annual report 2009
Our reporting strategy
As a leading global business, Sappi subscribes to best international practice in reporting to stakeholders.
We aim to provide a comprehensible, balanced, complete and comparable view of our business through
various structured reporting mechanisms, to assist stakeholders to make informed decisions about
their interactions with the group.
For a complete view of Sappi’s strategy, performance in the year ended September 2009 and longer
term prospects, stakeholders are directed to the following sources of company information:
(cid:129) Quarterly results announcements and analyst presentations
(cid:129) Annual report and accounts, prepared in accordance with International Financial Reporting Standards
(IFRS) issued by the International Accounting Standards Board (IASB)
(cid:129) Form 20-F, prepared in accordance with US Securities and Exchange Commission (SEC) regulations
(cid:129) Sustainable development report, published on the group website
http://sappi.investoreports.com/sappi_sdr_2009/
(cid:129) Group website – www.sappi.com
Note: Please refer to the glossary of terms used in this report on pages 199 to 201
Sappi Limited is listed on the following stock exchanges and is subject to their listing requirements:
(cid:129) JSE Limited, South Africa (primary listing)
(cid:129) New York Stock Exchange, USA (secondary listing)
Exchange rates
2009 2008 2007
Year Closing Year Closing Year Closing
average rate average rate average rate
US Dollar (US$)/
Rand (ZAR) 9.0135 7.4112 7.4294 8.0751 7.1741 6.8713
Euro (EUR)/(€)/
US Dollar (US$) 1.3657 1.4688 1.5064 1.4615 1.3336 1.4272
Pound (GBP)/(£)/
US Dollar (US$) 1.5578 1.5955 1.9804 1.8448 1.9715 2.0471
2009 annual report
1
Our report in overview
In striving to provide a more
integrated report, we have made
a few key improvements as
indicated below with an asterisk
2
3
4
19
24
26
Our global reach
A quick overview of our business,
including a high-level description
and showing the geographic
spread of our operations.
Our business structure
Indicates the divisional structure of
our business, including our Chinese
joint venture, gives sales and pulp
capacity, and provides key facts.
Our performance in 2009
An overview of our performance
against the prior year, including
financial and strategic highlights,
and key ratios.
Letter to shareholders
From the chairman and chief
executive officer; reviews the
group’s performance and strategic
developments in the year, and
provides prospects for the year
ahead.
Interview with the
chief executive officer
He answers investors’ most
frequently asked questions.
Our leadership
Provides short CVs for the non-
executive and executive members
of our board of directors, and lists
senior management in Sappi
Limited and our operating divisions.
5
6
8
Our performance against
strategic objectives
Sets out our strategic goal and
specific priorities, and plots our
progress against these in the year
under review.
Our performance against
financial targets
Provides five-year trends in key
financials and sets out the group’s
performance against its stated
financial targets. Also shows regional
sales by source and destination.
Our performance against
sustainability objectives
A comprehensive overview of our
commitment to sustainable
development, and our performance
against the triple bottom line
objectives set out in our
Sustainability Charter.
30
Review of operations
Sappi Fine Paper
36
Review of operations
Sappi Forest Products
40
Value added statement
41
Chief financial officer’s report
14
16
Our sustainable
business cycle
A process diagram that provides a
full picture of our business, showing
inputs, outputs and impacts of our
operations. It also indicates the
management systems used in our
operations.
Our products
Describes the wide range of end-
uses and lists our major brands
within each of our main product
categories, and shows sales by
product group.
18
Our objectives for 2010
Sets out management’s priorities
for the year ahead.
62
64
Five-year review
Sets out key financials from the
income statement, balance sheet
and cash flow statement, as well as
profitability, efficiency and liquidity
ratios, and exchange rates, over a
five-year period.
Share statistics
Provides relevant statistics,
including number of shareholders,
number of shares in issue, number
and value of shares traded, price
per share, earnings and dividend
yields, PE ratio and total market
capitalisation.
67
Risk management
70
Corporate governance
Includes an indication of the
implications of King III on our
governance processes.
83
Compensation report
92
Annual financial statements
202
Notice to shareholders
207 Proxy form for annual
general meeting
199
Glossary
206
Shareholder’s diary
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Our global reach
Founded and incorporated in South Africa in 1936, Sappi is today, a global paper and pulp group. We
are a leading producer of coated fine paper widely used in books, brochures, magazines, catalogues
and many other print applications. We are also the world’s largest producer of chemical cellulose, used
primarily in the manufacture of viscose fibre, acetate tow and consumer and pharmaceutical products.
In addition, we produce newsprint, uncoated graphic and business papers, premium quality packaging
papers, a range of coated speciality papers and a range of paper grade pulp.
North America
Europe
Regional head office
Regional head office – Brussels
Fine Paper mills
2
Speciality mill
1
Fine Paper mills
10
16
Fine Paper sales offices
Fine Paper sales offices
4
1
Sappi Trading sales offices
Sappi Trading sales office
1
United States
of America
San Francisco
Central America
Mexico
Europe
Finland
United Kingdom
Russia
The Netherlands
Poland
Belgium
Germany
France
Switzerland
Austria
Hungary
Ukraine
Spain
Italy
Greece
Turkey
Peopleʼs
Republic of
China
Taiwan
Singapore
South America
Africa
Brazil
Maine
Minnesota
New York
Boston
Ohio
Georgia
Kenya
South
Africa
Australia
Johannesburg
Swaziland
Port Elizabeth
Durban
Cape
Town
Central America
1
Sappi Trading sales office
South America
1
Sappi Trading sales office
Southern Africa
Corporate head office
Regional head office
Fine Paper mills
3
Forest Product mills
6
Fine Paper sales offices
4
East Africa
1
Sappi Trading sales office
Asia
Sappi Trading sales offices
4
1
Paper mill – joint venture
Forest Product sales offices
4
2
Sappi Trading sales offices
Australia
1
Sappi Trading sales office
Our business structure
2009 annual report
3
2009 Sales
US$5,369m
Employees
16,400
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Sappi Fine Paper
(84% of group’s sales in 2009)
Sappi Forest Products
(16% of group’s sales in 2009)
Sappi Trading
2009 Sales
US$4,508m
2009 Sales
Paper capacity
Pulp capacity
6.0m tons
2.3m tons
Paper capacity
Pulp capacity
US$861m
0.8m tons
1.9m tons
Sappi Fine Paper
Europe
Kraft
(Packaging paper and pulp)
64% of fine paper sales in 2009
Saiccor
(Chemical cellulose)
Sappi Trading operates a network
for the international selling and
distribution of our products outside
our core operating regions of North
America, Europe and Southern Africa.
Sappi Trading also co-ordinates our
shipping and logistical functions for
exports from these regions.
Sappi Fine Paper
North America
Forests
Plantations (pulpwood and sawlogs)
Jiangxi Chenming (China JV)
29% of fine paper sales in 2009
34% ownership
Sappi Fine Paper
South Africa
7% of fine paper sales in 2009
Pleasingly, the integration of M-real’s
coated graphic paper business went
extremely well. Our European team
focused on building customer
relationships, engaging with employees
and realising synergies.
Key facts
(cid:129) Manufacturing operations on four continents
(cid:129) Sales in over 100 countries
(cid:129) 16,400 employees worldwide
(cid:129) Paper production of 6.8 million tons per annum
(cid:129) Chemical cellulose production of 800,000 tons per annum
(cid:129) Paper pulp production of 3.3 million tons per annum
4
Our performance in 2009
Financial
(cid:129) Sales down 8% to US$5.4 billion
l o u r o p e r a t i o n s h a v e a c t e d
t o i m p r o v e e n e r g y e f f i c i e n c y
A l
a n d s e l f - s u f f i c i e n c y.
(cid:129) Operating profit of US$33 million (2008: US$366 million) excluding special items;
special items amounted to a net pre-tax charge of US$106 million
(cid:129) Basic EPS loss of 37 US cents, unfavourably affected by special items of 13 US cents
(2008: EPS of 28 US cents; unfavourably affected by special items of 23 US cents)
(cid:129) Cash generated of US$289 million (2008: cash utilised of US$139 million)
(cid:129) Net debt of US$2.6 billion, up US$171 million
(cid:129) No dividend declared
Major strategic achievements
(cid:129) Acquisition of M-real’s coated graphic paper business completed
on 31 December 2008
(cid:129) Saiccor Mill expansion reached full production in September 2009
(cid:129) Debt refinanced; good liquidity and extended maturities secured
Sales
Operating (loss) profit
Special items – losses
Operating profit excluding special items
EBITDA excluding special items(1)
(Loss) profit for the year
Basic (loss) earnings per share
Dividend per share(2)
Ordinary shareholders’ interest per share
September
2009
US$ million
5,369
(73)
106
33
431
(177)
September
2008
US$ million
5,863
314
52
366
740
102
ZAR convenience translation
September
2009
ZAR million(3)
48,393
(658)
955
297
3,885
(1,595)
September
2008
ZAR million(3)
43,559
2,333
386
2,719
5,498
758
US cents
US cents
SA cents(3)
SA cents(3)
(37)
–
348
28
16
700
(333)
–
2,578
208
156
5,655
Achieved
September 2009
Achieved
September 2008
Operating (loss) profit to sales (%)
Operating profit excluding special items to sales (%)
EBITDA excluding special items to sales
Operating profit excluding special items to
capital employed (ROCE) (%)
Return on equity (ROE) (%)
Net debt to total capitalisation
Cash interest cover (times)
(1.4)
0.6
8.0
0.8
(10.4)
58.9
3.2
5.4
6.2
12.6
9.1
6.0
60.0
4.4
(1) Refer to the five-year review for a reconciliation
of (loss) profit for the year to operating profit
excluding special items, and EBITDA excluding
special items.
(2) The dividend for the prior financial year was
declared subsequent to year end.
(3) The translation to South African Rands from
United States Dollars has been calculated at an
average rate for the year of US$1 to ZAR9.0135
(September 2008: US$1 to ZAR7.4294), except
for dividends which have been translated at the
rate of exchange on the date of declaration.
Note:
Definitions for various terms and ratios used above
are included in the glossary on page 199.
Our performance against strategic objectives
2009 annual report
5
Our goal is to be, on a sustainable basis, the most profitable company in paper, pulp and cellulose-based
solutions. Our key measures are Return on Capital Employed (ROCE) and to beat our cost of capital, as
a minimum. We also prioritise cash generation and improving our balance sheet structure.
We aim to build on our leading position in the coated fine paper market and explore opportunities across the
broad spectrum of coated paper, including growing our speciality business. We plan to grow our chemical cellulose
business and are expanding our low-cost fibre base in Southern Africa. We are investing in energy reduction and
self-sufficiency projects and extracting chemicals from renewable wood resources. Core to our business is our
Southern African portfolio of packaging paper, newsprint, printing and writing paper, and tissue paper.
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Strategic objectives
Progress in the financial year
Achieve our ROCE target of greater
than 12% and therefore exceed our
cost of capital
Strengthen our leadership position in
our core businesses through organic
growth and selective acquisitions
(cid:129) We fell well short of our target in all regions.
(cid:129) We have acted to improve our performance, resulting in a turnaround in our
fourth quarter, particularly in North America.
(cid:129) We expect to see the results of these actions in the next year.
(cid:129) The Saiccor Mill expansion reached full production by year-end, increasing
chemical cellulose production capacity by 30%.
(cid:129) The M-real acquisition strengthened our position in the European coated
paper market. Performance in the combined business is expected to
improve as further synergies are achieved and market conditions improve.
Expand our low-cost plantation fibre
base in Southern Africa as a resource
to grow our pulp and chemical
cellulose businesses
(cid:129) We continued to expand our plantation investments in Southern Africa
through tree breeding and selected acquisitions. Subsequent to year-end
we agreed to acquire 14,000 hectares of developed softwood plantations
close to Ngodwana Mill.
(cid:129) Trial plantings of Eucalyptus in Mozambique have grown well and the
project is making progress.
Drive efficient manufacturing and
logistics to remain a low-cost producer
(cid:129) We made significant progress in reducing variable costs with a focus on
product design, procurement, waste reduction and operating efficiency.
Drive growth through customer service,
innovation and reliability
(cid:129) Actions to reduce fixed costs included the closure of Blackburn Mill,
Muskegon Mill, Paper Machine No 5 at Maastricht Mill, and discussions
with labour representatives about our intention to close Usutu Pulp Mill and
possibly Kangas Mill. The number of people employed in each region was
reduced through efficiency measures.
(cid:129) Synergy benefits following the M-real acquisition for the nine months to
September 2009 totalled r73 million, above our target of r60 million.
(cid:129) Our market research has shown that our customers place customer service
and reliability high on their list of requirements. We believe we have made
good progress in meeting customer needs during the year and continue to
work closely with customers on meeting their needs more profitably.
(cid:129) A higher proportion of our sales came from newly designed products,
particularly in North America.
Entrench our core values:
(cid:129) Our values were derived from internal dialogue and incorporated in our
Excellence
Integrity
Respect
Code of Ethics, Strategy Statement and Sustainability Charter. The rollout of
our values as part of the integration of M-real has helped to create a
motivated single team in Europe.
Black Economic Empowerment (BEE)
in South Africa
(cid:129) We improved our audited BEE score to 54 points from 41 points.
(cid:129) We envisage undertaking a broad-based equity transaction within the
next year.
6
Our performance against financial targets*
for the year ended 30 September 2009
Current target
Current target
Current target
Operating profit excluding special items to
capital employed (ROCE)
Target ROCE is >12% as a minimum to beat our
weighted average cost of capital.
Return on equity (ROE) (%)
Net debt to total capitalisation
ROE of 11%; to provide shareholders with an
after tax return that, on average, exceeds the
weighted regional risk-free rate by at least five
percentage points.
To operate in a range of 40% to 65%. This range
was set after the adoption of IFRS in 2005.
Performance
Performance
Performance
All regions fell well short of the target. We took action
to improve our performance, with a turnaround
in quarter four, particularly in North America. We
expect further improvement in the current year.
ROE declined sharply due to lower net profit,
partly a result of negative non-cash plantation fair
value adjustments made in accordance with IFRS.
The ratio improved slightly due to the rights offer
undertaken as part of the acquisition. This benefit
was offset by higher net debt and the impact on
equity of the net loss, including the effect of asset
impairments, unfavourable plantation fair value
adjustments and the currency effect.
Five-year highlights
*See definitions on page 199.
2009 annual report
7
While we reported losses in the
second and third quarters, we
achieved a turnaround in the
fourth quarter. This resulted
in a small operating profit, excluding
special items for the year.
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Current target
Cash interest cover (times)
To exceed a level of 4 times cover.
Performance
Cash interest cover was lower due to lower
cash generated from operations and higher net
finance costs.
8
Our performance against sustainability objectives
Our sustainability vision
To embed the 3Ps of Prosperity, People and Planet into our everyday business processes, to add value to all stakeholders, and to help
achieve the Sappi Limited goal to be, on a sustainable basis, the most profitable company in paper, pulp and cellulose-based solutions.
Our approach to sustainability
Our Sustainability Charter, which sets out specific Prosperity, People and Planet commitments, is the roadmap for embedding
sustainability practices into our business. The table that starts below shows our performance against the objectives set out in the
Charter, as well as our future targets.
International, independently verified management systems including forest certification systems (FSC, PEFC and SFI®), OHSAS
18001 and OSHA health and safety standards, ISO 14001 environmental standards and ISO 9001 quality standards underpin our
strategic approach to sustainable development. This is enhanced by the use of external indicators and benchmarks such as the
Global Reporting Initiative (GRI) G3 guidelines, the JSE Socially Responsible Investment (SRI) Index, the Carbon Disclosure Project
and the UN Global Compact.
Our regional sustainability councils report to a Group Sustainable Development Council (GSDC). Ultimate responsibility for
sustainability rests with the executive sustainability committee. Chaired by an independent non-executive director, this committee
determines the priorities for the group’s efforts.
Prosperity
Sappi
performance
indicators
Actual performance
Future targets
i
More info
= charter commitment
Focus on long-term profitable growth
This commitment supports our strategic and financial objectives, set out on pages 5 to 7.
Value add Increased shareholder value and financial viability will enhance Sappi’s overall sustainability.
Promote an ethical culture
(cid:129) Code of Ethics
(cid:129) Post-roll out internal communications
through posters
(cid:129) Governance
(cid:129) Group and Regional Sustainability
(cid:129) Conduct employee survey on
Code of Ethics understanding
and compliance
Councils operating well
(cid:129) Formation of board/executive
sustainability committee
Value add The basis of sound governance and stakeholder confidence; also enhances reputation and licence to trade.
