FORM
6-K
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Report of
Foreign Private Issuer
Pursuant
to Rule 13a-16 or 15d-16
under the
Securities Exchange Act of 1934
For the
month of November, 2008
Commission
file number: 1-14872
SAPPI
LIMITED
(Translation
of registrant’s name into English)
48
Ameshoff Street
Braamfontein
Johannesburg
2001
REPUBLIC
OF SOUTH AFRICA
(Address
of principal executive offices)
Indicate
by check mark whether the registrant files or will file annual reports under
cover of Form 20-F or Form 40-F.
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Form
20-F
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X
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Form
40-F
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Indicate
by check mark if the registrant is submitting the Form 6-K in paper as permitted
by Regulation S-T Rule 101(b) (1):
Indicate
by check mark if the registrant is submitting the Form 6-K in paper as permitted
by Regulation S-T Rule 101(b) (7):
Indicate
by check mark whether by furnishing the information contained in this Form, the
registrant is also thereby furnishing the information to the Commission pursuant
to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
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Yes
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No
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X
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If “Yes”
is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-
INCORPORATION
BY REFERENCE
Sappi
Limited’s information below is furnished by the Registrant under this Form 6-K
is incorporated by reference into (i) the Registration Statements on Form S-8 of
the Registrant filed December 23, 1999 and December 15, 2004 in connection with
The Sappi Limited Share Incentive Scheme, (ii) the Section 10(a) Prospectus
relating to the offer and sale of the Registrant’s shares to Participants under
The Sappi Limited Share Incentive Scheme, (iii) the Registration Statements on
Form S-8 of the Registrant filed December 15, 2004 and December 21, 2005 in
connection with The Sappi Limited 2004 Performance Share Incentive Plan and (iv)
the Section 10(a) Prospectus relating to the offer and sale of the Registrant’s
shares to Participants under The Sappi Limited 2004 Performance Share Incentive
Plan.
FORWARD-LOOKING
STATEMENTS
In order
to utilize the “Safe Harbor” provisions of the United States Private Securities
Litigation Reform Act of 1995 (the “Reform Act”), Sappi Limited (the “Company”)
is providing the following cautionary statement. Except for historical
information contained herein, statements contained in this Report on Form 6-K
may constitute “forward-looking statements” within the meaning of the Reform
Act. 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
which do not relate to historical matters identify forward-looking statements.
In addition, this Report on Form 6-K may include forward-looking statements
relating to the Company’s potential exposure to various types of market risks,
such as interest rate risk, foreign exchange rate risk and commodity price risk.
Reliance should not be placed on forward-looking statements because they involve
known and unknown risks, uncertainties and other factors which are in some cases
beyond the control of the Company, together with its subsidiaries (the “Group”),
and may cause the actual results, performance or achievements of the Group 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; pulp and paper production, production capacity, input costs including
raw material, energy and employee costs, and pricing levels in North America,
Europe, Asia and southern Africa; any major disruption in production at the
Group’s key facilities; changes in environmental, tax and other laws and
regulations; adverse changes in the markets for the Group’s products; any
delays, unexpected costs or other problems experienced with any business
acquired or to be acquired; consequences of the Group’s leverage; adverse
changes in the South African political situation and economy or the effect of
governmental efforts to address present or future economic or social problems;
and the impact of future investments, acquisitions and dispositions (including
the financing of investments and acquisitions) and any delays, unexpected costs
or other problems experienced in connection with dispositions. These and other
risks, uncertainties and factors are discussed in the Company’s Annual Report on
Form 20-F and other filings with and submissions to the Securities and Exchange
Commission, including this Report on Form 6-K. Shareholders and prospective
investors are cautioned not to place undue reliance on these forward-looking
statements. These forward-looking statements are made as of the date of the
submission of this Report on Form 6-K and are not intended to give any assurance
as to future results. The Company undertakes no obligation to publicly update or
revise any of these forward-looking statements, whether to reflect new
information or future events or circumstances or otherwise.
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Unless otherwise specified or the context
requires otherwise herein:
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references to
“Sappi”, “Group”, “we”, “us” and “our” are to Sappi Limited together with
its subsidiaries excluding, unless otherwise indicated, the Acquired
Business (as defined below);
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references to
the “Acquired Business” are to the coated graphic paper business and
certain related uncoated graphic paper business activities of M-real
Corporation to be acquired by us pursuant to the Acquisition
Agreement;
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references to
the “Acquisition Agreement” are to the Master Business and Share Sale and
Purchase Agreement dated September 29, 2008, among M-real
Corporation, Sappi, and their respective subsidiaries named
therein;
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references to
the “Proposed Acquisition” are to the acquisition of the Acquired Business
pursuant to the Acquisition
Agreement;
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references to
“pro forma” or “pro forma basis” refer to financial or other data which is
presented on a pro forma basis after giving effect to the Proposed
Acquisition and any related
financing;
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references to
our “annual financial statements” or our “audited financial statements”
are to our annual financial statements contained in our annual report on
Form 20-F for fiscal 2007;
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references to
our “interim financial statements” are to our interim financial statements
for the nine months and the quarter ended June 2008 contained in our
current report on Form 6-K dated August 1,
2008;
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references to
“IFRS” are to the International Financial Reporting Standards, as issued
by the International Accounting Standards Board
(“IASB”);
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references to
“southern Africa” are to the Republic of South Africa, the Kingdom of
Swaziland, the Kingdom of Lesotho, the Republic of Namibia and the
Republic of Botswana;
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references to
“North America” are to the United States, Canada and the
Caribbean;
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references to
“Latin America” are to the countries located on the continent of South
America and Mexico;
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references to
“Rand”, “ZAR”, “R”, “SA cents” are to South African Rands and cents,
the currency of South Africa;
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references to
“US dollar(s)”, “dollar(s)”, “US$”, “$” and “US cents” are to
United States dollars and cents, the currency of the United
States;
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references to
“euro”, “EUR” and “€” are to the
currency of the European Union;
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references to
“UK pounds sterling”, “GBP” and “£” are to United Kingdom pounds
sterling, the currency of the United
Kingdom;
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references to
“m2”
are to square meters and references to “hectares” or “ha” are to a land
area of 10,000 square meters or approximately
2.47 acres;
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references to
“tonnes” are to metric tonnes (approximately 2,204.6 pounds or
1.1 short tons);
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references to
“market share” are, unless otherwise specified, based upon production
capacity in a particular market, as compared to the capacity of
competitors in that market;
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references to
“NBSK” are to northern bleached softwood kraft pulp, frequently used as a
pricing benchmark for pulp;
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references to
“groundwood” or to “mechanical” are to pulp manufactured using a
mechanical process, or where applicable to paper, made using a high
proportion of such pulp;
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references to
“woodfree paper” are to paper made from chemical pulp, which is pulp made
from wood fiber that has been produced in a chemical
process;
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references to
“PM” are to individual paper machines;
and
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references to
“SARB” are to the South African Reserve
Bank.
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Except as otherwise indicated, in this document
the amounts of “capacity” or “production capacity” of facilities or machines are
based upon our best estimates of production capacity at the date hereof. Actual
production by machines may differ from production capacity as a result of
products produced, variations in product mix and other factors.
Certain market share information and other
statements presented herein regarding our position relative to our competitors
with respect to the manufacture or distribution of particular products are not
based on published statistical data or information obtained from independent
third parties, but reflect our best estimates. We have based these estimates
upon information obtained from our customers, trade and business organizations
and associations and other contacts in our industries.
Unless otherwise provided herein, trademarks
identified by ® are registered
trademarks of Sappi Limited or its subsidiaries.
Except for historical information contained
herein, statements contained herein may constitute “forward-looking statements”
within the meaning of the United States Private Securities Litigation Reform Act
of 1995.
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, 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:
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the risk that
the Acquired Business will not be integrated successfully or such
integration may be more difficult, time-consuming or costly than expected;
that expected revenue synergies and cost savings from the acquisition may
not be fully realized or realized within the expected time frame; that
revenues following the acquisition may be lower than expected; or that any
anticipated benefits from the consolidation of the European paper business
may not be achieved;
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the highly
cyclical nature of the pulp and paper
industry;
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pulp and
paper production, production capacity, input costs (including raw
materials, energy and employee costs) and pricing levels in North America,
Europe, Asia and southern Africa;
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any major
disruption in production at our key
facilities;
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changes in
environmental, tax and other laws and
regulations;
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adverse
changes in the markets for our
products;
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any delays,
unexpected costs or other problems experienced with any business acquired
or to be acquired and achieving expected savings and
synergies;
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consequences
of our leverage, including as a result of adverse changes in credit
markets that affect our ability to raise capital when
needed;
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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;
and
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the impact of
future investments, acquisitions and dispositions (including the financing
of investments and acquisitions) and any delays, unexpected costs or other
problems experienced in connection with
dispositions.
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For further discussion on these factors, see
“Risk Factors” and note 31 to our Group annual financial statements for the
year ended September 2007. You are cautioned not to place undue reliance on
these forward-looking statements. These forward-looking statements are made as
of the date hereof and are not intended to give any assurance as to future
results. We undertake no obligation to update or revise any of these
forward-looking statements, whether to reflect new information or future events
or circumstances or otherwise.
On September 29, 2008, we entered into an
agreement with M-real (which is subject to the satisfaction or, where permitted,
waiver of certain conditions precedent as further described herein) to acquire
the Acquired Business.
With regard to Sappi, unless otherwise
specified, all references herein to a “fiscal year” and “year ended” of Sappi
Limited refer to a twelve-month financial period. All references herein to
fiscal 2007, fiscal 2006 and fiscal 2005, or the years ended September 2007,
2006 or 2005, refer to Sappi Limited’s twelve-month financial periods ended on
September 30, 2007, October 1, 2006 and October 2, 2005,
respectively. References to the nine months ended June 2008 and 2007 refer to
the periods from October 1, 2007 to June 29, 2008 and October 2,
2006 ended July 1, 2007, respectively. References herein to fiscal 2008
refer to the period beginning October 1, 2007 and ending September 28,
2008 and references to fiscal 2009 refer to the period beginning
September 29, 2008 and ending September 27, 2009. References to June
2008, September 2008, June 2007, September 2006 and September 2005 represent
amounts as at, respectively, June 29, 2008, September 30, 2007,
July 1, 2007, October 1, 2006 and October 2, 2005.
Our consolidated annual financial statements
have been prepared in conformity with IFRS, which differs in certain respects
from United States Generally Accepted Accounting Principles (“US GAAP”).
Note 35 to our consolidated annual financial statements includes a
reconciliation to US GAAP. As permitted by SEC Release
No. 33-8879—Acceptance From Foreign Private Issuers of Financial Statements
Prepared in Accordance with International Financial Reporting Standards Without
Reconciliation to US GAAP, our financial information for the nine months
ended June 2008 and 2007 was prepared in conformity with IFRS and omitted a
reconciliation to US GAAP. Likewise, when filed with the SEC, our fiscal
2008 financial statements will be prepared in accordance with IFRS, without
reconciliation to US GAAP (comparative financial information for fiscal
2007 and fiscal 2006 presented in our fiscal 2008 financial statements will also
omit the reconciliations to US GAAP that were included in our fiscal 2007
and fiscal 2006 financial statements when such statements were originally
prepared and filed).
The financial data presented herein with
respect to the Acquired Business has been prepared on a “carve-out” basis from
the consolidated financial statements of M-real using the historical results of
operations, assets and liabilities attributable to the Acquired Business, and
include allocations of expenses and assets from M-real. The financial statements
for the Acquired Business have been prepared on an annual basis for the years
ended December 31, 2007, 2006 and 2005 and on an interim basis for the
six months ended June 30, 2008 and 2007 and the three months
ended December 31, 2007 and 2006. With regard to the Acquired
Business, all references herein to the years ended December 2007, 2006
and 2005 refer to the 12 month periods ended December 31, 2007,
2006 and 2005, respectively. All references herein to the six months ended
June 2008 and 2007 refer to the periods ended June 30, 2008
and 2007, respectively. All references herein to the three months ended
December 2007 and 2006 refer to the periods ended December 31, 2007
and 2006, respectively. The financial data for the Acquired Business as of
and for the nine months ended June 2008 was combined from financial data
for the Acquired Business for the three months ended December 2007 and the six
months ended June 2008. The financial statements for the Acquired Business have
been prepared in conformity with IFRS.
The unaudited condensed combined pro forma
financial information presented herein has been derived from our consolidated
historical financial statements and the combined financial statements of the
Acquired Business.
We publish our Group annual financial
statements and all financial data presented herein in US dollars on a
nominal (non-inflation adjusted) basis. For information regarding the conversion
to US dollars in fiscal 2007, 2006 and 2005, see note 2 to our
annual financial statements for fiscal 2007.
The pro forma combined financial information
herein is presented in US dollars on a nominal (non-inflation adjusted)
basis.
For purposes of the preparation of the pro
forma combined financial information
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the income
statement data and cash flow data for the Acquired Business has been
converted from euros to US dollars using the average exchange rate
(i) for the year ended December 2007 of EUR1 = US$1.3755,
(ii) for the six months ended June 2008 of EUR1 = US$1.5315, and
(iii) for the three months ended December 2007 of EUR1 =
US$1.4556; and
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the balance
sheet data for the Acquired Business has been converted from euros to
US dollars using (i) our June 2008 closing rate of EUR1 =
US$1.5795 for data as of June 2008 and (ii) our December 2007 closing
rate of EUR1 = US$1.4717 for data as of December
2007.
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Risks
Related to Our Industry
We
operate in a cyclical industry, which has in the past resulted in substantial
fluctuations in our results.
The markets for our pulp and paper products are
significantly affected by changes in industry capacity and output levels and by
cyclical changes in the world economy. As a result of periodic supply/demand
imbalances in the pulp and paper industry, these markets historically have been
highly cyclical, with volatile pulp and paper prices. In addition, recent
turmoil in the capital and credit markets has led to decreased availability of
credit, which may have an adverse effect on the world economy and consequently
adversely affect the markets for our products. The timing and magnitude of price
increases or decreases in the pulp and paper market have generally varied by
region and by type of pulp and paper.
Despite a relatively high level of pulp
integration on a Group-wide basis, a significant increase in the prices for pulp
or pulpwood could adversely affect our non-integrated and partially integrated
operations if they are unable to raise paper prices sufficiently to offset the
effects of increased costs. Other input cost increases including energy and
chemicals may affect our operations if we are unable to raise paper prices
sufficiently.
The majority of our fine paper sales consist of
sales to merchants. However, the pricing of products for merchant sales can
generally be changed between 30 to 90 days’ advance notice to the merchant.
Sales to converters may be subject to longer notice periods for price changes.
Such notice periods generally would not exceed 6 to 12 months. In southern
Africa, we have entered into longer-term fixed-price agreements of between 6 to
12 months duration for primarily packaging paper and newsprint sales with
domestic customers. Such agreements accounted for approximately 5% of our sales
during the nine months ended June 2008.
Most of our chemical cellulose sales contracts
are multi-year contracts. However, the pricing is generally based on a formula
linked to the NBSK price and reset on a quarterly basis.
As a result of the short-term duration of paper
and chemical cellulose pricing arrangements, we are subject to cyclical
decreases in market prices for these products. A downturn in paper or chemical
cellulose prices could have a material adverse effect on our sales or results of
operations.
The
markets for pulp and paper products are highly competitive, and many of our
competitors have advantages that may adversely affect our ability to compete
with them.
We compete against a large number of pulp and
paper producers located around the world. A recent trend towards consolidation
in the pulp and paper industry has created larger, more focused pulp and paper
companies. Some of these companies benefit from greater financial resources or
operate mills that are lower cost producers of pulp and paper products than our
mills. We cannot assure you that each of our mills will be competitive.
Furthermore, we cannot assure you that we will be able to take advantage of
consolidation opportunities which may arise, or that any failure to exploit
opportunities for growth would not make us less competitive. Increased
competition, including a decrease in import duties in accordance with the terms
of free trade agreements, could cause us to lose market share, increase
expenditures or reduce pricing, any of which could have a material adverse
effect on the results of our operations. In addition, competition may result in
our being unable to increase selling prices of our products sufficiently or in
time to offset the effects of increased costs without losing market
share.
The
cost of complying with environmental regulation may be significant to our
business.
Our operations are subject to a wide range of
environmental requirements in the various jurisdictions in which we operate.
Although we strive to ensure that our facilities comply with all applicable
environmental laws, we have in the past been and may in the future be subject to
governmental enforcement action for failure to comply with environmental
requirements. We expect to continue to incur significant expenditures and may
face operational constraints to maintain compliance with applicable
environmental laws, to upgrade equipment at our mills and to meet new regulatory
requirements, including those in the United States, South Africa and Europe.
Impacts from historical operations, including the land disposal of waste
materials, may require further investigation and cleanup. In addition, we could
become subject to environmental liabilities resulting from personal injury,
property damage or natural resources damage. Expenditures to comply with future
environmental requirements and the cost related to any potential environmental
liabilities and claims could have a material adverse effect on our business and
financial condition.
For further information, see “Management’s Discussion and Analysis
of Financial Condition and Results of Operations—Environmental
Matters”.
The
availability and cost of insurance cover can vary considerably from year to year
as a result of events beyond our control, and this can result in our paying
higher premiums and periodically being unable to maintain the levels or types of
insurance carried.
Although the insurance market has been stable
for the last three to four years, it remains cyclical and catastrophic events
can change the state of the insurance market, leading to sudden and unexpected
increases in premiums and deductibles and unavailability of coverage due to
reasons totally unconnected with our business. In addition, recent turmoil and
volatility in the global financial markets may adversely affect the insurance
market.
Although we have successfully negotiated the
renewal of our 2008 insurance cover, and expect to renew our 2009 cover, at
rates similar to those of 2007 and self-insured deductibles for any one property
damage occurrence have remained at $25 million, with an unchanged aggregate
limit of $40 million, we are unable to predict whether past or future
events will result in less favorable terms. For property damage and business
interruption, there generally does not seem to be cost effective cover available
to full value; however, we believe that the loss limit cover of $1 billion
should be adequate for what we have determined as the reasonably foreseeable
loss for any single claim.
While we believe our insurance programs provide
adequate coverage for reasonably foreseeable losses, we continue working on
improved risk management to lower the risk of incurring losses from uncontrolled
incidents. We are unable to assure you that actual losses will not exceed our
insurance coverage or that such excess will not be material.
New
technologies or changes in consumer preferences may affect our ability to
compete successfully.
We believe that new technologies or novel
processes may emerge and that existing technologies may be further developed in
the fields in which we operate. These technologies or processes could have an
impact on production methods or on product quality in these fields. Unexpected
rapid changes in employed technologies or the development of novel processes
that affect our operations and product range could render the technologies we
utilize or the products we produce obsolete or less competitive in the future.
Difficulties in assessing new technologies may impede us from implementing them
and competitive pressures may force us to implement these new technologies at a
substantial cost. Any such development could materially and adversely impact our
revenues or net profits or both.
Consumer preferences may change as a result of
the availability of alternative products or of services such as electronic media
or the internet, which could negatively impact consumption of our
products.
Risks
Related to Our Business
Our
indebtedness may impair our financial and operating flexibility.
Our level of indebtedness and the terms of our
indebtedness could negatively impact our business and liquidity. On a pro forma
basis as of June 2008, our interest bearing debt (long-term and short-term
interest bearing debt plus overdraft, less cash on hand) was
US$3,086 million. While reduction of our indebtedness is one of our
priorities, opportunities to grow within our businesses will continue to be
evaluated, and the financing of any future acquisition or capital investment may
include the incurrence of additional indebtedness.
The level of our debt has important
consequences, including:
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our ability
to obtain additional financing may be limited, which could limit, among
other things, our ability to exploit growth
opportunities;
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a substantial
portion of our cash flow from operations may be required to make debt
service payments;
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we are
exposed to increases in interest rates because a portion of our debt bears
interest at variable rates;
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we may be
more leveraged than certain of our
competitors;
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we may be
more vulnerable to economic downturns and adverse changes in our
business;
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our ability
to withstand competitive pressure may be more limited;
and
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certain of
our financing arrangements contain covenants and conditions that may
restrict the activities of certain Group
companies.
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During fiscal 2009, we have approximately
US$827 million of renewable facilities that mature. We expect to be able to
continue to refinance these rolling facilities under our existing longer-term
funding arrangements and bilateral banking facilities. Other than rolling
facilities, the first significant scheduled debt repayment is a €400 million
facility maturing in December 2010. We will seek to refinance such indebtedness
when it becomes due through the issuance of new debt in the global capital
markets.
Our ability to refinance our debt, incur
additional debt, the terms of our existing and additional debt and our liquidity
could be affected by a number of adverse developments. In the third quarter of
fiscal 2007, the global debt markets were subject to significant pressure
triggered by the collapse of the sub-prime mortgage market in the U.S. This
liquidity crunch has continued through and worsened in calendar 2008, leading to
unprecedented volatility in the financial markets, an acute contraction in the
availability of credit, including in interbank lending, and the failure of a
number of leading financial institutions. Changes in investment markets,
including changes in interest rates, exchange rates and returns from equity,
property and other investments, could result in worsening general economic
conditions. As a result, certain government bodies and central banks worldwide
have undertaken unprecedented intervention programs, the effects of which remain
uncertain. In addition, since 2006 the Group’s credit ratings have been
downgraded to sub-investment grade by Standard & Poor’s (S&P) and
Moody’s. These adverse developments in the credit markets and in our credit
rating, as well as other future adverse developments, such as further
deterioration in the financial markets and a worsening of general economic
conditions, may negatively impact our ability to issue additional debt as well
as the amount and terms of the debt we are able to issue. Our liquidity will be
adversely affected if we must repay all or a portion of our maturing debt from
available cash or through use of our existing liquidity facilities. In addition,
our results of operations will be adversely impacted to the extent the terms of
the debt we are able to issue are less favorable than the terms of the debt
being refinanced. It is also possible that we will need to agree to covenants
that place additional restrictions on our business.
We are subject to South African exchange
controls, which may restrict the transfer of funds directly or indirectly
between our subsidiaries or between the parent company and our subsidiaries and
can restrict activities of our subsidiaries. We may also incur tax costs in
connection with these transfers of funds. These exchange controls have affected
the geographic distribution of our debt. As a result, acquisitions in the United
States and Europe were financed with indebtedness incurred by companies in those
regions. As a consequence, our ability or the ability of any of our subsidiaries
to make scheduled payments on its debt will depend on its financial and
operating performance, which will depend on various factors beyond our control,
such as prevailing economic and competitive conditions. If we or any of our
subsidiaries are unable to achieve operating results or otherwise obtain access
to funds sufficient to enable us to meet our debt service obligations, we could
face substantial liquidity problems. As a result, we might need to delay
investments or dispose of material assets or operations. The timing of and the
proceeds to be realized from any such disposition would depend upon
circumstances at the time.
Fluctuations
in the value of currencies, particularly the Rand and the euro, in relation to
the US dollar, have in the past had and could in the future have a
significant impact on our earnings in these currencies.
Exchange rate fluctuations have in the past,
and may in the future, affect the competitiveness of our products in relation to
the products of pulp and paper companies based in other countries.
Fluctuations in the exchange rate between
currencies, particularly the Rand and euro, in relation to the US dollar
have in the past significantly affected and could in the future significantly
affect our earnings.
Since the adoption of the euro by the European
Union on January 1, 1999 (when the euro was trading at approximately $1.18
per euro), it has fluctuated against the US dollar, reaching a low of
approximately $0.83 per euro in October 2000 before trading at approximately
$1.42, $1.27 and $1.20 per euro at the end of fiscal 2007, 2006 and 2005,
respectively, and rising to a high of $1.60 per euro in April 2008. On
November 6, 2008, it was trading at approximately $1.28 per euro. In recent
months, the US dollar has been appreciating against the euro. A significant
weakening of the US dollar in comparison to the euro could redirect a
significant amount of imports from Europe.
In recent years, the value of the Rand against
the US dollar has fluctuated considerably. It has moved against the
US dollar from a low of approximately R13.90 per US dollar in December
2001 to approximately R6.89, R7.77 and R6.37 per US dollar at the end of
fiscal 2007, 2006 and 2005, respectively. More recently, the Rand has been
declining against US dollar and was trading at approximately R9.80 per
US dollar on November 6, 2008.
For further information, see notes 2, 21
and 31 to our audited financial statements and “Management’s Discussion and Analysis
of Financial Condition and Results of Operations—Currency
Fluctuations”.
There
are risks relating to the countries in which we operate that could impact our
earnings or affect your investment in our Company.
We own manufacturing operations in five
countries in Europe, four states in the United States, South Africa and
Swaziland, and have an investment in a joint venture in China. These risks arise
from being subject to various economic, fiscal, monetary, regulatory,
operational and political factors that affect companies generally and which may
change as economic, social or political circumstances change. See “Management’s Discussion and Analysis
of Financial Condition and Results of Operations—South African Economic and
Political Environment”.
Our southern African operations have in recent
years accounted for a disproportionate percentage of our operating profits. In
fiscal 2007, 45% of our sales originated from Europe, 28% from North America and
27% from southern Africa and 40% of our operating assets were located in Europe,
22% in North America and 38% in southern Africa. However, in fiscal 2007, 23% of
our operating profits were from Europe, 6% from North America and 71% from
southern Africa. In the nine months ended June 2008, 47% of our sales originated
from Europe, 28% from North America and 25% from southern Africa and 42% of our
operating assets were located in Europe, 21% in North America and 37% in
southern Africa but 16% of our operating profits were from Europe, 22% from
North America and 62% from southern Africa. Adverse developments in the
economic, fiscal, monetary, regulatory or political circumstances in southern
Africa could negatively affect our operations.
We
face certain risks in dealing with HIV/AIDS which may have an adverse effect on
our southern African operations.
There is a serious problem with HIV/AIDS
infection among our southern African workforce, as there is in southern Africa
generally. The HIV/AIDS infection rate of our southern African workforce
is expected to increase over the next decade. The costs and lost workers’
time associated with HIV/AIDS may adversely affect our southern African
operations.
For further information, see “Management’s Discussion and Analysis
of Financial Condition and Results of Operations—South African Economic and
Political Environment”.
The
inability to recover increasing input costs through increased prices of our
products has had, and may continue to have, an adverse impact on our
profitability.
The selling prices of the majority of the
products manufactured and the purchase prices of many of the raw materials we
use generally fluctuate in correlation with global commodity cycles. In
addition, we have been experiencing increasing costs of a number of raw
materials due to global trends beyond our control. The global warming and carbon
footprint imperatives are causing the increased use of sustainable, non-fossil
fuel, sources for electricity generation. Electricity generation companies are
competing for the same raw material, namely wood and wood chips, in the same
markets as us, driving prices upwards, especially during winter in the Northern
hemisphere. In addition, the price of crude oil recently reached historically
high levels. Although oil prices have since decreased, they are likely to remain
at high levels for the foreseeable future because of, among other things,
political instability in the oil producing regions of the world. This impacts
the oil-based commodities required by our business in the areas of energy
(including electricity), transport and chemicals.
As occurred during the 2006 and 2007 fiscal
years, and during the nine months ended June 2008, a major potential consequence
of the increase in the price of input commodities is our inability to counter
this effect through increased selling prices. This results in reduced operating
profit, and has a negative impact on business planning.
While we are in the process of implementing
steps to reduce our cost of commodity inputs, other than maintaining a high
level of pulp integration, the hedging techniques we apply on our raw materials
and products are on a small scale and short term in nature. Moreover, in the
event of significant increases in the prices of pulp, our non-integrated and
partially integrated operations could be adversely affected if they are unable
to raise paper prices by amounts sufficient to maintain margins.
A
limited number of customers account for a significant amount of our
revenues.
We sell a significant portion of our products
to several major customers, including PaperlinX, Igepa, xpedx and Antalis. For
Sappi Fine Paper products, PaperlinX and Igepa represented individually more
than 10% of our total sales during fiscal 2007 and for the nine months ended
June 2008. Any adverse development affecting our principal customers or our
relationships with our principal customers could have an adverse effect on our
business and results of operations.
Because
of the nature of our business and workforce, we are facing challenges in the
retention of management and the employment of skilled people that could
adversely affect our business.
We are facing an aging demographic work profile
among our management due to the mature nature of our industry and the rural and
often remote location of our mills, together with generally long tenure of
employees at the mills. As a result, we are likely to experience groups of
employees leaving the company within a relatively short space of time of one
another and may have difficulty attracting qualified replacements. The potential
risks we face are a loss of institutional memory, skills, experience and
management capabilities. We may be unable to attract and retain sufficient
qualified replacements when and where necessary to avoid an adverse impact on
our business.
Catastrophic
events affecting our plantations, such as fires, may adversely impact our
ability to supply our southern African mills with timber from the
region.
The southern African landscape is prone to, and
ecologically adapted to, frequent fires. The risk of uncontrolled fires entering
and burning significant areas of plantation is high, but under normal weather
conditions this risk is managed through comprehensive fire prevention and
protection plans. In 2007 and 2008, southern Africa experienced a number of
abnormal weather events (hot, dry conditions fanned by extremely strong winds),
which resulted in disastrous plantation fires across vast areas of eastern South
Africa and Swaziland affecting 14,000 hectares and 26,000 hectares,
respectively, of our plantations. There is some cause for concern that these
abnormal weather conditions may be occurring more frequently as a result of the
potential impact of climate change. In addition, because the transformation of
land ownership and management in southern Africa has been moving ownership and
management of plantations to independent growers, we have less ability to
directly manage fire risk, as well as risks of other catastrophic events, such
as pathogen and pest infestations. As a consequence, the risk of plantation
fires or other catastrophic events remains high and may be increasing. Continued
or increased losses of our wood source could jeopardize our ability to supply
our mills with timber from the region.
Risks
Related to the Proposed Acquisition and the Acquired Business
The
risks associated with the Proposed Acquisition and the integration of the
Acquired Business could have a material adverse effect on our business,
financial condition and results of operations. We may not be able to
successfully integrate the Acquired Business into our business.
We may experience unforeseen operating
difficulties as we integrate the Acquired Business into our existing operations.
These difficulties may disrupt our operations and require significant management
attention and financial resources that would otherwise be available for
day-to-day operations or the ongoing development or expansion of existing
operations. The Proposed Acquisition involves risks, including:
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●
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unexpected
losses of customers or suppliers of the Acquired
Business;
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●
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challenges in
integrating IT systems and administrative
services;
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difficulties
in retaining management and key personnel and in working cooperatively
with the employees of the Acquired
Business;
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●
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difficulties
in integrating the financial, technological and management standards,
processes, procedures and controls of the Acquired Business with those of
our existing operations;
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●
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the
performance by M-real and its parent company of their obligations under
various agreements they will enter with us, including supply
agreements;
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●
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any inability
of our management to cause our best practices to be applied to the
Acquired Business;
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challenges in
managing the increased scope, geographic diversity and complexity of our
operations; and
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difficulties
in mitigating contingent and assumed
liabilities.
