
    North America                              318          316        1,008         998    
    Europe                                     833          795        2,502       2,501    
    Southern Africa - Pulp and paper           383          387        1,179       1,159    
                      Forestry                 380          306          882         812    
    Total                                    1,914        1,804        5,571       5,470    
    Which consists of:                                                                  
      Specialised cellulose                    277          275          866         859    
      Specialities and packaging papers        289          224          718         614    
      Printing and writing papers              968          999        3,105       3,185    
      Forestry                                 380          306          882         812    

    Segment information continued 
                                                              Quarter ended         Nine months ended
    US$ million                                        Jun 2018     Jun 2017     Jun 2018     Jun 2017    
    Sales                                                                                                 
    North America                                           339          314        1,044        1,003    
    Europe                                                  759          610        2,188        1,880    
    Southern Africa - Pulp and paper                        325          319          983          955    
                      Forestry                               22           17           56           47    
    Total                                                 1,445        1,260        4,271        3,885    
    Which consists of:                                                                                    
      Specialised cellulose                                 245          252          765          782    
      Specialities and packaging papers                     327          215          777          602    
      Printing and writing papers                           851          776        2,673        2,454    
      Forestry                                               22           17           56           47    
    Operating profit (loss) excluding special items                                                       
    North America                                             1           (2)          18           20    
    Europe                                                   37           25          119           99    
    Southern Africa                                          44           70          192          253    
      Unallocated and eliminations(1)                         3            -            3            2    
    Total                                                    85           93          332          374    
    Which consists of:                                                                                    
      Specialised cellulose                                  46           73          177          254    
      Specialities and packaging papers                      18           14           59           52    
      Printing and writing papers                            18            6           93           66    
        Unallocated and eliminations(1)                       3            -            3            2    
    Special items - (gains) losses                                                                        
    North America                                             1            -            3            -    
    Europe                                                   (2)           2           (1)           3    
    Southern Africa                                          (6)          (2)         (35)          (9)    
      Unallocated and eliminations(1)                         8            3           11            5    
    Total                                                     1            3          (22)          (1)    
    Segment operating profit (loss)                                                                       
    North America                                             -           (2)          15           20    
    Europe                                                   39           23          120           96    
    Southern Africa                                          50           72          227          262    
      Unallocated and eliminations(1)                        (5)          (3)          (8)          (3)    
    Total                                                    84           90          354          375    
    (1) Includes the group's treasury operations and our insurance captive.

    Segment information continued
                                                             Quarter ended         Nine months ended
    US$ million                                        Jun 2018     Jun 2017     Jun 2018     Jun 2017    
    EBITDA excluding special items                                 
    North America                                            20           17           75           79    
    Europe                                                   71           55          218          189    
    Southern Africa                                          59           84          240          294    
      Unallocated and eliminations(1)                         5           (1)           5            2    
    Total                                                   155          155          538          564    
    Which consists of:                                                                                
      Specialised cellulose                                  60           85          218          291    
      Specialities and packaging papers                      33           24           98           81    
      Printing and writing papers                            57           47          217          190    
        Unallocated and eliminations(1)                       5           (1)           5            2    
    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.

    EBITDA excluding special items                          155          155          538          564    
    Depreciation and amortisation                           (70)         (62)        (206)        (190)    
    Operating profit excluding special items                 85           93          332          374    
      Special items - gains (losses)                         (1)          (3)          22            1    
      Plantation price fair value adjustment                  8            2           30           14    
      Acquisition costs                                       -            -           (2)           -    
      Net restructuring provisions                            -           (1)           2           (1)    
      Profit on disposal and written off assets              (1)           -            8            -    
      Asset impairment reversal                               3            -            3            -    
      Black Economic Empowerment charge                       -            -           (1)          (1)    
      Fire, flood, storm and other events                   (11)          (4)         (18)         (11)    
    Segment operating profit                                 84           90          354          375    
      Net finance costs                                     (18)         (16)         (54)         (65)    
    Profit before taxation                                   66           74          300          310    
      Taxation                                              (15)         (16)         (84)         (74)    
    Profit for the period                                    51           58          216          236    
    (1) Includes the group's treasury operations and our insurance captive.