Drive customer satisfaction through technology and innovation
(cid:129) Investment in new
products
(cid:129) In Europe, launch of Identicate™
– security tracking paper using
nanotechnology
(cid:129) In North America, launch of a range
of digital papers and new Mokka
pattern for casting release papers
(cid:129) In South Africa, new passport paper
to enhanced specifications and
launch of wet strength label paper for
beverage bottles
(cid:129) Margins and market
share in the profitable
and fast growing digital
print sector in Europe
(cid:129) Our market share in the European
digital print sector is not significant
yet. Sappi is developing tailor-made
solutions for digital print
(cid:129) Review current portfolio of
brands and product selection
(cid:129) Investigate return on capital
employed (ROCE) assessment
of research and development
(cid:129) Understand customer/end-user
needs and Sappi’s performance
in satisfying these
(cid:129) Increase amount of revenue/
profit from ‘new’ business
(cid:129) Secure a leading position in the
emerging segments, while
taking a profitable share in the
already developed digital print
segments. New product
solutions will be launched in
Europe in early 2010
2009 annual report
9
Sappi
performance
indicators
Actual performance
Future targets
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Drive customer satisfaction through technology and innovation (continued)
(cid:129) Technical Innovation
Awards (TIA)
(cid:129) Technology Centre in South Africa
global winner of TIA awards in
2009 for development of new
passport paper
(cid:129) Continue to promote
development of disruptive
technology through TIA awards
(cid:129) Invest in wood fibre
(cid:129) South Africa participating in wood
(cid:129) Continue collaborating in the
genetics development
fibre molecular genetics programme
enhancement of wood fibre in
South Africa
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Value add Technological developments have resulted in competition from alternative forms of media and alternative products like plastic, thus meeting customers’
needs through innovation is crucial.
Build on our competitive position in our core markets
(cid:129) Promotion of the
Sappi brand
(cid:129) SWOT analyses with
respect to our main
competitors
(cid:129) Continued reputational enhancement
through initiatives aimed at the design
and print industries, eg ‘Ideas that
Matter’ and ‘Life with Print’
(cid:129) Explore further initiatives with
designers and printers
(cid:129) Set and measure against targets
of what we must improve,
reduce, eliminate, create
(cid:129) Monitor developments such as
Walmart’s sustainability index
and Newsweek’s Green
Rankings
(cid:129) Establish customers’ perception
of Sappi’s sustainable
performance
Value add Lost market share is difficult to regain, our strong sustainability platform will enhance the value of our brands.
Maintain our licence to trade
(cid:129) Compliance with
(cid:129) Effective legal compliance
regulatory frameworks
programme
(cid:129) In South Africa, Broad-
based Black Economic
Empowerment
(BBBEE) scorecard
rating
(cid:129) In 2009, we achieved a score of
54 points and an overall BBBEE status
of a ‘level six contributor’ (BB rating)
status and a preferential procurement
recognition level of 60% (improvement
from previous score of 41 points and
level seven status)
(cid:129) Participation and
(cid:129) Assessed as one of the top
inclusion in external
indices
performers on the JSE SRI Index in
2008 and 2009 and improved
performance on the Dow Jones
World Sustainability Index in 2009
(cid:129) Strategise BEE ownership
options and execute to
enhance ownership scorecard
(cid:129) Achieve a ‘level five contributor’
(BEE rating) status and
preferential procurement
recognition level of 80% in 2010
(cid:129) Continue making use of
external benchmarks to assess
sustainability performance
(cid:129) Implement lessons learned
from external assessments
(cid:129) Rated as top 20 GRI compliant
company by SustainabilityServices in
evaluation of over 400 South African
companies
(cid:129) Report on level of GRI
compliance and obtain
assessment of sustainability
reporting by GRI
(cid:129) UN Global Compact
(cid:129) UN Global Compact principles
(cid:129) Continue reporting on
reported
compliance with UN Global
compact principles
(cid:129) Copenhagen
Communiqué on
climate change
(cid:129) Committed to meet the Copenhagen
(cid:129) Report back on progress
Communiqué goals
in terms of Copenhagen climate
change objectives
Value add Being a responsible corporate citizen and matching our words with our actions, Sappi will become the organisation of choice to partner with.
Create value for all stakeholders
(cid:129) Value add, direct and
indirect, to parties
Sappi engages with
(cid:129) Direct economic value added to
(cid:129) Assess value add of each mill
businesses and communities and
multiplier effect related to each
mill/operation
Value add We cannot do business in a failing society which ignores People and Planet. Issues such as climate change have not just an environmental, but a
socio-economic impact.
10 Our performance against sustainability objectives continued
People
Sappi
performance
indicators
Actual performance
Future targets
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= charter commitment
Cultivate an inclusive, diverse workplace
(cid:129) Promotion of gender
and race equality
(cid:129) Canvassed feedback from employees
through employment engagement
survey
(cid:129) Monitor employee diversity
profile
(cid:129) In South Africa, 4,766 employees
participated in employment equity
training, 1,042 in diversity
management and discrimination
awareness programmes
(cid:129) Achievement of South
Africa’s Employment
Equity indicators
(cid:129) Improvement on various criteria and
review of BBBEE scorecard results
(cid:129) Review targets
Value add Enhances Sappi’s reputation internally and externally.
Be a great place to work
(cid:129) Global engagement
survey
(cid:129) 65% improvement in participation in
survey since previous survey in 2007
(cid:129) Results from survey show significant
shift in employees’ commitment
to Sappi
(cid:129) Implementation of action plans
flowing from results of global
survey
(cid:129) Report on employee wellbeing
programmes and outcomes
(cid:129) Absenteeism and turnover within
(cid:129) Overall absenteeism of <5%
industry averages
and voluntary turnover of <10%
(cid:129) Regional recognition
programmes
(cid:129) Reward/remuneration
based on merit
(cid:129) Absenteeism and
labour turnover
statistics
Value add Valuing our employees through recognition; granting freedom with responsibility; allowing people to stretch and reach their full potential; safety at work
and living the Sappi values. A fulfilled workforce is a committed and productive one.
Provide training and development opportunities
(cid:129) Targets set on training
hours and spend per
employee
(cid:129) Training hours increased in South
Africa: 109 hours per employee
(target: 45); North America achieved
32 hours (target: 60) for employees
and 15,683 for customers (target:
10,000); Europe achieved 21 hours
(target: 40 per employee)
(cid:129) Training and development spend as
a percentage of payroll was 1.3%
in 2009
(cid:129) Sappi Leadership
(cid:129) Further wave of Sappi managers
Academy
successfully completed programme
(cid:129) Talent and succession
planning review
(cid:129) Common and standardised talent
management and succession
planning progress embedded
in the organisation
Value add Stimulates productivity and retention.
(cid:129) Classify and report on training in
global categories
(cid:129) Report on talent pipeline
Training and
development spend
as a percentage of payroll
1.34%
in 2009
2009 annual report
11
Sappi
performance
indicators
Actual performance
Future targets
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Engage with stakeholders openly and constructively
(cid:129) Regular contact with
shareholders and
customers
(cid:129) Roadshows, mill visits and one-on-
one discussions with shareholders
and analysts
(cid:129) Internal and external
communications
(cid:129) Increased contact of management
with customers and suppliers
(cid:129) CEO and management to
maintain high level of visibility
and accessibility to all
stakeholders
(cid:129) Participation in industry
association initiatives
(cid:129) Regular updates from CEO and
(cid:129) Focus communication to target
management on policies, strategies
and key developments to employees
audience via all channels
(cid:129) Regional CEOs actively involved in
industry associations
(cid:129) Mill committee meetings held with
communities on topics of mutual
interest
(cid:129) Feedback from
communities
surrounding our
operations
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Value add Understanding what our stakeholders perceive as responsible behaviour, meeting these expectations and achieving recognition will deliver
obvious value.
Prioritise wellbeing, safety and health
(cid:129) Measurement,
monitoring and
management of safety
indicators in terms
of employees and
contractors with
the aim of achieving
zero harm
(cid:129) Mills safety milestones
(cid:129) In North America and South Africa,
(cid:129) Reduce LTIFR and fatalities
the Lost Time Injury Frequency Rate
(LTIFR) improved for employees and
contractors, but declined in Europe
as a result of inclusion of the acquired
mills. Their safety performance
needed considerable attention
and change in behaviour. Following
intervention noticeable improvement
in last quarter
(See shareholder letter on page 19)
(cid:129) Technology Centre, Pretoria achieve
safety diamond status (36 months
without lost-time injuries), Cape Kraft
and Enstra Mills achieve safety
platinum status (24 months without
lost-time injuries); Tugela and Usutu
Mills achieve safety gold status
(12 months without lost-time injuries)
to zero
(cid:129) Focus on executing safety
strategies which include further
training, visible senior
leadership and improved
contractor vetting, management
and safety performance
(cid:129) Improving the identification and
reporting of all classifications
of injuries to more fully identify
the root causes and
corrective actions
(cid:129) Report more fully on
occupational injuries
(cid:129) Increase number of mills
achieving safety ‘diamond’
status
(cid:129) Internationally
(cid:129) Move from OSHA to OHSAS in
recognised certification
standards, such as
OHSAS and OSHA
North America
(cid:129) Safety audits performed
(cid:129) Management of health
issues affecting the
workforce
(cid:129) Employee wellbeing programmes
focus on holistic health issues
pertinent to each site
(cid:129) In South Africa, participation in
voluntary counselling and testing
(VCT) for HIV/AIDS up from 28%
in 2008 to just over 40% in 2009
(cid:129) Measure, monitor and report on
occupational health risks
(cid:129) Identify the risks that influence
the HIV prevalence within Sappi
employees
Value add Has a positive impact on morale, productivity and reputation.
Partner with communities
(cid:129) Corporate Social
(cid:129) Total CSR spend of US$2 million
(cid:129) Review areas of spend
Responsibility (CSR)
spend on literacy,
skills development,
education, job creation,
health, environment,
HIV/AIDS
(cid:129) Majority of funding allocated to SA,
(cid:129) Report on impact of projects
with education, the environment and
heath and welfare receiving the most
funding
Value add Facilitates the resolution of issues, enhances our licence to trade and brand reputation.
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Our performance against sustainability objectives continued
Planet
Sappi
performance
indicators
Actual performance
Future targets
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= charter commitment
Reducing greenhouse gas emissions and increasing our use of renewable energy
(cid:129) Energy consumption
(cid:129) CO2 emissions
(cid:129) Percentage of
renewable energy
(cid:129) Percentage of self-
generated power
(cid:129) Globally over five years, achieved a
drop of 11% in specific* purchased
energy per ton of pulp and specific
CO2 emissions dropped by 2%
(cid:129) In 2009, in North America more than
83% of all energy used was derived
from renewable resources, in South
Africa 41%, and in Europe 30% with
our global figure at 50%
(cid:129) Explore cogeneration and
biofuel opportunities
(cid:129) Monitor regulatory
developments following the
Copenhagen climate change
summit
(cid:129) Report on carbon footprint
methodology
Value add Given the global focus on climate change, there are significant opportunities to leverage Sappi’s high levels of renewable energy and low carbon
footprint compared to other products, such as plastics. Reducing energy use also has economic benefits.
Safeguard biodiversity by promoting sustainable forestry
(cid:129) Tree improvement
(cid:129) Strong involvement in fibre research
programme to increase
yields per hectare
(cid:129) Commercialisation of certain hybrids
to reduce risk of pests etc
(cid:129) Pest and disease
resistance
(cid:129) Biocontrol
(cid:129) Management of
riparian zones
(cid:129) Involvement of
communities in
conservation/tourism
initiatives
(cid:129) Carried out extensive research
on effect of cossid moth on
eucalyptus nitens
(cid:129) Corporate Social Responsibility
spend on ecotourism
(cid:129) Continue funding support and
technical expertise to facilitate
breakthrough in fibre molecular
research programme
(cid:129) Investigate the use of offset
programmes
Value add Entrenches our competitive advantage by reassuring stakeholders on issues such as deforestation and provides ecotourism opportunities in SA.
Continue our commitment to applying independent, environmental, wood and fibre management systems
(cid:129) Use of FSC, PEFC and
(cid:129) Percentage of certified fibre used:
(cid:129) Increase percentage of certified
SFI® certification
systems
61.6% PEFC and
11.7% FSC Europe,
51% North America (SFI®) and
70% South Africa (FSC)
fibre in pulp and paper
Value add Supports our position on environmental concerns.
2009 annual report
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Sappi
performance
indicators
Actual performance
Future targets
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Reduce solid waste and improve water quality
(cid:129) Recycling of materials
for re-use
(cid:129) Increase use of solid waste
(cid:129) Solid waste to landfill
(cid:129) Globally decrease in solid waste to
(cid:129) Decrease waste to landfill
(cid:129) Combustible solid
waste
landfill of 21% over five years
(cid:129) Use of EFC and TCF
bleaching processes
(cid:129) Globally, over five years, specific water
use per ton of pulp dropped by 10%
(cid:129) Focus on decreasing total
specific water use
(cid:129) Measurement of total
suspended solids and
chemical oxygen
demand
(cid:129) Globally in 2009, total suspended
(cid:129) Improve the quality of effluent
solids and chemical oxygen demand
in effluent decreased by 18% and 4%
respectively
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Value add Re-using and minimising waste has economic and environmental advantages. Improving water quality is important from an environmental point of
view, especially with global pressure on water resources and in light of consumer concerns about bleaching processes.
Promote the recovery and use of recycled fibre
(cid:129) Increased product offering with Royal
Roto™ Recycled and Triple Green™
Embossed
(cid:129) Continue to meet customer
needs for products containing
post consumer and post
industrial waste
(cid:129) Environmental impact
of cleaning and
handling recovered
fibres
(cid:129) Use of post consumer
and post industrial
waste
Value add It makes economic sense in view of global demand for recovered fibre and adds to our product offering.
Conform with best environmental practice and legislation
(cid:129) Transfer of best
practice within the
group
(cid:129) Benchmarks
established by industry
associations
(cid:129) Leverage opportunities created
by changes in carbon legislation
(cid:129) Participate in industry groups to
influence legislative changes
(cid:129) Local legislation
(cid:129) Training relating to North American
Lacey Act
Value add Underpins our licence to trade and enhances our reputation.
* Data is given in specific form. This means that the actual quantity consumed, whether energy, water, emissions or solid waste is expressed in terms of a production parameter.
For Sappi, as with other pulp and paper industries, this parameter is air dry tons (adt) of product.
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Our sustainable business cycle
This diagram provides a full picture of our business.
It brings together the inputs, outputs and impacts of our operations.
Sustainably managed
forests mitigate climate
change by sequestering
carbon from the
atmosphere and
storing it as biomass.
When biomass is harvested and used to
generate energy, the carbon contained is
released as carbon dioxide (CO2) into the
atmosphere – this process is considered
‘carbon neutral’ as the CO2 generated is
the same amount that was bound from
the atmosphere by the process of
photosynthesis during the growth of
the trees.
Forests only contribute to net carbon
emissions when biomass is harvested faster
than it grows back. A sustainably managed
forest is considered to be a net carbon
sequester despite the removal of biomass
during harvesting. At Sappi, logging is
balanced with re-growth and twigs and
stumps are left behind, leading to
continuous enrichment of the soil.
Management systems
Water
All current papermaking processes use
large amounts of water – to hold, transport
and distribute the fibre that becomes the
sheet of paper. Water is also an integral
part of the steam systems used to
generate energy. Because water is such a
critical resource for our processes, we take
great care, as responsible manufacturers,
to filter it before it is used and to treat it
before it exits the process. We use
temperature controls, oxygen level controls
and other metrics to ensure that we comply
with all relevant environmental regulations.
Chemicals
Wherever possible, chemicals are
recovered and re-used.
Energy
Pulp and paper operations are highly
energy-intensive and in some regions
purchased power is our major energy
source. Equally, in certain regions, electricity
generation is mainly coal-based, and this
has obvious carbon implications. Globally,
49.7% of the energy we use comes from
renewable sources (waste products from
our production processes, black liquor, bark
and sludges and also purchased biomass).
(cid:129) International, independently verified
management systems underpin
our approach to sustainable
development.
(cid:129) We use internationally recognised
health and safety systems to
ensure the safety of our people.
(cid:129) The rights of indigenous peoples
are protected by the forest
management systems used by
Sappi.
ISO 9001 OHSAS 18000
ISO 14001 OSHA
A percentage
of water and
chemicals
is recycled.
2009 annual report
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Effluent
Total suspended solids (TSS) and chemical
oxygen demand (COD) are good indicators
of water quality. Globally, the TSS and
COD in the effluent we discharge shows a
decline over five years.
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CO2
Our mills emit carbon dioxide (CO2), one
of the main greenhouse gases (GHGs)
responsible for global warming. Globally,
CO2 emissions throughout our mills show
a declining trend from 2005.
Waste to landfill
We add value to waste products in a
number of different ways.
(cid:129) The ash created by burning bark,
branches and other biomass from trees
in our mill boilers, can be used as
fertiliser and a soil additive
(cid:129) Lime mud, a by-product of the pulping
process, is used by farmers to control
soil pH
(cid:129) Waste sludge can be used in
applications such as the manufacture of
bricks, cement or household products
such as cat litter
(cid:129) At Enstra Mill, lime produced as a by-
product during the manufacturing
process is sent to a wash plant on site.
From here it is sold to the metallurgical
industry and used to neutralise acid
mine drainage in a process patented
by the CSIR
(cid:129) At Alfeld Mill, coarse pigments from re-
pulping internal broke are recovered
from paper machine effluent and
reprocessed to substitute virgin
material. In another process, coating
colour is also recovered from effluent
and reprocessed.