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If we are unable to successfully meet the
challenges associated with the Proposed Acquisition, this could have a material
adverse effect on our business, financial condition and results of
operations.
We
may not be able to realize some or all of the anticipated benefits of the
proposed Acquisition or there may be delays and unexpected difficulties in
realizing such benefits or higher costs.
Our estimates regarding the earnings, operating
cash flow, capital expenditures and liabilities of the Acquired Business are
based on information currently available to us and may prove to be incorrect.
Since we are not involved in the management of the Acquired Business, our
assessment of the risks and opportunities may not be accurate. In addition, we
may not realize any anticipated benefits of the Proposed Acquisition and may not
be successful in integrating the Acquired Business into our existing
business.
Achieving the anticipated benefits of the
Proposed Acquisition will depend in part upon whether we integrate the Acquired
Business in an efficient and effective manner. We may not be able to accomplish
this integration process smoothly or successfully.
Although parts of the information herein assume
the consummation of the Proposed Acquisition, the consummation is subject to the
satisfaction of certain conditions precedent. In addition, we may terminate the
Acquisition Agreement if a significant adverse change occurs or is likely to
occur prior to completion. Our failure to consummate the Proposed Acquisition
would result in our asset base being smaller than anticipated. Accordingly, we
would not realize the anticipated benefits that are based on our completion of
the Proposed Acquisition, including the synergies that we expect to realize from
the Proposed Acquisition.
An inability to realize the full extent of the
anticipated benefits of the Proposed Acquisition, as well as any delays
encountered in the integration process, could have an adverse effect upon our
revenues, level of expenses and operating results.
Risks
Related to Our Shares
Your
ability to sell a substantial number of ordinary shares may be restricted by the
limited liquidity of shares traded on the JSE Limited.
The principal trading market for our ordinary
shares is on the exchange operated by the JSE Limited (“JSE”) (formerly known as
the Johannesburg Stock Exchange). Historically, trading volumes and liquidity of
shares listed on the JSE have been low in comparison with other major
international markets. In fiscal 2008, 241 million of our ordinary shares
were traded on the JSE and 51 million ADSs were traded on the New York
Stock Exchange. The relatively low liquidity of shares traded on JSE Limited
could affect your ability to sell ordinary shares. See “—Significant
shareholders may be able to influence the affairs of our Company”.
Significant
shareholders may be able to influence the affairs of our Company.
Although our investigation of beneficial
ownership of our shares identified only two beneficial owners of more than 5% of
our ordinary shares, holding approximately 18.1%, as shown in our shareholders’
register at September 26, 2008, the five largest shareholders of record,
four of which are nominees that hold shares for a multitude of beneficial
owners, owned approximately 96% of our ordinary shares as of that
date.
The
proposal by the South African Government to replace Secondary Tax on Companies
with withholding tax on dividends and other distributions may impact the amount
of dividends or other distributions received by our shareholders.
On October 21, 2008, the South African
Government tabled a bill containing proposed legislation to replace Secondary
Tax on Companies with a 10% withholding tax on dividends and other distributions
payable to shareholders for implementation in late 2009, following amendments to
some of the existing double tax treaties. This is the second phase in a process
that started in October 2007. Although this may reduce the tax payable by our
South African operations, thereby increasing distributable earnings, the
withholding tax will generally reduce the amount of dividends or other
distributions received by our shareholders.
Sales
of large quantities of our ordinary shares and ADSs, or the perception that
these sales may occur, could adversely affect the prevailing market price of
such securities, as could future offerings of our ordinary shares, ADSs or
securities exchangeable or exercisable for ordinary shares.
The market price of our ordinary shares or ADSs
could fall if large quantities of ordinary shares or ADSs are sold in the public
market, or there is the perception in the marketplace that such sales could
occur. Subject to applicable securities laws, holders of our ordinary shares or
ADSs may decide to sell them at any time. The market price of our ordinary
shares or ADSs could also fall as a result of any future offerings we make of
ordinary shares, ADSs, or securities exchangeable or exercisable for our
ordinary shares, or the perception in the marketplace that these sales might
occur. We may make such offerings, including offerings of additional, share
rights or similar securities, at any time or from time to time in the
future.
As part of the consideration for the Proposed
Acquisition we expect to issue 11,159,702 ordinary shares to M-real. We have
entered into a lock-up agreement with M-real restricting M-real’s ability to
dispose of shares issued to M-real as part of the consideration for the Acquired
Business for a period of nine months following the completion of the Proposed
Acquisition. The lock-up agreement contains certain exceptions, including
exceptions allowing M-real to dispose, subject to our consent, of any of the
shares issued as consideration for the Proposed Acquisition, if the sale
proceeds are needed by M-real to avoid triggering a default of a financial
covenant to which it is subject, or dispose of any such shares if the sale
proceeds are needed by M-real to satisfy a breach of warranty claim or other
liability to us in respect of the Proposed Acquisition. In addition, M-real may
seek to divest its interest in us after the expiration of the lock-up and any
such divestment would result in the sale or distribution of substantial amounts
of our ordinary shares. Sales by M-real of our ordinary shares, if substantial,
or the perception that such sales may occur and be substantial, could exert
downward pressure on the prevailing market prices for our ordinary shares or our
ADSs causing their market prices to decline.
RESULTS
OF OPERATIONS
You should read the following
discussion and analysis together with our Group annual financial statements,
including the notes, and the other financial information included herein.
Certain information contained in the discussion and analysis set forth below and
elsewhere in this document includes forward-looking statements that involve risk
and uncertainties. See “Note Regarding Forward-Looking Statements”, “Risk
Factors” and notes 2, 12, 15, 17, 21, 22, 23, 25, 26, 28, 29, 31, 35
and 36 to our annual financial statements and notes 8 and 9 to
our interim financial statements for a discussion of important factors that
could cause actual results to differ materially from the results described in or
implied by the forward-looking statements contained herein.
Our consolidated financial statements,
including the applicable notes thereto, and our consolidated financial
information have been prepared in accordance with International Financial
Reporting Standards, as issued by the International Accounting Standards Board.
We implemented IFRS for the first time in fiscal 2006 and comparative amounts
for fiscal 2005 were restated.
Fiscal 2007 and 2006 included 52 accounting
weeks, compared to 53 accounting weeks in fiscal 2005. Our fiscal years operate
on a 52 accounting week cycle, except every sixth fiscal year which includes an
additional accounting week (“additional accounting week”).
Company
and Business Overview
We are a global company which through
acquisitions in the 1990s has been transformed into one of the global market
leaders in coated fine paper. Two acquisitions were pivotal in establishing us
as a global company, namely the acquisition in 1994 of S.D. Warren Company,
now known as Sappi Fine Paper North America, and the acquisition in 1997 of
KNP Leykam, now integrated into Sappi Fine Paper Europe. The fine paper
acquisitions have been integrated into a single fine paper business, which
operates under the name Sappi Fine Paper. In September 2008, we entered into an
agreement to acquire certain assets of M-real’s graphic paper business. Further
opportunities to grow within core businesses will continue to be
evaluated.
Our group is organized into two operating
segments: Sappi Fine Paper and Sappi Forest Products. We also operate a trading
network, called Sappi Trading, for the international marketing and distribution
of chemical cellulose and market pulp throughout the world and of our other
products in areas outside the core operating regions of North America, Europe
and southern Africa.
Sales by source and destination for the nine
months ended June 2008 and fiscal 2007, fiscal 2006 and fiscal 2005 were as
follows:
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Sales
by Source
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Sales
by destination
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|||||||||||||||||||||||||||||||
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Nine
Months
ended
June
2008
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2007
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2006
|
2005
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Nine
Months
ended
June
2008
|
2007
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2006
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2005
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|||||||||||||||||||||||||
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North
America
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28 | % | 28 | % | 29 | % | 29 | % | 29 | % | 29 | % | 30 | % | 30 | % | ||||||||||||||||
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Europe
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47 | % | 45 | % | 44 | % | 45 | % | 40 | % | 39 | % | 40 | % | 40 | % | ||||||||||||||||
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Southern
Africa
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25 | % | 27 | % | 27 | % | 26 | % | 15 | % | 15 | % | 15 | % | 15 | % | ||||||||||||||||
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Far East and
others
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— | — | — | — | 16 | % | 17 | % | 15 | % | 15 | % | ||||||||||||||||||||
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Total
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100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||
Sappi Fine Paper has a total paper production
capacity of 4.4 million tonnes per annum. Our group is one of the global
market leaders in the coated fine paper business with a capacity of
3.4 million tonnes of coated fine paper per annum.
On a historical basis our group is
approximately 103% integrated on a net basis in terms of pulp usage, meaning
that, while some facilities are market buyers of pulp and others are market
sellers, in the aggregate we produce slightly more pulp than we use. By region,
the southern African operations are net sellers of pulp, Sappi Fine Paper North
America sells slightly more pulp than it uses and the European operations are
approximately 46% integrated. Approximately 69% of the wood requirements of the
South African businesses are from sources either owned or managed. Both the
North American and European operations are dependent on outside suppliers of
wood for their pulp production requirements. On a pro forma basis, our Group is
approximately 92% integrated on a net basis, meaning that we produce slightly
less pulp than we use.
On November 5, 1998, our American
Depositary Receipts commenced trading on the New York Stock Exchange. Based on
available information, we believe beneficial shareholding by region is as
follows:
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September
2008
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2007
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2006
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2005
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North
America
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17 | % | 20 | % | 30 | % | 49 | % | ||||||||
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Europe &
elsewhere
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14 | % | 7 | % | 10 | % | 10 | % | ||||||||
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Southern
Africa
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69 | % | 73 | % | 60 | % | 41 | % | ||||||||
| 100 | % | 100 | % | 100 | % | 100 | % | |||||||||
Source: Registered
addresses and disclosure by nominee companies, excluding the shares owned by a
subsidiary of Sappi.
Principal
Factors Impacting on Group Results
Our results of operations are affected by
numerous factors. Given the high fixed cost base of pulp and paper
manufacturers, industry profitability is highly sensitive to changes in sales
prices. Prices are significantly affected by changes in industry capacity and
output levels, customer inventory levels and cyclical changes in the world
economy. Profitability in the industry is, however, also influenced by factors
such as sales volume, the level of raw material, energy, chemicals and other
input costs, exchange rates, and operational efficiency.
The principal factors that have impacted the
business during the financial periods presented in the following discussion and
analysis and that are likely to continue to impact the business
are:
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|
(a)
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New
acquisitions, expansions, restructuring, cost-reduction initiatives, our
ability to maintain and continuously improve operational efficiencies and
performance, and other significant factors impacting
costs;
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(b)
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cyclical
nature of the industry and its impact on sales
volume;
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(c)
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movement in
market prices for products and for raw materials and other input costs of
manufacturing;
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(d)
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sensitivity
to currency movements and inflation rates;
and
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(e)
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the South
African economic and political environment, and environmental
matters.
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Because many of these factors are beyond our
control and certain of these factors have historically been volatile, past
performance will not necessarily be indicative of future performance and it is
difficult to predict future performance with any degree of
certainty.
Acquisitions,
Expansions, Restructurings and Cost-reduction Initiatives
We continually evaluate the performance of our
assets by maintaining a focus on profitability and we actively manage our asset
base, including by directing or closing non-performing assets and by pursuing an
investment policy that is focused on high-return projects. Some of these recent
transactions include the following:
Completion
of the Sappi Saiccor expansion project
In August 2006, we announced the expansion of
the capacity at Sappi Saiccor in South Africa, where Chemical Cellulose products
are produced. The capacity of the mill was approximately 600,000 tonnes per
annum. The expansion has increased such capacity to approximately
800,000 tonnes per annum. Originally scheduled for completion in the first
half of 2008, the project was subject to delays and cost increases. Production
using the increased capacity commenced in September 2008. On October 27,
2008, a leak of sulfur dioxide gas from a new pipeline occurred at the Saiccor
mill expansion. Following all necessary checks, the new plant is expected to be
fully operational by mid November 2008. Production at the rest of the Saiccor
mill was not affected by the incident.
Blackburn
mill closure and cessation of production from PM 5 at Maastricht
mill
In August 2008 we announced that we had
undertaken a review of our European production activities in response to
overcapacity and significant input cost pressure, and in accordance with our
strategy of maintaining an efficient asset base. In that context, we reached an
agreement with labor representatives at our Blackburn mill on September 22,
2008, pursuant to which the mill will be closed on November 12, 2008 unless
a buyer can be found before that date. Production at the Blackburn mill stopped
on October 17, 2008. We also intend to cease production from PM 5 at
our Maastricht mill. Upon closure of our Blackburn mill and cessation of
production from PM 5 at our Maastricht mill, our coated graphic fine paper
capacity will be reduced by 190,000 tonnes. See “—Liquidity and Capital
Resources—Mill Closures, Acquisitions, Dispositions, Impairment and Joint
Venture”.
Acquisition
of M-real’s coated graphic paper business
On September 29, 2008, we entered into an
agreement with M-real (which is subject to the fulfillment of certain conditions
precedent as further described herein) to acquire specific assets of M-real’s
graphic paper division.
Markets
The markets for pulp and paper products are
cyclical, with sales prices significantly affected by factors such as changes in
industry capacity and output levels, customer inventory levels and changes in
the world economy. The pulp and paper industry has often been characterized by
periods of imbalances between supply and demand, causing prices to be volatile.
Prices also vary significantly by geographic region and product. Coated fine
paper, our core product used for many types of publications, is susceptible to
the highly cyclical advertising market, a major driver in our
business.
Coated
Fine Paper
Paper demand from fiscal 2005 to fiscal 2007,
and during the nine months ended June 2008, increased as the upswing in world
economic growth and resultant increase in advertising activities resulted in an
increase in demand for coated fine papers. Global demand started to decline
during the remainder of fiscal 2008 due to a slowdown in the global
economy.
Global
Coated Fine Paper Market Balance
Source:
EMGE
The demand to capacity ratio for global coated
fine paper increased to approximately 95% in fiscal 2007 and further increased
to approximately 96% during the nine months ended June 2008 and to approximately
98% during fiscal 2008 overall. Increases in industry capacity in Europe and
North America were limited during this period, with companies reluctant to
undertake major new capital projects in these regions due to the poor returns
being achieved. Despite global overcapacity, high Asian demand growth rates and
availability of funding led to significant coated fine paper capacity additions
between fiscal 2000 and fiscal 2006 and this trend has continued during the nine
months ended June 2008 in Asia, particularly in China. Announced closures of
coated fine paper production capacity of approximately 1.2 million tonnes
in Europe and North America are expected to result in a reduction in
supply/demand imbalance.
Despite increased demand, operating rates were
low in fiscal 2002 through the first half of fiscal 2004 due to excess capacity,
causing price erosion in both Europe and North America. Despite the weakening US
dollar during this period, net imports into the United States continued to grow,
putting further pressure on prices. Prices in North America, however, did start
to improve in the latter half of fiscal 2004 due to a sharp increase in seasonal
demand. These tight supply/demand conditions in North America continued into
fiscal 2005, and more so in fiscal 2006 as inventory throughout the supply chain
dropped, giving rise to further price increases. In total, North American
apparent consumption, including imports, grew by 8.6% in fiscal 2006 but
declined by 7.2% in fiscal 2007. Excluding exports, apparent consumption grew by
4.3% and declined by 3.4% in fiscal 2006 and 2007, respectively. Apparent
consumption, including imports, further declined by 9.5% in the nine months
ended June 2008, as compared to the corresponding period in 2007, and by 10.1%
during fiscal 2008 as compared to fiscal 2007. The decreases in apparent
consumption during fiscal 2007 and fiscal 2008 were due to a decrease in
advertising activities and printer consumption, and to a significant reduction
in imports. Imports of coated fine paper into the United States decreased by
approximately 22% during fiscal 2007 as compared to fiscal 2006, and by
approximately 30% in the nine months ended June 2008, as compared to the
corresponding period in 2007. This decrease, which continued during the
remainder of fiscal 2008, was mainly due to a decrease in coated fine paper
imports from China. Following the imposition of import duties on certain Asian
producers in calendar 2007, Chinese coated fine paper imports were reclassified
as coated groundwood paper. As a result, such imports are accounted for
statistically as coated groundwood paper rather than coated fine
paper.
Coated fine paper prices in North America
increased during fiscal 2008 compared to fiscal 2007, with the largest increase
of approximately 35% occurring with respect to No 3 60lb rolls, the grade
representing the largest end use of coated fine paper.
In Europe, demand for coated fine paper
declined by 1.8% in the nine months ended June 2008 as compared to the
corresponding period in the prior year but was flat in fiscal 2008 as compared
to fiscal 2007. Demand grew by 1.4% in fiscal 2007, 2.3% in fiscal 2006 and 4.7%
in fiscal 2005. Capacity utilization, including exports, was high in fiscal
2007. Despite demand growth or flat demand in the year-on-year comparison and
sharp increases in input costs, attempts to increase prices in the European
market in fiscal 2007 and in the nine months ended June 2008 were unsuccessful
due to intense competition and persisting over-capacity. However, a small
increase in coated fine paper prices of approximately 1% occurred during
September 2008. Although the relative weakness of the US dollar versus the euro
made exports less attractive compared to regional sales, exports from Europe
grew by 8% in the nine months ended June 2008 compared to the corresponding
period in 2007 and by 3.7% in fiscal 2008 compared to fiscal 2007.
The graph below reflects apparent consumption
for the United States and Europe. Apparent consumption is consumption as
indicated by mill sales volumes, which ignores the impact of customer inventory
and the reclassification of imports. The sales volume to customers is used as
the indicator of demand, with the difference between apparent and real demand
being the movement in inventories.
US
and European Apparent Consumption of Coated Paper
Source:
AF&PA & Cepifine
US short tons
converted to tonnes
Average selling prices realized for the Sappi
Fine Paper businesses increased by US$92 per tonne, from US$972 in the nine
months ended June 2007 to US$1,064 per tonne in the nine months ended June 2008.
In the year-on-year comparison, average selling prices increased by US$94 per
tonne, from US$979 in fiscal 2007 to US$1,073 per tonne in fiscal 2008. Average
prices had increased by US$38 per tonne, from US$941 per tonne in fiscal 2006 to
US$979 per tonne in fiscal 2007, compared to US$1,006 per tonne in fiscal
2005.
The recent price history for benchmark coated
woodfree grades in North America and Europe is shown in the following
chart:
Prices are list
prices. Actual transaction prices could differ from prices depicted in
graph
Source: RISI
(Resource Information System Inc).
Coated
Fine Paper—North America
Sappi Fine Paper North America’s average price
realized increased by US$59 per tonne to US$1,058 in the nine months ended June
2008 as compared to the nine months ended June 2007. In fiscal 2008, the average
price realized increased by US$68 per tonne, to US$1,071, as compared to fiscal
2007. These increases were due to a weaker US dollar, reduced supply and a sales
and marketing strategy that was more focused on price
levels. Sappi Fine Paper North America’s average price realized decreased by
US$6 per tonne to US$1,003 per tonne in fiscal 2007 compared to fiscal 2006,
mainly due to competitive import price pressure and changes in product mix. In
fiscal 2006, prices in North America decreased to US$1,009 per tonne from
US$1,017 per tonne in fiscal 2005.
Coated
Woodfree Paper—Europe
Prices in Europe, in the local currency,
decreased in the nine months ended June 2008 (€706 per tonne)
compared to the nine months ended June 2007 (€721 per tonne),
and in fiscal 2008 (€709 per tonne)
compared to fiscal 2007 (€722 per tonne),
mainly due to increased competition in the market. Despite sharp input cost
increases and capacity closures during fiscal 2007, prices in Europe, in the
local currency, were relatively flat in fiscal 2007 (€722 per tonne)
compared to fiscal 2006 (€724 per tonne),
but significantly lower than fiscal 2005 (€732 per tonne).
Sales prices in Europe are impacted by the movement in the US$/euro exchange
rate as explained in more detail in the analysis of sales development by region.
See “—Financial Condition and Results of Operations—Comparison of the Nine
Months ended June 2008 to the Nine Months ended June 2007 and a Comparison of
Fiscal 2007, 2006 and 2005—Sales”.
Coated
Magazine Paper—Europe
In fiscal 2006, deliveries by European
producers increased by approximately 0.8%, compared to fiscal 2005, primarily
due to increased exports to markets outside Europe. Average market prices in
Europe increased by approximately 0.7%. The strengthening of the euro against
the US dollar depressed the euro-equivalent selling prices for exports. In
fiscal 2007, deliveries by producers of coated magazine paper increased
approximately 2.3%. The price development in Europe was unfavorable for coated
magazine paper, decreasing by 3.2% compared to fiscal 2006. European deliveries
of coated magazine paper increased by 1.5% in fiscal 2008 compared to fiscal
2007, while average market prices in Europe increased by 4.4%.
Pulp
Pulp prices tend to display higher volatility
than paper prices. During the period from 1993 to 1995 the price of the
benchmark pulp grade, NBSK, ranged from a low of US$395 (November 1993) to a
high of US$925 per tonne (September 1995). The average NBSK prices for fiscal
2008, the 9 months ended June 2008, fiscal 2007, fiscal 2006 and fiscal
2005 were US$876, US$873, US$764, US$643 and US$611 per tonne, respectively.
Throughout fiscal 2005, global demand for pulp was low in comparison to fiscal
2006 and fiscal 2007 and price fluctuations were driven primarily by currency
movements, inventory movement and non-integrated paper capacity expansion. High
pulp demand during fiscal 2007 resulted in the continued increase of pulp
prices. The pulp demand during the latter part of fiscal 2007 and for the nine
months ended June 2008 remained high as none of the usual seasonal decreases
occurred. Pulp demand and prices started decreasing in the remainder of fiscal
2008.
The traditional softwood pulp price premium to
hardwood was disrupted in fiscal 2005 as a result of pulp mills shifting from
hardwood to softwood production, and hardwood pulp mills closing temporarily.
This led to hardwood pulp prices exceeding that of softwood in the final quarter
of fiscal 2005. However, during October 2005 softwood price premiums were
restored as some softwood mills closed in eastern Canada, while hardwood supply
increased during the latter part of fiscal 2005 as an additional
1.9 million tonnes came on stream with large expansions at Hainan Island in
China and Veracel in Brazil. As a result, the softwood pulp price premium to
hardwood increased considerably during fiscal 2006 and continued to increase
through fiscal 2007 and to a lesser extent during the nine months ended June
2008 and the remainder of fiscal 2008.
Since we sell roughly as much pulp as we
purchase, fluctuations in market pulp prices have a negligible direct impact on
our overall profitability. At a divisional level, pulp prices do, however,
affect profitability since Sappi Fine Paper Europe is a net buyer of hardwood
pulp and Sappi Forest Products is a net seller of hardwood pulp.
The price of NBSK
and Northern Bleached Hardwood Kraft (“NBHK”) pulp is depicted in the following
chart:
Source: PIX (Index
from Forex Indexes Ltd)
Chemical cellulose accounts for the majority of
our third-party pulp sales. The chemical cellulose produced at our Saiccor
operation in southern Africa (“Saiccor”) is used principally as an input in the
production of various synthetic textiles and acetate flake used in the
manufacturing of acetate tow for cigarette filter tips.
The movement in price of certain chemical
cellulose grades is linked to the price of NBSK. Higher technical specifications
allow chemical cellulose to typically trade at a premium to NBSK. Bleached
Hardwood Kraft pulp (“BHK”) generally sells at a lower price than
NBSK.
We increased chemical cellulose product sales
significantly in this sector in fiscal 2004 and maintained these higher volumes
in each of the fiscal years through to 2007. While demand for Saiccor’s chemical
cellulose remained strong during the nine months ended June 2008, sales during
that period were at a lower level as compared to the corresponding period in the
prior year, primarily as a result of a shortfall in production volumes. Prices
in US dollars have steadily increased year on year from 2005 to
2008.
Significant competitive sources of chemical
cellulose supply were recently removed from the industry when Weyerhauser closed
its 140,000 tonnes per annum Cosmopolis plant in September 2006 and the RGM
mill in Indonesia (P.T. Toba) converted production from chemical cellulose
to paper grade pulp in May 2008. The capacity of the RGM mill is
180,000 tonnes per annum (tpa). In addition, the Baikalsk mill in Russia
(90,000 tpa) switched to producing unbleached kraft pulp during 2008 and
the Borregaard mill in Switzerland (120,000 tpa) announced that it would
close in December 2008. These closures are balanced by the start-up of an
additional 250,000 tonnes per annum at the Bahia pulp mill in Brazil, the
conversion of the AV Nackawic mill in Canada (180,000 to 200,000 tpa) to
chemical cellulose and the increase in capacity at our Saiccor mill to
approximately 800,000 tonnes per annum.
In line with the movement in the NBSK prices,
prices for chemical cellulose produced at our Saiccor mill increased in the
early part of fiscal 2005, but this trend was reversed later in the year. In
fiscal 2006, 2007 and the nine months ended June 2008 our chemical cellulose
business, which is 100% export-based, continued to be fully utilized and
subsequently achieved strong price growth in 2007 as well as the nine months
ended June 2008. We maintained a strong market position in the key Viscose
Staple Fiber and Lyocell segments but also posted good sales in the specialty
acetate flake and MCC segments.
Currency
Fluctuations
The principal currencies in which our
subsidiaries conduct business are the US dollar (US$), the euro and the South
African Rand (ZAR). Although our reporting currency is the US dollar, a
significant portion of our sales and purchases are made in currencies other than
the US dollar. In Europe and North America, sales and expenses are generally
denominated in euro and US dollars, respectively; however, pulp purchases in
Europe are primarily denominated in US dollars. In southern Africa, costs
incurred are generally denominated in Rands, as are local sales. Exports, which
are denominated primarily in US dollars, from the combined Southern African
businesses to other regions represent approximately 39% and 43%, respectively,
of sales, in local currency, for the nine months ended June 2008 and 2007.
Exports represented 43% of sales for fiscal 2007 (2006: 41%, 2005:
39%).
Our consolidated financial position, results of
operations and cash flows may be materially affected by movements in the
exchange rate between US dollars and the respective local currencies to which
our subsidiaries are exposed. The principal currencies in which subsidiaries
conduct business that are subject to these risks are the euro and the Rand. The
following table depicts the average and year end exchange rates for the Rand and
euro against the US dollar used in preparation of our financial statements in
the nine months ended June 2008 and 2007, fiscal 2007, fiscal 2006 and fiscal
2005:
|
Exchange
Rates
|
Nine
Months
ended
June
2008
|
Nine
Months
ended
June
2007
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Period end
rate : US$1=ZAR
|
7.9145 | 7.0393 | 6.8713 | 7.7738 | 6.3656 | |||||||||||||||
|
Average rate
YTD : US$1=ZAR
|
7.3236 | 7.2121 | 7.1741 | 6.6039 | 6.2418 | |||||||||||||||
|
Period end
rate : EUR1=US$
|
1.5795 | 1.3542 | 1.4272 | 1.2672 | 1.2030 | |||||||||||||||
|
Average rate
YTD : EUR1=US$
|
1.5071 | 1.3178 | 1.3336 | 1.2315 | 1.2659 | |||||||||||||||
Source: audited
financial statements of Sappi Limited.
US$1 = ZAR,
Euro 1 = US$.
Euro
and Zar Exchange Rate Movement against USD
Daily
Rate January 1999 to June 2008
Source: Saint Louis
Federal Reserve.
US$1 = ZAR,
Euro 1 = US$.
The profitability of certain of our southern
African operations is directly dependent on the Rand proceeds of the
US dollar exports. Prices in the local South African market are also
influenced by pricing of imports.
The translation, from local currency to
US dollars, of our results for reporting purposes, tends to distort
comparisons between financial periods when currencies are volatile. In the nine
months ended June 2008, the US dollar decreased to an average of US$1.50/Euro,
from an average of US$1.31/Euro in the nine months ended June 2007 and the Rand
decreased to an average of ZAR7.32/US$, from an average of ZAR7.21/US$ in the
nine months ended June 2007. The impact on sales for the nine months ended June
2008 was to increase sales by US$239 million compared to the same period in
fiscal 2007. The euro strengthened substantially against the US dollar in
fiscal 2007 (from an average US$1.23/Euro in fiscal 2006 to US$1.33/Euro in
fiscal 2007), while the Rand weakened on average against the US dollar in
fiscal 2007 (from an average ZAR6.60/US$ in fiscal 2006 to an average
ZAR7.17/US$ in fiscal 2007). The impact of exchange rates in fiscal 2006 was to
reduce sales by US$137 million. This is referred to as the currency
translation effect in the following discussion of the financial condition and
results of operations. For a more detailed discussion of these impacts see
“—Financial Condition and Results of Operations”.
Inflation
and Interest Rates
South African prime overdraft interest rates
declined in fiscal 2005 (10.5%) and remained at those levels until April 2006.
The rate then increased during the remainder of fiscal 2006 (11.5%), fiscal 2007
(13.5%) and nine months ended June 2008 (15.5%). South African interest and
inflation rates can be influenced by a variety of factors, including currency
exchange rates. The Rand on average decreased against the US dollar during
fiscal 2007 moving from an average of ZAR6.60/US$ in fiscal 2006 to an average
of ZAR7.17/US$ in fiscal 2007 (fiscal 2005: ZAR6.24/US$). The Rand on average
further decreased to an average of ZAR7.32/US$ in the nine months ended
June 2008 from an average of ZAR7.21/US$ in the nine months ended June 2007. The
year end closing rate strengthened from ZAR7.77/US$ in fiscal 2006 to
ZAR6.87/US$ in fiscal 2007. Partly due to the weaker Rand during fiscal 2007 and
fiscal 2006, the South African inflation rate increased from 4.4% in fiscal 2005
to 5.4% in fiscal 2006 and at the end of fiscal 2007 it was 7.2%. This increase
is also largely due to the effect of the impact of higher oil prices on the
South African economy. The South African Reserve Bank (SARB) increased its
repurchase rate in fiscal 2006 to 8%, further increases were implemented during
fiscal 2007 closing at 10% at our fiscal year end. As at the end of June 2008,
the South African inflation rate was 11.6% and the repurchase rate had increased
to 12%. The repurchase rate is the rate at which the SARB lends assistance to
the banking sector and therefore represents the cost of credit to the banking
sector. When the repurchase rate is changed, the interest rates on overdrafts
and other loans extended by the banks also change. In this way the SARB
indirectly affects interest rates in the economy. Although South African
interest rates impact the cost of our South African borrowings, the majority of
our borrowings have been incurred by subsidiaries outside southern Africa,
denominated in either US dollars or euros.