    Segment information continued
                                                            Nine months ended
    US$ million                                          Jun 2018    Jun 2017    
    Segment assets                                                               
    North America                                           1,141         997    
    Europe                                                  1,556       1,293    
    Southern Africa                                         1,380       1 300    
      Unallocated and eliminations(1)                           4           8    
    Total                                                   4,081       3,598    
    Reconciliation of segment assets to total assets                             
    Segment assets                                          4,081       3,598    
      Deferred taxation                                        92         153    
      Cash and cash equivalents                               317         446    
      Trade and other payables                                916         757    
      Provisions                                                4          10    
      Derivative financial instruments                         11           1    
      Taxation payable                                         46          53    
    Total assets                                            5,467       5,018    
    (1) Includes the group's treasury operations and our insurance captive.

3.  Operating profit
                                                                           Quarter ended           Nine months ended
    US$ million                                                        Jun 2018     Jun 2017     Jun 2018     Jun 2017    
    Included in operating profit are the following items:                                                                 
    Depreciation and amortisation                                            70           62          206          190    
    Fair value adjustment on plantations (included in cost of sales)                                                      
    Changes in volume                                                                                                     
      Fellings                                                               17           14           49           49    
      Growth                                                                (17)         (15)         (52)         (45)    
                                                                              -           (1)          (3)           4    
    Plantation price fair value adjustment                                   (8)          (2)         (30)         (14)    
                                                                             (8)          (3)         (33)         (10)    
    Net restructuring provisions                                              -            1            2            1    
    Profit on disposal of property, plant and equipment                      (1)           -            8            -    
    Asset impairment reversals                                                3            -            3            -    

4.  Earnings per share
                                                                            Quarter ended          Nine months ended
    US$ million                                                        Jun 2018     Jun 2017     Jun 2018     Jun 2017    
    Basic earnings per share (US cents)                                       9           11           40           44    
    Headline earnings per share (US cents)                                    9           11           38           44    
    EPS excluding special items (US cents)                                   10           11           41           44    
    Weighted average number of shares in issue (millions)                 538.9        534.8        537.8        533.6    
    Diluted earnings per share (US cents)                                     9           11           39           43    
    Diluted headline earnings per share (US cents)                            9           11           38           43    
    Weighted average number of shares on fully diluted basis (millions)   550.0        550.1        549.5        547.3    
    Calculation of headline earnings                                                                                      
      Profit for the period                                                  51           58          216          236    
      Profit on disposal of property, plant and equipment                     1            -           (8)           -    
      Asset impairment reversals                                             (3)           -           (3)           -    
      Tax effect of above items                                              (1)           -            2            -    
    Headline earnings                                                        48           58          207          236    
    Calculation of earnings excluding special items                                                                       
      Profit for the period                                                  51           58          216          236    
      Special items after tax                                                 1            2          (15)           -    
        Special items                                                         1            3          (22)          (1)    
        Tax effect                                                            -           (1)           7            1    
      Tax special items                                                       -            -           19            -    
    Earnings excluding special items                                         52           60          220          236    

5.  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), 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.

                                                                              Audited     
    US$ million                                                Jun 2018     Sept 2017    
    Fair value of plantations at beginning of year                  458           441    
    Gains arising from growth                                        52            58    
    Fire, flood, storm and other events                               -           (5)    
    In-field inventory                                              (3)             1    
    Gain arising from fair value price changes                       30            21    
    Harvesting - agriculture produce (fellings)                    (49)          (63)    
    Translation difference                                          (7)             5    
    Fair value of plantations at end of period                      481           458    

6.  Financial instruments
    The group's financial instruments that are measured at fair value on a recurring basis consist of derivative 
    financial instruments, available-for-sale financial assets and a contingent consideration liability. 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)
                                                Fair value                    Audited     
    US$ million                                  hierarchy     Jun 2018     Sept 2017    
    Investment funds(2)                            Level 1            7             7    
    Derivative financial assets                    Level 2            8             3    
    Derivative financial liabilities               Level 2           11             5    
    Contingent consideration liability(3)          Level 3           13            13    
    (1) The fair value of the financial instruments is equal to their carrying value.
    (2) Included in other non-current assets.
    (3) Included in other non-current liabilities and trade and other payables.