Methane emitted from landfill
Methane, a GHG with a global warming
potential approximately 23 times more
potent than CO2, is emitted from landfills.
Globally, the amount of solid waste to
landfill shows a steady decline, in line
with our move away from coal-fired boilers
to gas- and biomass-fired boilers
(Gratkorn and Tugela Mills).
Papermaking process
Pulping and
chemical recovery
process
In integrated pulp mills
(mills which produce their
own pulp), the black liquor
created during the pulping
process is a primary source
of renewable energy.
Black liquor is burnt in the
recovery boiler, producing
steam and energy which is
used in the mill.
Papermaking
Coating
Pulping
Cutting and
wrapping
Paper in the
marketplace
Despite the rise of electronic media,
the use of paper is increasing throughout
the world. Paper plays an important role in
promoting growth and development.
Wood products and the wood fibre
in paper store carbon throughout
their lifetime and can be
recycled or burnt for
renewable energy
generation.
Despatch
To mitigate our carbon
footprint, we are increasingly
moving product by rail rather
than road.
Recycling process
We are driving the use of recovered fibre throughout our
operations. The majority of our products are recyclable.
We offer many products that meet the needs of
environmentally-conscious consumers including:
Royal™ Roto Recycled
Royal™ Web Recycled
Triple Green™
Typek Recycled™
Opus® Web
Tempo™
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Our products
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Coated paper
gives a higher level of
smoothness than uncoated
paper by applying a coating
(typically clay-based) on the
surface of the paper. As a result,
higher reprographic quality and
printability is achieved. Uses
include brochures, catalogues,
corporate communications
materials, direct mailers,
educational textbooks, coffee
table, photographic and art
books, magazines and calendars.
2
Speciality paper
can be either coated or
uncoated. Uses include bags,
labels, packaging and release
paper for casting textured
finishes (eg artificial leather for
the automotive and fashion
industries) and security paper for
election, passport and vehicle
licensing paper.
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Uncoated paper
uses include business forms,
business stationery, general printing
paper and office copier and home
printing paper. We also produce
tissue wadding which is converted
into various hygiene products.
Products
and
brands
Coated
speciality
Products
and
brands
(cid:129) Allegro
(cid:129) Era (recycled)
(cid:129) EuroArt Plus
(cid:129) Flo®
(cid:129) Furioso
(cid:129) Galerie
(cid:129) HannoArt™
(cid:129) Magno™
(cid:129) McCoy®
(cid:129) Opus®
(cid:129) Quatro™
(cid:129) Royal™
(cid:129) Somerset®
(cid:129) Tempo™
(cid:129) Triple Green™
(cid:129) Algro™
(cid:129) Barricoat
(cid:129) EHR
(cid:129) Icena™
(cid:129) Leine
(cid:129) Parade
(cid:129) Prime Pak
(cid:129) Stripkote®
(cid:129) Superprint
(cid:129) Transkote®
(cid:129) Triple Green™ Label
(cid:129) Ultracast®
(cid:129) Versakote®
(cid:129) African Dream™
(cid:129) Camelot Cartridge®
(cid:129) Cento
(cid:129) China Embossed
(cid:129) Croxley®
(cid:129) Custodian®
(cid:129) El Toro®
(cid:129) Econoline®
(cid:129) Ecomail™
(cid:129) Express Brown
(cid:129) Laser Preprint
(cid:129) Lord Ariston™
(cid:129) MF Tag
(cid:129) Midas Golden™
(cid:129) Paradis
(cid:129) Presspride
(cid:129) Reviva Plus™
(cid:129) Sentinel
(cid:129) Silken
(cid:129) Sovereign Select®
(cid:129) Tauro
(cid:129) Tissue wadding
(cid:129) Tokai®
(cid:129) Typek®
(cid:129) Uniqa®
(cid:129) Vanguard
All our South African businesses
are focused on developing
niche products and ser vices
to improve our customer
offerings and profitability.
2009 annual report
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(cid:129) Algro Design™
(cid:129) Barricoat™
(cid:129) Beehive Bag™
(cid:129) Cape Fluting
(cid:129) Cape Liner™
(cid:129) Glass Glaze
(cid:129) Hi Yield Fluting®
(cid:129) Kraftguard®
(cid:129) Kraftpride®
(cid:129) Mg Industrial
(cid:129) Presspride®
(cid:129) Printpride®
(cid:129) Stackraft®
(cid:129) Stegi
(cid:129) Stratomax™
(cid:129) Superflute
(cid:129) Superprint®
(cid:129) Tobacco Liner
(cid:129) Wicked Wrap™
Products
and
brands
Pulp
(cid:129) Chemical cellulose
(cid:129) Kraft pulp
Hardcell™ – Softcell®
Our brands
of acetate tow, microcrystalline
cellulose, cellophane, ethers and
moulding powders. The various
grades of chemical cellulose are
manufactured in accordance with
the specific requirements of
customers in different market
segments.The purity of the
chemical cellulose is one of the key
determinants of its suitability for
particular applications.
The purity and viscosity of the
chemical cellulose are the key
determinants of its suitability for
particular applications.
Timber products
includes sawn timber for
construction and furniture
manufacturing.
4
Packaging paper
of heavy and lightweight
grades of paper and board
are mainly used for primary
and secondary packaging of
fast moving consumer
goods, agricultural and
industrial products. Products
include container board, sack
kraft and machine glazed
kraft which can be coated
to enhance barrier and
aesthetic properties.
5
Pulp
Paper pulp
is the main raw material used in the
production of printing, writing and
packaging paper. Pulp is the generic
term that describes the cellulose
fibre derived from wood. These
cellulose fibres may be separated by
mechanical, thermo-mechanical or
chemical processes. Mechanical
pulp is produced by mechanically
grinding wood or wood chips.
Thermo mechanical pulp is
produced by processing wood fibres
using heat and mechanical grinding
or refining wood or wood chips.
Chemical pulp is produced by using
chemical processes which remove
the glues (lignins) that bind the wood
fibres leaving cellulose fibres. Paper
made from chemical pulp is generally
termed ‘woodfree’ or ‘fine’ paper.
Chemical cellulose
is manufactured by similar processes
to paper pulp, but purified further to
leave virtually pure cellulose fibres.
Chemical cellulose is used in the
manufacture of a variety of cellulose
textile and non-woven fibre
products, including viscose staple
fibre (rayon), solvent spun fibre
(lyocell) and filament. It is also used
in various other cellulose-based
applications in the food, cigarette,
chemical and pharmaceutical
industries, including the manufacture
Our objectives for 2010
(cid:129) Improve profitability and returns
(cid:129) Generate strong cash flow and reduce debt
(cid:129) Engage with customers to meet changing
market needs and economics
(cid:129) Align manufacturing footprint with market
environment (including possible capacity
reduction)
(cid:129) Implement BEE equity deal
(cid:129) Optimise expanded Saiccor to improve
efficiency and profitability
(cid:129) Realise post-acquisition synergy targets
and acceptable returns in Europe
2009 annual report
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Letter to shareholders from
the chairman and chief executive officer
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We are of the opinion that it is
prudent to maintain a higher
cash balance as a cushion
in view of the economic
uncertainty, and are confident
the group has sufficient
liquidity to meet its business
requirements going forward.
Danie Cronjé
chairman
Ralph Boëttger
chief executive officer
Market conditions in the year ending September 2009 were amongst the worst in the group’s 73-year existence.
The year was marked by the rapid fall in demand which began late in the first quarter in the chemical cellulose
business, closely followed by the global decline in coated paper demand.
We started the year announcing the acquisition of M-real’s coated graphic paper business (the acquisition)
and a rights offer to partly finance the transaction. The acquisition was completed on 31 December 2008
after a successful rights offer.
Faced with sharply lower volumes and price pressure in many markets, we acted rapidly to curtail production
and align our output to demand. Management also took decisive action to reduce costs to support the
business in these extreme conditions.
Performance against objectives
We had some successes in relation to our targets for the year, but failed in our primary objective of meaningful
progress towards acceptable returns. In a year in which our shareholders took up a r450 million rights offer,
our key measure of return on capital employed declined to less than 1% from 9.1% the year before.
Pleasingly, the integration of M-real’s coated graphic paper business went extremely well. Our European
team focused on building customer relationships, engaging with employees and realising synergies. We
received considerable support from our customers and worked closely with them during the integration
process. Our people were quick to form a single team to tackle both the challenges of integration and the
grave market conditions. While business performance deteriorated sharply as a result of the conditions, we
exceeded our synergy target of r60 million for the nine months to September 2009.
Synergies were achieved mainly in procurement savings in excess of market price declines, the benefits of
order books taken over when M-real ceased coated paper production at its Gohrsmühle and Hallein Mills,
and reduced selling, general and administrative expenses.
The ramp up of chemical cellulose production to full capacity following the expansion of the Saiccor Mill
was initially deferred due to the slump in demand earlier in the year, but recommenced in April. By September
2009, we were successfully operating at close to full capacity with high quality output. In the fourth quarter,
interruptions caused by an industry-wide wage strike led to further delays and a loss of some 30,000 tons
of output.
At the beginning of the year, we singled out generating cash flow, containing capital expenditure and
preserving group liquidity as priority objectives. As the year progressed these became our main priorities.
Net cash generated by the group was US$289 million, excluding the cash outlay to finance the acquisition,
compared to net cash utilised of US$139 million the year before. Capital expenditure reduced from
US$505 million in 2008, which included part of the Saiccor expansion, to US$175 million. This was allocated
mainly to keep our asset base in safe and efficient condition, and represented approximately 47% of
20
Letter to shareholders continued
depreciation for the year. Our target for capital expenditure is below US$200 million a year for the next two
financial years.
At year-end, the group had cash available of US$770 million and an unutilised committed revolving credit
facility (RCF) of approximately US$300 million. This is well in excess of our interest-bearing short-term debt,
including the receivables securitisation programme which runs to December 2011 but is treated as short-
term debt. We are of the opinion that it is prudent to maintain a higher cash balance as a cushion in view
of the economic uncertainty, and are confident the group has sufficient liquidity to meet its business
requirements going forward.
We also set out to improve the structure of our balance sheet, which we achieved in two ways. Firstly, we
financed the acquisition mainly with equity, marginally improving the group’s debt to total capitalisation ratio,
and took on additional debt with a four-year term. Secondly, we committed to refinancing our RCF, which
was due to expire in May 2010, and a r400 million bank loan maturing in December 2010. The major
refinancing is described fully in the chief financial officer’s report, but suffice to say it has extended our debt
maturities significantly and provided strong liquidity. There are no major debt maturities until the repayment
of our US$500 million bonds in June 2012.
Following the refinancing, our net finance costs are expected to increase to US$250 million in the 2010
financial year. Consequently, management has set an objective to substantially reduce gearing and net debt
within three years.
Financial performance
Group operating profit, excluding special items declined sharply to US$33 million from US$366 million last
year. While we reported losses in the second and third quarters, we achieved a turnaround in the fourth
quarter. This resulted in a small operating profit, excluding special items for the year.
Special items reduced operating profit by US$106 million. The major unfavourable items, which were mainly
non-cash, were a plantation price fair value adjustment, impairment of the coated mechanical business unit
Kirkniemi Mill, Finland
2009 annual report
21
in Europe and restructuring charges in respect of Muskegon Mill. These were partly offset by the cash benefit
of alternative fuel tax credits in the United States.
The group recorded a basic loss per share of 37 US cents after unfavourable special items of 13 US cents.
This compares to last year’s earnings of 28 US cents, which reflected the unfavourable impact of 23 US cents
of special items.
Net debt rose by US$171 million to around US$2,6 billion at the end of the financial year. The debt incurred
for the acquisition was US$317 million, nearly matched by cash of US$289 million generated in the year.
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Regional performance
After a weak start to the year, the North American business returned to profitability in June and had a
particularly strong final quarter. This resulted in operating profit, excluding special items at close to break-
even for the year. US demand for coated woodfree paper collapsed by as much as 30% in the early part of
calendar 2009 and demand for the full year was 27% below last year. Despite gaining market share, we
curtailed production for extensive periods and suspended operations at Muskegon Mill in March, and closed
the mill in August. Pulp markets were weak and the price collapse took a heavy toll on our North American
business. We worked closely with customers to adapt our product lines to changing needs and economics.
Management’s action to reduce costs preserved healthy margins despite 11% lower prices on a year-on-
year basis in the final quarter. The benefit of alternative fuel tax credits added US$87 million to operating
profit and US$65 million to cash generated. We expect the credits to expire in December 2009, but we
believe we will receive an additional US$45 million in the first financial quarter of 2010.
Our European business realised improved prices for coated woodfree paper in the first half of the year after
eight years of gradually declining prices. However, after the decline in demand of up to 30% in the first half
of calendar 2009, excess supply over demand made the higher prices unsustainable. Prices declined
gradually before stabilising in September. The acquisition strengthened our market position in Europe and
enhanced our product and service offerings. Despite achieving r73 million in acquisition synergies, operating
profit, excluding special items declined to around breakeven level. This indicates the extent of the decline in
the business due to the exceptional drop in demand. Cost reduction was a major feature of the year and
our operating profit breakeven production level improved to approximately 80% from approximately 95% of
capacity last year. Subsequent to year end, we announced our discussions with labour representatives
about the possible closure of the 210,000 ton Kangas Mill in Finland.
Our South African businesses had a disappointing year. Although demand in the domestic market held up
longer than in other regions, there is still no sign of recovery following a 15% drop in demand experienced
since March. In addition, the stronger Rand resulted in increased competition from imports and downward
pressure on pricing. The chemical cellulose business experienced a steep decline in demand and prices
from the latter part of the first quarter. Demand levels recovered strongly from March and the NBSK pulp
benchmark price improved steadily from its low point of US$577 per ton in March to US$720 per ton at the
end of September. However, this was still US$180 per ton below the peak of August 2008. The business
incurred additional operating costs as a result of the interrupted ramp up of the Saiccor Mill. These sub-
optimal operating conditions included the use of oil to fire the boilers, and increased chemical loads and
people to operate the new plant. Input costs remained high in the first half of the year but wood, chemical
and coal costs have since declined. The plant was operating efficiently and producing top quality products
by September 2009. It is well positioned for the next financial year with strong order books, although the
stronger Rand continues to depress margins. We took steps in the latter part of the year to reduce fixed
costs across the business. In October 2009, we announced that we were in discussions with labour
representatives about the intention to cease operations at the Usutu Pulp Mill in Swaziland in January 2010.
All our South African businesses are focused on developing niche products and services to improve our
customer offerings and profitability.
Sustainability performance
We manage sustainability as an integral part of our business and decision-making and strive to create value
for current and future stakeholders. Particular themes in our sustainability efforts, discussed elsewhere
in this report, include reducing carbon emissions and energy consumption, investing in renewable energy
from biomass, sustainable forest management and chain of custody of our fibre inputs, water quality and
22
Letter to shareholders continued
consumption as well as managing the group’s safety performance and long-term viability of our
manufacturing sites, together with measures to address the levels of HIV/AIDS infection in our Southern
African business.
Safety is prioritised throughout our group, with the objective of eliminating all harm to people in our operations.
The lost time injury frequency rate, which is our primary measure, reflected an improving trend for employees
and contractors in the year. Sadly and regrettably, nine people died in work-related accidents of which eight
were in our forestry operations and one at our Tugela Mill, in Southern Africa. This is totally unacceptable and
we view any fatalities in a most serious light. Safety is receiving attention at the highest level and in particular
our forestry division is focusing on improving its safety management systems including specific protocols to
prevent fatalities. Critical task analyses and procedures, planned job observations, root cause analyses and
safety communication and promotion are being re-emphasised. Our behaviour-based safety systems are
entrenched across the group and receive constant management attention.
Our industry has been slow to demonstrate its strengths in relation to its carbon footprint relative to many
other industries. For generations our wood has been sourced from sustainably managed sources, a high
proportion of our energy has been derived from biomass, either in the form of forest and woodyard waste
or as black liquor separated from the fibre in the pulping process. Our customers have also recycled large
percentages of all paper consumed as new paper, moulded fibre products and as fuels.
Please refer to the overview of sustainability performance against objectives starting on page 8 for more
information on our specific sustainability initiatives.
Black Economic Empowerment (BEE)
Our South African business signed the Forestry Charter, which sets industry targets in seven categories
broadly similar to the DTI’s Code of Good Practice for Broad-based BEE. Our BEE rating, independently
audited by Empowerdex in terms of the DTI code, improved to 54% from 41%. We are of the opinion that
it is imperative for the group to enter into a BEE equity transaction that seeks to broaden the base of
shareholders and we aim to complete such a transaction within the foreseeable future.
Saiccor Mill, South Africa
2009 annual report
23
Looking forward
Although global economic conditions remain uncertain, we expect demand conditions to be significantly
better in the year ahead. Demand on paper producers should be similar to that on end-users which, even
if it remains at 2009 levels, will result in up to a 10% improvement on the previous year for paper producers.