Source: Standard
Bank South Africa.
In the US and Europe, inflation rates have been
relatively stable in recent years, and accordingly had a lesser impact on our
North American and European businesses. Please see table below depicting the
United States three-month Libor.
Annual
Average US$ Three-Month Libor
The three-month Euribor interest rate in Europe
is depicted below. The interest rates in the United States and Europe continue
to represent a significant interest rate differential when compared to South
Africa’s 12.0% repurchase rate as determined by the SARB. As of June 2008, this
differential between South Africa’s repurchase rate and the interest rates in
the US and Europe was 9% and 7%, respectively.
Annual
Average European Three-Month Euribor
We borrow in the currencies of the countries in
which we invest. As a result, finance costs are related to the location of
activities and not the domicile of our Group.
Our foreign exchange policy consists of the
following principal elements:
|
|
●
|
External
borrowings are taken up in the functional currency of the operating
company concerned and, if not, then the exposure is hedged. Where
appropriate we aim, in accordance with IFRS, to apply hedge accounting
treatment to avoid volatility in our results due to mark-to-market effects
of such hedging instruments.
|
|
|
●
|
Any debtors
or creditors not in the operating currency of the mill are hedged. Sales
are hedged from the time of invoicing, purchases from the time of the
approval of the capital expenditures in the case of capital expenditures,
and other purchases are hedged, in most instances, at the time the order
is placed.
|
|
|
●
|
Exposures are
hedged through our central treasury, where external hedging instruments
are contracted after netting the various Group
exposures.
|
|
|
●
|
Variations in
this policy are considered from time to time, but any deviations from the
central treasury policy are always subject to prior
approval.
|
|
|
●
|
No
speculative positions are
permitted.
|
Our group has a current policy of not hedging
translation risks. The South African and European operations use the Rand and
the euro as their respective functional currencies. Any translation of the value
of these operations into US dollars results in foreign exchange translation
differences as the Rand and the euro exchange rates move against the
US dollar. These changes are booked to the foreign currency translation
reserve account. We prefer not to hedge this exposure with financial
instruments, as these result in cash settlements which impact results on a
permanent basis. Borrowings taken up in a currency other than the functional
currency of the borrowing entity are specifically hedged with financial
instruments, such as currency swaps and forward exchange contracts.
With regard to interest rate swaps, hedge
accounting is permitted when the hedging relationship between the hedging
instrument and the underlying debt meets the relevant requirements of IFRS. For
example, we have entered into hedging relationships to swap the fixed rate on
our outstanding public bonds to a variable rate.
South
African Economic and Political Environment
Sappi Limited is a public company incorporated
in South Africa. We have significant operations in South Africa, which accounted
for 71% of our operating profit in fiscal 2007 and 62% of our operating profit
in the nine months ended June 2008.
South Africa features a highly developed,
sophisticated “first world” infrastructure at the core of its economy.
Econometrix, a provider of economic analysis and forecasting for the South
African economy, forecasts the South African GDP to grow by 3.7% and 3.0%,
respectively, in calendar 2008 and calendar 2009. South Africa’s long-term
foreign currency investment ratings have remained constant over the last year at
Baa1 from Moody’s Investor Services Inc. and BBB+ from Standard &
Poor’s Rating Service (“S&P”). Exchange controls regulations have not been
amended during fiscal 2008 and are not expected to be amended in the short term.
South African companies remain subject to restrictions on their ability to raise
and deploy capital outside of the southern African Common Monetary Area. South
Africa achieved 14 years of democracy in calendar 2008; however, the
country continues to face challenges in overcoming substantial differences in
levels of economic and social development among its people. Access to land,
poverty, unemployment, crime and a growing prevalence of HIV/AIDS are some of
the social and economic factors that affect businesses operating in this
country.
The Restitution of Land Rights Act (Act 22 of
1994), as amended, provides for the restoration of rights in land or other
equitable redress to persons or communities dispossessed of their land rights
after June 19, 1913 as a result of old laws or practices discriminating on
the basis of race. The legislation empowers the Minister of Land Affairs to
expropriate land in order to restore it to a successful claimant provided that
there is just and equitable compensation to the owner of the land. Claims under
the Act were required to be filed on or before December 31, 1998 and are
presently being processed by the Commission on Restitution of Land Rights and
adjudicated upon by the Land Court. This process is expected to continue for
many years. As one of the largest land owners in South Africa, we anticipate
that a substantial number of claims may affect land we own. The process of
determining the extent of claims filed in respect of our land and the potential
impact of these claims on our South African operations continues. The total
number of land claims against us is 64, of which 27 in Mpumalanga and 37 in Kwa
Zulu-Natal. Four of these claims are in the process of being settled in Kwa
Zulu-Natal. The remaining claims have not been finalized and are still under
investigation by the Regional Land Claims Commissioner.
The southern African region has one of the
highest infection rates of HIV/AIDS in the world. In 1992, we started a program
to address the effects of HIV/AIDS and its impact on our employees and our
business. Our aim is to ensure that our program prevents new infections and to
treat the HIV/AIDS positive employees. Each operating unit has an elected
HIV/AIDS committee and a workplace HIV/AIDS prevention program which are adapted
to suit the needs of each particular business unit and to ensure that they are
active owners and managers of their programs. Each Sappi operation in southern
Africa has also identified the relevant role players in their geographical area
and is working with them on the implementation of a comprehensive HIV/AIDS
program, eliminating duplication and making optimum use of relevant resources
through private-public partnerships. To ensure that our program remains current,
we are members of the Global Business Coalition on HIV/AIDS (“GBC”) and of the
South African Business Coalition against HIV/AIDS (“SABCOHA”). The GBC is a
global partnership and SABCOHA is a national partnership focused on developing
an integrated strategy for dealing with HIV/AIDS.
Following two previous anonymous, voluntary
prevalence tests, a third comprehensive voluntary study was initiated in 2007 in
all of our southern African operations. Based on a participation rate of greater
than 80%, at the locations tested, we estimate that the overall infection rate
in our southern African operations is approximately 14%, which is well below the
national average. Similar studies conducted in 2008 confirmed an infection rate
of approximately 14%.
Our HIV/AIDS response strategy places special
emphasis on testing and counseling to ensure that staff is informed with regard
to their HIV/AIDS status to enable them to make informed decisions as to their
life choices. Since August 2002, our medical care for employees has included
treatment to prevent mother to child transmission. Anti-retroviral treatment has
been offered to HIV-infected permanent employees from the beginning of 2003.
More recently, special focus has been given to the identification of the
environmental risks that could lead to an increase in the prevalence of HIV in
the company. We have also extended our voluntary counseling and testing (“VCT”)
programs, and are offering an HIV test to every employee who visits the clinics
for a medical examination. We estimate that approximately 50% of our employees
that are HIV/AIDS positive participate in our HIV/AIDS management program, which
is an improvement on the prior year’s participation rate.
The government and organized business have
taken a number of steps in recent years to increase the participation of Black
people in the South African economy. To this end, the Employment Equity Act
(No. 55 of 1998), the Skills Development Act (No. 97 of 1998) and the
Preferential Procurement Policy Framework Act (No. 5 of 2000) were
promulgated. The Broad-Based Black Economic Empowerment Act (No. 53 of
2003) has formalized the country’s approach to distributing skills, employment
and wealth more equitably between races and genders. Broad-Based Black Economic
Empowerment (“BBBEE”) focuses on increasing equity in ownership, management and
control of businesses, and improving Black representation in all levels of
employment. It also promotes the development of skills within a business, the
nurturing of Black entrepreneurship through preferential procurement and
enterprise development, and the uplifting of communities through social
investment.
More recently, our South African businesses
have actively participated in the drafting of a transformation charter for the
South African forestry industry. This charter sets the objectives and principles
for BBBEE, and includes the scorecard and targets to be applied within the
industry, as well as certain undertakings by government to assist the forestry
industry to achieve its BBBEE targets. This Forestry Charter has been signed in
May 2008 but has not been gazetted. Until such time as it is formally gazetted
as a Transformation Charter and Sector Code in terms of sections 12 and 10
of the Broad-Based Black Economic Empowerment Act (No. 53 of 2003), the
South African business will continue to be evaluated against the generic BBBEE
scorecard, based on guidelines set out in the Codes of Good Practice published
by the Department of Trade and Industry.
In 2006, we achieved an overall BBBEE rating of
BBB (BB rating in 2005) as verified by Empowerdex, a leading external BBBEE
rating agent. In February 2007, the BBBEE scorecard as set out in the Codes of
Good Practice published by the Department of Trade and Industry was streamlined
and simplified without affecting their intended objectives. The South African
businesses’ BBBEE scorecard was evaluated in December 2007. Based on this
revised generic BBBEE scorecard, we achieved an overall BBBEE status of a “level
seven contributor” (B rating) with preferential procurement recognition level of
50%. As a result, 50% of the value of all purchases from our South African
businesses qualify as preferential procurement spend in a customer’s BBBEE
scorecard. New BBBEE targets have been set for 2010 and 2013. In addition to the
generic scorecard, the Forestry Charter will set out further qualifying criteria
for companies associated to the forestry industry.
We will consider and are pursuing empowerment
transactions where they add to the value of our business and meet our
empowerment criteria.
The representation of Black people,
particularly Black women, in management and all levels of employment within the
company is a focus within the organization, driven by employment equity targets
set in each occupational category. Skills development initiatives, particularly
programs aimed at improving management and leadership skills, are geared to meet
these targets. Where practical, we purchase goods and services from Black-owned
businesses and seek opportunities to develop future Black vendors. We are
committed to the support of our Project Grow, which is an initiative with local
communities using their land for plantations while training them in the core
principles of forestry management. This is achieved through financial and
technical input, as well as by providing a secure market during the start-up
phase of these small tree farming enterprises. This initiative has been extended
to encourage aspirant tree farmers who wish to undertake forestry activities on
a larger scale. We have a number of enterprise development initiatives and have
established programs to train new entrepreneurs. These initiatives involve the
transfer of business skills, technical assistance, financial support and
preferential payment terms to assist new enterprises to enter the market. We
have a history of investment in the communities in which we operate. Initiatives
to promote education, health and welfare, arts and culture, and rural and
community development, amongst others, are regularly undertaken.
The South African constitution guarantees
ownership rights of assets, and it is the stated intent of the constitution that
transfer of ownership will occur at market prices. It should be noted that BBBEE
equity participation need not necessarily occur at the corporate level, and can
be effected at divisional, business unit or lower levels. Because the BBBEE Act
sets forth a framework for plans rather than specific requirements or goals, it
is not possible to predict whether or how our business or assets may be
impacted.
Environmental
Matters
We operate in an industry subject to extensive
environmental regulations. Typically, we do not separately account for
environmental operating expenses but do not anticipate any material expenditures
related to such matters. We do separately account for environmental capital
expenditures. See note 34 to our audited financial statements for a
discussion of these matters.
Financial
Condition and Results of Operations
The operations of our Group are organized into
two main business units:
|
|
I.
|
Sappi Fine
Paper (“SFP”), which consists of Sappi Fine Paper North America (“SFPNA”),
Sappi Fine Paper Europe (“SFPE”) and Sappi Fine Paper South Africa
(“SFPSA”); and
|
|
|
II.
|
Sappi Forest
Products (“FP”), which consists of Sappi Kraft (“Kraft”), Saiccor and
Sappi Forests (“Forests”). Kraft and Saiccor are jointly referred to as
the Pulp and Paper business of FP and Forests comprises the forests
business for purposes of this discussion and analysis. The volume, revenue
and cost relationship within the Forests business is substantially
different to that of the pulp and paper
business.
|
Corporate includes all other non-manufacturing
and trading sectors of the business not included in our two main business
units.
The analysis and discussion which follows
should be read in conjunction with our consolidated financial
statements.
Comparison
of the Nine Months ended June 2008 to the Nine Months ended June 2007 and a
Comparison of Fiscal 2007, 2006 and 2005
Overview
This overview of our Group’s operating results
is intended to provide context to the detailed discussion and analysis which
follow. General trends are highlighted with detailed discussions and analysis in
separate sections below. The key indicators of our Group’s operating performance
are:
|
Key
Figures
|
Nine
Months
ended
June
2008
|
Nine
Months
ended
June
2007
|
2007
|
2006
|
2005
|
|||||||||||||||
|
(Tonnes
’000)
|
||||||||||||||||||||
|
Sales
volume
|
5,093 | 5,083 | 6,863 | 7,199 | 7,479 | |||||||||||||||
|
(US$
million)
|
||||||||||||||||||||
|
Sales
value
|
4,344 | 3,882 | 5,304 | 4,941 | 5,018 | |||||||||||||||
|
Operating
profit/(loss)
|
289 | 296 | 383 | 125 | (109 | ) | ||||||||||||||
|
Net
income/(loss)
|
134 | 127 | 202 | (4 | ) | (184 | ) | |||||||||||||
|
Basic EPS (US
cents)
|
59 | 56 | 89 | (2 | ) | (81 | ) | |||||||||||||
Operating profit in the nine months ended June
2008 was US$289 million compared to US$296 million in the nine months
ended June 2007, US$383 million in fiscal 2007, US$125 million in
fiscal 2006 and a loss of US$109 million in fiscal 2005. From fiscal 2005
to fiscal 2007, operating profit has shown improvement in year-on-year
comparisons due to volume improvement in North America and Europe, but mainly
due to price realisation in North America and South Africa and the positive
impact of exchange rates on the translation of European results into US$.
Certain items, either by their nature or due to their magnitude relative to
other periods, have significantly impacted the results in fiscal 2007 and fiscal
2006 or negatively impacted fiscal 2005. These items will be dealt with in the
relevant section of this discussion and analysis.
Segment contributions to operating profit are
as follows:
|
Nine Months
ended June 2008
|
Nine
Months
ended
June 2007
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||||||||||||
|
Variance
|
Variance
|
Variance
|
||||||||||||||||||||||||||||||||||||||||||
|
Operating
Profit/(Loss)
|
Value
|
Value
|
%
|
Value
|
Value
|
Value
|
%
|
Value
|
Value
|
%
|
Value
|
|||||||||||||||||||||||||||||||||
|
(US$
million, except percentages)
|
||||||||||||||||||||||||||||||||||||||||||||
|
Fine
Paper
|
||||||||||||||||||||||||||||||||||||||||||||
|
North
America
|
62 | 49 | 377 | 13 | 22 | 38 | — | (16 | ) | 243 | — | (259 | ) | |||||||||||||||||||||||||||||||
|
Europe
|
47 | (24 | ) | (34 | ) | 71 | 88 | 115 | — | (27 | ) | (111 | ) | (132 | ) | 84 | ||||||||||||||||||||||||||||
|
South
Africa
|
5 | (1 | ) | (17 | ) | 6 | 9 | 15 | — | (6 | ) | 5 | — | (11 | ) | |||||||||||||||||||||||||||||
|
Total
|
114 | 24 | 27 | 90 | 119 | 168 | — | (49 | ) | 137 | — | (186 | ) | |||||||||||||||||||||||||||||||
|
Forest
Products
|
167 | (45 | ) | (21 | ) | 212 | 264 | 89 | 51 | 175 | 92 | 111 | 83 | |||||||||||||||||||||||||||||||
|
Corporate
|
8 | 14 | — | (6 | ) | — | 1 | (1 | ) | 5 | — | (6 | ) | |||||||||||||||||||||||||||||||
|
Total
|
289 | (7 | ) | (2 | ) | 296 | 383 | 258 | 206 | 125 | 234 | — | (109 | ) | ||||||||||||||||||||||||||||||
Operating profit for the nine months ended June
2008 as compared to the nine months ended June 2007 decreased primarily due to a
poorer performance in Europe and South Africa, partly offset by an improved
performance in North America. The decrease in operating profit for the nine
months ended June 2008 when compared to the nine months ended June 2007 was due
primarily to significantly increased variable costs (US$330 million) and
fixed costs (US$96 million) and a less positive fair valuation of
plantation adjustment (US$46 million), partly offset by higher sales
(US$462 million) in all regions. Increased sales were attributable to a
volume increase at Sappi Fine Paper, and, to a greater extent, to price
increases in North America and South Africa and the positive impact of exchange
rates on the translation of European results into US$. The US$330 million
increase in variable costs was due primarily to an increase in delivery
(US$43 million), wood (US$60 million), energy (US$91 million) and
pulp (US$130 million) costs. Fixed costs increases (US$96 million)
were mainly attributable to increased personnel (US$76 million) and
maintenance (US$17 million) costs. Cost increases reflect the adverse
impact of increases in global commodity prices, particularly oil. Operating
profit in fiscal 2007 compared to fiscal 2006 was favorably impacted by the
significantly improved performances in all segments of the business. The major
contributor to the improved performance was the improvement in sales, partly
offset by some cost escalations. Of the US$363 million improvement in sales
in fiscal 2007, US$123 million was attributable to volume improvements,
US$179 million to price improvement and US$61 million due to the
impact of exchange rates on reporting in US$. The major drivers of these changes
are dealt with in more detail below.
The underlying reasons for the movement in our
operating profit can be explained as follows:
Movements in the sales and variable and fixed
cost components of the movement in operating profit are explained below. The
items not dealt with in separate sections are as follows:
Plantation fair
value: This relates to the fair value adjustment of the timber
assets of the Forestry operation of Forest Products. There is a fair value
pricing and volume or growth component to the adjustment. The movement on this
item is mainly impacted by timber selling prices, value of standing timber and
costs of harvesting and delivery, the estimated growth rate or annual volume
changes and discount rates applied. The parameters applied are all market
related. Plantation values increased by US$67 million in the nine months
ended June 2008, compared to an increase of US$113 million for the
corresponding period in fiscal 2007. The increase was US$130 million
positive in fiscal 2007, US$104 million positive in fiscal 2006 and
US$118 million positive in fiscal 2005.
Impairment: In
fiscal 2005, impairment charges were US$182 million in SFPNA, and
US$49 million in Forest Products for a total of US$231 million. During
fiscal 2006, Forest Products, due to the improved performance of the mill,
reversed the impairment of the Usutu mill resulting in a credit to profit of
US$40 million. This resulted in an improvement of reported profitability
from fiscal 2005 to fiscal 2006 of US$271 million due to changes to
impairment charges.
Sale of Nash: The
SFPE Nash mill was closed in May 2006 and the operations were transferred to
other operations in our Group. The mill property was sold during fiscal 2007 and
realized a profit of US$26 million.
Fire damage: During
July and August 2007 the forestry operations of Forest Products experienced
devastating fires across a wide area of afforested land. The cost of fighting
these fires and of the forest destroyed, net of salvage, was
US$17 million.
Sales
Group
|
Nine Months
ended June 2008
|
Nine
Months
ended
June 2007
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||||||||||||
|
Variance
|
Variance
|
Variance
|
||||||||||||||||||||||||||||||||||||||||||
|
Sales
Volume
|
Volume
|
Volume
|
%
|
Volume
|
Volume
|
Volume
|
%
|
Volume
|
Volume
|
%
|
Volume
|
|||||||||||||||||||||||||||||||||
|
(Tonnes
’000, except percentages)
|
||||||||||||||||||||||||||||||||||||||||||||
|
Fine
Paper
|
||||||||||||||||||||||||||||||||||||||||||||
|
North
America
|
1,164 | 56 | 5 | 1,108 | 1,506 | 80 | 6 | 1,426 | (7 | ) | — | 1,433 | ||||||||||||||||||||||||||||||||
|
Europe
|
1,918 | 58 | 3 | 1,860 | 2,493 | 43 | 2 | 2,450 | 23 | 1 | 2,427 | |||||||||||||||||||||||||||||||||
|
South
Africa
|
246 | (14 | ) | (5 | ) | 260 | 350 | 22 | 7 | 328 | 11 | 3 | 317 | |||||||||||||||||||||||||||||||
|
Total
|
3,328 | 100 | 3 | 3,228 | 4,349 | 145 | 3 | 4,204 | 27 | 1 | 4,177 | |||||||||||||||||||||||||||||||||
|
Forest
Products
|
||||||||||||||||||||||||||||||||||||||||||||
|
Pulp &
Paper
|
1,039 | (28 | ) | (3 | ) | 1,067 | 1,484 | 14 | 1 | 1,470 | (95 | ) | (6 | ) | 1,565 | |||||||||||||||||||||||||||||
|
Forestry
|
726 | (62 | ) | (8 | ) | 788 | 1,030 | (495 | ) | (32 | ) | 1,525 | (212 | ) | (12 | ) | 1,737 | |||||||||||||||||||||||||||
|
Total
|
1,765 | (90 | ) | (5 | ) | 1,855 | 2,514 | (481 | ) | (16 | ) | 2,995 | (307 | ) | (9 | ) | 3,302 | |||||||||||||||||||||||||||
|
Total
|
5,093 | 10 | — | 5,083 | 6,863 | (336 | ) | (5 | ) | 7,199 | (280 | ) | (4 | ) | 7,479 | |||||||||||||||||||||||||||||
|
Nine Months
ended June 2008
|
Nine
Months
ended
June
2007
|
|||||||||||||||
|
Variance
|
||||||||||||||||
|
Sales
Value
|
Value
|
Value
|
%
|
Value
|
||||||||||||
|
(US$
million, except percentages)
|
||||||||||||||||
|
Fine
Paper
|
||||||||||||||||
|
North
America
|
1,231 | 124 | 11 | 1,107 | ||||||||||||
|
Europe
|
2,040 | 272 | 15 | 1,768 | ||||||||||||
|
South
Africa
|
271 | 8 | 3 | 263 | ||||||||||||
|
Total
|
3,542 | 404 | 13 | 3,138 | ||||||||||||
|
Forest
Products
|
||||||||||||||||
|
Pulp &
Paper
|
747 | 53 | 8 | 694 | ||||||||||||
|
Forestry
|
55 | 5 | 10 | 50 | ||||||||||||
|
Total
|
802 | 58 | 8 | 744 | ||||||||||||
|
Total
|
4,344 | 462 | 12 | 3,882 | ||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||
|
Variance
|
Variance
|
|||||||||||||||||||||||||||
|
Sales
Value
|
Value
|
Value
|
%
|
Value
|
Value
|
%
|
Value
|
|||||||||||||||||||||
|
(US$
million)
|
||||||||||||||||||||||||||||
|
Fine
Paper
|
||||||||||||||||||||||||||||
|
North
America
|
1,511 | 72 | 5 | 1,439 | (19 | ) | (1 | ) | 1,458 | |||||||||||||||||||
|
Europe
|
2,387 | 193 | 9 | 2,194 | (45 | ) | (2 | ) | 2,239 | |||||||||||||||||||
|
South
Africa
|
358 | 33 | 10 | 325 | 2 | 1 | 323 | |||||||||||||||||||||
|
Total
|
4,256 | 298 | 8 | 3,958 | (62 | ) | (2 | ) | 4,020 | |||||||||||||||||||
|
Forest
Products
|
||||||||||||||||||||||||||||
|
Pulp &
Paper
|
979 | 83 | 9 | 896 | (12 | ) | (1 | ) | 908 | |||||||||||||||||||
|
Forestry
|
69 | (18 | ) | (21 | ) | 87 | (3 | ) | (3 | ) | 90 | |||||||||||||||||
|
Total
|
1,048 | 65 | 7 | 983 | (15 | ) | (2 | ) | 998 | |||||||||||||||||||
|
Total
|
5,304 | 363 | 7 | 4,941 | (77 | ) | (2 | ) | 5,018 | |||||||||||||||||||
|
Nine
Months ended June 2008
|
||||||||||||||||
|
Sales
Variance Analysis vs. Comparable Period in Previous
Year
|
Volume
|
Price
|
Exchange
Rate
|
Total
|
||||||||||||
|
(US$
million)
|
||||||||||||||||
|
Fine
Paper
|
||||||||||||||||
|
North
America
|
56 | 68 | 124 | |||||||||||||
|
Europe
|
55 | (39 | ) | 256 | 272 | |||||||||||
|
South
Africa
|
(14 | ) | 26 | (4 | ) | 8 | ||||||||||
|
Total
|
97 | 55 | 252 | 404 | ||||||||||||
|
Forest
Products
|
||||||||||||||||
|
Pulp &
Paper
|
(18 | ) | 83 | (12 | ) | 53 | ||||||||||
|
Forestry
|
(4 | ) | 10 | (1 | ) | 5 | ||||||||||
|
Total
|
(22 | ) | 93 | (13 | ) | 58 | ||||||||||
|
Total
|
75 | 148 | 239 | 462 | ||||||||||||
The three factors impacting sales are volume,
price and exchange rate. The South African and European businesses transact in
Rand and euro respectively, but the results of their operations are translated
into US dollars for reporting purposes. The movement in the exchange rate
from local currency to US dollars during periods of high volatility
significantly impacts reported results from one period to the next. Sales
improvement was a major contributor to sustained profitability as it partly
offset the impact of cost escalations in the nine months ended June 2008. Volume
contributed US$75 million, price realisation US$148 million and
exchange rate US$239 million to the US$462 million improvement in
sales value for the nine months ended June 2008, when compared to the nine
months ended June 2007. The Fine Paper European US$55 million and Fine
Paper North American US$56 million improvements in sales volumes were
partly offset by negative volume contributions from Fine Paper South Africa
(US$14 million) and Forest Products (US$22 million). Positive price
contributions from Fine Paper North America (US$68 million), Fine Paper
South Africa (US$26 million) and Forest Products (US$93 million) were
partly offset by negative pricing impacts in Fine Paper Europe
(US$39 million). Positive exchange rate impacts in Europe
(US$256 million) were partly offset by negative impacts at Fine Paper South
Africa (US$4 million) and Forest Products
(US$13 million).
|
2007
|
2006
|
|||||||||||||||||||||||||||||||
|
Sales
Variance Analysis vs.
Previous
Year
|
Volume
|
Price
|
Exchange
Rate
|
Total
|
Volume
|
Price
|
Exchange
Rate
|
Total
|
||||||||||||||||||||||||
|
(US$
million)
|
||||||||||||||||||||||||||||||||
|
Fine
Paper
|
||||||||||||||||||||||||||||||||
|
North
America
|
81 | (9 | ) | 72 | (7 | ) | (12 | ) | (19 | ) | ||||||||||||||||||||||
|
Europe
|
39 | (28 | ) | 182 | 194 | 21 | (5 | ) | (61 | ) | (45 | ) | ||||||||||||||||||||
|
South
Africa
|
22 | 41 | (30 | ) | 32 | 11 | 10 | (19 | ) | 2 | ||||||||||||||||||||||
|
Total
|
142 | 4 | 152 | 298 | 25 | (7 | ) | (80 | ) | (62 | ) | |||||||||||||||||||||
|
Forest
Products
|
||||||||||||||||||||||||||||||||
|
Pulp &
Paper
|
9 | 159 | (85 | ) | 83 | (55 | ) | 95 | (52 | ) | (12 | ) | ||||||||||||||||||||
|
Forestry
|
(28 | ) | 16 | (6 | ) | (18 | ) | (11 | ) | 13 | (5 | ) | (3 | ) | ||||||||||||||||||
|
Total
|
(19 | ) | 175 | (91 | ) | 65 | (66 | ) | 108 | (57 | ) | (15 | ) | |||||||||||||||||||
|
Total
|
123 | 179 | 61 | 363 | (41 | ) | 101 | (137 | ) | (77 | ) | |||||||||||||||||||||
The increase in sales volume in Fine Paper
Europe and North America was attributable to an increase in customer market
share in both regions. The decrease in volume losses in South Africa was largely
due to operational issues with our production activities. In fiscal 2007,
volumes improved as market share was more effectively retained and in some
instances increased from previous levels. Volume growth at Fine Paper was not at
expected levels during fiscal 2005 and fiscal 2006 as all regions experienced
market share declines. Forest Products saw declines in pulp and paper volumes
due to some loss of local market share in 2006 resulting from import
substitution on the back of a much stronger local currency. In 2007, import
substitution was less evident as the local currency had weakened against the
US dollar making import substitution less attractive. Sappi Fine Paper
South Africa experienced similar local market dynamics to Forest Products in
2006 with import substitution being a major threat. Production output
difficulties in the nine months ended June 2008, fiscal 2007 and fiscal 2006 at
Kraft and the impact of the Saiccor expansion project in the nine months ended
June 2008 impacted Forest Products sales volumes adversely. The decline in
external timber sales volumes reflects efforts to reduce these sales in order to
protect timber stocks in anticipation of the increased Group demand that will
occur when the Saiccor upgrade is at full capacity. This situation has been
exacerbated by the fires in 2007.
Sales price development by region in US$/tonne
is as follows:
|
Nine Months
to
June 2008
|
Nine
Months
to June 2007
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||||||||||||
|
Variance
|
Variance
|
Variance
|
||||||||||||||||||||||||||||||||||||||||||
|
Sales
Price Development
|
US$/
Tonne
|
US$/
Tonne
|
%
|
US$/
Tonne
|
US$/
Tonne
|
US$/
Tonne
|
%
|
US$/
Tonne
|
US$/
Tonne
|
%
|
US$/
Tonne
|
|||||||||||||||||||||||||||||||||
|
Fine
Paper
|
||||||||||||||||||||||||||||||||||||||||||||
|
North
America
|
1,058 | 59 | 6 | 999 | 1,003 | (6 | ) | (1 | ) | 1,009 | (8 | ) | (1 | ) | 1,017 | |||||||||||||||||||||||||||||
|
Europe
|
1,064 | 113 | 12 | 951 | 957 | 61 | 7 | 896 | (27 | ) | (3 | ) | 923 | |||||||||||||||||||||||||||||||
|
South
Africa
|
1,102 | 90 | 9 | 1,012 | 1,023 | 32 | 3 | 991 | (28 | ) | (3 | ) | 1,019 | |||||||||||||||||||||||||||||||
|
Total
|
1,064 | 92 | 9 | 972 | 979 | 38 | 4 | 941 | (21 | ) | (2 | ) | 962 | |||||||||||||||||||||||||||||||
|
Forest
Products
|
||||||||||||||||||||||||||||||||||||||||||||
|
Pulp &
Paper
|
719 | 69 | 11 | 650 | 660 | 50 | 8 | 610 | 30 | 5 | 580 | |||||||||||||||||||||||||||||||||
|
Forestry
|
76 | 13 | 21 | 63 | 67 | 10 | 18 | 57 | 5 | 10 | 52 | |||||||||||||||||||||||||||||||||
|
Total
|
454 | 53 | 13 | 401 | 417 | 89 | 27 | 328 | 26 | 9 | 302 | |||||||||||||||||||||||||||||||||
|
Total
|
853 | 89 | 12 | 764 | 773 | 87 | 13 | 686 | 15 | 2 | 671 | |||||||||||||||||||||||||||||||||
Sappi
Fine Paper North America
The average price for the nine months ended
June 2008 increased to US$1,058 per tonne from US$999 per tonne for the nine
months ended June 2007 as a result of a weaker US dollar and a sales and
marketing strategy that was more focused on price levels. The average price
realized decreased to US$1,003 per tonne in fiscal 2007 from US$1,009 per tonne
in fiscal 2006 and US$1,017 per tonne in fiscal 2005 due to continued market
pricing and competition pressure. The major contributor to improved sales is
volume resulting from market share gain in the nine months ended June 2008 and
fiscal 2007. Volumes in fiscal 2006 were adversely affected by declines in
market share due to increased import substitution. There is no exchange rate
impact as the translation currency is the same as the reporting currency, namely
the US dollar.