    There have been no transfers of financial assets or financial liabilities between the categories of the 
    fair value hierarchy.

    The fair value of all external over-the-counter derivatives is calculated based on the discount rate 
    adjustment technique. The discount rate used is derived from observable rates of return for comparable 
    assets or liabilities traded in the market. The credit risk of the external counterparty is incorporated 
    into the calculation of fair values of financial assets and own credit risk is incorporated in the 
    measurement of financial liabilities. The change in fair value is therefore impacted by the movement of 
    the interest rate curves, by the volatility of the applied credit spreads, and by any changes to the 
    credit profile of the involved parties.

    The contingent consideration is based on a multiple of targeted future earnings, of which a 92% weighted 
    average outcome has been projected.

    There are no financial assets and liabilities that have been remeasured to fair value on a non-recurring 
    basis.

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

7.  Capital commitments
                                                              Audited     
    US$ million                             Jun 2018        Sept 2017    
    Contracted                                   345              253    
    Approved but not contracted                  411              219    
                                                 756              472
    
8.  Contingent liabilities                                               
    Other contingent liabilities                  22               19    
                                                  22               19    
    
    Other contingent liabilities mainly relate to environmental and other taxation queries in respect of 
    certain group companies.
    
9.  Material balance sheet movements
    Inventories, trade and other receivables and trade and other payables
    The increase in inventories, trade and other receivables and trade and other payables is largely 
    attributable to seasonal working capital movements.

    Deferred tax assets
    There were reductions in the corporate tax rate in various countries resulting in a decrease of US$36 million 
    in our deferred tax asset balance of which US$17 million was recorded through the income statement and 
    US$19 million through other comprehensive income.

10. Acquisition
    On 28 February 2018, Sappi acquired the speciality paper business of Cham Paper Group Holding AG (CPG) for 
    CHF132 million (US$139 million). The transaction includes all brands and know-how, the Carmignano and Condino 
    mills in Italy, as well as their digital imaging business and facility situated in Cham, Switzerland. The 
    acquisition was financed from internal resources. The acquisition increases Sappi's relevance in specialities 
    and packaging papers, opening up new customers and markets to Sappi's existing products and generating 
    economies of scale and synergies. It will improve near-term profitability and serve as a platform for organic 
    growth, further acquisitions and will add €183 million of annual sales and approximately €20 million of annual 
    EBITDA before taking into account synergies.

    Provisional fair values of assets acquired and liabilities assumed as at 28 February 2018 are as follows:

                                                          EURO      US$  
    Property, plant and equipment                           50       61  
    Trademarks                                               7        9  
    Inventories                                             25       31  
    Trade receivables                                       28       34  
    Prepayments and other debit balances                     2        3  
    Cash and cash equivalents                                6        7  
    Trade payables                                         (23)     (28) 
    Pension liabilities                                     (3)      (4) 
    Provisions                                              (1)      (2) 
    Other payables and accruals                             (9)     (10) 
    Net deferred tax (liabilities) assets                   (1)      (1) 
    Borrowings                                              (5)      (7) 
    Short-term loans                                        (5)      (6) 
    Net asset value acquired                                71       87  
    Intangibles and goodwill                                43       52  
    Purchase consideration                                 114      139  
    Less: Cash and cash equivalents acquired                (6)      (7) 
    Net cash outflow on acquisition                        108      132  

11. Related parties
    There has been no material change, by nature or amount, in transactions with related parties since the 
    2017 financial year-end other than purchases from The Boldt Company for engineering services which 
    amounted to US$88 million for the nine months ended June 2018 (September 2017: US$8 million).

12. Accounting standards, interpretations and amendments to existing standards that are not yet effective
    There has been no significant change to management's estimates in respect of new accounting standards, 
    amendments and interpretations to existing standards that have been published which are not yet effective 
    and which have not yet been adopted by the group. Management is in the process of completing its 
    assessments in this regard.    