Any improvement in end-user demand from current low levels will be a welcome bonus. We expect demand
for chemical cellulose and paper pulp to remain firm, and modest price improvements in financial 2010.
The low point in commodity prices was reached earlier in 2009 and we expect some increase in input costs
in the next few quarters. Pulp prices have risen since March and the crude oil price has more than doubled
from its low in December 2008.
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All our operations have acted to improve energy efficiency and self-sufficiency. The benefits of greater energy
self-sufficiency at the Saiccor Mill, which generates some 70% of the power it needs, will be realised now
that the expansion is fully operational. Our North American business is most advanced in using renewable
energy resources with 83% of energy provided from renewable sources (Southern Africa 41% and
Europe 30%).
Management’s actions over the last year have helped us navigate turbulent economic conditions and will
stand us in good stead going forward. The refinancing undertaken has provided sufficient liquidity to deal
with the foreseeable cash requirements of our business. We have also devoted resources at all levels of the
business to improving our understanding of customer needs and meeting them by developing new products
and services.
We expect an improvement in operating profitability excluding special items in financial 2010, based on a
gradual recovery in global economic conditions and the decisive action taken to improve our businesses.
While we will continue to face volatile market conditions and our finance costs will be substantially higher
than in the past, we believe we are on the way to improved profitability and returns, and lower debt levels.
Appreciation
This has been an exceptionally difficult year for all our stakeholders and we value their ongoing support. Our
customers have given us tremendous encouragement as we have integrated our new businesses in Europe
and ramped up our Saiccor Mill expansion. We will continue to work closely with our customers to develop
even stronger relationships.
Our more than 16,000 people have tackled the challenges of the global downturn wholeheartedly, despite
the uncertainty that has characterised this period. Regrettably, we had to reduce the number of people we
employ and although we have endeavoured to approach these reductions fairly and compassionately, we
fully understand this has resulted in hardship for individuals, families and communities.
There have been no bonuses awarded under the group’s management incentive scheme related to the
2009 financial year irrespective of personal or business unit performance, given the group’s poor profitability.
While this was well accepted by all concerned, it is important to record that staff and management at all
levels made huge personal and collective contributions to the group’s progress. The many actions on
different fronts to deal with the economic downturn and to position the group for the upturn were deftly
handled and we thank all our people for their efforts.
The confidence and insight provided by our board has allowed the group to tackle many challenges promptly
and effectively, and we thank them for their guidance and accessibility.
Dave Brink and Franklin Sonn will be retiring from the board at the end of December 2009 after 15 and 10
years of service respectively. Dave has held the role of senior independent director since 2006. Both have
made considerable contributions to the group and we thank them for their support and the wisdom they
have brought to Sappi’s development.
We thank our shareholders for their support in a difficult year, and assure you of our best efforts to generate
better returns in the years ahead.
Danie Cronjé
chairman
04 December 2009
Ralph Boëttger
chief executive officer
24
Interview with Ralph Boëttger, chief
executive officer
Q
A
Considering how the global
economic crisis has panned
out and the collapse in demand
for coated paper, do you still
think the acquisition was a
good move?
How do you reconcile your
stated achievement of
acquisition synergies with the
poor results of the European
business?
How much of the decline
in coated paper consumption
is structural as a result of
new media?
Since Sappi is very focused on
the coated paper segment,
how will the group grow as
coated paper consumption in
the developed economies
matures?
You have improved the group’s
debt maturities and liquidity.
Can Sappi afford the higher
interest rate costs of its
refinanced debt?
How do you see Sappi’s profit
growth in the year ahead?
•
•
•
•
•
•
The sharp drop in demand and difficult market conditions have certainly meant that the full benefits of the
acquisition have been delayed. We don’t see demand returning to historic levels in the near term, and we
may need to align capacity to demand levels or consolidate further to help improve market dynamics and
achieve acceptable returns. While we will never know what our results would have been without the
acquisition, I think they may have been much worse. So yes, I still think it was a good strategic move but
we will have to measure the result over a few years to know better.
Firstly, we have applied rigorous measures vetted by an external party, to appraise synergy benefits. We
have aimed to remove market effects and benefits not strictly related to the combination of the businesses
from our calculations which have in turn been reviewed by our internal auditors. We are satisfied that our
disclosure is realistic. Reconciling the synergy achievement to the overall results of the European business
shows that the European business without the acquisition would likely have returned a substantial operating
loss, excluding special items for the year.
Our view is that a downward shift in coated paper demand is likely in the developed markets following the
current recession, but we would expect demand over the next year or so to improve from these very low
levels to around 10% short of 2007/2008 levels. After that we expect a gradual decline in demand in
developed markets and modest growth in developing markets. We do believe that print media and coated
paper will continue to play an important role in communication, advertising and promotion. Paper will stay
relevant because it is versatile and effective in conveying messages and images, and because its environ -
mental credentials continue to improve.
We are convinced that we can improve the profitability and returns of our coated paper business, by
managing our business with a focus on customers, cash generation, costs and strict allocation of capital
expenditure. Also, our speciality paper businesses have good growth prospects. Some of these are based
on proprietary technologies which have applications beyond graphics, packaging and even paper itself. Our
chemical cellulose business has strong prospects both in existing and novel applications. Since our business
is based on renewable wood resources and we have many technologies to improve and beneficiate those
resources, we see a great future for the group.
Yes. The increase in interest costs will add substantially to our finance costs, but the group’s ability to
generate cash is strong. While taking steps to improve profitability, we will have to stay focused on generating
cash and containing capital expenditure. Importantly, we also aim to reduce debt substantially over the next
three years. We know the additional finance costs are a burden, but we took the view that re-establishing
good liquidity and extending debt maturities were essential and this could only be achieved at the available
market interest rates.
We expect a gradual improvement in market conditions over the next year. Combined with the improvements
made to our business in the last year, better conditions should lead to much better operating results. The
upside if market conditions improve faster than we expect, could be exciting given our operational gearing.
2009 annual report
25
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Allentown Distribution Centre, North America
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Our leadership
Independent non-executive directors
Daniël (Danie) Christiaan
Cronjé
Chairman
Age: 63
Qualifications:
BCom (Hons), MCom,
DCom
Nationality: South African
Appointed: January 2008
Professor Meyer Feldberg
Age: 67
Qualifications:
BA, MBA, PhD (American)
Nationality: American
Appointed: March 2002
Sappi board committee memberships
(cid:129) Human resources and transformation
committee (chairman)
(cid:129) Nomination and governance committee*
(Attends audit committee meetings and
compensation committee meetings
ex officio)
* Chairman from 01 January 2010
Other board and organisation
memberships
Eqstra Holdings Limited (chairman),
TSB Sugar Holdings Limited
Skills, expertise and experience
Dr Cronjé retired in July 2007 as chairman
of both ABSA Group Limited and ABSA
Bank Limited (a leading South African
banking organisation in which Barclays plc
obtained a majority share in 2005).
Dr Cronjé had been with ABSA Group
since 1975 and held various executive
positions, including group chief executive
for four years and chairman for 10 years.
Prior to that Dr Cronjé was lecturer in
Money and Banking at Potchefstroom
University.
Sappi board committee memberships
(cid:129) Compensation committee*
(cid:129) Nomination and governance committee
(chairman)**
* Chairman from 01 January 2010
** Member only from 01 January 2010
Other board and organisation
memberships
Include British American Business Council
(advisory board member), Columbia
University Business School, Macy’s Inc,
Morgan Stanley (senior advisor), New York
City Ballet, New York City Global Partners
(president, appointed by the Mayor of
New York City), PRIMEDIA Inc, Revlon Inc,
UBS Global Asset Management,
University of Cape Town Graduate School
of Business.
Skills, expertise and experience
Professor Feldberg is currently serving as
a Senior Advisor to Morgan Stanley. His
career has included teaching and
leadership positions in the business
schools of the University of Cape Town,
Northwestern and Tulane. He served as
president of Illinois Institute of Technology
for three years and as dean of Columbia
Business School for 15 years. He is
currently dean emeritus and professor of
leadership at Columbia Business School.
He has served on the Council of
Competitiveness in Washington, DC.
In 2001, the International Centre in
New York honoured Professor Feldberg
as a distinguished foreign-born American
who has made a significant contribution
to American life.
Sappi board committee memberships
(cid:129) Audit committee
(cid:129) Compensation committee (chairman)
(cid:129) Nomination and governance committee
Other board and organisation
memberships
ABSA Bank Limited (chairman), ABSA
Group Limited (chairman), Steinhoff
International Holdings Limited, SA Institute
of Directors (vice president), The Business
Trust (South Africa), The National Business
Initiative (South Africa)
Skills, expertise and experience
Mr Brink retired from the boards of BHP
Billiton Limited and BHP Billiton plc in
November 2007 after serving on those
boards and their predecessor companies
since 1994. He is also a past chief
executive officer and chairman of
construction group Murray and Roberts
Holdings Limited.
David (Dave) Charles Brink
Senior independent
director
Age: 70*
Qualifications:
MSc Eng (Mining), DCom
(hc), Graduate Diploma
(Company Direction)
Nationality: South African
Appointed: March 1994.
* Retires 31 December 2009
Sappi board committee memberships
(cid:129) Audit committee
(cid:129) Human resources and transformation
committee
(cid:129) Sappi Fine Paper North America audit
committee (chairman)
Skills, expertise and experience
He has held various senior financial
positions in a career spanning 37 years.
In 1995, Mr Healey became vice president
and treasurer of Bestfoods, formerly CPC
International Inc. In 1997, he became
executive vice president and chief financial
officer of Nabisco Holdings Inc, one of the
world’s largest snack food manufacturers,
a position from which he retired at the end
of 2000.
James (Jim) Edward
Healey
Age: 68
Qualifications:
BSc (Public Accounting),
Honorary Doctor
(Commercial Science),
Certified Public Accountant
(USA)
Nationality: American
Appointed: July 2004
Sappi board committee memberships
(cid:129) Audit committee (chairman)
(cid:129) Human resources and transformation
committee
Other board and organisation
memberships
These include Exxaro Resources Limited
(acting chairman), Illovo Sugar Limited,
Implementation Oversight Panel of the
World Bank (co-chairman), JD Group
Limited, Mustek Limited (chairman),
South African Reserve Bank, Steinhoff
International Holdings Limited (chairman)
Skills, expertise and experience
Previously professor and head of the
department of Accountancy at the
University of Durban, Westville, Dr Konar
is a member of the King Committee on
Corporate Governance in South Africa,
the Securities Regulation Panel and the
SA Institute of Directors. He is a past
member and chairman of the external
audit committee of the International
Monetary Fund.
Sappi board committee memberships
(cid:129) Compensation committee
(cid:129) Sustainability executive committee
(chairman of this management
committee)
Other board and organisation
memberships
Accelerate Cape Town, Coronation Fund
Managers, University of Cape Town
Foundation (chairman)
Skills, expertise and experience
Mr McKenzie joined the Sappi board after
having held senior executive positions
globally and in South Africa. He is a
former president for Asia, Middle East and
Africa Downstream of the Chevron Texaco
Corporation and also served as the
chairman and chief executive officer of the
Caltex Corporation. He was a member of
the Singapore Economic Development
Board from 2000 to 2003.
Deenadayalen (Len) Konar
Age: 55
Qualifications:
BCom, MAS, DCom,
CA (SA)
Nationality: South African
Appointed: March 2002
John (Jock) David
McKenzie
Age: 62
Qualifications: BSc
Chemical Engineering
(cum laude), MA
Nationality: South African
Appointed: September 2007
Helmut Claus-Jurgen
Mamsch
Age: 65
Nationality: German
Appointed: January 2004
Karen Rohn Osar
Age: 60
Qualifications: BA, MBA,
Finance
Nationality: American
Appointed: May 2007
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2009 annual report
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Sappi board committee memberships
(cid:129) Audit committee
(cid:129) Compensation committee
(cid:129) Sappi Fine Paper Europe audit
committee (chairman)
Other board and organisation
memberships
Electrocomponents plc (chairman),
GKN plc
Skills, expertise and experience
Mr Mamsch studied economics at
Deutsche Aussenhandels-und Verkehrs-
Akademie, Bremen and also received
training in business administration and
shipping in Germany, the UK and Belgium.
He worked for 20 years in international
trade and shipping. In 1989, he joined
VEBA AG (now E ON AG), Germany’s
largest utility-based conglomerate. From
1993 to 2000, he was a VEBA AG
management board member and, from
1998, responsible for their US electronic
businesses and their corporate strategy
and development. In 1997, he joined
Logica as a non-executive director and
until 2007 was their deputy chairman.
Sappi board committee memberships
(cid:129) Audit committee
Other board and organisation
memberships
Innophos Holdings, Inc (chairperson of
audit committee), Webster Financial
Corporation
Skills, expertise and experience
Ms Osar was executive vice president and
chief financial officer of speciality
chemicals company Chemtura
Corporation until her retirement in March
2007. Prior to that, she was vice president
and treasurer for Tenneco, Inc and also
served as chief financial officer of
Westvaco Corporation and as senior vice
president and chief financial officer of the
merged MeadWestvaco Corporation. Prior
to those appointments, she spent 19
years at JP Morgan and Company,
becoming a managing director of the
Investment Banking Group. She has
chaired several board audit committees.
28
Our leadership continued
Independent non-executive directors continued
Bridgette Radebe
Age: 49
Qualifications:
BA (Pol Sc and Socio)
Nationality: South African
Appointed: May 2004
Franklin Abraham Sonn
Age: 70
Qualifications:
BA Hons, HDip Ed
Nationality: South African
Appointed: July 1999
* Retires 31 December 2009
Sappi board committee memberships
(cid:129) Human resources and transformation
committee
Other board and organisation
memberships
Mmakau Mining (Pty) Limited (executive
chairperson), South African Mining
Development Association (president),
Minerals and Mining Development Board
(vice president), New Africa Mining fund
(founder and board trustee)
Skills, expertise and experience
Ms Radebe was the first black South
African deep level hard rock mining
entrepreneur in the 1980s. She has more
than a decade of experience in contract
mining, mining construction and mining
mergers and acquisitions. She is founder
of Mmakau Mining which has investments
in platinum, coal, chrome and gold mines
as well as shaft sinkers. She participated
in the design of the South African Mining
Charter and present mining legislation.
Sappi board committee memberships
(cid:129) Nomination and governance committee
Other board and organisation
memberships
African Star Ventures (Pty) Limited
(chairman), Ekapa Mining (Pty) Limited
(chairman), Esorfranki Limited, Imalivest
(Pty) Limited (chairman), KV 3 Engineers
(Pty) Limited (chairman), Macsteel Service
Centres SA (Pty) Limited, Pioneer Group
Limited, RGA Reinsurance Co of
SA Limited, Steinhoff International
Holdings Limited, University of Cape Town
Graduate School of Business (executive in
residence), University of the Free State
(chancellor), Xinergistix Management
Services (Pty) Limited.
Skills, expertise and experience
Dr Sonn was formerly Rector of Peninsula
Technikon in Cape Town for 17 years and
was appointed democratic South Africa’s
first Ambassador to the United States
from 1995 to 1998. Dr Sonn is the
recipient of 12 honorary doctorates in
Law, Education, Humanities and
Philosophy from various institutions in
South Africa, Europe and North America.
He is chairman, trustee and patron to
numerous organisations of civil society.
He retired recently as chairman of Airports
Company South Africa Limited and as
non-executive director of ABSA Group,
Metropolitan Holdings Limited and
Metropolitan Life Limited.
Sappi board committee memberships
(cid:129) Compensation committee
(cid:129) Nomination and governance committee
Other board and organisation
memberships
BAA Limited (chairman), BAE Systems
plc, Invensys plc (chairman), Pendragon
plc (chairman)
Skills, expertise and experience
Sir Nigel Rudd has held various senior
management and board positions in a
career spanning more than 35 years.
He founded Williams plc in 1982 and the
company went on to become one of the
largest industrial holding companies in the
United Kingdom. He was knighted by the
Queen for services to the manufacturing
industry in the UK in 1996 and holds
honorary doctorates at both the
Loughborough and Derby Universities.
In 1995, he was awarded the Founding
Societies Centenary Award by the Institute
of Chartered Accounts. He is a Deputy
Lieutenant of Derbyshire and a Freeman
of the City of London.
Sappi board committee memberships
Attends meetings of all board committees
by invitation
Skills, expertise and experience
At the age of 34 he was appointed chief
executive officer of Safair and the next
year appointed to the executive
committee of Safmarine Limited. From
1998 until July 2007, he was with Imperial
Holdings following Imperial’s acquisition of
Safair. From 2002, he was an executive
director of Imperial Holdings with
responsibility for their local and
international logistics operations, the
aviation division and the heavy
commercial vehicle distribution
operations. His field of responsibility
encompassed businesses operating in
Southern Africa, numerous European
countries, the Middle East and Asia. He is
well versed in managing an operation with
diverse cultures.