Sappi
Fine Paper Europe
The average price for the nine months ended
June 2008 increased to US$1,064 per tonne from US$951 per tonne for the nine
months ended June 2007 due mainly to the depreciation of the US$ against the
Euro. Average prices realized in US dollar terms were US$957 per tonne in
fiscal 2007, US$61 per tonne up from US$896 per tonne in fiscal 2006, which was
US$27 per tonne down from the US$923 per tonne in fiscal 2005. Pricing in Europe
has been under pressure since fiscal 2005 due to strong competition for local
market position largely due to the weakening of the US dollar. The average
exchange rate for the nine months ended June 2008 was US$1.50/Euro, compared to
an average of US$1.31/Euro in the same period during fiscal 2007. Pricing in US
dollars benefits from the depreciation of the US dollar against the euro
when euro values are translated into the US dollar reporting currency. From
fiscal 2005 to fiscal 2007 the US dollar declined 19% from US$1.20/Euro to
US$1.42/Euro. Volumes have, since fiscal 2005, been impacted by changes in
market share resulting from attempts to improve pricing and increasing
competition in local markets.
Sappi
Fine Paper South Africa
The average price for the nine months ended
June 2008 compared to the nine months ended June 2007 increased to US$1,102 per
tonne from US$1,012 per tonne for the nine months ended June 2007. The average
price realized at SFPSA in US dollar terms increased to US$1,023 per tonne
in fiscal 2007 from US$991 per tonne in fiscal 2006 after declining from
US$1,019 per tonne in fiscal 2005. During 2006, the region experienced pricing
pressure due to import substitution as a result of the strength of the Rand
against the US dollar. In 2007, the Rand weakened, lessening the threat and
creating the climate for price increases. This trend has continued into fiscal
2008. The weakening of the currency also reduces import substitution volumes
creating increased demand for locally produced product. The average exchange
rate for the nine months ended June 2008 was ZAR7.32/US$, compared to an average
of ZAR7.21/US$ in the same period during fiscal 2007, ZAR7.17/US$ in fiscal
2007, ZAR6.60/US$ in fiscal 2006 and ZAR6.24/US$ in fiscal 2005. The commercial
benefit achieved as a result of the relatively weaker Rand was partly offset by
an adverse impact on the translation of results into the reporting currency
(US dollars).
Forest
Products
Timber volumes at Forest Products have shown a
decline as the region reduced external sales in order to conserve and build
timber supply inventories in anticipation of the full commissioning of the
Saiccor upgrade. Recent fires have placed inventories under further pressure and
strategic plans to secure long term fiber supplies are being implemented. A
major determinant of pricing in both the Kraft and Saiccor businesses of Forest
Products is the international NBSK price. Its price remained high during the
nine months ended June 2008 at an average of US$872/tonne, which was higher than
the price as at the close of fiscal 2007 of US$811 per tonne. These prices were
at historical highs and contributed to increasing sales value for both the Kraft
and Saiccor businesses. Hardwood Pulp sales, which form a major portion of
Kraft sales, have also experienced favorable pricing conditions with an average
market price at US$791/tonne. Hardwood pulp was at US$720 per tonne at end of
fiscal 2007. Kraft’s local packaging board sales have also benefited from the
depreciation of the Rand against the US dollar which results in a decrease
in import substitution and an increase in both local pricing and volumes. The
commercial benefit achieved as a result of the relatively weaker Rand was partly
offset by the adverse impact of the translation results into the reporting
currency (US dollars).
Operating
expenses
An analysis of our operating expenses is as
follows:
|
Nine Months
ended June 2008
|
Nine Months
ended June 2007
|
|||||||||||||||||||||||
|
Variance
|
||||||||||||||||||||||||
|
Operating
Costs
|
Costs
US$
Million
|
US$/Tonne
|
Value
|
%
|
Costs
US$
Million
|
US$/Tonne
|
||||||||||||||||||
|
Variable
Costs
|
||||||||||||||||||||||||
|
Delivery
|
371 | 73 | 43 | 13 | 328 | 65 | ||||||||||||||||||
|
Manufacturing
|
2,258 | 443 | 287 | 15 | 1,971 | 388 | ||||||||||||||||||
|
Total
Variable
|
2,629 | 516 | 330 | 14 | 2,299 | 453 | ||||||||||||||||||
|
Fixed
Costs
|
1,434 | 282 | 96 | 7 | 1,338 | 263 | ||||||||||||||||||
|
Fair value
plantation
|
(67 | ) | (13 | ) | 46 | (41 | ) | (113 | ) | (22 | ) | |||||||||||||
|
Impairment
|
— | — | — | — | — | — | ||||||||||||||||||
|
Restructuring
|
— | — | — | — | — | — | ||||||||||||||||||
|
Pension
cost
|
— | — | — | — | — | — | ||||||||||||||||||
|
Profit on
sale of Nash
|
— | — | — | — | — | — | ||||||||||||||||||
|
Fire
damage
|
— | — | — | — | — | — | ||||||||||||||||||
|
Other
|
59 | 12 | (3 | ) | (5 | ) | 62 | 12 | ||||||||||||||||
|
Total
|
4,055 | 797 | 469 | 13 | 3,586 | 706 | ||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||||||||||
|
Variance
|
Variance
|
|||||||||||||||||||||||||||||||||||||||
|
Operating
Costs
|
Costs
US$
Million
|
US$/
Tonne
|
Value
|
%
|
Costs
US$
Million
|
US$/
Tonne
|
Value
|
%
|
Costs
US$
Million
|
US$/
Tonne
|
||||||||||||||||||||||||||||||
|
Variable
Costs
|
||||||||||||||||||||||||||||||||||||||||
|
Delivery
|
453 | 66 | 12 | 3 | 441 | 61 | (10 | ) | (2 | ) | 451 | 60 | ||||||||||||||||||||||||||||
|
Manufacturing
|
2,685 | 391 | 169 | 7 | 2,516 | 349 | 90 | 4 | 2,426 | 324 | ||||||||||||||||||||||||||||||
|
Total
Variable
|
3,138 | 457 | 181 | 6 | 2,957 | 410 | 80 | 3 | 2,877 | 384 | ||||||||||||||||||||||||||||||
|
Fixed
Costs
|
1,808 | 263 | 9 | 1 | 1,799 | 250 | (135 | ) | (7 | ) | 1,934 | 259 | ||||||||||||||||||||||||||||
|
Fair value
plantation
|
(130 | ) | (19 | ) | (26 | ) | 25 | (104 | ) | (14 | ) | 14 | (12 | ) | (118 | ) | (16 | ) | ||||||||||||||||||||||
|
Impairment
|
— | — | 31 | (100 | ) | (31 | ) | (4 | ) | (262 | ) | (113 | ) | 231 | 31 | |||||||||||||||||||||||||
|
Restructuring
|
(7 | ) | (1 | ) | (57 | ) | (114 | ) | 50 | 7 | 29 | 138 | 21 | 3 | ||||||||||||||||||||||||||
|
Pension
cost
|
— | — | 1 | (100 | ) | (1 | ) | — | (42 | ) | (102 | ) | 41 | 5 | ||||||||||||||||||||||||||
|
Profit on
sale of Nash
|
(26 | ) | (4 | ) | (26 | ) | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
Fire
damage
|
17 | 2 | 17 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
|
Other
|
121 | 18 | (25 | ) | (17 | ) | 146 | 20 | 5 | 4 | 141 | 19 | ||||||||||||||||||||||||||||
|
Total
|
4,921 | 716 | 105 | 2 | 4,816 | 669 | (311 | ) | (6 | ) | 5,127 | 685 | ||||||||||||||||||||||||||||
In the analysis which follows cost per tonne
has been based on sales tonnes. The fair value pricing adjustment, impairment
charge, profit on sale of Nash mill and fire damage items are discussed under
“Overview”. The restructuring charge in 2006 relates to a provision created at
SFPE for the restructuring as a result of the cost and operational improvement
project run in the region. The US$7 million reversal in 2007 relates to the
balance of this restructuring provision not utilized. This project was
implemented and benefits started to flow to the region in 2007. The pension cost
reversal in 2006 relates to the impact of the changes to IFRS and restructuring
of certain of our post employment benefit funds. Variable and fixed costs have
been analyzed in more detail below.
Variable
manufacturing costs
Group
Variable manufacturing costs relate to costs of
inputs which vary directly with output. Other costs relate to inputs such as
electricity, water, fillers and consumables. Our variable costs are impacted by
sales volume, exchange rate impacts on translation of European and South African
businesses into US dollars, and the underlying costs of inputs. In the analysis
and discussion of variable costs, volume reflects the changes in cost
attributable to sales volume changes, costs refer to changes in input costs and
exchange rate relates to the impact of the movement in exchange rate on the
translation from local currency to US dollars for reporting purposes at
Fine Paper Europe and South Africa. The major contributors to variable cost
escalations at a Group level were the impact of the exchange rate on translation
of the European and South African operations into the US dollar reporting
currency and actual input cost escalations. See “—Currency Fluctuations” for
exchange rate movements. Increases due to volume are related to the movement in
sales volumes year on year and changes in usage. Cost escalations are being
driven by international commodity price movements. The two major cost drivers
have been oil and pulp price movements.
An analysis of the impact of these components
is as follows:
|
Nine Months
ended June 2008
|
Nine Months
ended June 2007
|
|||||||||||||||||||||||
|
Variance
|
||||||||||||||||||||||||
|
Variable
Manufacturing Costs
|
US$
Million
|
US$/Tonne
|
Value
|
%
|
US$
Million
|
US$/Tonne
|
||||||||||||||||||
|
Wood
|
535 | 105 | 60 | 13 | 475 | 93 | ||||||||||||||||||
|
Energy
|
417 | 82 | 91 | 28 | 326 | 64 | ||||||||||||||||||
|
Pulp
|
598 | 117 | 130 | 28 | 468 | 92 | ||||||||||||||||||
|
Chemical &
Other
|
708 | 139 | 6 | 1 | 702 | 138 | ||||||||||||||||||
|
Total
|
2,258 | 443 | 287 | 15 | 1,971 | 388 | ||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||||||||||
|
Variance
|
Variance
|
|||||||||||||||||||||||||||||||||||||||
|
Variable
Manufacturing Costs
|
US$
Million
|
US$/
Tonne
|
Value
|
%
|
US$
Million
|
US$/
Tonne
|
Value
|
%
|
US$
Million
|
US$/
Tonne
|
||||||||||||||||||||||||||||||
|
Wood
|
635 | 93 | 4 | 1 | 631 | 88 | (16 | ) | (2 | ) | 647 | 87 | ||||||||||||||||||||||||||||
|
Energy
|
438 | 64 | 5 | 1 | 433 | 60 | 68 | 19 | 365 | 49 | ||||||||||||||||||||||||||||||
|
Pulp
|
623 | 91 | 60 | 11 | 563 | 78 | 49 | 10 | 514 | 69 | ||||||||||||||||||||||||||||||
|
Chemical &
Other
|
989 | 143 | 100 | 11 | 889 | 124 | (11 | ) | (1 | ) | 900 | 120 | ||||||||||||||||||||||||||||
|
Total
|
2,685 | 391 | 169 | 7 | 2,516 | 350 | 90 | 4 | 2,426 | 324 | ||||||||||||||||||||||||||||||
|
Nine Months
ended June 2008
|
||||||||||||||||
|
Variable
Cost Movement Analysis vs. Comparable Period in Previous
Year
|
Volume
|
Exchange
Rate
|
Price
|
Total
|
||||||||||||
|
(US$
million)
|
||||||||||||||||
|
Wood
|
33 | 17 | 10 | 60 | ||||||||||||
|
Energy
|
11 | 24 | 56 | 91 | ||||||||||||
|
Pulp
|
48 | 50 | 32 | 130 | ||||||||||||
|
Chemical &
Other
|
(77 | ) | 55 | 28 | 6 | |||||||||||
|
Total
|
15 | 146 | 126 | 287 | ||||||||||||
|
2007
|
2006
|
|||||||||||||||||||||||||||||||
|
Variable
Cost Movement Analysis vs. Previous Year
|
Volume
|
Exchange
Rate
|
Price
|
Total
|
Volume
|
Exchange
Rate
|
Price
|
Total
|
||||||||||||||||||||||||
|
(US$
million)
|
||||||||||||||||||||||||||||||||
|
Wood
|
(43 | ) | 5 | 42 | 4 | (39 | ) | (9 | ) | 32 | (16 | ) | ||||||||||||||||||||
|
Energy
|
(7 | ) | 7 | 5 | 5 | (3 | ) | (11 | ) | 82 | 68 | |||||||||||||||||||||
|
Pulp
|
(15 | ) | 25 | 50 | 60 | 25 | (14 | ) | 38 | 49 | ||||||||||||||||||||||
|
Chemical &
Other
|
71 | 26 | 3 | 100 | 17 | (27 | ) | (1 | ) | (11 | ) | |||||||||||||||||||||
|
Total
|
6 | 63 | 100 | 169 | — | (61 | ) | 151 | 90 | |||||||||||||||||||||||
The regional variable costs in the table below
are regional operating costs excluding consolidation adjustments and
reallocation and represent the operating costs as reported internally at a
regional level for management purposes.
|
Nine Months
ended June 2008
|
Nine Months
ended June 2007
|
|||||||||||||||||||||||
|
Variance
|
||||||||||||||||||||||||
|
Regional
Variable Manufacturing Costs
|
US$
Million
|
US$/Tonne
|
Value
|
%
|
US$
Million
|
US$/Tonne
|
||||||||||||||||||
|
SFPNA
|
682 | 586 | 40 | 6 | 642 | 579 | ||||||||||||||||||
|
SFPE
|
1,206 | 629 | 189 | 19 | 1,017 | 547 | ||||||||||||||||||
|
SFPSA
|
160 | 650 | 2 | 1 | 158 | 608 | ||||||||||||||||||
|
Forest
Products
|
386 | 219 | 57 | 17 | 329 | 177 | ||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||||||||||
|
Variance
|
Variance
|
|||||||||||||||||||||||||||||||||||||||
|
Regional
Variable Manufacturing Costs
|
US$
Million
|
US$/
Tonne
|
Value
|
%
|
US$
Million
|
US$/
Tonne
|
Value
|
%
|
US$
Million
|
US$/
Tonne
|
||||||||||||||||||||||||||||||
|
SFPNA
|
869 | 577 | 44 | 5 | 825 | 579 | 42 | 5 | 783 | 546 | ||||||||||||||||||||||||||||||
|
SFPE
|
1,370 | 550 | 139 | 11 | 1,231 | 502 | 63 | 5 | 1,168 | 481 | ||||||||||||||||||||||||||||||
|
SFPSA
|
210 | 600 | 7 | 3 | 203 | 619 | 7 | 4 | 196 | 618 | ||||||||||||||||||||||||||||||
|
Forest
Products
|
462 | 184 | (22 | ) | (5 | ) | 484 | 162 | (6 | ) | (1 | ) | 490 | 148 | ||||||||||||||||||||||||||
An analysis of variable cost developments by
regions is as follows:
Sappi
Fine Paper North America
Wood costs and product re-design have been
major focus areas in the region in recent years with improved management systems
and processes being introduced in order to address escalating costs. However,
market conditions and escalating energy costs have resulted in wood costs for
the nine months ended June 2008 increasing to US$124 per tonne compared to
US$117 per tonne for the corresponding period in the prior fiscal year. Wood
costs decreased to US$98 per tonne in fiscal 2007 from US$110 per tonne in
fiscal 2006 and US$111 per tonne in fiscal 2005. Energy costs are largely driven
by international crude oil prices. Given the escalating cost of energy, the
region has embarked on a number of energy utilization improvement plans which
have contributed to a reduction in energy costs relative to the potential impact
of oil price movements. Pulp costs are driven by the cost of bought-in
non-integrated pulp. Escalating international pulp pricing in US$ have
contributed to the cost increases. Cost management remains a major focus area
with product design being constantly reviewed in order to ensure products are
not over-designed for intended use, thereby minimizing costs.
Sappi
Fine Paper Europe
SFPE has experienced a number of cost pressures
during the nine months ended June 2008 and fiscal 2007. Wood costs are being
driven by specific supply and demand issues as well as increased demand for
alternative renewable fuels in Europe. International crude oil prices have
driven energy and other oil-based input costs up significantly in recent years.
Significant cost reduction initiatives have managed to curtail the increased
pressure from escalating commodity input costs to some extent through process as
well as product re-engineering initiatives. Escalating international pulp prices
have increased the cost of non-integrated pulp. The region has been protected to
some extent by the relative strength of the euro against the US dollar for
US dollar-based inputs, such as pulp and certain chemicals. However, when
reporting, costs in US dollars increase significantly due to the impact of
the exchange rate on the translation of costs from euro into
US dollars.
Sappi
Fine Paper South Africa
The region has minimal external purchased wood
input costs as wood is supplied by the forestry operations of Forest Products.
The costs of producing and supplying timber for own consumption are included in
fixed and variable costs, according to their nature. The costs of growing timber
are accounted for as silvicultural costs. In Rand, the region’s costs have shown
increases in year-on-year comparison and in the nine months ended June 2008 as
compared to the same period in the previous year. These increases are largely
attributable to the impact of the weakening of the Rand against the
US dollar on US dollar-based inputs. The major contributors have been
purchased pulp, energy and chemical input costs, which are being driven by
international oil, commodity price pressures and the impact of the exchange rate
movements.
Forest
Products
The wood cost at Forest Products relates to the
cost of timber consumed that is purchased externally by Forestry. Wood pricing
is driven by export parity pricing pressures which reflect both the
international trend in wood pricing and the impact of the ZAR/US$ exchange rate
dynamics. The cost of local timber has been escalating due to increased demand
from both major local paper producers and exporters. The pool of non-integrated
timber in South Africa is relatively small and currently very costly due to the
increasing demand. The impact of pulp cost movements are limited as in the
region we only purchase pulp in instances when we experience pulp production
capacity issues that limit supply. Chemical and other costs are being driven by
a combination of escalating international commodity prices and the impact of the
depreciation of the Rand relative to US dollars on US dollar-based
variable inputs.
Fixed
costs
Group
A summary of our major fixed cost components is
as follows:
|
Nine Months
ended June 2008
|
Nine Months
ended June 2007
|
|||||||||||||||||||||||
|
Variance
|
||||||||||||||||||||||||
|
Fixed
Costs
|
US$
Million
|
US$/Tonne
|
Value
|
%
|
US$
Million
|
US$/Tonne
|
||||||||||||||||||
|
Personnel
|
763 | 150 | 76 | 11 | 687 | 135 | ||||||||||||||||||
|
Maintenance
|
188 | 37 | 17 | 10 | 171 | 34 | ||||||||||||||||||
|
Depreciation
|
281 | 55 | — | — | 281 | 55 | ||||||||||||||||||
|
Other
|
202 | 40 | 3 | 2 | 199 | 39 | ||||||||||||||||||
|
Total
|
1,434 | 282 | 96 | 7 | 1,338 | 263 | ||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||||||||||
|
Variance
|
Variance
|
|||||||||||||||||||||||||||||||||||||||
|
Fixed
Costs
|
US$
Million
|
US$/
Tonne
|
Value
|
%
|
US$
Million
|
US$/
Tonne
|
Value
|
%
|
US$
Million
|
US$/
Tonne
|
||||||||||||||||||||||||||||||
|
Personnel
|
926 | 135 | 48 | 5 | 878 | 122 | (103 | ) | (10 | ) | 981 | 131 | ||||||||||||||||||||||||||||
|
Maintenance
|
236 | 34 | 7 | 3 | 229 | 32 | (29 | ) | (11 | ) | 258 | 34 | ||||||||||||||||||||||||||||
|
Depreciation
|
372 | 54 | (15 | ) | (4 | ) | 387 | 54 | (29 | ) | (7 | ) | 416 | 56 | ||||||||||||||||||||||||||
|
Other
|
274 | 40 | (31 | ) | (10 | ) | 305 | 42 | 26 | 9 | 279 | 37 | ||||||||||||||||||||||||||||
|
Total
|
1,808 | 263 | 9 | 1 | 1,799 | 250 | (135 | ) | (7 | ) | 1,934 | 259 | ||||||||||||||||||||||||||||
The regional fixed costs in the table below are
regional operating costs excluding consolidation adjustments and reallocations
and represent the operating costs as reported internally at a regional level for
management purposes.
|
Nine Months
ended June 2008
|
Nine Months
ended June 2007
|
|||||||||||||||||||||||
|
Variance
|
||||||||||||||||||||||||
|
Regional
Fixed Costs
|
US$
Million
|
US$/Tonne
|
Value
|
%
|
US$
Million
|
US$/Tonne
|
||||||||||||||||||
|
SFPNA
|
411 | 353 | 7 | 2 | 404 | 365 | ||||||||||||||||||
|
SFPE
|
651 | 339 | 65 | 11 | 586 | 315 | ||||||||||||||||||
|
SFPSA
|
84 | 341 | 5 | 6 | 79 | 304 | ||||||||||||||||||
|
Forest
Products
|
302 | 171 | 31 | 11 | 271 | 146 | ||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||||||||||
|
Variance
|
Variance
|
|||||||||||||||||||||||||||||||||||||||
|
Regional
Fixed Costs
|
US$
Million
|
US$/
Tonne
|
Value
|
%
|
US$
Million
|
US$/
Tonne
|
Value
|
%
|
US$
Million
|
US$/
Tonne
|
||||||||||||||||||||||||||||||
|
SFPNA
|
542 | 360 | (19 | ) | (3 | ) | 561 | 393 | (59 | ) | (10 | ) | 620 | 433 | ||||||||||||||||||||||||||
|
SFPE
|
778 | 312 | 8 | 1 | 770 | 314 | (52 | ) | (6 | ) | 822 | 339 | ||||||||||||||||||||||||||||
|
SFPSA
|
107 | 306 | 3 | 3 | 104 | 317 | (8 | ) | (7 | ) | 112 | 353 | ||||||||||||||||||||||||||||
|
Forest
Products
|
374 | 149 | (3 | ) | (1 | ) | 377 | 126 | (36 | ) | (9 | ) | 413 | 125 | ||||||||||||||||||||||||||
Sappi
Fine Paper North America
The region has been involved in restructuring
and cost reduction processes in recent years and the benefits of these
initiatives are contributing to the fixed cost reductions after fiscal
2005.
Sappi
Fine Paper Europe
During fiscal 2006, the region embarked on a
major restructuring project aimed at reducing costs and improving efficiencies,
which has been the major contributor to the cost reductions in fiscal 2006.
Included in the program was a significant headcount reduction. 2006 personnel
costs were also impacted by a post-employment benefit credit of
US$11 million. Fixed costs in US dollars in fiscal 2007 were
US$8 million higher than fiscal 2006 which was US$52 million lower
than fiscal 2005 due to the impact of the currency on translation. In the nine
months ended June 2008, cost saving initiatives remained a key focus
area.
Sappi
Fine Paper South Africa and Forest Products
In the nine months ended June 2008, personnel
and maintenance cost increases in local currency remained the major drivers of
fixed cost increases. These cost increases were, in US dollars, offset by
the impact of the exchange rate on translation of the costs into the
US dollar reporting currency. Personnel costs are under pressure from labor
rate increases due to cost of living adjustments and the impact of the skills
shortage on labor rates, particularly in the skilled technical
functions.
Net
Finance Costs
Net finance costs consists of gross interest
and other finance costs net of interest received, interest capitalized, foreign
exchange gains and losses and change in fair value of financial instruments. Net
finance costs for the nine months ended June 2008 were US$100 million as
compared to US$107 million for the nine months ended June 2007. Net finance
costs were US$134 million in 2007, US$130 million in 2006 and
US$80 million in 2005. Net interest cost for the nine months ended June
2008 decreased by US$6 million to US$106 million as compared to the
corresponding period the previous year. Net interest cost increased in 2007 from
2006 by US$16 million to US$152 million.
Cash interest cover (cash generated by
operations divided by net finance costs (before capitalized interest)) for the
nine months ended June 2008 increased to 4.22 times from 3.7 times for the
corresponding period in 2007. Cash interest cover also increased from 2.9 times
in 2006 to 3.8 times for 2007. The increases in the nine months ended June 2008
and fiscal 2007 were mainly due to higher cash generated by
operations.
Finance costs capitalized for the nine months
ended June 2008 were US$16 million compared to US$8 million for the
corresponding period in 2007. Finance costs capitalized were US$14 million
in 2007 and US$2 million in 2006. Finance costs capitalized relate
primarily to the capitalized interest on major projects under construction, in
particular the Saiccor upgrade.
Taxation
The taxation charge for the nine months ended
June 2008 was US$55 million (effective tax rate 29%) compared to
US$62 million (effective tax rate 33%) for the corresponding period in
2007. The taxation charge for fiscal 2007 was US$47 million (fiscal 2006:
US$1 million benefit; fiscal 2005: US$5 million benefit) corresponding
to an effective tax rate of 19% (fiscal 2006: 15%; fiscal 2005: 3%). The
effective tax rate is impacted by the magnitude of the fair value price
adjustment of plantations relative to operating profitability, which affects the
deferred tax provision as well as the geographical source of operating profit in
a particular period. Also the expected taxation (fiscal 2007: US$68 million
charge; fiscal 2006: US$13 million benefit; fiscal 2005:
US$109 million benefit), which is derived by applying the average statutory
tax rate applicable to our profit and loss making tax entities, respectively,
was favorably impacted by announced tax rate reductions in Germany (fiscal 2007:
US$19 million; fiscal 2006: nil; fiscal 2005: nil), the Netherlands (fiscal
2007: US$2 million; fiscal 2006: US$1 million; fiscal 2005:
US$4 million) and South Africa (fiscal 2007: nil; fiscal 2006: nil; fiscal
2005: US$9 million). Certain of our Group’s profits are not taxed as a
result of losses carried forward or favorable permanent differences. Tax relief
was not taken on the taxation losses of certain loss-making entities due to
management’s judgment that these taxation losses may not be recoverable in the
near future (net impact fiscal 2007: US$1 million benefit; fiscal 2006:
US$3 million charge; fiscal 2005: US$93 million charge). The Secondary
Tax on Companies (nine months ended June 2008: US$7 million; fiscal 2007:
US$8 million; fiscal 2006: US$9 million; fiscal 2005:
US$8 million) relates to South African tax on the dividend.
Net
Profit
Net profit for the nine months ended June 2008
increased to US$134 million compared to US$127 million for the
corresponding period in 2007. Net profit increased to US$202 million in
fiscal 2007 from a loss of US$4 million in fiscal 2006 and a loss of
US$184 million in fiscal 2005. The increased profitability in the nine
months ended June 2008 as compared to the corresponding period in 2007 was
mainly attributable to lower finance (US$7 million) and tax
(US$7 million) charges partly offset by lower operating profits
(US$7 million). The increased profitability in fiscal 2007 was mainly due
to improved sales. The factors impacting operating profitability have been dealt
with in the sales and cost discussions above. Net loss in fiscal 2005 was
impacted by the Muskegon and Usutu impairment charges of US$231 million
pre-tax. Restructuring charges in Europe were partly offset, in fiscal 2006, by
the reversal of impairment on Usutu mill at Sappi Forest Products.
Basic earnings per share for the nine months
ended June 2008 were 59 US cents, compared with 56 US cents for the
corresponding period in 2007. Basic earnings per share increased from a loss of
2 US cents per share in 2006 (2005: 81 US cents loss per share) to an income of
89 US cents per share in 2007.
Liquidity
and Capital Resources
Cash
Flow—Operations
An analysis of cash flow for our Group is as
follows:
|
Nine
Months
ended
June
|
||||||||||||||||||||
|
Cash
Flow
|
2008
|
2007
|
2007
|
2006
|
2005
|
|||||||||||||||
|
(US$
million)
|
||||||||||||||||||||
|
Cash
generated by operations
|
487 | 424 | 585 | 396 | 569 | |||||||||||||||
|
Movement in
working capital
|
(134 | ) | (80 | ) | 60 | (17 | ) | (30 | ) | |||||||||||
|
Finance
costs
|
(150 | ) | (109 | ) | (162 | ) | (138 | ) | (127 | ) | ||||||||||
|
Taxation
|
(56 | ) | (18 | ) | (27 | ) | (13 | ) | (43 | ) | ||||||||||
|
Capital
expenditure
|
(368 | ) | (320 | ) | (442 | ) | (303 | ) | (293 | ) | ||||||||||
|
Cash
generated utilized
|
(277 | ) | (117 | ) | 24 | (127 | ) | (78 | ) | |||||||||||
Cash generated from operations for the nine
months ended June 2008 was US$487 million compared to US$424 million
for the corresponding period in 2007. Profit for the period
(US$134 million) increased by US$7 million compared to the same period
2007 (US$127 million). Cash generated was reduced by finance costs paid
(net of interest income) of US$150 million US$41 million more than for
the corresponding period in 2007, taxation paid of US$56 million
US$38 million more than for the corresponding period in 2007. Finance costs
paid during the nine months ended June 2007 were US$109 million and
taxation paid US$18 million. Working capital decreased by
US$134 million during the nine months ended June 2008 and decreased by
US$80 million during the nine months ended June 2007.
Cash generated from operations during fiscal
2007 was US$585 million compared to US$396 million in fiscal 2006, an
increase of US$222 million in cash generated compared to fiscal 2006
(fiscal 2005 cash generated by operations was US$569 million). Operating
Profit (US$383 million) improved by US$258 million as against fiscal
2006 operating profit (US$125 million). Fiscal 2005 operating loss was
US$109 million. Cash generated was reduced by finance costs paid (net of
interest income) of US$162 million (US$24 million more than fiscal
2006), taxation paid of US$27 million (US$14 million more than 2006).