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

General definitions
Average - averages are calculated as the sum of the opening and closing balances for the relevant period divided by
two

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

Capital employed - shareholders' equity plus net debt

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

EPS excluding special items - earnings per share excluding special items and certain once-off finance and tax items

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

Headline earnings - as defined in circular 4/2018, issued by the South African Institute of Chartered Accountants in
April 2018, which separates from earnings all separately identifiable remeasurements. It is not necessarily a measure of
sustainable earnings. It is a Listings Requirement of the JSE Limited to disclose headline earnings per share

Interest cover - last 12 months EBITDA excluding special items to net interest adjusted for refinancing costs

NBSK - Northern Bleached Softwood Kraft pulp. One of the main varieties of market pulp, produced from coniferous trees
(ie spruce, pine) in Scandinavia, Canada and northern USA. The price of NBSK is a benchmark widely used in the pulp and
paper industry for comparative purposes

Net assets - total assets less total liabilities

Net asset value per share - net assets divided by the number of shares in issue at balance sheet date

Net debt - current and non-current interest-bearing borrowings, bank overdrafts less cash and cash equivalents

Net debt to EBITDA excluding special items - net debt divided by the last 12 months EBITDA excluding special items

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

Operating profit - a profit from business operations before deduction of net finance costs and taxes

Non-GAAP measures - the group believes that it is useful to report certain non-GAAP measures for the following
reasons:
- these measures are used by the group for internal performance analysis;
- the presentation by the group's reported business segments of these measures facilitates comparability with other
  companies in our industry, although the group's measures may not be comparable with similarly titled profit 
  measurements reported by other companies; 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

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

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

Special items - special items cover those items which management believes are material by nature or amount to the
operating results and require separate disclosure. Such items would generally include profit or loss on disposal of
property, investments and businesses, asset impairments, restructuring charges, non-recurring integration costs related 
to acquisitions, financial impacts of natural disasters, non-cash gains or losses on the price fair value adjustment of
plantations and alternative fuel tax credits receivable in cash

The above financial measures are presented to assist our shareholders and the investment community in interpreting our
financial results. These financial measures are regularly used and compared between companies in our industry.

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


Summary Rand convenience translation
                                                                                 Quarter ended          Nine months ended
                                                                          Jun 2018     Jun 2017       Jun 2018      Jun 2017    
Key figures: (ZAR million)                                                                                                      
Sales                                                                       18,252       16,614         54,351        52,267    
Operating profit excluding special items(1)                                  1,074        1,226          4,225         5,032    
Special items - (gains) losses(1)                                               13           40           (280)          (13)    
EBITDA excluding special items(1)                                            1,958        2,044          6,846         7,588    
Profit for the period                                                          644          765          2,749         3,175    
Basic earnings per share (SA cents)                                            120          143            511           595    
Net debt(1)                                                                 22,005       17,207         22,005        17,207    
Key ratios: (%)                                                                                                                 
Operating profit excluding special items to sales                              5.9          7.4            7.8           9.6    
Operating profit excluding special items to capital employed (ROCE)(1)         9.6         12.7           12.7          17.5    
EBITDA excluding special items to sales                                       10.7         12.3           12.6          14.5    
(1) Refer to supplemental information for the definition of the term.

The above financial results have been translated into Rand from US Dollar as follows:
- assets and liabilities at rates of exchange ruling at period end; and
- income, expenditure and cash flow items at average exchange rates.


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

Exchange rates
                                                        Jun          Mar          Dec         Sept          Jun    
                                                       2018         2018         2017         2017         2017    
Exchange rates:                                
Period end rate: US$1 = ZAR                         13.7275      11.8385      12.3724      13.5561      13.0551    
Average rate for the quarter: US$1 = ZAR            12.6312      11.9577      13.6220      13.1761      13.1857    
Average rate for the year to date:                  12.7255      12.7723      13.6220      13.3813      13.4536    
US$1 = ZAR                                                                     
Period end rate: €1 = US$                            1.1685       1.2323       1.1998       1.1814       1.1426    
Average rate for the quarter: €1 = US$               1.1920       1.2286       1.1778       1.1756       1.1011    
Average rate for the year to date: €1 = US$          1.1995       1.2032       1.1778       1.1055       1.0827    


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 (Pty) Ltd     
Rosebank Towers, 15 Biermann Avenue           
Rosebank 2196, South Africa                   
PO Box 61051, Marshalltown 2107, South Africa 
www.computershare.com

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

13 August 2018

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


Date: 13/08/2018 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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