Sappi board committee memberships
Attends audit committee meetings
by invitation
Skills, expertise and experience
Mr Thompson joined Sappi in 1999 as
group corporate counsel and was
appointed to his present position in
August 2006. Prior to joining Sappi, he
was group treasurer at Anglo American,
managing director of Discount House
Merchant Bank and previously head of
the corporate finance division of Central
Merchant Bank.
Sir Anthony Nigel
Russel Rudd
Age: 63
Qualifications:
DL, Chartered Accountant
Nationality: British
Appointed: April 2006
Executive directors
Roeloff (Ralph) Jacobus
Boëttger
Chief executive officer
Age: 48
Qualifications:
BAcc Hons, CA (SA)
Nationality: South African
Appointed: July 2007
Mark Richard Thompson
Chief financial officer
Age: 57
Qualifications:
BCom, BAcc, LLB, CA (SA)
Nationality: South African
Appointed: August 2006
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2009 annual report
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Divisional and corporate management
Sappi Limited
Chief executive officer
*Ralph Boëttger (48) BAcc Hons, CA (SA)
Chief financial officer
*Mark Thompson (57) BCom, BAcc, LLB, CA (SA)
Group financial manager
Stephen Blyth (35) BCom, PG Dip Acc, CA (SA), HDip Tax**
Group financial controller
Laurence Newman (53) BCom, BAcc, CA (SA)
Group head internal audit
Roland Agar (45) BCom BAcc, CA (SA)
Group management accountant
Wikus van Zyl (41) BCom Hons, CA (SA)
Group tax manager
Bernd Ross (50) MS (Economics and Business Administration)
Group treasurer
Jörg Pässler (49) BCom Hons, MCom, HDip Tax, CAIB (SA)
Group head technology
*Andrea Rossi (55) BSc (Engineering) Hons, C Eng
Sappi Fine Paper
Sappi Fine Paper Europe
Chief executive officer
*Berry Wiersum (54) MA (Medieval and Modern History)
Chief financial officer
Glen Pearce (46) BCom Hons, CA (SA)
General counsel
Hannes Boner (46) lic iur, DHEE, Admitted Attorney
Human resources director
Rainer Neumann (47) MS (Administrative Sciences),
MS (Industrial Relations and HRM)
Manufacturing, research and development director
Mat Quaedvlieg (59) BS (Electronics)
Marketing sales graphic papers director
Marco Eikelenboom (42) MS (Economics and Business
Administration)
Procurement, supply chain, IT and business planning director
Gregory Gettinger (47) PhD (Economics and Business Administration)
Speciality papers director
Theo Reijnen (62) BS (Economics)
Sappi Fine Paper North America
President and chief executive officer
*Mark Gardner (54) BSc (Industrial Technology)
Vice president and chief financial officer
Annette Luchene (47) BS (Accounting), MBA
Group risk manager
Molupe Thelejane (39 ) BSc (Chemical Engineering)
Chief information officer
Bradley Coward (54) Grad Dip (Corporate Direction and Business
Management), Cert (Senior Management and Leadership
Development)
Group head strategic development
*Robert Hope (57) BA Hons (Economics), MRICS
Group investor relations manager
Graeme Wild (37) BSc (Forestry), MBA
Group head human resources
*Lucia Swartz (52) BA, Dip HR
Group head corporate affairs
André Oberholzer (43) BCom (Law)
Group corporate counsel
Ria Sanz (44) BCom, LLB, HDip Tax, Admitted Attorney
Integration executive
*Alex Thiel (48) BSc (Mechanical Engineering), MBA (Financial
Management and IT)
Executive vice president strategic marketing and
chief sustainability officer
Jennifer Miller (54) BA (Economics), Juris Doctor
Vice president corporate development and
chief information officer
Anne Ayer (44) BA (Psychology), MBA
Vice president human resources and general counsel
Sarah Manchester (44) BA (History), Juris Doctor
Vice president manufacturing
John Donahue (54), BS (Chemical Engineering)
Vice president release and technical specialties businesses
Bob Weeden (58) BS (Chemistry), MS (Management)
Vice president sales
Bob Forsberg (47) BA (Economics and Art History)
Vice president supply chain
Randy Rotermund (47) BS, Imaging Technology, MBA
Sappi Fine Paper South Africa
Managing director
Dinga Mncube (49) Dip (Forestry), BSc (Forest Management),
MSc (Forest Products), Dip (Business Management), MCom
General manager marketing
Bernhard Riegler (39) APD Diploma
Sappi Forest Products
Sappi Trading
Chief executive officer
*Jan Labuschagne (49) BCom Hons, CA (SA)
Finance director
Colin Mowatt (52) BCom Acc, CA (SA), EDP, MBL
Human resources director
Brian Dick (59) BAdmin***
Information technology director
Deon van Aarde (49) BCompt
Technical director
Bertus van der Merwe (56) BSc, MBA, HDip (Engineering)
Sappi Forests managing director
Hendrik de Jongh (54), NDip (Elec), GCC (Elec), MDP
Sappi Kraft managing director
Albert Lubbe (61) NDip Mech, GCC (Mech), AEP
Sappi regional procurement director
Nat Maelane (50) MDP, SEP
Sappi Saiccor managing director
Alan Tubb (59) BSc (Electrical Engineering), GCC (Mines and Works), BCom
Chief executive officer
Wayne Rau (47) HND (Marketing), Senior Executive Programme
Financial director
Henri Kirsten (56) BCom, BCompt Hons, CA (SA)
*** Group executive committee.
*** John Shaw (33) BCom, PG Dip Man Acc, PG Dip Acc, CA (SA), will replace
Stephen Blyth on 01 January 2010 on his appointment to a new position in
Sappi.
*** Jeanett Modise (46) BCom, MDP, MBL will replace Brian Dick on 01 January
2010 on his retirement from Sappi.
30
Review of operations
Sappi Fine Paper
Biberist Mill, Switzerland
2009 annual report
31
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Mills/ Capacity
factories/ (’000 tons)
Divisions plantations Products produced Paper Pulp Employees*
Cloquet Mill Bleached chemical pulp for own consumption
and market pulp 455
Coated woodfree paper 330
North
Somerset Mill Bleached chemical pulp for own consumption
America
and market pulp 490
Coated woodfree paper 795
Westbrook Mill Coated speciality paper 35
Total North America 1,160 945 2,340
Alfeld Mill Bleached chemical pulp for own consumption 125
Coated woodfree paper, coated and
uncoated speciality paper 330
Biberist Mill*** Coated woodfree paper, uncoated woodfree paper 500
Ehingen Mill Bleached chemical pulp for own consumption
and market pulp 135
Coated woodfree paper 250
Gratkorn Mill Bleached chemical pulp for own consumption 255
Coated woodfree paper 950
Kangas Mill***† Coated mechanical paper 210
Europe
Kirkniemi Mill*** Bleached Mechanical pulp for own consumption 330
Coated mechanical paper 730
Lanaken Mill Bleached chemi-thermo mechanical pulp for
own consumption 180
Coated mechanical paper 500
Maastricht Mill** Coated woodfree paper, coated speciality paper 280
Nijmegen Mill Coated woodfree paper 240
Stockstadt Mill*** Bleached chemical pulp for own consumption
and market pulp 150
Coated woodfree paper, uncoated woodfree paper 430
Total Europe 4,420 1,175 6,680
Adamas Mill Uncoated woodfree paper (specialities) 40
Enstra Mill Bleached chemical pulp for own consumption 105
Uncoated woodfree and business paper 200
South Africa
Stanger Mill Bleached bagasse pulp for own consumption 60
Coated woodfree paper and tissue paper 110
Total South Africa 350 165 1,720
Total Sappi Fine Paper 5,930 2,285 10,740
*** Rounded to nearest 10.
*** Production on Paper Machine No 5 at Maastricht Mill ceased in December 2008.
*** Mills acquired from M-real in January 2009.
† Kangas Mill announced in October 2009 possible closure.
32
Review of operations | Sappi Fine Paper continued
Sappi Fine Paper’s main product line, coated graphic paper, contributes 67% of group
sales by value, and is used in producing calendars, catalogues, brochures, books, premium
magazines, direct mailings and annual reports. Sappi Fine Paper also produces a range of
uncoated graphic and business paper, coated and uncoated speciality paper, like that used
in flexible packaging, and casting release paper, used in the manufacture of synthetic
leather and decorative laminate products. Total paper sales represent 84% of group sales.
The geographic spread of our operations allows us to optimise our global knowledge of
market developments, operating best practices and technology. Sappi Fine Paper is
approximately 63% integrated in pulp, with Europe a major net buyer of pulp and North
America a net seller of pulp.
Europe
As we completed the acquisition at the end of December 2008 demand across Europe began
falling as a result of the global economic downturn. We acted quickly to curtail output to match
demand and took account of the unprecedented market conditions as we integrated the new
business.
The European team was well prepared for the integration, which went smoothly. We placed
particular emphasis on customer relations and service and our market shares for coated fine
paper and coated magazine paper, at year end, were in line with the theoretical market shares
of the two businesses combined. It is pleasing that our people came together enthusiastically
and our team in Europe is highly motivated and focused on further optimising our business.
We achieved synergy benefits in excess of the r60 million target for the nine months to
September 2009, and we expect to achieve the full target of r120 million a year ahead of the
three-year timeframe.
The team is currently working with customers to find ways to improve their profitability and ours,
based on improving our understanding of their needs and serving them better while reducing
complexity and cost throughout the supply chain. We expect these initiatives to deliver significant
benefits over the next few years.
Acquisition synergies: Synergy achievement
Sources of synergies
Procurement (excluding market effects)
Asset optimisation (including benefits of acquired order books)
SG&A reduction
Other (including recipe changes and manufacturing efficiency)
Transitional and once-off costs
Total
* Annualised – r97 million.
– Nine-month target – r60 million.
– Full target – r120 million per annum within three years.
Nine months to
September 2009
EUR million
30
23
22
11
(13)
73*
Our lower production levels resulted in a reduced environmental impact in terms of lower water
consumption (11%) and reduced carbon dioxide emissions (18%). However, the frequent stops
and starts necessitated by market conditions reduced our efficiencies resulting in higher emissions
per ton produced.
During the year, we launched a revolutionary coated fine paper, Tempo™, which was named as
the innovation of the year by Pulp & Paper International (PPI). The product markedly reduces ink
drying time, providing major efficiencies for printers, and allowing them to reduce the use of
dusting powder resulting in cost and environmental benefits.
2009 annual report
33
After a weak start to the
year, the North American
business returned to
profitability in June
and had a particularly
strong final quarter.
North America
Faced with a drop in demand of up to 30% in the early part of the year, we took decisive action
to improve our business. This included a restructuring, necessitated by closing our operations at
Muskegon Mill. We now have two very efficient coated fine paper mills which took up the full
range of products previously supplied by Muskegon Mill, without interruption.
We continued working with our customers to ensure our product range serves their changing
requirements. Flo, a coated fine paper brand which includes sheets and web, showed improved
profitability during the year by meeting the needs of our important economy sector customers.
Our specialities business launched new products and patterns in the casting release market
during the year and experienced a good uptake by customers. The new Mokka pattern, which
adds a suede finish to the cast product, is expected to become a leading pattern in terms of
quality and profitability.
Cost reduction was a major theme in the year and we focused on product design, procurement,
eliminating waste and operational efficiency. We managed to reduce fixed costs in absolute and
per unit terms.
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Review of operations | Sappi Fine Paper continued
We also placed particular emphasis on reducing energy consumption. We use a high proportion
of renewable and biomass fuels which comprised 83% of our total energy consumption in 2009.
This has lowered our carbon footprint significantly. In October 2010, we will commission a
recovery boiler project at the Somerset Mill to further reduce our reliance on fossil fuels and
improve our energy efficiency further.
In 2009, we realised a benefit from alternative fuel tax credits of US$87 million. We expect to be
entitled to additional tax credits of approximately US$45 million before the law under which the
credits are available expires in December 2009.
The business leadership was recognised when Mark Gardner, chief executive officer of our
North American business, was named chief executive officer of the year by the Paper Industry
Management Association.
Southern Africa
The Southern African business, which is the smallest part of the fine paper business, also
experienced a major fall in demand, which came later than the decline in the other two regions.
Innovation was a key theme for the business during the year, with achievements, including the
expansion of the security paper business into new market segments and the launch of wet
strength label paper for beverage bottles.
The business is focused on developing other niche products.
Going forward
We expect a gradual improvement in demand for coated paper in our major markets over the
next year but do not expect it to recover to pre-recession levels in the near term.
Our businesses will continue to seek opportunities to enhance business opportunities and reduce
costs. We will also look at rationalising our businesses further, particularly in Europe where we
expect further consolidation of the industry.
We expect export markets to improve in the year ahead in terms of both prices and volumes.
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Gratkorn Mill, Austria
36
Review of operations
Sappi Forest Products
Saiccor Mill, South Africa
2009 annual report
37
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Mills/ Capacity
factories/ (’000 tons)
Divisions plantations Products produced Paper Pulp Employees*
Cape Kraft Mill Waste-based linerboard and corrugating medium 60
Ngodwana Mill Unbleached kraft pulp for own consumption,
bleached chemical pulp for own consumption
and market pulp 410
Mechanical pulp for own consumption 100
Kraft and white top linerboard 240
Sappi Kraft
Newsprint
140
Tugela Mill Unbleached kraft and semi-chemical pulp
for own consumption 350
Kraft linerboard and corrugating medium 300
Other kraft packaging paper 90 2,240
Usutu Mill** Unbleached kraft market pulp 190 560
Total Sappi Kraft 830 1,050 2,800
Saiccor Mill Chemical cellulose 800 1,220
Sappi Saiccor
Capacity/
hectares
’000
KwaZulu Natal Plantations (pulpwood and sawlogs)***
Sappi Forests
Mpumalanga Plantations (pulpwood and sawlogs)***
Usutu Mill** Plantations (pulpwood)***
220ha
241ha
66ha
Sawmills Sawn timber
85m³ 1,130
Total Sappi Forest Products
830 1,850 5,150
*** Rounded to nearest 10.
*** Usutu Mill announced possible closure in October 2009.
*** Plantations include title deed and lease area as well as projects.
Sappi Forest Products, based in Southern Africa, produces nearly two million tons of pulp.
The business is a significant net seller of pulp and together with the North American net
surplus provides a pulp revenue stream that effectively hedges most of the purchases of
pulp by our European business. This virtually eliminates the group’s overall exposure to
changes in world pulp prices.
Sappi Saiccor is the world’s largest manufacturer of chemical cellulose and has one of the
lowest-cost positions. The uses of chemical cellulose are wide-ranging and include producing
viscose and lyocell fibres, moulding powders, cellophane, cellulose acetate for filter tow, and
micro crystalline cellulose and ethers for pharmaceutical and food applications.
Sappi Kraft makes bleached and unbleached kraft pulp, containerboard, packaging paper
and newsprint.
38
Review of operations | Sappi Forest Products continued
Sappi Forests has some 527,000 hectares of land under direct and indirect management,
of which 380,000 hectares are forested. More than 34 million tons of timber stands on
this land. Sappi’s owned plantations provide 70% of the wood needs of our Southern
African businesses. All wood grown on Sappi-owned land is Forest Stewardship Council
(FSC) and ISO 9000 certified. Sappi’s sawmill, Lomati, produces sawn timber for the
construction industry.
Review
The impact of fires on our plantations reduced substantially after two years of devastating forest
fires which affected us and the whole industry in Southern Africa. We increased our focus on
training our people, building community awareness of the destruction caused by fires, and
upgrading fire detection systems and firefighting equipment.
We have pursued sustainable forestry practices for decades, including focusing on protecting
wetlands by widening the unforested areas around them.
We continue to develop our wood resources through a combination of tree breeding to improve
yield and fibre characteristics, and selective acquisition of plantations close to our major centres
of operations. We recently reached an agreement to acquire 14,000 hectares of softwood
plantations close to our Ngodwana Mill in Mpumalanga Province, South Africa.
We made progress in our feasibility project to create a substantial plantation resource in
Mozambique with very successful trial plantings of Eucalyptus.
The major development in our business last year was the ramp up of production at the expanded
Saiccor Mill, which added 30% production capacity. This will also contribute significantly to the
future sustainability of the business by increasing power self-sufficiency to 70% and boosting the
recovery of energy and chemicals from waste.
Over the past few years forest fires have destroyed around 40% of Usutu Pulp Company’s
plantations in Swaziland. As a result, the Usutu Pulp Mill is no longer sustainable. We intend to
close the pulp mill in January 2010, and are in discussion with labour representatives. We are
exploring ways to beneficiate Usutu’s plantation wood in future, including with third party
investors.
Other actions we have taken to improve our business include the reduction of approximately
300 positions across the operations, partly as a result of the mothballing of a 60,000 ton
containerboard machine at Tugela Mill and of parts of the Ngodwana Pulp Mill which will result in
a small net reduction in its pulp output.
Our Forest Products business continues to work with customers to develop new product and
service solutions, including the design of high-performance packaging and new uses for chemical
. . . fo l low ing the expans ion
o f the Sa icco r M i l l by
Sep tembe r 2009 , we
we re success fu l ly
ope ra t ing a t c lose to
fu l l capac i ty w i th h igh
qua l i ty ou tpu t .