Finance costs paid in 2006 were US$138 million (fiscal
2005 US$127 million) and taxation paid US$13 million (fiscal
2005 US$43 million). Working capital reduced by US$60 million in
fiscal 2007 and increased US$17 million in fiscal 2006 and
US$30 million in fiscal 2005.
Total non-cash items included the
following:
|
Nine
Months
ended
June
|
||||||||||||||||||||
|
Non-cash
Items
|
2008
|
2007
|
2007
|
2006
|
2005
|
|||||||||||||||
|
(US$
million)
|
||||||||||||||||||||
|
Depreciation
|
283 | 282 | 374 | 391 | 422 | |||||||||||||||
|
Fellings
|
61 | 52 | 70 | 74 | 66 | |||||||||||||||
|
Asset
Impairments & closures
|
3 | 1 | 2 | (14 | ) | 232 | ||||||||||||||
|
Plantation
fair value-price
|
(12 | ) | (56 | ) | (54 | ) | (34 | ) | (60 | ) | ||||||||||
|
Plantation
fair value-volume
|
(55 | ) | (57 | ) | (76 | ) | (70 | ) | (58 | ) | ||||||||||
|
Post-employment
benefits
|
(65 | ) | (80 | ) | (101 | ) | (68 | ) | — | |||||||||||
|
Other
|
(17 | ) | (14 | ) | (13 | ) | (9 | ) | 76 | |||||||||||
| 198 | 128 | 202 | 270 | 678 | ||||||||||||||||
The fiscal 2005 impairment charges related
mainly to the Sappi North American Muskegon and Forest Products Usutu mills. The
Usutu impairment was reversed in fiscal 2006 (US$40 million). Impairment
charges for the nine months ended June 2008 and 2007 related mainly to the
ongoing impairment of capital expenditure at impaired mills.
Net working capital changes are shown in the
graph below:
Working
Capital Movement—US$ million
Investing
Cash utilized in investing activities was
US$351 million in the nine months ended June 2008, US$265 million in
the same period 2007, US$364 million in fiscal 2007, US$287 million in
fiscal 2006 and US$379 million in fiscal 2005.
|
Nine
Months
ended
June
|
||||||||||||||||||||
|
Investing
Activities
|
2008
|
2007
|
2007
|
2006
|
2005
|
|||||||||||||||
|
(US$
million)
|
||||||||||||||||||||
|
Capital
expenditure
|
368 | 320 | 442 | 303 | 293 | |||||||||||||||
|
Proceeds on
disposals
|
(3 | ) | (48 | ) | (50 | ) | (5 | ) | (5 | ) | ||||||||||
|
Investments
and loans
|
(14 | ) | (7 | ) | (28 | ) | (11 | ) | 91 | |||||||||||
| 351 | 265 | 364 | 287 | 379 | ||||||||||||||||
Capital Expenditure by region is as
follows:
|
Nine
Months
ended
June
|
||||||||||||||||||||
|
Capital
Expenditure by Region
|
2008
|
2007
|
2007
|
2006
|
2005
|
|||||||||||||||
|
(US$
million)
|
||||||||||||||||||||
|
SFPNA
|
98 | 28 | 42 | 48 | 76 | |||||||||||||||
|
SFPE
|
48 | 72 | 102 | 136 | 109 | |||||||||||||||
|
SFPSA
|
5 | 6 | 12 | 19 | 22 | |||||||||||||||
|
Forest
Products
|
217 | 213 | 285 | 99 | 83 | |||||||||||||||
|
Other
|
— | 1 | 1 | 1 | 3 | |||||||||||||||
|
Total
|
368 | 320 | 442 | 303 | 293 | |||||||||||||||
Capital expenditure excludes capitalized
interest.
Capital
Expenditure to Expand Operations
Set out below is a summary of our capital
expenditure to expand operations:
|
Nine
Months
ended
June
|
|||||||||||||||||||||
|
2008
|
2007
|
2007
|
2006
|
2005
|
Rationale
|
||||||||||||||||
|
(US$
million)
|
|||||||||||||||||||||
|
Sappi Fine
Paper North America
|
— | — | 1 | — | 26 |
Relates in
2005 mainly to product improvement and cost reductions at Cloquet
mill.
|
|||||||||||||||
|
Sappi Fine
Paper Europe
|
4 | 48 | 59 | 81 | 58 |
The majority
of the spend relates to the energy supply project at Gratkorn
mill.
|
|||||||||||||||
|
Sappi Forest
Products—Saiccor
|
190 | 206 | 247 | 32 | — |
Relating to
the capacity increase project at Saiccor.
|
|||||||||||||||
|
Sappi Forest
Products—Other
|
10 | — | 18 | 29 | 27 |
Relating
mainly to process improvement.
|
|||||||||||||||
|
Sappi Fine
Paper South Africa
|
1 | — | 1 | 1 | — | ||||||||||||||||
|
Total
|
205 | 254 | 326 | 143 | 111 | ||||||||||||||||
Our capital expenditure program varies from
year to year and from period to period, and expenditure in one year or period is
not necessarily indicative of future capital expenditure. Capital expenditure to
expand operations in fiscal 2008 primarily consisted of investments at Sappi
Forest Products Saiccor mill. The expansion of the existing capacity, announced
in August 2006, at Sappi Saiccor in South Africa, where Chemical Cellulose
products are produced, was completed in the second quarter of 2008 and
commissioned in August 2008. The previous capacity of the mill was approximately
600,000 tonnes per annum. The expansion has increased capacity to
approximately 800,000 tonnes per annum. The investments at Sappi Fine Paper
Europe related mainly to a major project at our European Gratkorn mill for a new
energy supply (fiscal 2007 €37 million
and fiscal 2006 €13 million).
Total capital spending for our Group during the nine months ended June 2008 was
130% of depreciation. For fiscal 2007, total capital spending was 118% of
depreciation, and 77% in 2006 and 70% in 2005. Capital spending is expected to
be funded primarily through internally generated funds. For further details
about our capital commitments, see note 26 to our audited financial
statements and note 6 to our interim financial information.
We operate in an industry that requires high
capital expenditures and, as a result, we need to devote a significant part of
our cash flow to capital expenditure programs, including investments relating to
maintaining operations. Capital spending for investment relating to maintaining
operations during the nine months ended June 2008 and 2007 amounted to
US$163 million and US$66 million, respectively, and during fiscal 2007
and fiscal 2006 amounted to approximately US$116 million and
US$160 million, respectively (2005: US$183 million). The capital
expenditure program for these fiscal years was funded primarily through
internally generated funds.
Financing
General
|
Nine
Months
ended
June
|
||||||||||||||||||||
|
Gross
Debt
|
2008
|
2007
|
2007
|
2006
|
2005
|
|||||||||||||||
|
(US$
million)
|
||||||||||||||||||||
|
Long-term
interest-bearing liabilities
|
1,882 | 1,623 | 1,828 | 1,634 | 1,600 | |||||||||||||||
|
Short-term
interest-bearing liabilities
|
990 | 854 | 771 | 694 | 616 | |||||||||||||||
|
Bank
overdraft
|
22 | 23 | 22 | 9 | 159 | |||||||||||||||
|
Gross
interest-bearing liabilities
|
2,894 | 2,500 | 2,621 | 2,337 | 2,375 | |||||||||||||||
|
Nine
Months
ended
June
|
||||||||||||||||||||
|
Cash
Position
|
2008
|
2007
|
2007
|
2006
|
2005
|
|||||||||||||||
|
(US$
million)
|
||||||||||||||||||||
|
Cash
equivalents
|
227 | 187 | 364 | 224 | 367 | |||||||||||||||
|
Cash
position
|
227 | 187 | 364 | 224 | 367 | |||||||||||||||
Approximately 47% of total assets are funded by
gross debt as is shown in the table below:
|
Nine
Months
ended
June
|
||||||||||||||||||||
|
Total
Assets Excluding Cash Equivalents
|
2008
|
2007
|
2007
|
2006
|
2005
|
|||||||||||||||
|
(US$
million)
|
||||||||||||||||||||
|
Gross
interest-bearing liabilities
|
2,894 | 2,500 | 2,621 | 2,337 | 2,375 | |||||||||||||||
|
Shareholder’s
equity
|
1,669 | 1,635 | 1,816 | 1,386 | 1,589 | |||||||||||||||
|
Other
liabilities
|
1,769 | 1,847 | 1,907 | 1,794 | 1,925 | |||||||||||||||
|
Cash
equivalents
|
(227 | ) | (187 | ) | (364 | ) | (224 | ) | (367 | ) | ||||||||||
|
Total
assets excluding cash equivalents
|
6,105 | 5,795 | 5,980 | 5,293 | 5,522 | |||||||||||||||
|
Nine
Months
ended
June
|
||||||||||||||||||||
|
Total
Assets Excluding Cash Equivalents
|
2008
|
2007
|
2007
|
2006
|
2005
|
|||||||||||||||
|
(US$
million)
|
||||||||||||||||||||
|
Gross
interest-bearing liabilities
|
47 | 43 | 44 | 44 | 43 | |||||||||||||||
|
Shareholder’s
equity
|
28 | 28 | 30 | 26 | 29 | |||||||||||||||
|
Other
liabilities
|
29 | 32 | 32 | 34 | 35 | |||||||||||||||
|
Cash
equivalents
|
(4 | ) | (3 | ) | (6 | ) | (4 | ) | (7 | ) | ||||||||||
|
Total
assets excluding cash equivalents
|
100 | 100 | 100 | 100 | 100 | |||||||||||||||
The movement in gross debt is explained
below.
|
Nine
Months
ended
June
|
||||||||||||||||
|
Gross
Debt Movement Analysis
|
2008
|
2007
|
2007
|
2006
|
||||||||||||
|
(US$
million)
|
||||||||||||||||
|
Gross
debt-beginning of period
|
2,621 | 2,337 | 2,337 | 2,375 | ||||||||||||
|
Cash
(generated)/utilized during period
|
277 | 117 | (24 | ) | 127 | |||||||||||
|
Currency &
fair value impact
|
133 | 83 | 168 | (22 | ) | |||||||||||
| 3,031 | 2,537 | 2,481 | 2,480 | |||||||||||||
|
Increase/(decline)
in cash equivalents
|
(137 | ) | (37 | ) | 140 | (143 | ) | |||||||||
|
Gross
debt-end of period
|
2,894 | 2,500 | 2,621 | 2,337 | ||||||||||||
Since the end of fiscal 2007 ended June 2008,
gross debt has increased by US$273 million. US$133 million of this
increase was due to the impact of translating Euro and ZAR debt into the
weakening US$. During this period we have utilized US$277 million of cash.
In fiscal 2007, gross debt increased by US$284 million, of which
US$168 million was due to the impact of translating Euro and ZAR debt into
the weakening US$. During this period we generated US$24 million of
cash.
Debt
Profile
The make-up of our gross debt is set out in the
table below.
|
Nine
Months
ended
June
|
||||||||||||||||||||
|
Debt
Profile
|
2008
|
2007
|
2007
|
2006
|
2005
|
|||||||||||||||
|
(US$
million)
|
||||||||||||||||||||
|
Long-term
debt
|
1,882 | 1,623 | 1,828 | 1,634 | 1,600 | |||||||||||||||
|
Short-term
debt
|
990 | 854 | 771 | 694 | 616 | |||||||||||||||
|
Bank
overdraft
|
22 | 23 | 22 | 9 | 159 | |||||||||||||||
|
Gross
interest-bearing liabilities
|
2,894 | 2,500 | 2,621 | 2,337 | 2,375 | |||||||||||||||
Short-term debt as of June 2008 and 2007
includes an amount of US$393 million and US$342 million, respectively.
Short-term debt includes an amount of US$354 million in fiscal 2007,
US$347 million in fiscal 2006 and US$346 million in fiscal 2005 of
securitized receivables funding under various revolving securitization
programs.
The average maturity of our debt as at June
2008 is shown below.
Short-term debt and overdraft funding was
US$1,012 million at June 2008 and US$793 million as of September 2007.
Of this, US$393 million at June 2008 and US$354 million at September
2007 was in the form of revolving securitized receivable funding which in the
normal course we expect to continue to be available. For further information on
our borrowing facilities secured by trade receivables, refer to Note 21 to
our annual financial statements.
We had unutilized committed and uncommitted
borrowing facilities of US$1,401 million at June 2008 and
US$1,210 million at September 2007. The committed facilities were largely
in terms of the undrawn portion of our Euro 600 million syndicated
loan facility.
During September 2007, a second
ZAR1 billion (approximately US$150 million) was raised under the
domestic South African medium-term note program which was established in 2006.
The maturity of this bond is 4 years and the proceeds were applied to
refinance short-term ZAR debt.
The make-up of our gross debt by currency is
shown in the following table.
|
At
June 2008
|
2007
|
2006
|
2005
|
|||||||||||||||||||||||||||||
|
Gross
debt by currency ratio
|
%
|
US$
million
|
%
|
US$
million
|
%
|
US$
million
|
%
|
US$
million
|
||||||||||||||||||||||||
|
USD
|
34 | 997 | 37 | 964 | 48 | 1,125 | 43 | 1,012 | ||||||||||||||||||||||||
|
EUR &
CHF
|
52 | 1,503 | 49 | 1,294 | 40 | 933 | 46 | 1,105 | ||||||||||||||||||||||||
|
ZAR
|
14 | 394 | 14 | 363 | 12 | 279 | 11 | 258 | ||||||||||||||||||||||||
|
Total
|
100 | 2,894 | 100 | 2,621 | 100 | 2,337 | 100 | 2,375 | ||||||||||||||||||||||||
Interest
on Borrowings
To compare our borrowing costs with market
rates, we convert interest rates on all debt to US$ equivalent rates. The
resulting interest rate was 4.45% as of June 2008 before taking account of
interest rate swaps taken up to swap US$857 million of borrowings from
fixed to floating interest rates. As of September 2007 the resulting interest
rate was 5.38% before taking account of interest rate swaps taken up to swap
US$857 million of borrowings from fixed to floating interest
rates.
The average maturity profile of our debt was
5.7 years as of June 2008 and 6.6 years as of September 2007. Compared
with the six-year US dollar swap rate of 4.49% as at June 2008 and the
seven-year US dollar swap rate (a benchmark rate at which borrowers with
low credit risk transact in longer-term maturities) of 4.84% as of September
2007, our average interest cost was 4 basis points below the swap rate and
54 basis points above the swap rate for those periods,
respectively.
The fixed to floating interest rate swaps
decreased the total interest cost to 3.83% as of June 2008 and to 5.64% as of
September 2007, which was 66 basis points below and 80 basis points above the
relevant Dollar swap rate for those periods, respectively.
Most of our long-term debt was raised when our
credit ratings were better than the current ratings and market conditions were
more favorable. In current market circumstances and based on our current credit
ratings, raising new debt or replacing existing debt would be at a margin higher
than we are currently paying.
Interest
Rate Risk
We have a policy of maintaining a balance
between fixed and variable rate loans which enables it to minimize the impact of
borrowing costs on reported earnings. Hedging activity in relation to borrowings
are restricted to interest rate swaps and where appropriate, cross-currency
swaps.
In fiscal 2007 and during the nine months ended
June 2008, no further interest rate swaps were concluded and, as at both dates,
the ratio of gross debt at fixed and floating interest rates was
49:51.
Covenants
Financial covenants apply to approximately
US$1,383 million of our non-South African long-term debt. The debt is not
subject to any rating triggers; however our ratings impact our interest costs.
For the nine months ended June 2008 and for fiscal 2007 and fiscal 2006 we were
within our covenants.
Vendor
Loan Notes
As part of the consideration for the Acquired
Business, Sappi Papier Holding GmbH intends to issue to M-real vendor loan
notes (the “Vendor Loan Notes”) for a maximum of €250 million.
The Vendor Loan Notes will constitute unsecured obligations and will be
guaranteed as to payment of principal and interest by Sappi Limited, Sappi
International S.A. and Sappi Trading Pulp AG. The Vendor Loan Notes will
have a maturity of up to 48 months and will rank pari passu with our existing
long-term debt. Certain terms of our existing Revolving Credit Facility (as
defined below), including certain financial covenants, are incorporated by
reference into the terms and conditions of the Vendor Loan Notes. Interest on
the Vendor Loan Notes will be payable semi-annually in arrears at an initial
interest rate of 9% per annum for the first interest period, increasing to 12%
per annum for the second interest period, 14% per annum for the third interest
period and 15% per annum thereafter. We may repay the Vendor Loan Notes at any
time in tranches of €10 million.
Revolving
Credit Facility
In June 2005, we entered into a revolving
credit facility (as amended in September 2006, the “Revolving Credit Facility”)
with a group of lenders, which provides, among other things, for up to €600 million
of borrowing availability in Euros, US dollars or other currencies as
determined under the agreement, and terminates on May 31, 2010. The annual
interest rate on borrowings is calculated based on LIBOR or, for borrowings in
Euro, EURIBOR, plus a margin varying between 0.25% and 0.60% depending on the
credit rating assigned to Sappi Limited, and certain costs. Borrowings may be
made by certain subsidiaries of Sappi Limited and are guaranteed by Sappi
Limited and certain of its subsidiaries, subject to applicable statutory
limitations. As of June 2008 and September 2007, we had an aggregate of
US$320 million and US$142 million, respectively, drawn and outstanding
under the Revolving Credit Facility. As of September 2008, we had an aggregate
of US$297 million drawn and outstanding under the Revolving Credit
Facility.
Availability of amounts under the Revolving
Credit Facility is subject to compliance with financial covenants, which require
that (i) at the end of each quarter the mean average of the ratios of
EBITDA to consolidated net interest expense for that quarter and each of the
three preceding quarters be not less than 3.00:1; (ii) at the end of each
quarter the mean average of the ratios of EBITDA to consolidated net interest
expense for that quarter and each of the seven preceding quarters be not less
than 3.50:1; (iii) the ratio of net debt to capitalization be not, at the
end of any quarter, greater than 0.65:1; and (iv) with regard to Sappi
Manufacturing (Pty) Ltd. and its subsidiaries only, the ratio of net debt
to capitalization be not, at the end of any quarter, greater than 0.65:1, in
each case as such terms are defined in the Revolving Credit
Facility.
The Revolving Credit Facility contains
customary events of default, such as failure to make payment of amounts due,
defaults under other agreements evidencing indebtedness, certain bankruptcy
events and a cessation of business (as defined in the Revolving Credit
Facility). The agreement also contains customary affirmative and negative
covenants restricting, among other things, the granting of security, incurrence
of indebtedness, the provision of loans and guarantees, mergers and
dispositions. Failure to comply with a covenant or the occurrence of an event of
default could result in the acceleration of payment obligations under the
Revolving Credit Facility. As of September 2008, we were in compliance with
these covenants.
2002
Guaranteed Notes
In June 2002, Sappi Papier Holding GmbH
(then organized as an AG) issued US$500 million 6.75% guaranteed notes due
2012 and US$250 million 7.50% guaranteed notes due 2032 (together, the
“2002 Notes”), guaranteed by Sappi Limited and Sappi International S.A.
Interest under the Notes is payable semi-annually. The indentures governing the
2002 Notes provide for an optional redemption of the 2002 Notes, in whole or in
part, at any time at a redemption price of the greater of (i) the principal
amount of the notes to be redeemed and (ii) the sum of the present values
of the applicable remaining scheduled payments discounted at a rate as
determined under the indentures, together with, in each case, accrued
interest.
The indentures governing the 2002 Notes contain
events of default customary for investment grade debt, including failure to pay
principal or interest, a default in any other indebtedness, certain enforcement
actions against our property and certain bankruptcy events. The indentures also
contain certain customary covenants, which restrict our ability to create liens,
to enter into sale and leaseback transactions and to undertake mergers or
consolidations.
Domestic
Medium-Term Notes
On June 27, 2006, Sappi Manufacturing
(Pty) Ltd. (“Sappi Manufacturing”) issued ZAR1 billion
(US$146 million) Senior Unsecured Fixed Rate Notes (the “First Tranche”)
under its ZAR3 billion (US$437 million) Domestic Medium-Term Note
Program (the “Program”) at a fixed interest rate of 9.34% payable semi-annually
on December 27, and June 27, of each year, commencing on June 27,
2006. The securities issued under the First Tranche mature on June 27,
2013. On September 25, 2007, Sappi Manufacturing issued a second tranche of
ZAR1 billion (US$146 million) Senior Unsecured Fixed Rate Notes (the
“Second Tranche”) under the Program at a fixed interest rate of 10.64%. The
interest on the securities issued under the Second Tranche is payable
semi-annually on April 14 and October 14 of each year, commencing on
April 14, 2008. The securities issued under the Second Tranche mature on
October 14, 2011. Sappi Manufacturing has also agreed to observe certain
undertakings with respect to the securities including limitations on
encumbrances (other than permitted encumbrances) over its assets. With regard to
the Second Tranche only, should a change of control event (more than 50% of the
voting rights of Sappi Manufacturing be acquired by any party other than a
subsidiary of Sappi Limited) and a negative rating event (a downgrade of Sappi
Manufacturing’s national credit rating, currently at AA-, of below A-) occur,
then the holders of the securities may within 60 days after the public
announcement of the change of control having occurred, they can by way of an
extraordinary resolution require the redemption of the notes.
Leverage
Gross debt to capitalization (the book value of
gross debt plus shareholders’ equity) as calculated by most financial
institutions is as follows.
|
As
of June
|
||||||||||||||||||||
|
2008
|
2007
|
2007
|
2006
|
2005
|
||||||||||||||||
|
(US$
million, except percentages)
|
||||||||||||||||||||
|
Gross
debt
|
2,894 | 2,500 | 2,621 | 2,337 | 2,375 | |||||||||||||||
|
Debt &
equity
|
4,563 | 4,135 | 4,437 | 3,723 | 3,964 | |||||||||||||||
|
Gross debt to
capitalization ratio
|
63% | 60% | 59% | 63% | 60% | |||||||||||||||
Management monitors our indebtedness in the
context of the various factors associated with determining an appropriate level
of debt finance. These factors include the financial risk of the level of
indebtedness, our credit ratings, the cost of debt and the expected return that
can be earned on the investment for which the debt is incurred. In regard to our
debt level we also monitor cash flow to net interest cover. We recognize that we
operate in a mature industry that normally generates substantial and reasonably
reliable cash flows and that management has significant flexibility to manage
capital expenditure as a measure to control our cash flow.
For a description of how our level of
indebtedness may impact our business and liquidity, see “Risk Factors—Risks
Related to Our Business—Our Indebtedness may impair our financial and operating
flexibility”.
Research
and Development, Patents and Licenses
Our research and development efforts focus on
the improvement of product quality and production processes as well as the
development of new products and processes. Research and development is managed
at a number of regional technology centers. These “centers of excellence”
provide the basis to leverage unique sets of skills and provide customer-focused
product development. We spent approximately US$24 million and
US$22 million on research and development activities in the nine months
ended June 2008 and 2007, respectively, and we spent approximately
US$34 million, US$34 million and US$35 million during fiscal
2007, fiscal 2006 and fiscal 2005, respectively.
Off-Balance
Sheet Arrangements
We have entered into certain asset-related
finance arrangements for which various obligations, which are significant and
related assets, are not included in our audited financial statements under IFRS.
These Off-Balance Sheet Arrangements include:
|
|
●
|
lease
arrangements described in
note 26;
|
|
|
●
|
letters of
credit discounting, Scheck-Wechsels and securitization facilities
described in note 17; and
|
|
|
●
|
an equity
accounted investment described in
note 14.
|
In each case, notes
refer to our audited financial statements, and are detailed as
follows:
Lease
Arrangements. In 1997, we sold one of our paper machines at
our Somerset mill for US$150 million and entered into a leaseback
arrangement. This transaction diversified our sources of funding and provided a
longer-term horizon to our repayment profile. This qualified as an operating
lease under the applicable accounting principles. We exercised an option to
repurchase the paper machine earlier in January 2008. The machine has been
acquired for US$75 million and the cost of the acquisition is included in
the capital expenditure for the nine months ended June 2008 and is also included
in property plant and machinery on the balance sheet.
Letters of Credit
Discounting. To improve our working capital, we discount
certain letters of credit with ABN AMRO Hong Kong at every financial quarter end
on a non-recourse basis. This program allows us to obtain financing and receive
payment upon shipment of goods, based on trade transaction documents. The bank
will purchase a sight bill of exchange (for sight letter of credit) or a usance
bill of exchange (for usance letter of credit) at a discount in line with
current market rates.
Scheck-Wechsels. In
Germany, certain banks provide a means for our customers to obtain short-term
loans for the purpose of permitting early payment of trade debts owed to us in
order to obtain early payment discounts. In order for one of our customers to
obtain such a loan, we must sign a “Scheck-Wechsel”, which is a financial
guarantee that we supply to the bank in respect of the customer loan. By signing
the Scheck-Wechsel, we provide a financial guarantee to the bank of the
customer. Because of the short-term nature of these loans, our credit exposure
to our customer is essentially the same as for the trade receivables but we are
able to accelerate collection and improve our cash flows. This financial
guarantee contract falls under the scope of IAS 39 “Financial
Instruments”.
This financial guarantee contract is initially
recognized at fair value. There is no evidence that the customer will not
reimburse its loan to the bank. There is also no guarantee fee due by the bank
and the Scheck-Wechsel is a short-term instrument (maximum 90 days).
Therefore, the fair value at inception is immaterial. Subsequently, the
financial guarantee contract shall be measured at the higher of:
|
|
(i)
|
the amount
determined in accordance with IAS 37 “Provisions, Contingent
Liabilities and Contingent Assets”;
and
|
|
|
(ii)
|
the amount
initially recognized less any cumulative
amortization.
|
As no default event has occurred, no provision
is set up and the fair value at year end remains immaterial. However, according
to IAS 37 a contingent liability of US$20 million has been disclosed
in this respect.
Trade Receivables
Securitization. To improve our cash flows in a cost-effective
manner, we sell between 86% and 99% of our eligible trade receivables on a
non-recourse basis to special purpose entities (“SPE”) that are owned and
controlled by third-party financial institutions. These SPEs are funded in the
commercial paper market. The majority of these receivables are now reflected on
our balance sheet with the exception of the southern Africa receivables. The
funds received are reflected as interest-bearing borrowings, as further
described in note 21 to our audited financial statements. This accounting
treatment is in line with the strict derecognition criteria introduced through
amendments to IAS 39 “Financial Instruments”.
In the southern African region the sale of
receivables to iNdwa Investments Limited is not reflected on balance sheet. The
key difference in the securitization program in this region is that there are no
first tier loss provisions which reduce the bank’s credit risk. In this region
virtually all receivables are securitized; however, we retain 15% of the credit
risk on the receivables on a proportionate basis, after all recoveries,
including insurance recoveries. The total amount of trade receivables sold and
derecognized at June 2008 and at June 2007 amounted to US$176 million and
US$141 million, respectively, and at the end of fiscal 2007 amounted to
US$144 million (2006: US$107 million).
If this securitization facility was to be
terminated, we would discontinue further sales of trade receivables and would
not incur any losses in respect of receivables previously sold. There are a
number of events which may trigger termination of the facility, amongst others,
an unacceptable amount of defaults; terms and conditions of the agreements not
being met; or breaches of various credit insurance ratios. The impact on
liquidity varies according to the terms of the agreement; generally, however,
future trade receivables would be recorded on balance sheet until a replacement
agreement was entered into.
An impairment of accounts receivable has been
recorded for any receivables which may be uncollectible. The determination of
this allowance is restricted to the 15% risk retained by us.
During fiscal 2006, SD Warren (“SDW”),
part of Sappi Fine Paper North America, became aware of an issue relating to its
accounts receivable securitization program. Since September 2002, the sale of
inter-company receivables from SDW to SD Warren Finance Company (“Finco”) had
not been reflected in the Finco financial statements. The sale of inter-company
receivables is required under the first step agreement between SDW, Cloquet and
Finco. (In September 2002, SDW amended its securitization agreement with State
Street Bank to eliminate the securitization of inter-company receivables).
Though the issues had no financial or negative impact on external parties to the
securitization program, it was determined that breaches of various covenants
under both the first step agreement and the securitization agreement with State
Street Bank existed. SDW and Cloquet received a waiver dated August 15,
2006 to address the breaches. It was determined that the omission of the sale of
inter-company receivables in Finco’s financial statements required a restatement
of Finco’s financial statements for fiscal 2003, 2004 and 2005. In the course of
assessing the situation described above, SDW and Cloquet became aware of various
other breaches of covenants under the securitization program. During fiscal
2007, SDW and Cloquet obtained waivers and amendments to the receivables
purchase agreement to address these matters and to extend certain dates within
the program, as further described in note 21 to our audited financial
statements.
Equity Accounted
Investment. In 1998, our interests in timberlands located in
Maine and certain equipment and machinery were sold to a third party timber
company, Plum Creek Timberlands LLP, in exchange for cash of
US$3 million and three promissory notes receivable in the aggregate amount
of US$171 million. In 1999, we contributed these promissory notes to an
SPE. The promissory notes were pledged as collateral for the SPE to issue bonds
to investors in the amount of US$156 million. In 2001, we contributed its
interest in the SPE to a limited liability company in exchange for 90% of the
outstanding limited liability membership interest. All voting control of the
limited liability company is controlled by an unrelated investor that has
significant capital at risk and therefore has not been consolidated in our
financial statements. The SPE is not consolidated in our financial statements
because we have taken the position that it is controlled by an unrelated
investor which has sufficient equity capital at risk to support such a position.
Our investment in the SPE is US$11 million as of June 2008.
The SPE may not be liquidated prior to
repayment of the bonds it issued. The first tranche of the bonds matured in
February 2007. The SPE distributed to the limited liability company the net
proceeds (US$6 million) for the first repayment of the notes receivable
(US$71 million) and the bonds (US$65 million). The limited liability
company distributed these profits to its members. The remaining bonds mature in
two further tranches in February 2009 and February 2011. We may not redeem our
investment in the SPE (via its ownership interest in the limited liability
company) prior to complete repayment of the bonds issued by the SPE and our
investment has a subordinate interest to the payment of the outstanding bonds.
We have not guaranteed the obligations of the SPE and the holders of the notes
payable issued by the SPE have no recourse to us.
The SPE is bankruptcy remote and serves to
protect the investors in the notes from any credit risk relating to us by
isolating cash flows from the Plum Creek notes receivable. The structure was set
up to raise funding using the promissory notes as collateral in a manner that
would not result in either debt or the Plum Creek Timberlands LLP notes
being reflected on balance sheet. This would not be the case if we monetized the
promissory notes through an issuance of secured notes directly or by an entity
that was required to be consolidated in our financial statements under the
applicable accounting principles.