2009 annual report
39
cellulose. We are engaging with major South African supermarket chains to offer more
environmentally benign paper bags and packets as an alternative to plastic bags, and expect
the initiative to be launched early in 2010.
We continue to explore opportunities to invest in power cogeneration facilities to increase our
power self-sufficiency, and to increase the proportion of renewables in our total energy mix. To
date it has been difficult to reach agreement with the power utility on either sales or transmission
agreements which would allow us to transfer our power from one mill to another, to optimise
energy efficiencies. Our new performance-based log-transporting vehicles will help reduce our
wood costs and lower our carbon footprint by reducing fuel consumption per ton transported,
by 18%.
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Going forward
We expect firm markets for chemical cellulose in the year ahead. Our focus will therefore be on
optimising production at the Saiccor Mill. Although the timing of an upturn in the Southern African
domestic markets is unclear, we expect a gradual improvement from current levels of low demand.
We will continue to work with customers on more effective product and service offerings, and on
finding more efficient ways to take our products to market.
We expect to benefit, over the next year, from cost initiatives launched in the last few months
and our objective will be to bolster the resilience of our business notwithstanding the strength of
the Rand relative to the US Dollar.
40
Value added statement
for the year ended September 2009
US$ million
Sales
Income from investments
Less: Paid to suppliers for materials and services
Total value added
Distributed as follows:
To employees as salaries, wages and other benefits
To lenders of capital as interest
To shareholders as dividends
To governments as taxation
Total value added distributed
Portion of value added reinvested to sustain and expand the business
Total value added distributed and reinvested
Taxation
Paid in taxes to governments (including US$3 million (September 2008:
US$6 million, September 2007: US$38 million) direct taxes on income)
Collected on behalf of, and paid over to governments:
– Employees’ taxation deducted from remuneration paid
– Net value added taxation (VAT)
Total
* Excludes the acquisition of the coated graphic business of M-real.
2009
5,369
61
3,865
1,565
1,002
205
37
76
1,320
245
1,565
76
148
(149)
75
2008
5,863
38
4,077
1,824
965
179
73
89
1,306
518
1,824
89
158
(47)
200
2007
5,304
21
3,631
1,694
867
169
68
111
1,215
479
1,694
111
148
39
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Chief financial officer’s report
2009 annual report
41
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Mark Thompson
The group reports its financial results in US Dollars and the main exchange rates used in
preparing the group financial statements were:
Income statement
average rates
Balance sheet
closing rates
2009
2008
2009
2008
Euro (EUR)(r)/US Dollar (US$)
1.3657
1.5064
1.4688
1.4615
US Dollar (US$)/Rand (ZAR)
9.0135
7.4294
7.4112
8.0751
Introduction
The objective of this discussion and analysis is to provide additional insight into the operating
performance and financial position of the group. This report should be read in conjunction with
the operational reviews on pages 30 to 39 and the group annual financial statements beginning
on page 92.
In summary, fiscal 2009 was a busy but challenging year for our group. In December 2008, we
concluded a rights issue of r450 million and the proceeds of this rights issue were used to
finance in part the acquisition of four mills and the graphics paper business of M-real for an
enterprise value of r750 million (the acquisition). The acquisition, which is described in more
detail in note 34 of the annual financial statements, was completed on 31 December 2008.
In July/August 2009, we completed a major refinancing of our debt. We refinanced well in
advance of its maturity a r400 million syndicated bank loan (which was due for repayment in
December 2010) with a r400 million five-year amortising loan and we put in place a new three-
year revolving credit facility of r209 million, which remains undrawn. In August 2009 we raised
two five-year bonds with a face value of US$300 million (for the US Dollar tranche) and r350 million
(for the Euro tranche). The proceeds of the bonds together with some of our cash holdings were
used to repay the drawings under our previous revolving credit facility, the vendor loan notes
(issued to M-real in part payment of the acquisition) at a discount and other short-term debt. The
refinancing has significantly improved our liquidity position and positively affected our debt
maturities as well. In addition, we now have solid cash resources – US$770 million as at the end
of our financial year. More details about these refinancing activities are given later in this report.
On the operating front, our financial results were heavily impacted by the global economic crisis
which began in our first quarter. However, we took a number of actions to mitigate this and
improve our business. The acquisition was successfully integrated into our European business
and we realised synergy benefits in excess of the r60 million target we set ourselves for the nine
months to September 2009. We started up the US$500 million Saiccor expansion and this plant
is now running at close to full design capacity in order to meet demand. The Muskegon Mill in
North America was closed and post our year end we announced the possible closure of our
Kangas Mill in Finland and our Usutu Mill in Swaziland. During the year all our businesses focused
aggressively on cost reduction and will continue to do so. We believe that these actions and
others that we are considering will yield rewards in the next and following years.
42 Chief financial officer’s report continued
Operating performance of our divisions
We believe that operating profit excluding special items is a good indicator of underlying
operating performance as it excludes what management believes are items that are non-recurring
and/or uncontrollable in the normal course. Please see page 52 further on for a full explanation
of special items.
Operating profit excluding special items declined significantly compared to fiscal 2008 from
US$366 million to US$33 million.
The contribution by each of our divisions to the group operating profit excluding special items
was as follows:
US$ million
Europe
North America
South Africa
Fine Paper
Forest Products
Corporate and other
Sappi group
2009
2008
12
(2)
(1)
9
18
6
33
55
95
6
156
203
7
366
Three of our four business units have home or ‘functional’ currencies other than the US Dollar
(which is our reporting currency) as follows:
Business unit
Sappi Fine Paper
Sappi Fine Paper Europe (SFPE)
Sappi Fine Paper North America (SFPNA)
Sappi Fine Paper South Africa (SFPSA)
Forest Products
Functional
currency
EUR
US Dollar
SA Rand
SA Rand
% of
group
sales
54
24
6
16
100
The revenue and cost items of each of the non-US Dollar units (which constitute approximately
75% of the group’s sales) are translated into US Dollars at the average exchange rate for the
period in order to arrive at the group revenue and costs in US Dollars. When exchange rates
differ from one period to the next, the impact on our revenue and costs in US Dollars can be
large, but largely off-set one another at the net level (when netting costs against revenue). Indeed
in fiscal 2009, the impact of translating the sales of our European and South African businesses
into US Dollars had a big (US$547 million) negative impact on group sales revenue compared to
fiscal 2008, but this was offset by a positive impact of US$553 million on costs translated into
US Dollars.
Thus, while the translation impact is large on sales and costs, on a net basis, this impact is
relatively small. This translation impact complicates and distorts the comparison of sales and
costs in US Dollars year-on-year and for this reason we believe it is more instructive to analyse
the performance of each division compared to fiscal 2008 in that division’s home currency. This
we do starting on the next page.
Information about the mills (and their capacities and products, etc) in each of the divisions is set
out on pages 31 and 37. Also, further information about each of the divisions is given in the
operational reviews on pages 30 to 39 and in the group annual financial statements.
2009 annual report
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Sappi Fine Paper Europe
Sales volume (metric tons ’000)
2009
2,956
2008
2,546
2009
2008
EUR million
EUR per ton
Sales
2,120
1,806
717
709
Variable manufacturing and
delivery costs
(1,330)
(1,204)
Contribution
Fixed costs
Sundry (costs) income and
consolidation entries
Operating profit excluding
special items
Special items – losses
Operating loss
790
(771)
(10)
9
(58)
(49)
602
(573)
8
37
(79)
(42)
(450)
267
(261)
(3)
3
(473)
236
(225)
4
15
Overall, sales volumes in metric tons increased by 16% to approximately 2,956,000 tons. This
increase was entirely due to the acquisition. Excluding the sales volume of the acquired mills of
approximately 926,000 tons included in the 2009 results, sales volume was down 20% compared
to fiscal 2008 at 2,030,000 tons, reflecting the significant fall-off in demand following the global
economic downturn.
The division’s main products are coated woodfree paper, coated magazine paper and speciality
paper. In Europe we produce approximately 44% of the pulp required to produce our paper
products – the rest is purchased in the market.
According to industry statistics, demand for coated woodfree products declined by approximately
17% in the European region and exports of coated woodfree paper from Europe declined by
33% compared to 2008 due to a slowdown in global economic and advertising activity. Industry
average selling prices of coated woodfree paper in Euro terms increased by approximately 5%
despite the severe slowdown in demand, due to curtailment, closures in production capacity and
producer consolidation (particularly our acquisition from M-real).
The demand for coated magazine paper products declined by approximately 25% compared to
2008. Industry average selling prices in Euro terms for 2009 were at a similar level as the average
for 2008, but prices ended the year approximately 10% lower than in September 2008.
Overall, our average selling price per ton realised was slightly higher (1%) at r717 per ton than in
2008 (r709 per ton).
Cost saving initiatives remained a key focus area of the European business both as part of its
synergy realisation programme and in the normal course.
44 Chief financial officer’s report continued
Variable manufacturing costs
Wood
Energy
Pulp
Chemicals
Other
Delivery costs
Total
2009
2008
2009
2008
EUR million
EUR per ton
136
250
301
369
116
158
125
185
317
340
96
141
1,330
1,204
46
85
102
125
39
53
450
49
73
125
134
37
55
473
Variable costs per ton declined by 5% to r450 per ton compared to r473 per ton in 2008. This
reduction was due to reduced global commodity prices – in particular market pulp of which we
bought in approximately 0.9 million tons – the realisation of cost synergies from the acquisition
and cost reductions through process as well as product re-engineering initiatives.
Fixed costs
Personnel
Maintenance
Depreciation
Services and administration
Total
2009
2008
EUR million
418
82
153
118
771
316
61
118
78
573
Fixed costs increased by r198 million compared to fiscal 2008, this increase was mainly due to
the acquisition.
Our European business is highly sensitive to changes in selling prices, variable costs and volume
as is more fully described in the section ‘Major sensitivities’ further on in this report.
Special items in 2009 include a r55 million impairment of the coated mechanical business unit
to take account of the weak market conditions. Special items in 2008 of r79 million related mainly
to the charges taken upon closure of the Blackburn Mill and the cessation of production at
Maastricht Mill’s Paper Machine No 5.
Sappi Fine Paper North America
Sales volume (metric tons ’000)
2009
1,274
2008
1,553
2009
2008
US$ million
US$ per ton
Sales
1,295
1,664
1,016
1,071
Variable manufacturing and
delivery costs
Contribution
Fixed costs
Sundry (costs) income and
consolidation entries
Operating (loss) profit
excluding special items
Special items – gains (losses)
Operating profit
(812)
483
(475)
(10)
(2)
55
53
(1,056)
608
(543)
30
95
(3)
92
(637)
379
(373)
(8)
(2)
(680)
391
(350)
20
61
2009 annual report
45
This division produces coated woodfree paper, speciality paper and pulp. Approximately 300,000
tons of this pulp is surplus to its own needs, and is sold as market pulp, although other types of
pulp are purchased.
Compared to fiscal 2008, sales volume dropped by 18% to 1,274,000 tons in 2009 as a result
of the significant decrease in economic activity and demand for print advertising in North America.
In these circumstances we decided to close our Muskegon Mill which was the smallest and least
efficient of our North American coated woodfree mills. The full range of products previously
produced at the Muskegon Mill were successfully transitioned to our Somerset and Cloquet Mills.
Despite the difficult market environment and the closure of one of our mills, we gained 2% coated
woodfree market share compared to fiscal 2008.
Average selling price per ton for the business as a whole declined by 5% compared to fiscal 2008
due to the weaker demand for all our products. Our pulp selling prices in this region dropped by
US$184 per metric ton or approximately 28% compared to fiscal 2008.
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Variable manufacturing costs
Wood
Energy
Pulp
Chemicals
Other
Delivery costs
Total
2009
2008
2009
2008
US$ million
US$ per ton
194
115
49
223
108
123
812
202
156
139
266
129
164
1,056
152
90
38
175
85
97
637
130
100
90
171
83
106
680
Total variable costs decreased by approximately 23% due to the significant amount of curtailment
of output during 2009 to align with reduced demand (including the suspension and closure of
operations of the Muskegon Mill), and due to reduced variable manufacturing costs per ton.
Variable manufacturing costs per ton decreased by 6% in fiscal 2009 compared to fiscal 2008,
largely due to decreases in the costs of purchased pulp and energy costs, partially offset by
increases in the cost of wood and chemicals.
Fixed costs
Personnel
Maintenance
Depreciation
Services and administration
Total
2009
2008
US$ million
243
60
90
82
475
270
70
95
108
543
The impact of our restructuring actions and focus on a reduction of overheads is reflected in the
reduction of US$68 million in fixed costs compared to last year. In addition to permanent SG&A
restructuring actions during the year, we also ceased operations at our Muskegon Mill.
Special items in 2009 of US$55 million consist mainly of US$87 million relating to the alternative
fuel tax credit partly offset by US$31 million of restructuring and related costs flowing from the
closure of the Muskegon Mill and other restructuring initiatives.
46 Chief financial officer’s report continued
Sappi Fine Paper South Africa
Sales volume (metric tons ’000)
2009
305
2008
339
2009
2008
ZAR million
ZAR per ton
Sales
2,866
2,823
9,397
8,327
Variable manufacturing and
delivery costs
Contribution
Fixed costs
Sundry costs and
consolidation entries
Operating (loss) profit
excluding special items
Special items – losses
Operating (loss) profit
(2,028)
(1,874)
838
(833)
(14)
(9)
(18)
(27)
949
(822)
(82)
45
–
45
(6,649)
2,748
(2,731)
(47)
(30)
(5,529)
2,798
(2,425)
(240)
133
Our South African fine paper business manufactures coated and uncoated woodfree paper and
some of the pulp it requires for own consumption.
Although sales volume declined 10% compared to fiscal 2008, we managed to increase our
average selling price per ton by 13% to ZAR9,397 per ton and this enabled us to increase sales
slightly to ZAR2,866 million in 2009. Selling prices were unfortunately under pressure towards
the end of the year due to increased competition from imports as the Rand strengthened against
the US Dollar.
Variable manufacturing costs
Wood
Energy
Pulp
Chemicals
Other
Delivery costs
Total
2009
2008
2009
2008
ZAR million
ZAR per ton
99
277
730
443
302
177
106
200
613
451
311
193
325
908
2,393
1,452
991
580
313
590
1,808
1,330
919
569
2,028
1,874
6,649
5,529
Variable costs per ton increased by 20% compared to 2008 mainly due to an increase in energy
costs, production problems at our Enstra Mill and the fact that we had to buy in pulp at our
Stanger Mill due to the shortage of bagasse during the year (bagasse is waste from the sugar
industry and forms the base of the feedstock for our own pulp production at Stanger).
Fixed costs
Personnel
Maintenance
Depreciation
Services and administration
Total
2009
2008
ZAR million
429
105
121
178
833
440
102
108
172
822
2009 annual report
47
As in the case of the other regions, the South African businesses also places great emphasis on
the management of fixed costs. We were able to contain fixed costs to a 1% increase over 2008
through various cost reduction actions.
As of fiscal 2010, Sappi Fine Paper South Africa will be incorporated into the Sappi Forest
Products division. We do not consider this change in our future reporting to be material.
Sappi Forest Products
Sales volume (metric tons ’000)
2009
2,172
2008
2,413
2009
2008
ZAR million
ZAR per ton
Sales
7,761
8,165
3,573
3,384
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Variable manufacturing and
delivery costs
Contribution
Fixed costs
Other income and
consolidation entries
Operating profit
excluding special items
Special items – (losses) gains
Operating (loss) profit
(4,618)
3,143
(3,335)
(4,117)
4,048
(2,991)
(2,126)
1,447
(1,535)
354
451
163
162
(631)
(469)
1,508
520
2,028
75
(1,706)
1,678
(1,240)
187
625
Our Forest Products business produces various types of packaging paper and board, newsprint,
paper pulp (for own use and sale as market pulp) and chemical cellulose pulp. All chemical
cellulose pulp is sold in the export market.
As with our other businesses, our Forest Products business experienced a severe decline in
demand for all major products, particularly in our chemical cellulose business during the first half
of fiscal 2009. The two major factors impacting our revenue from chemical cellulose are the
Rand/US Dollar exchange rate and the NBSK market price. The Rand was weak against the
US Dollar during the first half of our fiscal year, which is beneficial for our exports, but this benefit
from the exchange rate was largely negated by the depressed demand levels for export product.
As demand for chemical cellulose and NBSK pulp prices started to recover from March 2009,
the Rand started to strengthen against the US Dollar, negatively affecting the benefit of increased
export volumes and improved selling prices. The average NBSK price was 26% lower during
2009 compared to fiscal 2008.
Local sales in the region benefited from the weaker Rand to the US Dollar during the early part
of 2009, which reduced import substitution and improved local pricing. The Rand strengthened
against the US Dollar during the second half of the year, increasing competition from imports and
placing pressure on local product prices.
2009
2008
2009
2008
ZAR million
ZAR per ton
Variable manufacturing costs
Wood
2,100
1,966
Energy
Chemicals
Other
Delivery costs
Total
738
706
211
863
597
585
190
779
967
340
325
97
397
815
247
242
79
323
4,618
4,117
2,126
1,706
48 Chief financial officer’s report continued
Variable input costs per ton increased significantly in the year compared to fiscal 2008. This was
due to additional operating costs incurred as a result of the interrupted ramp up of the Saiccor
Mill expansion and the decision to take commercial downtime as local demand in the packaging
business weakened during the latter part of the year. Sub-optimal operating conditions included
the use of additional oil to fire the boilers, and additional chemical loads and additional people
required for the new Saiccor plant. Input costs remained high in the first half of the year but wood,
chemical and coal costs have since decreased. The average wood costs increased significantly
in 2009 compared to 2008, due to a wood shortage after severe forest fires in Southern Africa
that occurred in 2007 and 2008. Energy costs increased sharply due to increased electricity
prices in South Africa.
Fixed costs
Personnel
Maintenance
Depreciation
Services and administration
Total
2009
2008
ZAR million
1,415
1,319
593
629
698
574
471
627
3,335
2,991
Personnel costs in our Forest Products division increased due to the skills shortage in South Africa,
particularly in skilled technical functions. Fixed costs increased by 12% from ZAR2,991 million to
ZAR3,335 million compared to fiscal 2008. This increase was mainly due to a 34% increase in
depreciation, a significant increase in plantation fire prevention costs and also higher than usual
plantation re-establishment costs. The increase in depreciation is a result of the capacity
expansion at the Saiccor Mill.
Special items in 2009 of ZAR631 million consist mainly of a negative plantation price fair value
adjustment of ZAR606 million. Special items in 2008 of ZAR520 million consist mainly of a positive
plantation price fair value adjustment of ZAR890 million offset by asset impairments and losses
due to fire damage.
Corporate and other
Attributable profit from China joint venture
Other
Operating profit excluding special items
2009
2008
US$ million
4
2
6
10
(3)
7
2009 annual report
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Our income statement
Our group financial results can be summarised as follows:
2009 % Change
Sales volume (metric tons ’000)
6,707
US$ million
Sales revenue
Variable manufacturing and delivery costs
Contribution
Fixed costs
Sundry (loss) income*
Operating profit excluding special items
Special items
Operating (loss) profit
Finance costs
(Loss) profit before tax
Taxation
Net (loss) profit
Basic (loss) earnings per share
(US cents)
5,369
(3,322)
2,047
(1,970)
(44)
33
(106)
(73)
(145)
(218)
41
(177)
(37)
(2)
(8)
(7)
5
(91)
15
2008
6,851
US$ million
5,863
(3,582)
2,281
(1,919)
4
366
(52)
314
(126)
188
(86)
102
28
* Sundry (loss) income consists mainly of inventory revaluation, plantation fair value volume adjustments and external debtors
securitisation costs.
Operating profit, excluding special items compared to 2008
For the group, the decline in operating profit excluding special items is depicted in terms of sales,
variable costs and fixed costs in the chart below:
50 Chief financial officer’s report continued
Sales
Compared to fiscal 2008, group sales declined by US$494 million (8%) from US$5,863 million in
2008 to US$5,369 million in 2009. This decline was due to lower volumes (US$123 million in
monetary terms) and the negative impact of translating the sales of the European and South
African divisions into US Dollars (US$547 million) partly offset by better price and product mix
(US$176 million).
In terms of metric tons, sales volumes declined by 144,000 tons from 6,851 million tons in 2008
to 6,707 million tons in 2009 as shown in the table below:
Sales volumes – tons ’000
2009
% Change
Europe
Europe, excluding acquired mills
Acquired mills
North America
Fine Paper South Africa
Forest Products
Forest Products – pulp and paper
Forest Products – forestry
Sappi group
2,956
2,030
926
1,274
305
2,172
1,355
817
6,707
16
(20)
n/a
(18)
(10)
(10)
(5)
(18)
(2)
2008
2,546
2,546
–
1,553
339
2,413
1,419
994
6,851
At constant exchange rates, price per ton realised on sales was US$26 per ton higher than in
fiscal 2008 (US$882 per ton in 2009 compared to US$856 per ton in 2008). This increase was
mainly due to the fact that we added 926,000 tons of business at a higher average price of
approximately US$960 per ton as a result of the acquisition in December 2008. Thus, more higher
value tons of coated paper were sold in 2009 relative to 2008.
The average exchange rate of the US Dollar was stronger versus the Euro in 2009 than in 2008
(Euro/US$1.3657 compared to Euro/US$1.5064 in 2008). This difference in translating the sales
of our European business had a US$298 million negative impact on the group’s sales in US Dollars.
The stronger US Dollar versus the South African Rand (US$/ZAR9.0135 in 2009 compared to
US$/ZAR7.4294 in 2008) also had the effect of reducing the sales of the South African divisions
in US Dollars compared to fiscal 2008 by US$249 million.
Variable and delivery costs
Variable manufacturing costs relate to costs of inputs which vary directly with output. The ‘Other’
costs component included under variable manufacturing costs in the table below, relates to inputs
such as water, filler materials and consumables.
Delivery costs relate closely to sales volumes. An analysis of variable costs by major category is
as follows:
US$ million
Wood
Energy
Pulp
Chemicals
Other
Variable manufacturing costs
Delivery costs
Total
2009
2008
663
584
543
868
210
2,868
454
3,322
722
558
702
935
156
3,073
509
3,582
2009 annual report
51
Group variable costs in fiscal 2009 were US$260 million lower than in fiscal 2008 (US$3,322 million
in 2009 compared to US$3,582 million in 2008). Our variable costs are impacted by sales volumes,
the underlying price of inputs and the exchange rate effects on translation of our European and
South African businesses into US Dollars. The impact on 2009 operating profit of volume and
price changes in variable costs in regional home currencies, as discussed earlier in this report,
was negative US$86 million, offset by a US$346 million positive currency translation effect.
Cost management remains a major focus area in our group. We continue to engage in a number
of cost reduction initiatives aimed at offsetting the impact of increases in input costs. These
initiatives are aimed at improved procurement strategies and product re-engineering initiatives to
reduce raw material input costs through substitution. Product design and raw material inputs are
constantly reviewed to ensure that product attributes and quality meet market specifications.
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Fixed costs
The major components of fixed costs were as follows:
US$ million
Personnel
Maintenance
Depreciation
Services and administration
2009
1,046
250
396
278
2008
1,017
252
374
276
1,970
1,919
Fixed costs increased by US$51 million (3%) compared to 2008 from US$1,919 million in 2008
to US$1,970 million in 2009. However, fixed costs of the European and South African businesses
were favourably impacted by the stronger US Dollar in 2009 compared to 2008 in an amount of
US$206 million. So, in local currency terms, group fixed costs actually increased by the equivalent
of US$257 million.
The main reason for this increase was the acquisition which added r198 million to the group’s
fixed cost base.
To mitigate the impact of challenging market conditions, we have engaged in many restructuring
actions and fixed cost reduction programmes in all our regional businesses. Some of these are
mentioned earlier on in the operating performance of our divisions.
Key operating targets
Our financial targets and our performance against these targets are set out and discussed on
page 6 of the annual report.
Our key operating target is for operating profit excluding special items to exceed 12% of capital
employed (ROCE). This target has been derived to meet the group’s weighted average cost of
capital after adjusting book assets for inflation. Our performance against this target for 2009 was
below 1% – clearly not an acceptable return for our shareholders.
In order to meet our ROCE target we need to improve operating profit excluding special items to
around US$520 million, given our current level of debt and equity.
52 Chief financial officer’s report continued
Major sensitivities
Some of the more important factors which impact the group’s operating profit excluding special
items, based on current anticipated revenue and cost levels, are summarised in the table below.
Operating profit excluding
special items sensitivity
Volumes change
Selling prices change
1%
1%
Pulp price change/ton
US$10
Variable costs change
Fixed costs change
1%
1%
SFPE
EUR
million
SFPNA
US$
million
SFPSA
ZAR
million
10
24
8
12
5
5
14
0
7
4
10
27
7
19
9
Forest
Products
ZAR
million
37
34
(52)
40
34
Group
US$
million
25
56
6
32
15
The calculation of the impact of these sensitivities on operating profit excluding special items
assumes all other factors remain the same and does not take into account potential management
interventions to mitigate negative impacts or enhance benefits. As the table shows, the impact
on the individual businesses of one sensitivity may be different as indeed is the case with changes
in international pulp prices which affect Forest Products (which is a net seller of pulp) and the
European business (which is a net purchaser of pulp) in opposite ways.
The previous table shows that operating profit excluding special items is most sensitive to
changes in the selling prices of our products.
Special items
Special items are those items which management believe are material by nature or amount to
the operating results and require separate disclosure. Such items generally include profit and
loss on disposal of property, investments and businesses, asset impairments, restructuring
charges, non-recurring integration costs related to acquisitions, financial impacts of natural
disasters, non-cash gains or losses on the price fair value adjustment of plantations and unusual
government subsidies such as the alternative fuel tax credits paid to qualifying pulp producers in
the USA.
Special items for the year compared to 2008 are shown in the table below:
US$ million gain (loss)
Plantation price fair value adjustment
Restructuring provisions raised
Asset impairments
Fuel Tax Credits in North America
Fire, flood and related events
Other
Loss for the period
2009
(67)
(34)
(79)
87
(11)
(2)
(106)
2008
120
(41)
(119)
–
(17)
5
(52)
Our operating profit in 2009 was negatively affected by a plantation price fair value adjustment
of US$67 million, restructuring charges of US$34 million and impairment charges of US$79 million,
partly offset by alternative fuel tax credits earned in North America of US$87 million (alternative
fuel tax credits are discussed in more detail in note 2 of this annual report). Our plantation price
fair value adjustment was negative for the year due to increases in wood delivery costs exceeding
wood price increases. The restructuring charges relate mainly to the closure of the Muskegon
Mill and the impairment charges represent the impairment of the coated mechanical paper
business unit in Europe to take account of weak market conditions.
After taking account of these items, our operating loss for fiscal 2009 was US$73 million
compared to an operating profit of US$314 million in fiscal 2008.
2009 annual report
53
Finance costs
Details of net finance costs are set out below:
US$ million
Net interest paid
Finance costs capitalised
Net foreign exchange gains
Net fair value loss on financial instruments
Net finance costs
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137
–
(17)
25
145
2008
143
(16)
(8)
7
126
Net interest paid (interest paid less interest earned) in fiscal 2009 was US$137 million compared
to US$143 million in 2008. While interest rates remained low in all our borrowing currencies, net
interest paid was unusually low in fiscal 2009 because of the US$41 million discount obtained on
repaying the r220 million M-real vendor loan notes in the last quarter of our financial year. The
finance costs capitalised in fiscal 2008 relate to the Saiccor Mill expansion project in South Africa.
The net fair value financial instrument loss includes an amount of US$20 million arising from our
unwinding fixed to variable swaps with a notional value of US$857 million. The unwinding of these
swaps resulted in a positive cash inflow of US$55 million. In view of the refinancing transactions
completed in the last quarter of our financial year, and as outlined in more detail below, the net
interest paid will increase substantially in future years as interest margins on the new financing
reflect current market conditions and the current Sappi credit rating.
The group’s policy is to identify foreign exchange transaction risks when they arise and to cover
these risks to the functional currency of the division where the risk lies. The majority of the group’s
foreign exchange exposures are covered centrally by the group treasury which nets the internal
exposures and hedges the residual exposure with third party banks.
Taxation
US$ million
(Loss) profit before taxation
Expected taxation (benefit) charge
Tax rate reductions
Net effect of losses with no tax relief and
permanent differences
Secondary Tax on Companies
Other
Taxation (benefit) charge
Effective tax rate
2009
(218)
2008
188
(60)
(3)
18
4
–
(41)
38
(9)
35
7
15
86
19%
46%
With a loss before taxation of US$218 million, the total taxation relief to the income statement of
US$41 million resulted in a tax rate of 19%. The expected taxation relief of US$60 million was
reduced due to no tax relief being taken on the losses of certain loss-making entities because, in
our judgement, these losses may not be recoverable in the near future. In addition, certain of the
group’s profit is not taxed as a result of losses carried forward or favourable permanent differences.
Earnings per share
The loss per share for fiscal 2009 was 37 US cents. As required by IFRS, prior period earnings
per share figures have been restated to take into account the bonus element of the rights issue
concluded in December 2008 by adjusting the weighted average number of shares in each prior
year by a factor of 1.58. Please refer to note 7 to the annual financial statements for an explanation
of how this adjustment factor is calculated.
54 Chief financial officer’s report continued
A Listing Requirement of the JSE Securities Exchange in South Africa is to disclose ‘headline
earnings per share’. The computation of headline earnings per share is disclosed in note 7 to the
group annual financial statements. Earnings per share and headline earnings per share over the
past five years are depicted in the bar chart alongside.
In fiscal 2009, earnings per share was adversely impacted by certain major items classified as
special items (discussed above). Excluding these special items after the impact of tax, earnings
per share for fiscal 2009 would have been negative 24 US cents. On the same basis, earnings
per share, excluding special items (after the impact of tax) for fiscal 2008 would have been 46
US cents.
Working capital
Optimising the levels of our working capital is a key management focus area. The aim is to
minimise the investment in working capital to the point where it does not negatively impact
profitability by more than the savings in finance costs from the lower investment in working capital.
We regularly compare our ratio of working capital to annual sales to those of our peers, and we
believe that our working capital management compares favourably in that regard, although we
have identified opportunities to improve this further. Managing the average monthly level of net
working capital is a large element of the management incentive scheme for all our businesses.
The component parts of our working capital at the financial year end for the past two years are
shown in the table below, as is the net working capital to sales percentage:
US$ million
Inventories
Receivables
Payables
Net working capital
Net working capital to sales
2009
792
858
(1,151)
499
9.3%
2008
725
698
(1,001)
422
7.2%
As part of the acquisition at the end of the first quarter of fiscal 2009, we acquired r232 million
(US$326 million) of additional working capital – which amount was included in the purchase price.
In the three quarters following the acquisition, great efforts were made by our European division
to reduce net working capital to be more in line with the lower levels of business following the
global economic crises. These efforts are reflected in the large (US$152 million) release of cash
from working capital shown in the cash flow analysis section further on. Nevertheless, net working
capital as a percentage of sales was higher (9.3%) in fiscal 2009 compared to 7.2% in 2008.
As part of our measures to address current challenging market conditions we have intensified
our efforts to minimise investment in working capital by setting tight working capital targets for
fiscal 2010.
2009 annual report
55
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Cash flow analysis
In the table below we present the group’s cash flow statement in a summarised format:
US$ million
2009
2008
Cash generated by operations before post
employment benefits
Contributions to post employment benefits
Cash generated by operations
Net movement in working capital
Cash generated by operating activities
Cash spent to maintain and expand non-current assets*
Finance costs
Taxation
Other
Dividends to shareholders
Net cash generated (utilised)
494
(62)
432
152
584
(176)
(81)
(5)
4
(37)
289
711
(88)
623
1
624
(505)
(126)
(70)
11
(73)
(139)
* 2009 excludes US$590 million relating to the acquisition and includes US$1 million of plantation expenditure.
We generated cash from operations of US$432 million in 2009 compared to US$623 million in
2008. The significant decline in operating profit during 2009 resulted in lower cash generated
from operations when compared to 2008.
Contributions to post employment benefits include approximately US$44 million in 2009 and
US$38 million in 2008 of ‘catch-up’ payments to reduce funding deficits in certain of our funds.
We expect our total contributions in 2010 to be slightly above the 2009 levels.
The US$152 million of cash released from working capital relates mainly to working capital
reduction in the European business following the acquisition as discussed in the section above.
Our net cash generated for 2009 of US$289 million included US$65 million of cash received for
alternative fuel tax credits by our North American business and also an amount of US$55 million
received when we unwound fixed-to-floating interest rate swaps as discussed above.
Our investment in non-current assets was US$329 million lower than in 2008, due to the
completion of the Saiccor Mill expansion and our drive to reduce capital expenditure during the
difficult market conditions we experienced during the year.
Over the past five years the relationship between investment in property, plant and equipment
and depreciation is depicted alongside.
Investment in non-current assets by region was as follows:
US$ million
Fine Paper
North America*
Europe
South Africa
Forest Products
Saiccor upgrade
Other**
Corporate
Total**
2009
116
28
83
5
62
18
44
(2)
176
2008
230
130
91
9
274
236
38
1
505
* 2008 includes Paper Machine No 3 at Somerset after termination of the lease (US$75 million).
** 2009 includes expenditure of US$1 million relating to plantations.
The above figures include both ‘maintenance’ and ‘expansion’ expenditures relating to non-current
assets – the latter was US$29 million in fiscal 2009.
56 Chief financial officer’s report continued
Debt
Debt is a major source of funding for the group. In the management of debt we focus on net
debt, which is the sum of current and non-current interest-bearing borrowings and bank overdraft,
net of cash, cash equivalents and short-term deposits.