Contractual
Obligations
We have various obligations and commitments to
make future cash payments under contracts, such as debt instruments, lease
arrangements, supply agreements and other contracts. The following table
includes information contained within the audited financial statements, as well
as information regarding purchase obligations. As this information is only
compiled annually for statutory reporting purposes, the tables reflect those
contractual obligations at the end of fiscal 2007 that could be
quantified.
|
Payments
Due by Period
|
||||||||||||||||||||
|
Total
|
Less
than
1 year
|
1-3
years
|
3-5
years
|
More
than
5 years
|
||||||||||||||||
|
Long-Term
Debt Obligations(1)
|
3,606 | 885 | 136 | 1,645 | 940 | |||||||||||||||
|
Capital Lease
Obligations(1)
|
58 | 13 | 17 | 10 | 18 | |||||||||||||||
|
Operating
Lease Obligations(2)
|
145 | 112 | 24 | 7 | 2 | |||||||||||||||
|
Purchase
Obligations(3)
|
46 | 26 | 20 | — | — | |||||||||||||||
|
Other
Long-term Liabilities Reflected on Balance Sheet(4)
|
384 | — | — | — | — | |||||||||||||||
|
Capital
Commitments(5)
|
188 | 184 | 4 | — | — | |||||||||||||||
|
Group
Total
|
4,427 | 1,220 | 201 | 1,662 | 960 | |||||||||||||||
|
(1)
|
Includes
interest obligations to maturity to service the debt. The principal debt
is US$2,599 million.
|
|
(2)
|
Operating
leases are future minimum obligations under operating leases. Refer to
note 26 of our audited financial
statements.
|
|
(3)
|
Unconditional
Purchase Obligations are obligations to transfer funds in the future for
fixed or minimum amounts or quantities of goods or services at fixed or
minimum prices (for example, as in take-or-pay contracts or throughput
contracts, relating to among others, timber and
power).
|
|
(4)
|
The Other
Long-Term Liabilities of US$384 million (fiscal
2006 US$472 million) on balance sheet, relate mainly to
post-employment benefits, post-retirement benefits other than pensions
obligations, workmen’s compensation, and other items which do not have a
payment profile. Refer to note 22 of our audited financial
statements.
|
|
(5)
|
Capital
commitments are commitments for which contracts have been entered into.
Refer to note 26 of our audited financial
statements.
|
Share
Buy Back
Following an initial approval of our
shareholders, on December 15, 2000, of purchases by our subsidiaries of our
ordinary shares, further approval to purchase was obtained at the annual general
meeting of shareholders held on March 5, 2007. A special resolution
granting authority to us or our subsidiaries to buy back up to 10% of our issued
ordinary shares in any one year was approved. Pursuant to this approval, which
was renewed at the annual general meeting of shareholders held on March 3,
2008, we or our subsidiaries may buy back ordinary shares from time to time.
This authority is valid until the next annual general meeting.
No purchases of our ordinary shares were made
by our subsidiaries during the nine months ended June 2008 and fiscal years 2007
and 2006. We held approximately 9.9 million treasury shares (or
approximately 4.4% of our issued shares) as of June 2008. On November 6,
2008, the closing price for our shares on the JSE was ZAR58.25 per
share.
In terms of the listing requirements of the JSE
a company may not repurchase its shares during a closed period, which is defined
as the period between the end of a financial reporting period and the
publication of the results for that period and any period during which the
company is trading under a cautionary announcement.
Dividends
In 2007, we declared dividends in respect of
ordinary shares of 32 US cents per share (2006: 30 US cents
per share). On November 6, 2008, we announced that the Sappi Board has
approved a dividend in respect of ordinary shares of 16 US cents per
share, which will be payable on all ordinary shares in issue on
November 28, 2008.
Our policy is to consider dividends on an
annual basis and to declare cash dividends in US Dollars. We aim to declare
annual dividends, which, over time, incorporate real growth for shareholders. To
this end, dividend cover in each year will vary in line with changes in the
business cycle. Our current intention is to maintain a long-term average of
three times dividend cover (earnings divided by dividends).
Notwithstanding our inability to meet this
target in recent years, we remain committed to this policy in the longer
term.
Mill
Closures, Acquisitions, Dispositions, Impairment and Joint Ventures
Usutu impairment
reversal. During the first quarter of 2005 we impaired our
Usutu mill. The Usutu mill is an unbleached kraft pulp mill and forms part of
the Sappi Forest Products reporting segment. Due to continued losses an
impairment review was conducted which led to the recognition of an impairment
charge of US$50 million in 2005. During the fourth quarter of 2006 the
impairment of Usutu mill was reversed, in terms of IAS 36, because, as a
result of improved pulp prices, weakening of the Rand against the US Dollar,
improved economic conditions and improved operational performance, profitability
improved. Demand for the mill’s product has improved as international pulp
prices improved and the differential between bleached and unbleached pulp prices
widens resulting in unbleached capacity reverting back to bleached pulp
production. The improved international pricing and improved product quality have
resulted in improved pricing and the weakening of the local currency against the
US Dollar is improving margins in local currency as costs are mainly local
currency-denominated. The impairment reversal for 2006 was US$40 million.
The mill operated normally during the nine months ended June 2008 and
2007.
Nash mill
closure. In May 2006 paper production at our Nash mill was
stopped. The mill had been suffering from escalating costs, especially energy
costs, which made it uncompetitive. The plant and equipment has been scrapped or
transferred within our Group. The product previously manufactured at the mill is
now produced elsewhere in our Group. The land and buildings were sold in 2007
and realized US$26 million pre-tax profit on disposal. The closure resulted
in an impairment charge of US$2 million in fiscal 2006. An initial
impairment charge of US$3 million was taken during fiscal
2005.
Restructuring. During
fiscal 2006, Sappi Fine Paper Europe undertook a major cost reduction and
productivity improvement project which resulted in a significant headcount
reduction of employees mainly throughout 2007. This project resulted in a
restructuring charge of US$47 million in fiscal 2006. The European
restructuring was completed in fiscal 2007 and has resulted in a credit to the
income statement of US$7 million as certain details of the plan were
refined. No material adjustments to the provision are expected in fiscal
2008.
Blackburn mill closure and cessation
of production from PM 5 at Maastricht mill. In August
2008, we announced that we had undertaken a review of our European production
activities in response to overcapacity and significant input cost
pressure.
On September 22, 2008 we reached an
agreement with labor representatives at our Blackburn mill, pursuant to which
the mill will be closed on November 12, 2008 unless a buyer can be found
before that date. On October 17, 2008, production ceased at the mill. We
have informed customers of the mill about the closure of the production facility
in order to find alternatives within our Group to meet the needs of these
customers. The sales office for Coated Fine Paper in the UK will continue
operations, as will the specialties sales and marketing
organization.
As a result of our review, we also intend to
cease production at PM 5 at our Maastricht mill, having reached an
agreement with the mill’s works council regarding such action.
We offer customers comparable products and
services from our other sites in Europe and do not anticipate any supply
interruption. Blackburn has an annual capacity of 120,000 tonnes of coated
graphic fine paper. PM 5 at Maastricht has an annual capacity of
60,000 tonnes of specialty paper. Following the closure of our Blackburn
cessation of production from PM 5 at our Maastricht mill, our coated
graphic fine paper capacity will be reduced by 190,000 tonnes after giving
effect to a reallocation of our products.
Muskegon
impairment. During the third quarter of fiscal 2005, we
announced the impairment of our North American Muskegon mill, and recorded
impairment charges of US$183 million in fiscal 2005. During the nine months
ended June 2008, impairment charges of US$3 million were incurred. During
fiscal 2007, impairment charges of US$2 million were incurred and during
fiscal 2006 impairment charges of US$4 million were incurred.
Joint Venture with Shandong Chenming
Paper Holdings Limited. During 2004, we acquired 34% of
Jiangxi Chenming Paper Company Limited (“Jiangxi Chenming”) in a joint venture
with Shandong Chenming Paper Holdings Limited (“Shandong Chenming”) (51%),
Moorim Paper Manufacturing Company Limited of South Korea (7.5%) and the
International Finance Corporation (“IFC”) (7.5%). Our equity contribution was
approximately US$60 million.
The mill has an annual capacity of
350,000 tonnes per annum light-weight coated paper machine together with a
bleached thermo mechanical pulp (BCTMP) mill, de-inked pulp plant and power
plant. The mill is located in Nanchang, the capital of Jiangxi Province, which
is in southeast China. The mill was commissioned in August 2005. The total cost
of the project is approximately US$440 million. The IFC had arranged the
debt financing for the project, which is without recourse to us.
Implementation of Lereko Property
Consortium (Lereko) deal. We have received the final approval
from the Minister of Land Affairs with regard to our Black Economic Empowerment
transaction with Lereko Investments. In respect of this transaction, we
recognized a charge to the income statement, in an amount that was not material,
in June 2008.
Impairment of
assets. We have reviewed the carrying value of all our
non-current assets in the nine months ended June 2008, and have determined that
no impairment provision was required against any of the carrying value of our
assets.
Pensions
and Post-retirement Benefits Other than Pensions
We provide various post-retirement benefits to
our active and retired employees worldwide, including pension, post-retirement
health and other life benefits. We do not undertake full assessments of our
pension schemes and post-retirement benefit liabilities (other than pension) on
a quarterly basis. Accordingly, the data as of June 2008 presented below
represents an estimate of the financial position of the pension schemes. Data as
of September 2007 and 2006 presented below has been obtained through full
assessments.
Based on approximate data as of June 2008, the
underfunded status of the company’s pension plans decreased by
US$43 million to a deficit of US$19 million as of June 2008 from a
deficit of US$62 million as of September 2007. Post-retirement benefit
liabilities (other than pension) decreased by US$2 million to
US$171 million as of June 2008 from US$173 million as of September
2007.
The underfunded status of the company’s pension
plans had decreased by US$166 million from the deficit of
US$228 million as of September 2006 to a deficit of US$62 million as
of September 2007. Post-retirement benefit liabilities (other than pension) had
increased by US$9 million to US$173 million from US$164 million
as of September 2006.
Benefit obligations and fair value of plan
assets across the regions are as follows:
|
As
of
|
||||||||||||||||||||||||
|
June
2008
|
September
2007
|
September
2006
|
||||||||||||||||||||||
|
Benefit
Obligation
|
Fair
value
of
plan
assets
|
Benefit
Obligation
|
Fair
value
of
plan
assets
|
Benefit
Obligation
|
Fair
value
of
plan
assets
|
|||||||||||||||||||
|
(US$
in million)
|
||||||||||||||||||||||||
|
Pensions
|
1,572 | 1,553 | 1,607 | 1,545 | 1,513 | 1,285 | ||||||||||||||||||
|
The South
African Surplus Recognition Restriction
|
— | — | — | — | (41 | ) | — | |||||||||||||||||
|
Post-retirement
Benefits other than pensions
|
171 | — | 173 | — | 164 | — | ||||||||||||||||||
Actual returns for the various regional pension
funds during 2007 were significantly better than actuarial projections, which
improved asset levels as of September 2007. Discount rate assumptions were
adjusted upwards in North American, United Kingdom and European funds,
reflecting prevailing higher interest rates. The discount rate in South Africa
was, however, adjusted downwards slightly, also due to prevailing market
interest rates. With the effects of future accrual and experience adjustments
and provisions for improved mortality in The Netherlands, this resulted in a net
increase in pension liabilities of US$94 million for fiscal
2007.
Actual returns on plan assets for the various
regional pension funds during the nine months ended June 2008 were mixed,
compared to actuarial projections with some regions experiencing small positive
returns and others experiencing small negative returns as of June
2008.
The balance sheet position as of June 2008 for
each scheme was derived by rolling forward the assets and liabilities from the
September 2007 year end using an established method. An allowance for
assumptions as of June 2008 was accounted for in our European schemes. Tests
were carried out to assess whether these roll forward calculations were
reasonable. As a result of these tests, we believe that the data above would not
likely be materially different if a full assessment were undertaken. The
improvement in the overall balance sheet position is due to a general increase
in the discount rate.
The key assumptions used in the European
schemes and the tests for Southern African and North American schemes as of June
2008 and assumptions adopted in prior year ends are shown below:
|
Europe
|
North
America
|
South
Africa
|
||||||||||||||||||||||||||
|
June
2008
|
Sep.
2007
|
Sep.
2006
|
June
2008
|
Sep.
2007
|
Sep.
2006
|
June
2008
|
Sep.
2007
|
Sep.
2006
|
||||||||||||||||||||
|
%
|
%
|
%
|
%
|
%
|
%
|
%
|
%
|
%
|
||||||||||||||||||||
| Discount rate | 6.00-6.40 | 5.10-5.75 | 4.50-5.00 | 7.10 |
6.30
|
5.75 | 10.5 | 8.25 | 8.50 | |||||||||||||||||||
|
Return on
assets
|
5.00-6.75 | 5.00-6.75 | 5.50-6.00 | 8.25 | 8.25 | 8.25 | 9.66 | 9.66 | 10.50 | |||||||||||||||||||
|
Salary
increase
|
3.00-3.50 | 3.00-3.50 | 3.00-4.00 | 3.75 | 3.50 | 3.50 | 8.3 | 6.24 | 6.00 | |||||||||||||||||||
No 1% sensitivity figures were available as of
June 2008. However, as a guide, a 1% increase in discount rates would decrease
the pension liability by approximately US$175 million based on September
2007 year end results and also decrease the related pension expense by
approximately US$6 million per annum based on September 2007 year end
results.
As stated previously, no 1% sensitivity figures
were available as of June 2008. However, as a guide a 1% increase in the
healthcare cost trend rates would increase the accumulated other post-retirement
benefit obligation by US$14 million based on September 2007 year end
results, and increase the aggregate of the service and interest cost components
of net periodic other post-retirement benefit expense by US$1 million per
annum based on September 2007 year end results.
The South African pension fund has been closed
to new employees since 2005.
For further information, see notes 28 and
29 to our audited annual financial statements.
Insurance
We have successfully negotiated the renewal of
our 2008 insurance cover at rates similar to those of 2007. We expect to renew
our insurance cover on January 1, 2009 and believe rates will remain
stable, provided the insurance markets are not subject to any significant
upheaval. Self-insured retention for any one property damage occurrence has
remained at US$25 million, with an unchanged annual aggregate of
US$40 million. For property damage and business interruption insurance,
cost-effective cover to full value is not readily available. However, we believe
that the loss limit cover of US$1 billion should be adequate for what we
have determined as the reasonably foreseeable loss for any single
claim.
Critical
accounting policies and estimates
Our Group financial statements have been
prepared in accordance with IFRS. The preparation of financial statements in
conformity with IFRS requires management to make estimates and assumptions about
future events that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities.
Future events and their effects cannot be
determined with absolute certainty. Therefore, the determination of estimates
requires the exercise of judgment based on various assumptions and other factors
such as historical experience, current and expected economic conditions, and in
some cases, actuarial techniques. We constantly re-evaluate these significant
factors and makes adjustments where facts and circumstances dictate. We believe
that the following accounting policies are critical due to the degree of
estimation required and/or the potential material impact they may have on our
financial position and performance.
Asset
impairments. We periodically evaluate our long-lived assets
for impairment, including identifiable intangibles and goodwill, whenever
events, such as losses being incurred, or changes in circumstances, such as
changes in the pulp and paper market, indicate that the carrying amount of the
asset may not be recoverable. Our judgments regarding the existence of
impairment indicators are based on market conditions and operational performance
of the business. Future events could cause management to conclude that
impairment indicators exist.
In order to assess if there is any impairment,
we estimate the future cash flows expected to result from the use of the assets
and its eventual disposition. If the carrying amount exceeds the recoverable
amount (being the greater of the discounted expected future cash flows and the
net selling price of the asset) of the asset, we will recognize an impairment
loss for the difference. Considerable management judgment is necessary to
estimate discounted future cash flows, including an appropriate basis for making
judgments and estimates as to future product pricing (we currently use RISI as a
basis for determining future product pricing), raw material costs, volumes of
product sold, changes in the planned use of machinery or equipment or closing of
facilities. The calculation of appropriate pre-tax discount rates (weighted
average cost of capital) is another sensitive input to the valuation. While
every effort is made to make use of independent information and apply consistent
methodology, actual circumstances or outcomes could vary significantly from such
estimates, including as a result of changes in the economic and business
environment. These variances could result in changes in useful lives or
impairment. These changes can have either a positive or negative impact on our
estimates of impairment and can result in additional charges.
Goodwill impairment tests are performed
annually to compare the fair value of each of our cash generating units to its
carrying amount. Goodwill impairment testing is conducted at cash generating
unit levels of our business and is based on a cash flow-based valuation model to
determine the fair value of the cash generating unit. The assumptions used in
estimating future cash flows were based upon our business forecasts and
incorporated external information from industry sources, where applicable.
Actual outcomes could vary significantly from our business forecasts. Changes in
certain of these estimates could have a material effect on the estimated fair
value of the cash generating unit. In addition to the judgments described in the
preceding paragraph that are necessary in estimating future cash flows,
significant judgments in estimating discounted cash flows also include the
selection of the pre-tax discount rate (weighted average cost of capital) and
the terminal value (net present value at end of period where there is a willing
buyer and seller) multiple used in our valuation model. The discount rate used
in our valuation model considered a targeted debt and equity mix, a market risk
premium and other factors consistent with valuation methodologies. The terminal
value multiple used in our valuation model considered the valuations for
comparable companies. Based on the results of the impairment evaluation
described above, the recorded goodwill in our historical financial statements
was not impaired as the fair value of each cash generating unit exceeded the
carrying value.
Small changes to the valuation model would not
significantly impact the results of our valuation; however, if future cash flows
were materially different than our forecasts, then the assessment of the
potential impairment of the carrying value may be impacted.
Property, plant and
equipment. Property, plant and equipment represents items that
are integral to those assets that are held-for-use in the production or supply
of goods or services, for rental to others, or for administrative purposes and
that are expected to be used during more than one period.
Items of property, plant and equipment are
stated at cost less accumulated depreciation and impairment losses. The cost
includes the estimated cost of dismantling and removing the assets, where
specifically required in terms of legislative requirements or a constructive
obligation exists.
Owner-occupied investment properties and
properties in the course of construction are carried at cost, less any
impairment loss where the recoverable amount of the asset is estimated to be
lower than its carrying value. Cost includes professional fees and, for
qualifying assets, borrowing costs capitalized in accordance with our accounting
policy. Depreciation commences, on the same basis as other property assets, when
the assets are ready for their intended use. We currently do not hold any
investment properties.
Subsequent expenditure is capitalized when it
is measurable and will result in probable future economic benefits. Expenditure
incurred to replace a component of an item of owner-occupied property or
equipment is capitalized to the cost of the item of owner-occupied property and
equipment and the part replaced is derecognized. All other expenditure is
recognized in profit or loss as an expense when incurred. Management evaluates
whether future economic benefits will be generated based on future projections
of cash flows.
Depreciation is charged so as to write off the
depreciable amount of the assets, other than land, over their estimated useful
lives to estimated residual values, using a method that reflects the pattern in
which the asset’s future economic benefits are expected to be consumed by the
entity.
Where significant parts of an item have
different useful lives to the item itself, these parts are depreciated over
their estimated useful lives. The methods of depreciation, useful lives and
residual values are reviewed annually. Depreciation rates for similar items of
plant or equipment could vary significantly based on the location and use of the
asset.
Determining the depreciable amount for an item
of plant and equipment, the residual amount of the item of plant and equipment
is taken into consideration. The residual value for the majority of items of
plant and equipment has been deemed to be zero by management due to the
underlying nature of the equipment.
The following methods and rates were used
during fiscal 2007 to depreciate property, plant and equipment to estimated
residual values:
|
Land
|
no
depreciation
|
|
Buildings
|
straight line
40 years
|
|
Plant
|
straight line
5 to 20 years
|
|
Vehicles
|
straight line
5 to 10 years
|
|
Furniture and
equipment
|
straight line
3 to 6 years
|
Assets held under finance leases are
depreciated over their expected useful lives or the term of the relevant lease,
where shorter. Previously, the cost of assets was written off over the asset’s
expected useful life, depending on the class of asset. Under IFRS these useful
lives have to be reassessed annually and the depreciation charge adjusted
accordingly. This process is, by its nature, dependent on certain key
assumptions. Management believes that the assigned values and useful lives,
including the underlying assumptions have been adequately considered and
consistently applied. Different assumptions and assigned useful lives could have
an impact on the reported amounts.
The gain or loss arising on the disposal or
scrapping of property, plant and equipment is recognized in profit or loss in
the period in which the disposal occurs.
For material items of property, plant and
equipment an internal engineer is used to assist in determining the remaining
useful lives and residual values. Management believes that the assigned values
and useful lives, including the underlying assumptions, have been adequately
considered and consistently applied. Different assumptions and assigned useful
lives could have an impact on the reported amounts.
Taxation. We
estimate our income taxes in each of the jurisdictions in which we operate. This
process involves estimating its current tax liability together with assessing
temporary differences resulting from differing treatment of items for tax and
accounting purposes. These differences result in deferred tax assets and
liabilities, which are included within the consolidated balance
sheet.
We then assess the likelihood that the deferred
tax assets will be recovered from future taxable income and, to the extent
recovery is not likely, a deferred tax asset is not recognized. In recognizing
deferred tax assets the company considers profit forecasts including the effect
of exchange rate fluctuations on sales and external market conditions. Where it
is probable that a position may be successfully challenged, based on reported
challenges by revenue authorities of similar positions taken by other taxpayers,
as well as items already raised by revenue authorities during audits, but for
which resolution has not yet been reached, a valuation allowance or tax
provision is raised for the tax on the probable adjustment. Management’s
judgment is required in determining the provision for income taxes, deferred tax
assets and liabilities and any valuation allowance recorded against the net
deferred tax assets. Deferred tax assets have been recognized where management
believes there are sufficient taxable temporary differences or other convincing
evidence that sufficient taxable profits will be available in future to realize
deferred tax assets. Although the deferred tax assets which have been recognized
are considered realizable, actual amounts could be reduced if future taxable
income is not achieved. This can materially affect our reported net income and
financial position.
We released a US$6 million provision in
the fourth quarter of fiscal 2007 as a result of South African income tax
legislation which was, in management’s judgment, substantively enacted at year
end. If the legislation had not been substantively enacted a further provision
of US$11 million would have had to be made in fiscal 2007.
In the nine months ended June 2008, we recorded
a taxation credit of US$10 million relating to a South African taxation
rate change from 29% to 28%, which was announced in February 2008. In addition,
a taxation provision of US$21 million was made relating to the tax status
of our Belgian coordination center, following the European Commission’s
position, in November 2007, that the phase-out period for Belgian coordination
centers should have ended in December 2005.
During the third quarter of 2007, we recognized
a taxation credit of US$14 million related to a tax rate change in Germany.
The recognition was based on our judgment that the change in the German tax rate
from 38% to 30% had been substantively enacted during the quarter ended June
2007. We have subsequently concluded that the tax law change was substantively
enacted on July 6, 2007, and accordingly, the impact of the tax rate change
should have been reflected in our fourth quarter results. The change has no
impact on our results for the year ended September 2007. However it does impact
the deferred taxation and profit for the period for the quarters ended June and
September 2007 and for the nine months ended June 2007.
Hedge accounting for financial
instruments. For the purposes of hedge accounting, we classify
hedges into two categories: (a) fair value hedges which hedge the exposure
to changes in the fair value of a recognized asset or liability; and
(b) cash flow hedges, which hedge exposure to variability in cash flows
that are either attributable to a particular risk associated with a recognized
asset or liability or a forecasted transaction. The financial instruments that
are used in hedging transactions are assessed both at inception and quarterly
thereafter to ensure they are effective in offsetting changes in either the fair
value or cash flows of the related underlying exposures. Hedge accounting is
mainly used for debt instruments to hedge interest rate and foreign currency
risk exposures and for firm commitments to hedge foreign currency risk
exposures. We do not currently use hedge accounting for trading
transactions.
In relation to fair value hedges, which meet
the conditions for hedge accounting, any gain or loss from re-measuring the
hedging instrument to fair value is recognized immediately against income. Any
gain or loss on the hedged item attributable to the hedged risk is adjusted
against the carrying amount of the hedged item and recognized against income.
Any residual ineffectiveness related to fair value hedges affects our reported
net income. External market data is applied in re-measuring the hedging
financial instrument.
In relation to cash flow hedges, which meet the
conditions for hedge accounting, the portion of the gain or loss on the hedging
instrument that is determined to be an effective hedge is recognized directly in
shareholders’ equity and the ineffective portion is recognized in income. The
gains or losses, which are recognized directly in shareholders’ equity, are
transferred to income in the same period in which the hedged transaction affects
income. Any residual ineffectiveness related to cash flow hedges can affect our
reported net income. External market data is applied in measuring the hedge
effectiveness of the financial instrument. Hedge ineffectiveness is recognized
immediately against income. We currently do not have any cash flow
hedges.
Refer to note 31.5 of our audited
Financial Statements for details of the fair value hedging
relationships.
Plantations. Plantations
are stated at their fair value, less estimated costs to sell at the harvesting
stage. The fair value of immature timber is the present value of the expected
future cash flows taking into account, unadjusted current market prices,
estimated projected growth over the rotation period for the existing immature
timber volumes in tonnes, cost of delivery and the estimated maintenance costs
through to when the timber becomes usable. The discount rate used is the
applicable pre-tax weighted average cost of capital of the business unit.
Determining the appropriate discount rate requires significant assumptions and
judgments and changes in these assumptions could change the outcomes of the
plantation valuations. The standing value of mature timber is based on
unadjusted current market prices and estimated timber volumes in tonnes less
cost of delivery at current market prices.
The age threshold used for quantifying immature
timber is dependent on the rotation period of the specific timber genus. In the
southern African region, softwood less than eight years and hardwood less than
five years is classified as immature timber. Management focuses its attention on
good husbandry techniques, which include ensuring that the rotation of
plantations is combined with adequate planting activities for future harvesting.
The rotation periods vary from eight to eighteen years in southern
Africa.
Assumptions and estimates are used in the
recording of plantation volumes, maintenance cost per tonne, and depletion.
Changes in the assumptions or estimates used in these calculations may affect
our results, in particular, our plantation valuation and depletion
costs.
A key assumption and estimation is the
projected growth estimation over a period of eight to eighteen years per
rotation. The inputs to our immature timber growth model are complex and involve
estimations and judgments, which are regularly updated. We established a
long-term sample plot network which is representative of the species and sites
on which we grow trees and the measured data from these permanent sample plots
are used as input in our growth estimation. Periodic adjustments are made to
existing models for new genetic material.
We manage the establishment, maintenance and
harvesting of our plantations on a compartmentalized basis. These comprise
pulpwood and saw logs and are managed in such a way so as to ensure that the
optimum fiber balance is supplied to its paper and pulping operations in
southern Africa. As of June 2008, we owned approximately 369,000 (2007:
approximately 369,000 and 2006: approximately 372,000) hectares of plantation
and directly or indirectly managed a further approximately 166,000 (2007:
approximately 184,000 and 2006: approximately 173,000) hectares established on
land held by independent commercial farmers. We provide technical advice on the
growing and tendering of trees which are recognized as silviculture costs in
cost of sales. As of June 2008, approximately 389,000 (2007: approximately
409,000 and 2006: approximately 398,000) hectares of this land is forested with
approximately 37.5 million (2007: approximately 37.3 million and 2006:
approximately 38.2 million) standing tonnes of timber. Given the extent of
our plantations, between 30% and 40% of these areas are measured in a three-year
cycle in order to confirm the accuracy of the recorded volume changes. As we
manage our plantations on a rotational basis and by implication, the respective
increases by means of growth are, over the rotation period, negated by
depletions for our own production or sales. Estimated volume changes, on a
rotational basis, amount to approximately six million tonnes per
annum.
Depletions include the fair value of timber
felled, which is determined on the average method, plus amounts written off
against standing timber to cover loss or damage caused by fire, disease and
stunted growth, which also requires judgment and estimation. Depletions are
accounted for on a cost per tonne allocation method. Tonnes are calculated using
the projected growth to rotation age and are extrapolated to current age on a
straight line basis.
Ruling unadjusted current market prices applied
at the reporting date, as well as the assumptions that are used in determining
the extent of biological transformation (“growth”), can have a significant
effect on the valuation of the plantations, and as a result, the amount recorded
in the income statement arising from fair value changes and growth. In addition,
the discount rate applied in the valuation of immature timber has an impact as
tabled below.
|
Nine
Months
ended
June
2008
|
Nine
Months
ended
June
2007
|
2007
|
2006
|
|||||||||||||
|
(US$
million)
|
||||||||||||||||
|
Fair
value changes:
|
||||||||||||||||
|
1% increase
in market prices
|
18 | 17 | 17 | 14 | ||||||||||||
|
1% decrease
in market prices
|
17 | (17 | ) | (17 | ) | (14 | ) | |||||||||
|
Discount
rate (for immature timber):
|
||||||||||||||||
|
1% increase
in rate
|
(4 | ) | (4 | ) | (4 | ) | (3 | ) | ||||||||
|
1% decrease
in rate
|
5 | 4 | 4 | 4 | ||||||||||||
|
Volume
assumption:
|
||||||||||||||||
|
1% increase
in estimate of volume
|
6 | 6 | 6 | 5 | ||||||||||||
|
1% decrease
in estimate of volume
|
(6 | ) | (6 | ) | (6 | ) | (5 | ) | ||||||||
|
Growth
assumptions:
|
||||||||||||||||
|
1% increase
in rate of growth
|
1 | 1 | 2 | 1 | ||||||||||||
|
1% decrease
in rate of growth
|
(1 | ) | (1 | ) | (2 | ) | (1 | ) | ||||||||
We are exposed to financial risks arising from
climatic changes, disease and other natural risks such as fire, flooding and
storms and human-induced losses arising from strikes, civil commotion and
malicious damage. These risks are covered by an appropriate level of insurance
as determined by management. In addition, management focuses close attention to
good husbandry techniques and fire-fighting methods. The plantations have an
integrated management system that is certified to ISO 9001, ISO 14001,
OHSAS 18001 and FSC standards.
For further information see note 11 of our
audited financial statements for the year ended September 2007.
Post-employment
benefits. We account for our pension benefits and other
post-retirement benefits using actuarial models. These models use an attribution
approach that generally spreads individual events over the service lives of the
employees in the plan. Examples of “events” are changes in actuarial assumptions
such as discount rate, expected long-term rate of return on plan assets, and
rate of compensation increases. The principle underlying the required
attribution approach is that employees render service over their service lives
on a relatively consistent basis and, therefore, the income statement effects of
pension benefits or post-retirement healthcare benefits are earned in, and
should be expensed in, the same pattern.
Numerous estimates and assumptions are
required, in the actuarial models, to determine the proper amount of pension and
other post-retirement liabilities to record in our consolidated financial
statements and set the expense for the next fiscal year. These include discount
rate, return on assets, salary increases, healthcare cost trends, longevity and
service lives of employees. Although there is authoritative guidance on how to
select these assumptions, our management and its actuaries exercise some degree
of judgment when selecting these assumptions. Selecting different assumptions,
as well as actual versus expected results, would change the net periodic benefit
cost and funded status of the benefit plans recognized in the financial
statements.
Refer to notes 28 and 29 in our audited
financial statements for the key assumptions, the benefit obligations and plan
assets and the net periodic pension cost as of the end of September 2007 and
2006.
The impact on our future financial results in
relation to post-employment benefits is dependent on economic conditions,
employee demographics and investment performance. A 1% increase in discount
rates would decrease the related pension liability by approximately
US$175 million and the related pension expense by approximately
US$6 million per annum. A 1% increase in the healthcare cost trend rates
would increase the accumulated other post-employment benefit obligation by
US$14 million and the aggregate of the service and interest cost components
of net periodic other post-employment benefit cost by US$1 million after
tax per annum.
Provisions. Provisions
are required to be recorded when we have a present legal or constructive
obligation as a result of past events, for which it is probable that an outflow
of economic benefits will occur, and where a reliable estimate can be made of
the amount of the obligation. Best estimates, being the amount that we would
rationally pay to settle the obligation, are recognized as provisions at balance
sheet date. Risks, uncertainties and future events, such as changes in law and
technology, are taken into account by management in determining the best
estimates.
Where the effect of discounting is material,
provisions are discounted. The discount rate used is the pre-tax rate that
reflects current market assessments of the time value of money and, where
appropriate, the risks specific to the liability, all of which requires
management judgment.
The establishment and review of the provisions
requires significant judgment by management as to whether or not there is a
probable obligation and as to whether or not a reliable estimate can be made of
the amount of the obligation, which requires judgments as to the likelihood of
future payment. All provisions are reviewed at each balance sheet date. Various
uncertainties can result in obligations not being considered probable or
estimable for significant periods of time. As a consequence, potentially
material obligations may have no provisions and a change in facts or
circumstances that results in an obligation becoming probable or estimable can
lead to a need for the establishment of material provisions. In addition, where
estimated amounts vary from initial estimates the provisions may be revised
materially, up or down, based on the facts.
We periodically restructure our business units
for productivity and business improvement initiatives and record charges for
reductions in our workforce, the closure of manufacturing facilities, and other
actions related thereto. These events require estimates of liabilities for
employee separation payments and related benefits, equipment removal,
environmental cleanup and other costs. The actual costs incurred could differ
materially from those estimated at balance sheet date.
We are required to record provisions for
estimated environmental liabilities, based on current interpretations of
environmental laws and regulations, when expenditures are considered probable
and can be reasonably estimated. These estimates reflect management assumptions
and judgments as to the probable nature, magnitude and timing of required
investigations, remediation and monitoring activities, changes in governmental
regulations, insurance recoveries and the contributions by other potentially
responsible parties. These assumptions and judgments are subject to various
uncertainties which could result in estimated costs that could materially differ
from the actual costs incurred.
We are required to record provisions for legal
contingencies when the contingency is probable of occurring and the amount of
the loss can be reasonably estimated. Liabilities provided for legal matters
require judgments regarding projected outcomes and ranges of losses based on
historical experience and recommendations of legal counsel. Litigation is,
however, unpredictable and actual costs incurred could differ materially from
those estimated at the balance sheet date.
Provisions for dismantling of property, plant
and equipment are only recognized when a legal or constructive obligation
arises.
Adoption
of Accounting Standards in Fiscal 2008
We have adopted the following accounting
standards in fiscal 2008:
IFRS 7—Financial Instruments:
Disclosures and IAS 1: Presentation of financial statements: Capital
disclosures
We have adopted IFRS 7 Financial
Instruments: Disclosures and the associated revisions to IAS 1 Presentation
of Financial Statements. As a result, the financial instrument disclosures
previously required by IAS 32 Financial Instruments: Presentation and
Disclosure have been replaced by those required under IFRS 7 and capital
risk management disclosures have been included.
Adoption of this accounting standard has had no
impact on the reported profits or financial position of our Group.
IFRIC 10—Interim financial
reporting
This interpretation addresses an apparent
conflict between the requirements of IAS 34—interim financial reporting and
those in other standards on the recognition and reversal in financial statements
of impairment losses on goodwill and certain financial assets. The
interpretation concludes that an entity shall not reverse an impairment loss
recognized in a previous interim period in respect of goodwill, or an investment
in either an equity instrument or a financial asset carried at
cost.
The impact of this interpretation on our group
is not considered to be significant.
IFRIC 11—Group and treasury share
transactions
This interpretation addresses two issues. The
first is whether treasury share transactions should be accounted for as equity
settled or as cash-settled share-based payment arrangements, and the second
where a share-based payment transaction involves two or more entities within the
same group.
The impact of this interpretation on our group
is not considered to be significant.
IAS 1—Amendment to International
Accounting Standard 1—Presentation of financial statements: capital
disclosures
The amendment requires our group to disclose
information that will enable users of its financial statements to evaluate our
group’s objectives, policies and processes of managing capital.
Adoption of this accounting standard had no
impact on the reported profits or financial position of our group.
Potential
Impact of Future Changes in Accounting Policies
The following standards and interpretations,
which have been issued but which are not yet effective and which are applicable
to our Group, have not been applied in fiscal 2008:
Revised IAS 1—Presentation of
financial statements
The main changes from the previous standard
require that an entity must present:
|
|
●
|
all non-owner
changes in equity (that is, “comprehensive income”)—either in one
statement of comprehensive income or in two statements (a separate income
statement and a statement of comprehensive
income);
|
|
|
●
|
a statement
of financial position (balance sheet) as at the beginning of the earliest
comparative period in a complete set of financial statements when the
entity applies an accounting policy; retrospectively or makes a
retrospective restatement;
|
|
|
●
|
income tax
relating to each component of other comprehensive income;
and
|
|
|
●
|
reclassification
adjustments relating to components of other comprehensive
income.
|
This revised standard is effective for our
September 2010 year end. We are currently assessing the impact of this
standard on our group.
IFRS 8—Operating
segments
This IFRS introduces the concept of an
operating segment; it expands the identification criteria for segments of an
entity and the measurement of segment result. This statement will allow an
entity to align its operating segment reporting with the internal identification
and reporting structure.
The standard first becomes applicable to our
group for the financial year ending September 2010, and we are currently
assessing the impact of this standard on our group.
IFRIC 12—Service concession
arrangements
This interpretation clarifies the treatment of
arrangements whereby a government or other body grants contracts for the supply
of public services—such as roads, energy distribution, prisons or hospitals—to
private operators. The objective of this IFRIC is to clarify aspects of
accounting for service concession arrangements.
This interpretation first becomes applicable to
our Group for the financial year ending September 2009. We are currently
assessing the impact of this interpretation on our Group.
IFRIC 13—Customer loyalty
programs
This interpretation addresses accounting by
entities that grant loyalty awards to customers who buy other goods or services.
The interpretation deals with the accounting treatment of the obligations to
provide free or discounted goods or services granted under such a
program.
This interpretation first becomes applicable to
our Group for the financial year ending September 2009. We are currently
assessing the impact of this interpretation on our Group.
Amendment to IAS 39 Financial
Instruments: Recognition and Measurement on eligible hedged items
The amendment clarifies that inflation can only
be designated as a hedged risk or portion, if it is a contractually-specified
portion of the cash flows of a recognized financial instrument; and the time
value of a purchased option used as a hedging instrument is not a risk or
portion present in a hedged item, and would cause ineffectiveness if the entire
option is designated as a hedging instrument.
The amendment also clarifies that a risk-free
or benchmark interest rate portion of the fair value of a fixed rate financial
instrument will normally be separately identifiable and reliably measurable, and
hence may be hedged.
The amendment first becomes applicable to our
group for the financial year ending September 2010, and we are currently
assessing the impact of this amendment on our group.
IFRIC 15 Agreements for the
Construction of Real Estate
This interpretation provides guidance on when
and how to apply IAS 11 Construction Contracts and IAS 18 Revenue to
real estate construction agreements before construction is
complete.
This interpretation first becomes applicable to
our Group for the financial year ending September 2010. We are currently
assessing the impact of this interpretation on our Group.
IFRIC 16 Hedges of a Net
Investment in a Foreign Operation
This interpretation clarifies the accounting
for net investment hedges and it provides guidance on the following
issues:
|
|
●
|
which foreign
currency risks qualify for hedge accounting, and what amount can be
designated;
|
|
|
●
|
where within
our Group the hedging instrument can be held;
and
|
|
|
●
|
what amount
should be reclassified to profit or loss when the foreign operation is
disposed of.
|
This interpretation first becomes applicable to
our Group for the financial year ending September 2009. We are currently
assessing the impact of this interpretation on our Group.
Revision to IFRS 3: Business
Combinations and amended IAS 27 Consolidated and Separate Financial
Statements
The revision of IFRS 3 Business
Combinations and amendment to IAS 27 Consolidated and Separate Financial
Statements aligns some of the US accounting requirements related to business
combinations with existing IFRS 3 and IAS 27.
The revised standard will only be applicable to
our Group for the financial year ending September 2010. We are currently
assessing the impact of this revised standard on our Group.
Quantitative
and Qualitative Disclosures About Market Risk
The principal market risks (that is, the risk
of loss arising from adverse changes in market rates and prices) to which we are
exposed are:
|
|
●
|
interest
rates on interest bearing debt;
|
|
|
●
|
foreign
exchange rates, generating translation and transaction gains and
losses;
|
|
|
●
|
fair value
fluctuations on financial
instruments;
|
|
|
●
|
fair value
fluctuations on plantations;
|
|
|
●
|
credit
risk;
|
|
|
●
|
commodity
prices, affecting the cost of products;
and
|
|
|
●
|
discount
rates for post-employment benefits.
|
For a detailed description of these risks, see
notes 1, 2, 11, 28, 29 and 31 to our audited financial
statements.
Commodity
Price Risk
The selling prices of the majority of products
manufactured and purchase prices of many raw materials used generally fluctuate
in line with commodity cycles. Prices of chemical cellulose generally follow
those of paper pulp, although the cycle is generally less volatile. As a result,
the sale of chemical cellulose also tends to act as a natural hedge for paper
pulp. Our total pulp production capacity is over 100% of our total pulp
requirements. However, there are differences between the types of pulp required
in our paper making operations and the grades of pulp we produce, as well as
regional differences. We are therefore a buyer as well as a seller of paper
pulp. Other than maintaining a high level of pulp integration, no hedging
techniques are applied. Despite our present relatively high level of pulp
integration on a Group-wide basis, in the event of significant increases in the
prices of pulp, our non-integrated and partially integrated operations could be
adversely affected if they are unable to raise paper prices by amounts
sufficient to maintain margins.
Ongoing
industry rationalization in Europe
Increases in new production capacity in the
past have resulted in significant overcapacity in the pulp and paper industry,
particularly in the European fine paper market. This overcapacity has
contributed to downward pressure on product prices, despite heightened demand
levels and high production operating rates. We believe that a combination of
industry consolidation and capacity reductions should encourage a
rationalization of the European pulp and paper industry similar to recent
developments in the North American market, which should contribute to improved
profitability.
A number of producers, including our European
business, have announced capacity reductions in Europe amounting to
approximately one million tonnes of coated woodfree paper over the next few
months and representing approximately 10% of the total European capacity for
fine paper. We are actively participating in this process through the planned
closure of our Blackburn mill (which has recently stopped production) and
cessation of production from PM 5 at our Maastricht mill. In addition, we
believe that the Proposed Acquisition will contribute to the consolidation of
the European pulp and paper industry and lead to improvement in the operating
results of our European operations.
Efficient
asset base
We own and operate what we believe are some of
the lowest cost and most efficient assets in the coated fine paper sector in the
world. A significant portion of our capital expenditures are designed to
increase production capacity at efficient facilities, reduce costs and improve
product quality. We continually evaluate the performance of our assets by
maintaining a focus on profitability and we actively manage our asset base,
including by divesting or closing non-performing assets and by pursuing an
investment policy that is focused on high-return projects.
As part of this strategy, we have closed 14
paper machines since 1995, including the closure of our Nash mill in 2006, and
we intend to close our Blackburn mill (which has recently stopped production)
and cease production from PM 5 at our Maastricht mill, shifting production
volumes to more efficient facilities and optimizing capacity utilization. We
believe that the expected rationalization of manufacturing and synergies
resulting from the integration of the Acquired Business will further enhance the
efficiency of our operations.
High
level of economic pulp integration and expansion of pulpwood
operations
On a pro forma basis our Group is approximately
92% integrated on a net basis in terms of pulp usage, meaning that, while some
of our facilities are market buyers of pulp and others market sellers, in the
aggregate we produce almost as much pulp as we use, making us less dependent on
market supplies. In the chemical cellulose segment we have recently completed an
expansion project that has significantly increased production capacity at Sappi
Saiccor, the world’s largest single producer of chemical cellulose. We also
intend to expand our pulpwood operations and further increase our pulp and
chemical cellulose capacity. We expect to maintain a high level of economic pulp
integration, which helps reduce the impact of pulp price volatility on our
earnings. Two of the mills we are acquiring from M-real, Kirkniemi and
Stockstadt, also have integrated pulp mills.
Leading
market positions
We have achieved leading positions in our core
products, in particular in the coated woodfree paper segment, by building a
portfolio of premium international operating brands, and we are currently the
largest producer of coated woodfree paper in the world (as measured by
capacity). Our leading market positions place us in an advantageous position to
benefit from the expected future growth of the coated woodfree paper segment,
historically one of the fastest growing segments of the global paper industry.
The Proposed Acquisition will strengthen our position in the coated woodfree
market and significantly increase our presence in the coated magazine paper
market.
Global
presence
We believe that our existing 19 pulp and paper
mills across Europe, North America and southern Africa enable us to take greater
advantage of opportunities where markets are strong and reduce risk where they
are weak. Our geographic diversity assists us in offsetting the effects of
volatile movements of major currencies as we can benefit from imbalances in
demand and relative strengths of currencies by shifting production between
regions. We believe that these benefits of our geographic diversity will be
increased by our expansion into Finland and Switzerland and our increased
presence in Germany as a result of the Proposed Acquisition.
Focus
on product innovation and customer service
One of our main strategic objectives is the
further integration of our international marketing and distribution efforts,
with an emphasis on meeting our customers’ requirements and expectations. We
intend to enhance client relationships by continually improving service and
reliability, and we will continue to focus on increasing service and efficiency,
including through business-to-business interaction. We expect to continue to
maintain a focus on innovation, transferring knowledge throughout our Group and
implementing best-practice policies. We believe that our three research and
development centers in Europe, North America and South Africa, enhance our
ability to design and improve value-added products and services and to bring
them to market with increased efficiency.
|
Pro
Forma Group Financial Statements for Sappi Limited for the year ended
September 2007 and nine months ended June 2008
|
|||
| P-2 | |||
| P-8 | |||
| P-10 | |||
Sappi has entered into agreements (which are
subject to the fulfilment of conditions precedent) to acquire the Acquired
Business for a consideration of approximately EUR750 million
(US$1,184 million), less any third party net debt outstanding at the date
of completion and adjusted by the variation from the target net working capital
of EUR235 million (US$371 million), as determined in accordance with
the Master Agreement on the date of completion of the acquisition of the
Acquired Business by Sappi (the “Transaction”). As of 30 June 2008 the
third party net debt of the Acquired Business was EUR88 million
(US$139 million) and the variation to the target net working capital was
EUR13 million (US$21 million). In addition, total acquisition expenses
directly attributable to the Transaction are estimated to be EUR19 million
(US$30 million).
In accordance with the Master Agreement and
other ancillary agreements relating to the Transaction, the aggregated purchase
price, if the Transaction occurred on 30 June 2008, is calculated as
follows:
|
EUR’m
|
US$’m
|
|||||||
|
Gross
purchase price
|
750 | 1,184 | ||||||
|
Adjusted
for:
|
||||||||
|
External
third party net debt
|
(88 | ) | (139 | ) | ||||
|
Acquisition
costs
|
19 | 30 | ||||||
|
Working
capital variation
|
13 | 21 | ||||||
| 694 | 1,096 | |||||||
|
The purchase
price will be funded as follows:
|
||||||||
|
Cash
(obtained from the net proceeds from the rights issue)
|
432 | 682 | ||||||
|
Newly issued
Sappi shares
|
50 | 79 | ||||||
|
Interest
bearing vendor loan issued to M-real
|
212 | 335 | ||||||
| 694 | 1,096 | |||||||
In connection with the Transaction, Sappi will
also enter into long term supply agreements with M-real for energy, wood and
pulp and exclusive marketing agreements for the outputs of the Husum PM8 machine
and the Äänekoski PM2 machine. Management believes these contracts are executed
at a market rate and therefore have not been reflected as a pro forma
adjustment.
The pro forma adjustments reflect
the acquisition and related financing transactions. The pro forma adjustments do
not give effect to any use of cash or borrowings to fund up to €18.6 million for
any exercise in the rights offer in connection with the Transaction (the “Rights
Offer”) by Sappi of rights corresponding to treasury shares. The unaudited pro forma condensed income
statements for the year ended September 2007 and the period ended June 2008 give
effect to the acquisition and related financing as if it occurred on
1 October 2006. The unaudited pro forma condensed balance
sheet as at June 2008 gives effect to the acquisition and related financing as
if it occurred on that balance sheet date.
Historical financial information for all
periods presented has been prepared on a full carve-out basis in accordance with
International Financial Reporting Standards (“IFRS”) as issued by the
International Accounting Standards Board (“IASB”), and is presented in
Euros.
The unaudited pro forma condensed financial
statements have been derived using:
|
|
●
|
for the year
ended September 2007, Sappi’s audited historical group income statement
for the year ended September 2007, and the audited combined income
statement of the Acquired Business for the year ended December 2007. The
financial information for the Acquired Business has been converted from
Euros into US dollars using the average exchange rate for the year ended
December 2007 of EUR1 : US$1.3755;
|
|
|
●
|
for the nine
months ended June 2008, Sappi’s unaudited condensed group income statement
for the nine months ended June 2008 and the unaudited condensed combined
income statements of the Acquired Business for the six months ended June
2008, and the three months ended December 2007. Financial information for
the Acquired Business for the six months ended June 2008 has been
converted from Euros into US dollars using the average exchange rate for
the six months ended June 2008 of EUR1 : US$1.5315, and for the three
months ended December 2007, have been converted from Euros into US dollars
using the average exchange rate for the three months ended December 2007
of EUR1 : US$1.4556;
|
|
|
●
|
as at June
2008, Sappi’s unaudited condensed interim group balance sheet as at June
2008, and the unaudited condensed combined balance sheet of the Acquired
Business as at June 2008. Financial information for the Acquired Business
as at June 2008 has been converted from Euros into US dollars using
Sappi’s June 2008 closing rate of EUR1 :
US$1.5795.
|
As noted above, the pro forma adjustments reflect
the acquisition and associated financing transactions. The allocation of the
purchase price reflected in the unaudited pro forma condensed financial
statements is preliminary. It is based on estimated fair values and estimated
purchase price and eventually will be adjusted based on a complete assessment of
the fair value of the net assets acquired and final purchase price. The final
purchase price allocation is dependent on, among other things, the finalization
of asset and liability valuations. As at the date hereof, we have not completed
the valuation studies necessary to finalize the fair values of the assets
acquired and liabilities assumed and the related allocation of the purchase
price. We have allocated the total estimated purchase price, calculated as
described under “Pro forma notes”, to the assets acquired and liabilities
assumed based on preliminary estimates of their fair values. A final
determination of these fair values will reflect, among other things, our
consideration of a final valuation based on the actual net tangible and
intangible assets, such as brands, order books, customer lists and intellectual
property that exist as at the closing of the acquisition. Any final adjustment
will change the allocation of the purchase price, which will affect the fair
value assigned to the assets and liabilities and could result in a material
change to the unaudited pro
forma condensed financial statements, including a change to
goodwill.
The unaudited pro forma adjustments give
effect to events that are directly attributable to the acquisition and related
financing, and are factually supportable. The unaudited pro forma condensed financial
statements are presented for information purposes only, and do not purport to
represent what our actual results of operations or financial position would have
been had the acquisition and financing occurred on the dates indicated, nor are
they necessarily indicative of future results of operations or financial
position. In addition to the matters noted above, the unaudited condensed
consolidated pro forma
financial statements do not reflect the effect of:
|
|
●
|
anticipated
synergies and efficiencies associated with combining the Sappi Group and
the Acquired Business due to the adoption of best practices;
and
|
|
|
●
|
movements in
the US Dollar / Euro exchange rate.
|
The unaudited pro forma condensed financial
statements should be read in conjunction with the information contained
elsewhere in the Acquired Business financial statements, Sappi’s audited
historical financial statements for the year ended September 2007 and the
unaudited condensed combined interim financial statements for the period ended
June 2008.
The directors of Sappi are responsible for the
preparation of the unaudited pro forma balance sheet and
income statements. The unaudited pro forma financial results
have been prepared in accordance with IFRS as issued by the IASB.
UNAUDITED
PRO FORMA BALANCE SHEET AS AT JUNE 2008
The unaudited pro forma balance sheet of
the Sappi Group as at June 2008 has been prepared on the assumption that the
Transaction was effected on 30 June 2008.
|
Sappi
Group
As
at June 2008
(A)
|
Acquired
Business
As
at June 2008
(B)
|
Pro
forma adjustments
|
Notes
|
Pro
forma
|
||||||||||||||||
|
US$
million
|
||||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||
|
Non-current
assets
|
4,574 | 1,035 | (85 | ) | 5,524 | |||||||||||||||
|
Property,
plant and equipment
|
3,568 | 1,026 | (294 | ) | (1 | ) | 4,300 | |||||||||||||
|
Plantations
|
556 | — | — | 556 | ||||||||||||||||
|
Deferred
taxation
|
56 | — | 83 | (1 | ) | 139 | ||||||||||||||
|
Other
non-current assets
|
394 | 9 | 126 | (1 | ) | 529 | ||||||||||||||
|
Current
assets
|
1,758 | 589 | (16 | ) | 2,331 | |||||||||||||||
|
Inventories
|
789 | 206 | — | 995 | ||||||||||||||||
|
Trade and
other receivables
|
742 | 378 | (11 | ) | (1 | ) | 1,109 | |||||||||||||
|
Cash and cash
equivalents
|
227 | 5 | (5 | ) | (1 | ) | 227 | |||||||||||||
|
TOTAL
ASSETS
|
6,332 | 1,624 | (101 | ) | 7,855 | |||||||||||||||
|
EQUITY
AND LIABILITIES
|
||||||||||||||||||||
|
Shareholders’
equity
|
1,669 | 989 | (228 | ) | (2 | ) | 2,430 | |||||||||||||
|
Non-current
liabilities
|
2,629 | 319 | 135 | 3,083 | ||||||||||||||||
|
Interest-bearing
borrowings
|
1,882 | 150 | 198 | (1 | ),(3) | 2,230 | ||||||||||||||
|
Deferred
taxation
|
384 | 71 | (51 | ) | (1 | ) | 404 | |||||||||||||
|
Other
non-current liabilities
|
363 | 98 | (12 | ) | (1 | ) | 449 | |||||||||||||
|
Current
liabilities
|
2,034 | 316 | (8 | ) | 2,342 | |||||||||||||||
|
Interest-bearing
borrowings
|
990 | 71 | — | 1,061 | ||||||||||||||||
|
Bank
overdraft
|
22 | — | — | 22 | ||||||||||||||||
|
Other current
liabilities
|
946 | 245 | (8 | ) | (1 | ) | 1,183 | |||||||||||||
|
Taxation
payable
|
76 | — | — | 76 | ||||||||||||||||
|
TOTAL
EQUITY AND LIABILITIES
|
6,332 | 1,624 | (101 | ) | 7,855 | |||||||||||||||
|
Number of
shares in issue at balance sheet date (in millions)*
|
229.1 | 515.1 | ||||||||||||||||||
|
Net asset
value per share (US$)
|
7.29 | 4.72 | ||||||||||||||||||
|
Net tangible
asset value per share (US$)
|
7.25 | 4.45 | ||||||||||||||||||
|
*
|
The number of
shares in issue at balance sheet date has been adjusted by
286.0 million shares representing the number of shares (net of
treasury shares) to be issued as consideration for the Acquired Business
(“Settlement Shares”) of EUR 50 / US$ 79 million and the
Rights Offer of EUR 450 / US$711 million. The number of
Settlement Shares will be 11,159,702 which is based on the volume weighted
average share price of Sappi on the JSE during the 30 trading days prior
to the date of the announcement of the Transaction and the average EUR /
ZAR daily exchange rate for the same period. The number of Settlement
Shares has been adjusted for the dilutive effect of the Rights Offer and
will be adjusted for any other action by Sappi in respect of its capital
with the effect of diluting the value of its shares, or otherwise
disadvantaging M-real in respect of the Settlement Shares, prior to the
date Sappi is required to deliver the Settlement Shares. The number of new
shares was calculated as the number of shares required to satisfy the 6
for 5 rights issue raising ZAR5,815 million being the ZAR equivalent
of EUR450 million at an exchange rate of
12.925.
|
NOTES
TO THE UNAUDITED PRO FORMA BALANCE SHEET AS AT JUNE 2008
|
(A)
|
Financial
information for the Sappi Group has been extracted without adjustment from
Sappi’s published and unaudited condensed consolidated balance sheet as at
June 2008.
|
|
(B)
|
The Acquired
Business financial information has been extracted from the Acquired
Business’s unaudited condensed combined balance sheet as at June 2008. The
Acquired Business’s balance sheet was converted from Euros into US Dollars
at Sappi’s June 2008 closing rate of EUR1 :
US$1.5795.
|
We refer to the
Reconciliation of the Acquired Business Balance Sheet as of June 2008 to Sappi’s
presentation format below.
Pro-forma
Adjustments
|
(1)
|
The estimated
price for the Acquired Business is EUR750 million
(US$1,184 million), which is based on the enterprise value of the
Acquired Business (as defined in the Master Agreement) less third party
debt and adjusted by the variation from the target net working capital of
EUR235 million (US$371 million). The net debt at 30 June
2008 was EUR88 million (US$139 million) and the variation to the
target net working capital was EUR13 million (US$21 million). In
addition, it is estimated that the costs incurred in connection with the
acquisition will be approximately EUR19 million (US$30 million),
resulting in an aggregated purchase price of EUR694 million
(US$1,096 million) including fees assuming an acquisition at June
2008. The actual cash and enterprise value of the Acquired Business will
be determined at the date of completion of the Transaction and accordingly
will vary from that used in the preparation of the pro forma financials.
Any variation could have a material impact on the cost of the Acquired
Business and accordingly, the purchase price
allocation.
|
The preliminary
allocation of the estimated aggregate purchase price to the fair value of the
assets and liabilities acquired is summarised below:
|
EUR’m
|
US$’m
|
|||||||
|
Net
assets of the Acquired Business as at June 2008
|
626 | 989 | ||||||
|
Cash and cash
equivalents*
|
(3 | ) | (5 | ) | ||||
|
VAT
receivables*
|
(7 | ) | (11 | ) | ||||
|
Other current
liabilities*
|
5 | 8 | ||||||
|
Other
non-current liabilities*
|
8 | 12 | ||||||
|
Deferred tax
liability**
|
32 | 51 | ||||||
|
Intercompany
debt***
|
87 | 137 | ||||||
|
Adjusted
net assets as at June 2008
|
748 | 1,181 | ||||||
|
Decrease in
property, plant and equipment****
|
(186 | ) | (294 | ) | ||||
|
Tax effect
thereon
|
52 | 83 | ||||||
|
Net assets
acquired
|
614 | 970 | ||||||
|
Goodwill
|
80 | 126 | ||||||
|
Aggregated
purchase price
|
694 | 1,096 | ||||||
|
|
*
|
These items
were included in the Acquired Business condensed carve-out balance sheet
as at June 2008 but are excluded from the Master
Agreement.
|
|
|
**
|
This relates
to the Kirkniemi and Kangas mills. As these are asset purchases, Sappi
will not be taking over the tax history of these mills and therefore has
reduced the deferred tax liability balance by this
amount.
|
|
|
***
|
The
intercompany debt will be assumed by Sappi and settled as part of the
Transaction consideration.
|
|
|
****
|
Management
has preliminarily determined the fair value of the mills acquired to be
less than the reported book value in the unaudited condensed combined
balance sheet of the Acquired Business as of 30 June
2008.
|
The aforementioned
purchase price allocation is preliminary. It is based on estimated fair values
and eventually may require adjustment based on a complete assessment of the fair
value of the net assets acquired. Any adjustments made to fair values of assets
and liabilities acquired will impact on the purchase price allocation and could
result in a material change to goodwill.
|
(2)
|
Adjustments
to the equity balance consist of the
following:
|
|
EUR’m
|
US$’m
|
|||||||
|
—Elimination
of the Acquired Business historical equity
|
(626 | ) | (989 | ) | ||||
|
—Newly issued
equity (a)
|
50 | 79 | ||||||
|
—Estimated
additional equity from the rights offering (b)
|
432 | 682 | ||||||
| (144 | ) | (228 | ) | |||||
|
|
(a)
|
As described
in the introduction, a portion of the consideration to purchase the
Acquired Business will be funded through the issuance of shares valued at
EUR50 million (US$79 million). The number of shares issued will
be 11,159,702 which is based on the volume weighted average share price of
Sappi on the JSE during the 30 trading days prior to the announcement of
the signing of the Transaction and on the average EUR / ZAR daily closing
exchange rate for the same period. The number of Settlement Shares has
been adjusted for the dilutive effect of the Rights Offer and will be
adjusted for any other action by Sappi in respect of its capital with the
effect of diluting the value of its shares, or otherwise disadvantaging
M-real in respect of the Settlement Shares, prior to the date Sappi is
required to deliver the Settlement Shares. In accordance with
International Financial Reporting Standards, in determining the cost of
the Acquired Business, the cost of the Settlement Shares issued by Sappi
will be measured at their fair value at the date of exchange, which may
differ from the market price on such date due to, among other things, the
Lock-Up Deed. To the extent that the price of the Settlement Shares as
determined in accordance with the Master Agreement, differs from the fair
value of the Settlement Shares on the date of the exchange, the cost of
acquisition will vary. Any such difference could have a material impact on
the cost of the Acquired Business. In the preparation of this pro forma financial
information, Sappi have assumed that the fair value of the Settlement
Shares equates to the market price, and that the date of exchange is
30 June 2008.
|
|
|
(b)
|
The Rights
Offer is for up to EUR450 million (US$711 million), and the
estimated costs are expected to be EUR18 million (US$28million). This
represents the net proceeds for the issuance of these shares. The number
of shares will vary based on the offer
price.
|
|
(3)
|
This pro forma adjustment
reflects the changes in the interest bearing borrowings. A reconciliation
is as follows:
|
|
EUR’m
|
US$’m
|
|||||||
|
Interest
bearing vendor loan note
|
250 | 395 | ||||||
|
Variation in
respect of third party debt and working capital
|
(38 | ) | (60 | ) | ||||
|
Estimated net
borrowings at completion date
|
212 | 335 | ||||||
|
Less:
Intercompany debt per note 1 above
|
(87 | ) | (137 | ) | ||||
|
Pro forma
adjustment
|
125 | 198 | ||||||
A portion of the
Transaction consideration will be funded by the issue of a Vendor Note payable
to M-real amounting to EUR250 million (US$395 million). The amount of
this note will vary based on the final purchase price according to the variation
from EUR50 million in respect of third party debt and EUR235 million
in respect of the target working capital. At 30 June 2008 these variations
amounted to EUR38 million (US$60 million). The vendor note has a
48 month term, repayable in tranches of EUR10 million, before expiry
date and ranks pari passu with existing long term debt.
Reconciliation
to Acquired Business Balance Sheet as of June 2008
The Acquired Business balance sheet
presentation format differs in certain respects from that of Sappi. The table
below conforms the Acquired Business balance sheet presentation as at June 2008,
into Sappi’s reporting format.
|
Acquired
Business carve-
out
financial statements
conformed
As
at June 2008
(i)
|
Abridging
notes
|
Conformed
presentation format
(ii)
|
|||||||
|
EUR’000
|
US$’000
|
||||||||
|
ASSETS
|
|||||||||
|
Non-current
assets
|
655,449 | 1,035,281 | |||||||
|
Property,
plant and equipment
|
649,531 | 1,025,934 | |||||||
|
Goodwill and
intangibles
|
2,580 | 4,075 | |||||||
|
Other
non-current assets
|
3,338 |
(iii)
|
5,272 | ||||||
|
Current
assets
|
372,989 | 589,135 | |||||||
|
Inventories
|
130,572 | 206,238 | |||||||
|
Trade and
other receivables
|
239,371 |
(iv)
|
378,086 | ||||||
|
Cash and cash
equivalents
|
3,046 | 4,811 | |||||||
|
TOTAL
ASSETS
|
1,028,438 | 1,624,416 | |||||||
|
EQUITY
AND LIABILITIES
|
|||||||||
|
Shareholders’
equity
|
626,162 | 989,022 | |||||||
|
Non-current
liabilities
|
202,044 | 319,128 | |||||||
|
Interest-bearing
borrowings
|
95,231 | 150,417 | |||||||
|
Deferred
taxation
|
44,664 | 70,547 | |||||||
|
Other
non-current liabilities
|
62,149 |
(v)
|
98,164 | ||||||
|
Current
liabilities
|
200,232 | 316,267 | |||||||
|
Interest-bearing
borrowings
|
45,037 | 71,136 | |||||||
|
Trade and
other payables
|
155,195 | 245,131 | |||||||
|
Taxation
payable
|
— | — | |||||||
|
TOTAL
EQUITY AND LIABILITIES
|
1,028,438 | 1,624,416 | |||||||
|
(i)
|
Financial
information for the Acquired Business has been extracted from the Acquired
Business unaudited condensed balance sheet as at June
2008.
|
|
(ii)
|
The conformed
carve-out financial statements for the Acquired Business graphic paper
business have been converted from Euros to US dollars at Sappi’s June 2008
closing rate of EUR1 : US$1.5795.
|
Abridging
notes
|
(iii)
|
This
represents the aggregation of the non-current financial receivables of
EUR2,100 and other non-current assets of
EUR1,238.
|
|
(iv)
|
This
represents the aggregation of the current financial receivables of
EUR1,991, accounts receivable and non-interest bearing receivables of
EUR237,252 and a current income tax receivable of
EUR128.
|
|
(v)
|
This
represents the aggregation of post-employment benefit obligations of
EUR43,896, provisions of EUR1,810 and other non-current liabilities of
EUR16,443.
|
The unaudited pro forma income statement of
the Sappi Group for the fiscal year ended September 2007 has been prepared on
the assumption that the transaction was effected on 1 October
2006.
|
US$’m
|
Sappi
Group
Year
ended
September
2007
(A)
|
Acquired
Business
Year
ended
December
2007
(B)
|
Pro
forma adjustments
|
Notes
|
Pro
forma
|
|||||||||||||||
|
Sales
|
5,304 | 1,833 | — | 7,137 | ||||||||||||||||
|
Cost of
sales
|
4,591 | 1,722 | (29 | ) | (1 | ) | 6,284 | |||||||||||||
|
Gross
profit
|
713 | 111 | 29 | 853 | ||||||||||||||||
|
Selling,
general and administration expenses
|
362 | 119 | — | 481 | ||||||||||||||||
|
Share of
profit (loss) from associates and joint ventures
|
(10 | ) | — | — | (10 | ) | ||||||||||||||
|
Other
operating (income) expenses
|
(22 | ) | (133 | ) | — | (155 | ) | |||||||||||||
|
Operating
profit
|
383 | 125 | 29 | 537 | ||||||||||||||||
|
Net
finance costs
|
134 | 16 | 25 | 175 | ||||||||||||||||
|
Finance
costs
|
173 | 12 | 25 | (2 | ) | 210 | ||||||||||||||
|
Finance
revenue
|
(21 | ) | (2 | ) | — | (23 | ) | |||||||||||||
|
Finance costs
capitalised
|
(14 | ) | — | — | (14 | ) | ||||||||||||||
|
Net foreign
exchange gains
|
(13 | ) | 6 | — | (7 | ) | ||||||||||||||
|
Net fair
value loss on financial instruments
|
9 | — | — | 9 | ||||||||||||||||
|
Profit
(loss) before taxation
|
249 | 109 | 4 | 362 | ||||||||||||||||
|
Taxation
charge (benefit)
|
47 | 18 | 1 | (3 | ) | 66 | ||||||||||||||
|
Profit
(loss) for the year
|
202 | 91 | 3 | 296 | ||||||||||||||||
|
Basic
earnings per share (US cents)
|
89 | 58 | ||||||||||||||||||
|
Weighted
average number of shares in issue (millions)*
|
227.8 | 513.8 | ||||||||||||||||||
|
Diluted
earnings per share (US cents)
|
88 | 57 | ||||||||||||||||||
|
Weighted
average number of shares on fully diluted basis
(millions)*
|
230.5 | 516.5 | ||||||||||||||||||
|
*
|
The number of
shares in issue at period end date has been adjusted by 286.0 million
shares representing the number of shares (net of treasury shares) to be
issued as consideration for the Acquired Business of EUR50 million
(US$79 million) and the Rights Offer of EUR450 million
(US$711 million). The number of Settlement Shares will be 11,159,702
which is based on the volume weighted average share price of Sappi on the
JSE during the 30 trading days prior to the date of the announcement of
the signing of the Master Agreement and the average EUR / ZAR daily
exchange rate for the same period. The number of Settlement Shares has
been adjusted for the dilutive effect of the Rights Offering and will be
adjusted for any other action by Sappi in respect of its capital with the
effect of diluting the value of its shares, or otherwise disadvantaging
M-real in respect of the Settlement Shares, prior to the date Sappi is
required to deliver the Settlement Shares. The number of new shares was
calculated as the number of shares required to satisfy the 6 for 5 rights
issue raising ZAR5,815 million being the ZAR equivalent of
EUR450 million at an exchange rate of
12.925.
|
NOTES
TO UNAUDITED PRO FORMA INCOME STATEMENT FOR THE YEAR ENDED SEPTEMBER
2007
|
(A)
|
The Sappi
financial information has been extracted without adjustment from Sappi’s
published audited group income statement for the year ended September
2007.
|
|
(B)
|
The Acquired
Business financial information has been extracted from the Acquired
Business unaudited condensed combined income statement for the year ended
December 2007. The Acquired Business income statement was converted from
Euros into US Dollars using the average exchange rate for the year ended
December 2007 of EUR1 : US$1.3755. We refer to Reconciliation of Acquired
Business Income Statement as of December 2007 to Sappi’s presentation
format below.
|
Pro forma adjustments and
notes
|
(1)
|
Reflects the
elimination of estimated historical depreciation charges associated with
the decrease in property, plant and equipment in connection with the
purchase price allocation.
|
|
(2)
|
The pro forma adjustment
related to finance costs represents the incremental interest expense
associated with the financing used to partially fund the acquisition of
the Acquired Business. The adjustment is calculated as
follows:
|
|
EUR’m
|
US$’m
|
|||||||
|
Vendor note
loan
|
23 | 30 | ||||||
|
Less:
historical interest on debt not acquired
|
(4 | ) | (5 | ) | ||||
|
Pro forma
adjustment
|
19 | 25 | ||||||
The finance costs
on the vendor note payable of EUR212 million (US$335 million) has been
determined based on fixed interest rates established in the vendor note
agreement and calculated at 9% for the first 6 months, 12% for the next
6 months, 14% for the next 6 months and 15% thereafter.
|
(3)
|
Represents
the tax effect of the pro forma adjustments
described above at an estimated statutory tax rate for the combined group
of 28.3%. We have applied this rate to all periods presented as we believe
it is a rate indicative of our future tax rate. We have assumed that tax
benefits created will be utilised to offset tax liabilities in these
periods. However, our ability to utilise such assets is dependent on our
taxable income and actual deferred tax liabilities. Accordingly, Sappi’s
future effective tax rate may differ significantly from the rate presented
in these unaudited pro
forma condensed combined financial
statements.
|
The unaudited pro forma income statement of
the Sappi Group for the nine months ended June 2008 has been prepared on the
assumption that the Transaction was effected on 1 October
2006.
|
(4)
|
Headline
Earnings Per Share
|
|
US$’m
|
Sappi
Group
Year
ended
September
2007
(A)
|
Acquired
Business
Year
ended
December
2007
(B)
|
Pro
forma adjustments
|
Notes
|
Pro
forma
|
|||||||||||||||
|
Headline
earnings per share (US cents)
|
82 | 30 | ||||||||||||||||||
|
Calculation
of Headline earnings**
|
||||||||||||||||||||
|
Profit for
the year
|
202 | 296 | ||||||||||||||||||
|
Profit on
disposal of property, plant and equipment
|
(24 | ) | (24 | ) | ||||||||||||||||
|
Asset
impairments (reversals)
|
2 | (152 | ) | |||||||||||||||||
|
Tax effect of
above items
|
6 | 32 | ||||||||||||||||||
|
Headline
earnings
|
186 | 152 | ||||||||||||||||||
|
**
|
Headline
earnings disclosure is required by the JSE Limited. The pro forma headline
earnings per share for the twelve months ended September 2007 excludes the
net asset impairment reversal of EUR111 million (30 US cents)
recorded by the Acquired Business.
|
NINE
MONTHS ENDED JUNE 2008
|
US$’m
|
Sappi
Group
Nine
month
period
ended
June
2008
(A)
|
Acquired
Business
Three
month
period
ended
December
2007
(B)
|
Acquired
Business
Six
month
period
ended
June
2008
(C)
|
Acquired
Business
Combined
nine month period
ended
June
2008
|
Pro
forma adjustments
|
Notes
|
Pro
forma
|
|||||||||||||||||||||
|
Sales
|
4,344 | 491 | 967 | 1,458 | — | 5,802 | ||||||||||||||||||||||
|
Cost of
sales
|
3,782 | 448 | 956 | 1,404 | (22 | ) | (1 | ) | 5,164 | |||||||||||||||||||
|
Gross
profit
|
562 | 43 | 11 | 54 | 22 | 638 | ||||||||||||||||||||||
|
Selling,
general and administration expenses
|
294 | 56 | 46 | 102 | — | 396 | ||||||||||||||||||||||
|
Share of
profit (loss) from associates and joint ventures
|
(6 | ) | — | — | — | — | (6 | ) | ||||||||||||||||||||
|
Other
operating (income) expenses
|
(15 | ) | (155 | ) | 23 | (132 | ) | — | (147 | ) | ||||||||||||||||||
|
Operating
profit
|
289 | 142 | (58 | ) | 84 | 22 | 395 | |||||||||||||||||||||
|
Net
finance costs
|
100 | 7 | 9 | 16 | 30 | 146 | ||||||||||||||||||||||
|
Net
interest
|
106 | 3 | 5 | 8 | 30 | (2 | ) | 144 | ||||||||||||||||||||
|
Finance costs
capitalised
|
(16 | ) | — | — | — | — | (16 | ) | ||||||||||||||||||||
|
Net foreign exchange
gains
|
(3 | ) | 4 | 4 | 8 | — | 5 | |||||||||||||||||||||
|
Net fair value
loss on financial instruments
|
13 | — | — | — | — | 13 | ||||||||||||||||||||||
|
Profit
(loss) before taxation
|
189 | 135 | (67 | ) | 68 | (8 | ) | 249 | ||||||||||||||||||||
|
Taxation
charge (benefit)
|
55 | 19 | (9 | ) | 10 | (2 | ) | (3 | ) | 63 | ||||||||||||||||||
|
Profit
(loss) for the year
|
134 | 116 | (58 | ) | 58 | (6 | ) | 186 | ||||||||||||||||||||
|
Basic earnings
per share (US cents)
|
59 | 36 | ||||||||||||||||||||||||||
|
Weighted
average number of shares in issue (millions)*
|
228.7 | 514.7 | ||||||||||||||||||||||||||
|
Diluted
earnings per
share (US cents)
|
58 | 36 | ||||||||||||||||||||||||||
|
Weighted average number of shares on fully
diluted basis (millions)*
|
230.9 | 516.9 | ||||||||||||||||||||||||||
|
*
|
The number of
shares in issue at period end date has been adjusted by 286.0 million
shares representing the number of shares (net of treasury shares) to be
issued as consideration for the Acquired Business of EUR50 million
(US$79 million) and Rights Offer of EUR450 million
(US$711 million). The number of Settlement Shares will be 11,159,702
which is based on the volume weighted average share price of Sappi on the
JSE during the 30 trading days prior to the date of the signing of the
Master Agreement and the average EUR / ZAR daily exchange rate for the
same period. The number of Settlement Shares has been adjusted for the
dilutive effect of the Rights Offer and will be adjusted for any other
action by Sappi in respect of its capital with the effect of diluting the
value of its shares, or otherwise disadvantaging M-real in respect of the
Settlement Shares, prior to the date Sappi is required to deliver the
Settlement Shares. The number of new shares was calculated as the number
of shares required to satisfy the 6 for 5 rights issue raising
ZAR5,815 million being the ZAR equivalent of EUR450 million at
an exchange rate of 12.925.
|
|
(A)
|
The Sappi
unaudited financial information has been extracted without adjustment from
Sappi’s published group income statement for the period ended June
2008.
|
|
(B)
|
The Acquired
Business financial information has been extracted from the Acquired
Business unaudited condensed combined income statement for the three month
period ended December 2007. The Acquired Business income statement was
converted from Euros into US Dollars using the average exchange rate
for the three months ended December 2007 of EUR1 : US$1.4556. We
refer to Reconciliation of Acquired Business Income Statement as of
December 2007 to Sappi’s presentation format
below.
|
|
(C)
|
The Acquired
Business financial information has been extracted from the Acquired
Business unaudited condensed combined income statements for the six month
period ended June 2008. The Acquired Business income statement was
converted from Euros into US Dollars using the average exchange rate for
the six months ended June 2008 of EUR1 :
US$1.5315.
|
Pro
forma adjustments and notes
|
(1)
|
Reflects the
elimination of estimated historical depreciation charges associated with
the decrease in property, plant and equipment in connection with the
purchase price allocation.
|
|
(2)
|
The pro forma adjustment
related to finance costs represents the incremental interest expense
associated with the financing used to partially fund the acquisition of
the Acquired Business. The adjustment is calculated as
follows:
|
|
EUR’m
|
US$’m
|
|||||||
|
Vendor loan
note
|
23 | 35 | ||||||
|
Less:
historical interest on debt not acquired
|
(3 | ) | (5 | ) | ||||
|
Pro forma
adjustment
|
20 | 30 | ||||||
The finance costs
on the note payable of EUR212 million (US$335 million) has been
determined based on fixed interest rates established in the vendor note
agreement and calculated at 9% for the first 6 months, 12% for the next
6 months, 14% for the next 6 months and 15% thereafter.
|
(3)
|
Represents
the tax effect of the pro forma adjustments
described above at an estimated statutory tax rate for the combined group
of 28.3%. We have applied this rate to all periods presented as we believe
it is a rate indicative of our future tax rate. We have assumed that tax
benefits created will be utilised to offset tax liabilities in these
periods. However, our ability to utilise such assets is dependent on our
taxable income and actual deferred tax liabilities. Accordingly, our
future effective tax rate may differ significantly from the rate presented
in these unaudited pro
forma condensed combined financial
statements.
|
|
(4)
|
Headline
Earnings Per Share
|
|
US$’m
|
Sappi
Group
Nine
month
period
ended
June
2008
(A)
|
Acquired
Business
Three
month
period
ended
December
2007
(B)
|
Acquired
Business
Six
month
period
ended
June
2008
(C)
|
Acquired
Business
Combined
nine month period
ended
June
2008
|
Pro
forma adjustments
|
Notes
|
Pro
forma
|
|||||||||||||||||||||
|
Headline
earnings per share (US cents)
|
58 | 10 | ||||||||||||||||||||||||||
|
Calculation
of Headline earnings**
|
||||||||||||||||||||||||||||
|
Profit for the
year
|
134 | 186 | ||||||||||||||||||||||||||
|
Profit on
disposal of property, plant and equipment
|
(5 | ) | (5 | ) | ||||||||||||||||||||||||
|
Asset
impairments (reversals)
|
3 | (160 | ) | |||||||||||||||||||||||||
|
Tax effect of
above items
|
1 | 28 | ||||||||||||||||||||||||||
|
Headline
earnings
|
133 | 49 | ||||||||||||||||||||||||||
|
**
|
Headline
earnings disclosure is required by the JSE Limited. The pro forma headline
earnings per share for the nine months ended June 2008 excludes the net
asset impairment reversal of EUR111 million (31 cents) recorded by
the Acquired Business.
|
Reconciliation of the Acquired
Business Income Statement for the year ended December 2007
The Acquired Business income statement
presentation format differs in certain respects from that of Sappi. The
following table conforms the Acquired Business information for the year ended
December 2007 to Sappi’s reporting format.
|
EUR’000
Year
ended
December
2007
(i)
|
Abridging
notes
|
EUR’000
Reclassifications
(A),(B)
|
Reclassification
notes
|
EUR’000
Conformed
presentation
format
|
US$’000
Conformed
presentation
format
(ii)
|
||||||||||||||||
|
Sales
|
1,332,787 | — | 1,332,787 | 1,833,249 | |||||||||||||||||
|
Cost of
sales
|
1,239,379 |
(a)
|
12,448 | (1),(2 | ) | 1,251,827 | 1,721,888 | ||||||||||||||
|
Gross
profit
|
93,408 | (12,448 | ) | 80,960 | 111,361 | ||||||||||||||||
|
Selling,
general and administration expenses
|
— | 86,508 | (1 | ) | 86,508 | 118,992 | |||||||||||||||
|
Share of
profit (loss) from associates and joint ventures
|
— | — | — | — | |||||||||||||||||
|
Other
operating (income) expenses
|
2,571 |
(b)
|
(98,956 | ) | (2 | ) | (96,385 | ) | (132,578 | ) | |||||||||||
|
Operating
profit
|
90,837 | — | 90,837 | 124,947 | |||||||||||||||||
|
Net
finance costs
|
11,644 | — | 11,644 | 16,016 | |||||||||||||||||
|
Finance
costs
|
8,687 | — | 8,687 | 11,949 | |||||||||||||||||
|
Finance
revenue
|
(1,153 | ) | — | (1,153 | ) | (1,586 | ) | ||||||||||||||
|
Net foreign
exchange gains
|
4,110 | — | 4,110 | 5,653 | |||||||||||||||||
|
Profit
before taxation
|
79,193 | — | 79,193 | 108,931 | |||||||||||||||||
|
Taxation
charge
|
12,740 | — | 12,740 | 17,524 | |||||||||||||||||
|
Profit
for the year
|
66,453 | — | 66,453 | 91,407 | |||||||||||||||||
|
(i)
|
The Acquired
Business financial information has been extracted from the Acquired
Business audited results for the year ended December
2007.
|
|
(ii)
|
The conformed
carve out income statement for the Acquired Business has been converted
from Euros to US dollars using the average rate for the 12 months to
December 2007 of EUR1 : US$1.3755.
|
Abridging
notes
|
(a)
|
This
represents the aggregation of change in stocks of finished goods and work
in progress for EUR2,527, purchases of EUR919,488, external services of
EUR76,123, employee costs of EUR145,579 and depreciation and amortisation
cost of EUR95,662.
|
|
(b)
|
This
represents other operating income of (EUR15,452), the impairment reversal
of (EUR151,000) and other operating expenses of
EUR169,923.
|
Reclassification
notes
|
(A)
|
Financial
information for the Acquired Business for the year ended December 2007 is
included in the Acquired Businesses audited financial
statements.
|
|
(B)
|
The Acquired
Business income statement presentation is by nature of expense while the
Sappi income statement presentation is by function. As a result certain
presentation reclassifications have been performed to conform to Sappi’s
presentation format. These reclassifications from cost of sales are as
follows:
|
|
|
(1)
|
EUR86,508 has
been reallocated to selling, general and administration expenses
(SG&A). These expenses include costs such as personnel, marketing and
general office expenses that are not directly related to the cost of
production of goods.
|
|
|
(2)
|
(EUR98,956)
has been reallocated to other operating expenses. Included in this income
(expense) function are items of income or expense which are material by
nature or amount to the operating results and require separate disclosure.
Under Sappi’s accounting policies, such items would generally include
profit and loss on disposal of property, investments and business, asset
impairments (reversals), restructuring charges, financial impacts of
natural disasters and non-cash gains or losses on the price fair value
adjustment of plantations.
|
Reconciliation
of the Acquired Business Income Statement for the three month period ended
December 2007
The Acquired Business income statement
presentation format differs in certain respects from that of Sappi. The table
below conforms the Acquired Business information for the three month period
ended December 2007 to Sappi’s reporting format.
|
EUR’000
3 month
period
ended
December
2007
(i)
|
Abridging
notes
|
EUR’000
Reclassifications
(A),(B)
|
Reclassification
notes
|
EUR’000
Conformed
presentation
format
|
US$’000
Conformed
presentation
format
(ii)
|
||||||||||||||||
|
Sales
|
337,225 | — | 337,225 | 490,865 | |||||||||||||||||
|
Cost of
sales
|
352,958 |
(a)
|
(45,392 | ) | (1),(2 | ) | 307,566 | 447,693 | |||||||||||||
|
Gross (loss)
profit
|
(15,733 | ) | 45,392 | 29,659 | 43,172 | ||||||||||||||||
|
Selling,
general and administration expenses
|
— | 38,482 | (1 | ) | 38,482 | 56,014 | |||||||||||||||
|
Share of
profit (loss) from associates and joint ventures
|
— | — | — | — | |||||||||||||||||
|
Other
operating (income) expenses
|
(113,392 | ) |
(b)
|
6,910 | (2 | ) | (106,482 | ) | (154,995 | ) | |||||||||||
|
Operating
profit
|
97,659 | — | 97,659 | 142,153 | |||||||||||||||||
|
Net
finance costs
|
4,323 | — | 4,323 | 6,293 | |||||||||||||||||
|
Finance
costs
|
2,319 | — | 2,319 | 3,376 | |||||||||||||||||
|
Finance
revenue
|
(431 | ) | — | (431 | ) | (627 | ) | ||||||||||||||
|
Net foreign
exchange gains
|
2,435 | — | 2,435 | 3,544 | |||||||||||||||||
|
Profit
before taxation
|
93,336 | — | 93,336 | 135,860 | |||||||||||||||||
|
Taxation
charge
|
13,275 | — | 13,275 | 19,323 | |||||||||||||||||
|
Profit
for the period
|
80,061 | — | 80,061 | 116,537 | |||||||||||||||||
|
(i)
|
The Acquired
Business financial information has been extracted from the Acquired
Business unaudited condensed combined income statement for the three month
period ended December 2007.
|
|
(ii)
|
The conformed
carve out income statement for the Acquired Business has been converted
from Euros to US dollars using the average exchange rate for the three
months ended December 2007 of EUR1 :
US$1.4556.
|
Abridging
notes
|
(a)
|
This
represents the aggregation of change in stocks of finished goods and work
in progress for EUR11,107, purchases during the financial period of
EUR234,956, external services of EUR20,217, employee costs of EUR32,750,
depreciation and amortisation of
EUR53,928.
|
|
(b)
|
This
represents other operating income of (EUR5,355), the impairment reversal
of (EUR151,000) and other operating expenses of
EUR42,963.
|
Reclassification
notes
|
(A)
|
Financial
information for the Acquired Business for the 3 months ended December
2007 is included in the Acquired Businesses unaudited condensed
results.
|
|
(B)
|
The Acquired
Business income statement presentation is by nature of expense while the
Sappi income statement presentation is by function. As a result certain
presentation reclassifications have been performed to conform to Sappi’s
presentation format. These reclassifications are as
follows:
|
|
|
(1)
|
EUR38,482 has
been reallocated to selling, general and administration expenses
(SG&A). These expenses include costs such as personnel, marketing and
general office expenses that are not directly related to the cost of
production of goods.
|
|
|
(2)
|
EUR6,910 has
been reallocated to other operating (income) expenses. Included in this
income (expense) function are items of income or expense which are
material by nature or amount to the operating results and require separate
disclosure. Under Sappi’s accounting policies, such items would generally
include profit and loss on disposal of property, investments and business,
asset impairments (reversals), restructuring charges, financial impacts of
natural disasters and non-cash gains or losses on the price fair value
adjustment of plantations.
|
Reconciliation
of the Acquired Business Income Statement for the six month period ended June
2008
The Acquired Business income statement
presentation format differs in certain respects from that of Sappi. The table
below conforms the Acquired Business information for the six month period ended
June 2008 to Sappi’s reporting format.
|
EUR’000
6 month
period
ended
June
2008
(i)
|
Abridging
notes
|
EUR’000
Reclassifications
(A),(B)
|
Reclassification
notes
|
EUR’000
Conformed
presentation
format
|
US$’000
Conformed
presentation
format
(ii)
|
||||||||||||||||
|
Sales
|
631,239 | — | 631,239 | 966,743 | |||||||||||||||||
|
Cost of
sales
|
599,522 |
(a)
|
24,864 | (1),(2 | ) | 624,386 | 956,247 | ||||||||||||||
|
Gross
profit
|
31,717 | 24,864 | 6,853 | 10,496 | |||||||||||||||||
|
Selling,
general and administration expenses
|
— | 30,106 | (1 | ) | 30,106 | 46,107 | |||||||||||||||
|
Share of
profit (loss) from associates and joint ventures
|
— | — | — | — | |||||||||||||||||
|
Other
operating (income) expenses
|
69,768 |
(b)
|
(54,970 | ) | (2 | ) | 14,798 | 22,663 | |||||||||||||
|
Operating
loss
|
(38,051 | ) | — | (38,051 | ) | (58,274 | ) | ||||||||||||||
|
Net
finance costs
|
5,625 | — | 5,625 | 8,614 | |||||||||||||||||
|
Finance
costs
|
3,775 | — | 3,775 | 5,781 | |||||||||||||||||
|
Finance
revenue
|
(457 | ) | — | (457 | ) | (700 | ) | ||||||||||||||
|
Net foreign
exchange gains
|
2,307 | — | 2,307 | 3,533 | |||||||||||||||||
|
Loss
before taxation
|
(43,676 | ) | — | (43,676 | ) | (66,888 | ) | ||||||||||||||
|
Taxation
benefit
|
(5,835 | ) | — | (5,835 | ) | (8,936 | ) | ||||||||||||||
|
Loss
for the period
|
(37,841 | ) | — | (37,841 | ) | (57,952 | ) | ||||||||||||||
|
(i)
|
The Acquired
Business financial information has been extracted from the Acquired
Business unaudited condensed results for the six month period ended
June 2008.
|
|
(ii)
|
The conformed
carve out income statement for the Acquired Business graphic paper
business has been converted from Euros to US dollars using the
average exchange rate for the six months ended June 2008 of EUR1 :
US$1.5315.
|
Abridging
notes
|
(a)
|
This
represents the aggregation of change in stocks of finished goods and work
in progress of (EUR2,919), purchases of EUR451,693, external services of
EUR37,893, employee costs of EUR75,044 and depreciation and amortisation
cost of EUR37,811.
|
|
(b)
|
This
represents other operating income of (EUR14,798) and other operating
expenses of EUR84,566.
|
Reclassification
notes
|
(A)
|
Financial
information for the Acquired Business for the six months ended
30 June 2008 is included in the Acquired Businesses unaudited
condensed results.
|
|
(B)
|
The Acquired
Business income statement presentation is by nature of expense while the
Sappi income statement presentation is by function. As a result certain
presentation reclassifications have been performed to conform to Sappi’s
presentation format. These reclassification are as
follows:
|
|
|
(1)
|
EUR30,106 has
been reallocated to selling, general and administration expenses
(SG&A). These expenses include costs such as personnel, marketing and
general office expenses that are not directly related to the cost of
production of goods.
|
|
|
(2)
|
(EUR54,970)
has been reallocated to other operating (income) expenses. Included in
this income (expense) function are items of income or expense which are
material by nature or amount to the operating results and require separate
disclosure. Under Sappi’s accounting policies, such items would generally
include profit and loss on disposal of property, investments and business,
asset impairments (reversals), restructuring charges, financial impacts of
natural disasters and non-cash gains or losses on the price fair value
adjustment of plantations.
|
P-14
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Date: November
12, 2008
|
SAPPI
LIMITED,
|
|||
| by |
/s/
D.J. O’Connor
|
||
|
Name: D.J.
O’Connor
Title: Group
Secretary |
|||