Net debt
The movement in net debt from 2008 to 2009 is explained below:
US$ million
Net debt at beginning of year
Cash generated during the year*
Debt assumed with the acquisition
Acquisition fees
Vendor loan notes (r220 million)
Discount on the subsequent repayment of vendor loan notes
Fair value adjustments
Currency and other
Net debt at end of year
2009
2,405
(289)
52
32
307
(41)
53
57
2,576
* Excludes cash outflow relating to the acquisition which was funded by the r450 million rights issue.
During the year, net debt increased by US$171 million. As part of the acquisition funding, we
issued r220 million (US$307 million) of vendor loan notes to M-real (which were subsequently
repurchased at a discount of approximately US$41 million) and we assumed debt of US$52 million.
This was offset by strong cash generation from operations after deducting capital expenditure of
US$289 million for the year.
During the year, we embarked on a major refinancing of our debt in order to refinance impending
maturities and short-term debt. All new debt taken up during the year was used to either settle
existing facilities (including the vendor loan notes) or hold as cash for liquidity purposes and
therefore did not result in an increase net debt.
Debt structure
Two material debt maturities were approaching that required refinancing; namely a r600 million
revolving credit facility (RCF) due for repayment in May 2010 and a r400 million syndicated bank
facility (the OeKB facility) maturing in December 2010. In order to address these maturities and
to term out short-term debt, the following actions were taken:
(cid:129) The r400 million OeKB facility was refinanced with a new r400 million five-year amortising
loan profile until 2014.
(cid:129) New public bonds of approximately US$800 million maturing in 2014 were issued.
(cid:129) The proceeds of these bonds, together with surplus cash balances, were used to repay
amounts outstanding under our previous RCF, the majority of our short-term debt and the M-
real vendor loan note at a substantial discount.
(cid:129) A new RCF of r209 million with a tenure of three years was arranged, which remains
unutilised at this point in time.
The refinancing has improved the group’s debt structure considerably. This is indicated by
comparing the position as at end September 2008 with September 2009, which shows that net
short-term debt has improved from a negative position of US$724 million at September 2008 to
a positive US$150 million (ie cash holdings exceed short-term debt by US$150 million).
2009 annual report
57
US$ million
Long-term debt
RCF drawn
Securitised debtors
Overdrafts, commercial paper
Short-term position of long-term debt
Less: Cash
Net short-term debt
Total net debt
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2009
2,726
–
400
125
95
(770)
(150)
2,576
2008
1,681
151
362
315
170
(274)
724
2,405
Following this refinancing, we have a much improved liquidity position with cash of US$770 million
available at the end of September 2009 and no major debt maturities before 2012. We are of the
opinion that it is prudent to maintain an increased cash balance as a cushion in times of economic
uncertainty. Our finance costs have increased significantly and at current interest rates we expect
our net finance costs for 2010 to increase to approximately US$250 million. In order to continue
reducing our net debt we will focus on cash generation and will manage our capital expenditures
tightly but at a level which ensures that we maintain our assets in good condition and meet our
commitments to health, safety and environmental standards.
The major elements of the refinancing are discussed below.
Revolving credit facility
In June 2005, we entered into a r600 million revolving credit facility with a consortium of banks
– the maturity date of this facility was 31 May 2010. This facility was cancelled in August 2009
and replaced with a new secured revolving credit facility, providing for up to r209 million of
borrowing availability in Euros or US Dollars. This facility remains undrawn. The facility terminates
on 31 May 2012 and the annual interest rate on drawings is calculated based on Euribor plus a
margin varying between 3.00% and 6.50% (currently 4.50%), depending on the credit rating
assigned to Sappi Papier Holding’s secured debt rating. Sappi Papier Holding is the holding
company for all of the group’s assets outside of Southern Africa. A commitment fee of 45% of
the margin referred to above is payable to the extent the facility is undrawn.
OeKB syndicated credit facility
In May 2003, Sappi Papier Holding entered into a term loan facility with the Oesterreichische
Kontrollbank (OeKB) and a group of banks, which provided a r500 million borrowing facility for
the purpose of refinancing the purchase price of the 2002 Cloquet acquisition in the USA. The
fully utilised loan had a first repayment of r100 million in December 2004 and a final repayment
of r400 million scheduled for 31 December 2010. The r400 million outstanding was refinanced
in August 2009 by the OeKB and a group of banks with a secured five-year amortising facility,
terminating on 30 June 2014. The annual interest rate is calculated based on Euribor, plus a
margin varying between 4.00% and 7.50% (currently 5.5%), depending on the credit rating
assigned to Sappi Papier Holding’s secured debt rating, plus certain costs.
2009 Guaranteed notes
In July 2009, a subsidiary of Sappi Papier Holding issued US$300 million 12% secured guaranteed
notes due 2014 and r350 million 11.75% secured guaranteed notes due 2032 (together, the
‘2009 notes’). Interest on the notes is payable semi-annually.
The revolving credit facility, the OeKB facility and the 2009 notes are guaranteed by Sappi Limited
and certain material subsidiaries and share in a security package consisting of mortgage bonds
over certain property and plant, pledges of shares of certain material subsidiaries, pledges of
receivables under certain material intercompany loans and pledges of certain inventories at Sappi
Fine Paper North America.
Further information about security over our borrowings is contained in notes 20 and 24 to our
annual financial statements.
58 Chief financial officer’s report continued
The 2009 notes and our bank facilities contain 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 and certain restricted payments, including
the payment of dividends.
Vendor loan notes
As part of the consideration price for the acquisition, Sappi Papier Holding issued to M-real
Corporation the vendor loan notes of r220 million in December 2008. The notes carried an
interest rate stepping up from 9% to 15% over time. The notes had a maturity of up to 48 months
and ranked pari passu with our existing long-term debt. The vendor loan notes were repaid in
full on 27 August 2009 at a discount of 13.5% (approximately r30 million/US$41 million), utilising
proceeds from the issuance of the 2009 notes.
Debt maturity structure
Following the refinancing, the average maturity of our debt is 4.8 years, with the profile as shown
alongside.
As at September 2009 financial year end, short-term debt and overdraft funding was US$620 million,
all of which – and US$150 million of the 2011 maturities – is covered by cash and near cash
resources of US$770 million. In addition, included in the short-term debt is US$400 million of
funding in the form of revolving securitised trade receivables funding, which in the normal course
we expect to continue to be available and not to require refinancing. For further information on
group borrowing facilities secured by trade receivables, please refer to note 20 to the annual
financial statements.
In addition, we have unutilised committed and uncommitted borrowing facilities of US$307 million
and US$156 million respectively. The committed facilities consist of the undrawn portion of our
r209 million RCF. A downgrade of our public debt ratings could result in banks reviewing the
availability of uncommitted facilities.
Net debt by currency
The make-up of net debt by currency is shown in the following table:
Net debt by currency ratio
US$
EUR
CHF
ZAR
2009
48.4%
34.1%
0%
17.5%
2008
41.3%
40.3%
6.3%
12.1%
Off-balance sheet funding
Off-balance sheet funding at the end of each of the last two financial years comprises a debtor’s
securitisation programme at Forest Products, amounting to US$194 million and US$171 million
in 2008 and 2009 respectively. This securitisation programme involves the outright sale of
receivables to FirstRand Bank Limited and we expect this funding to remain off-balance sheet
for the foreseeable future. For more information on this, please refer to note 16 to the annual
financial statements.
Interest rate risk
The group has a policy of maintaining a reasonable balance between fixed and variable rate loans
which enables it to minimise the impact of borrowing costs on reported earnings. Exceptions are
made when fixed rates can be obtained at attractive rates, as this strategy locks in acceptable
interest rates for the life of the borrowing instrument. Hedging activity in relation to borrowings
are restricted to interest rate swaps and where appropriate, cross-currency swaps.
As explained above, a number of interest rate swaps were unwound during the financial year.
A new interest rate and currency swap of US$300 million was taken up in August 2009 to hedge
the new US$300 million public bonds in the books of Sappi Papier Holding, a Euro functional
currency company. At year end, the ratio of gross debt at fixed and floating interest rates was
85:15 respectively.
2009 annual report
59
Covenants
Financial covenants apply to approximately US$588 million of our non-South African long-term
debt and our unutilised r209 million revolving credit facility. This debt is supported by a Sappi
Limited guarantee. For this reason the first two of the three covenants mentioned below are
measured on a consolidated group level. The covenants also differ from measurement period to
period, as they are set in line with the long-term forecast of group results.
Sappi Papier Holding financial covenants require that:
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(i) At the end of each quarter the mean average of the ratios of EBITDA to consolidated net
interest expense for that quarter and each of the three preceding quarters be not less than
2:1 (increasing over the term of the facility to 2.5 in July 2012);
(ii) The ratio of net debt to EBITDA be not greater than 6:1 (reducing over the term of the facility
to 4:1 in September 2012); and
(iii) With regard to Sappi Manufacturing (Pty) Limited (the holding company for South African
agents) and its subsidiaries only, the ratio of net debt to equity be not, at the end of any
quarter, greater than 0.65:1, and at the end of the full-year, the ratio of EBITDA (as defined)
to consolidated net interest paid for that period be not less than 2:1, for the period ended
September 2009.
The table below shows that as at September 2009 we were in compliance with these covenants.
US$ million
Group covenants
Net debt to EBITDA
EBITDA to net interest
Sappi manufacturing covenants
Net debt to equity
EBITDA to net interest
Fiscal 2009
Covenant
4.63
3.96
43.1%
3.17
<6.0
>2.0
<65%
>2.0
The group financial covenants also apply to the securitisation programmes with outstanding
balances of US$400 million at the end of September 2009. No Sappi Limited guarantee has
been provided for these facilities.
Dividend restriction
Under the recently concluded financing arrangements, the group is restricted from paying cash
dividends in certain circumstances – for example while the net debt to EBITDA ratio exceeds 4:1
or when the EBITDA to fixed charges (generally consolidated net interest expense) ratio is less than
2:1. In addition, any cash dividends paid may not exceed 50% of net profit, excluding special items.
Credit ratings
At the date of this annual report, our credit ratings were as follows:
Fitch South African national rating
Sappi Manufacturing (Pty) Limited
Moody’s international rating
Sappi Papier Holding GmbH
(Supported by Sappi Limited guarantee)
Secured Debt Rating
Unsecured Debt Rating
Standard & Poor’s international rating
Corporate Credit Rating
Secured Debt Rating
Unsecured Debt Rating
A/F1/Negative (November 2009)
Ba3/NP/Stable (September 2009)
Ba2 (September 2009)
B2 (September 2009)
BB-/B/Stable (September 2009)
BB (September 2009)
B+ (September 2009)
In May 2009, S&P revised its rating for the group from BB to BB-, while moving the outlook from
negative to stable. This change was mainly as a result of an industry-wide re-rating of the
European Forest Products sector, sustained cost inflation, and an uncertain outlook for paper
60 Chief financial officer’s report continued
pricing and demand in the light of an expected softening economic growth. One of the key
requirements of this rating was the successful refinancing of material debt maturities in 2010,
well ahead of time. This refinancing took place in August 2009 and S&P subsequently confirmed
the rating.
In June 2009, Moody’s revised its rating from Ba2 to Ba3, with a stable outlook. The main reasons
for this revision were the difficult market conditions in the European paper industry, and the slower
than expected improvement in the key rating metrics. In September 2009 this rating and outlook
were confirmed after the successful refinancing of material 2010 debt maturities.
In November 2009 Fitch revised their Sappi Manufacturing local South African rating from
A+/F1/Negative to A/F1/Negative, mainly due to the continuing difficult market and trading
conditions, and the resulting negative impact on the operating margins of Sappi Manufacturing
when compared to the requirements for the previous rating.
A security rating is not a recommendation to buy, sell or hold securities and it may be revised or
withdrawn at any time by the rating agencies without prior notice to us. Each rating should be
evaluated independently of any other rating.
Gearing
Net debt to capitalisation for each of the past two years is set out below:
US$ million
Net debt
Net debt and equity
Net debt to capitalisation ratio
2009
2,576
4,370
59%
2008
2,405
4,010
60%
Given our relatively high level of fixed costs, we are highly ‘operationally’ geared – changes in
volume, sales prices and variable costs have a material effect on our operating results. After the
re-financing of much of our debt at our current credit rating, finance costs have increased
substantially – previously most of our debt had been raised when the group had a much better
credit rating. The higher finance costs we now face have increased our ‘financial’ gearing and we
plan to address this by aggressively reducing our debt levels. We have made a good start at this
by generating net cash of US$289 million in fiscal 2009 – despite the difficult operating conditions.
Significant accounting policies and judgements
The group has defined accounting policies as significant if they have the potential to materially
affect the group’s financial performance, position or cash flow.
The group’s significant accounting policies are those that relate to:
(cid:129) Asset impairments;
(cid:129) Business combinations and goodwill impairments;
(cid:129) Property, plant and equipment;
(cid:129) Taxation;
(cid:129) Hedge accounting;
(cid:129) Plantations;
(cid:129) Post-employment benefit funds; and
(cid:129) Provisions.
The effect of these accounting policies and judgements is included in note 2 to the annual financial
statements.
Shareholding and equity
The group’s primary listing is on the JSE Limited, South Africa’s stock exchange, and has a
secondary listing on the New York Stock Exchange. Sappi delisted from the London Stock
Exchange in November 2009. Information regarding shares, share price, the value of shares
traded, main shareholders and other related information is contained on pages 64 and 65 of this
annual report.
Share price performance
2009 annual report
61
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During the year, we increased our authorised share capital as a result of the rights issue and the
issuance of shares to M-real in part payment for the acquisition. We issued 286.9 million shares
in terms of the rights offer and 11.2 million shares to M-real. Please refer to the Directors’ report
for further detail on the changes in share capital during the year.
The share prices in the graph above have been revised by an adjustment factor of 1.58 to reflect
the impact of the rights offer. Please refer to earnings per share above and also note 7 to the
annual financial statements for further details on this adjustment factor.
The group’s equity increased by US$189 million during 2009 from US$1,605 million at the end
of September 2008 to US$1,794 million at the end of September 2009. This increase arose
as follows:
Equity – September 2008
Rights offer – net proceeds
Shares issued to M-real (in part payment of the acquisition)
Dividend in respect of fiscal 2008
Loss for the year
Actuarial loss on pension funds (net of tax)
Other
Equity – September 2009
US$ million
1,605
544
45
(37)
(177)
(197)
11
1,794
The actuarial loss on pension funds arose mainly as a result of an unusually large drop in discount
rates, which caused pension fund liabilities to increase by more than the growth in the underlying
asset portfolio. We do not expect this to result in a significant increase in the group’s contributions
to its pension funds for the next few years as the contribution rates are set using a funding basis
as opposed to a (more conservative) accounting basis, minimum statutory recovery rates (pace of
funding) in certain countries have recently been eased and the returns of the underlying equity asset
portfolios are expected to improve on the 2009 performance, thereby helping to close deficits.
Conclusion
On the operating front, we have taken a number of actions to improve our business. Although
our finance costs have increased, we have a strong liquidity position.
We expect improved operating results in 2010 and will continue to focus on generating cash and
reducing our debt.
M R Thompson
chief financial officer
04 December 2009
62
Five-year review
for the year ended September 2009
Income statement
Sales
Operating profit excluding special items
Special items* losses (gains)
Operating (loss) profit
Net finance costs
(Loss) profit before taxation
Taxation (benefit) charge
(Loss) profit for the year
Balance sheet
Total assets
Non-current assets
Current assets
Assets held for sale
Current liabilities
Shareholders’ equity
Net debt
Capital employed
Cash flow
Cash generated from operations
Decrease (increase) in working capital
Finance costs paid
Finance revenue received
Taxation paid
Dividends paid
Cash retained from operating activities
Capital expenditure (gross)
Cash effects of financing activities
EBITDA excluding special items(1)
Statistics
Number of ordinary shares (millions)
In issue at year end(2)
Basic weighted average number of shares
in issue during the year(2,4)
Per share information (US cents per share)
Basic (loss) earnings(4)
Diluted (loss) earnings(4)
Headline (loss) earnings(4)
Diluted headline (loss) earnings(4)
Ordinary dividend declared(3)
Net asset value
Ordinary dividend cover (times)(3)
Profitability ratios (%)
Operating profit excluding special items
to sales
EBITDA excluding special items to sales
Operating profit excluding special items to
capital employed (ROCE)
(Loss) profit to average ordinary
shareholders’ equity (ROE)
September
2009
US$ million
September
2008
US$ million
September
2007
US$ million
September
2006
US$ million
September
2005**
US$ million
5,369
5,863
5,304
4,941
5,018
33
106
(73)
145
(218)
(41)
(177)
7,297
4,867
2,430
–
1,841
1,794
2,576
4,370
432
152
(107)
26
(5)
(37)
461
175
707
431
515.7
482.6
(37)
(37)
(21)
(21)
–
348
–
0.6
8.0
0.8
(10.4)
366
52
314
126
188
86
102
6,109
4,408
1,701
–
1,926
1,605
2,405
4,010
623
1
(139)
13
(70)
(73)
355
505
49
740
229.2
362.2
28
28
60
59
16
700
2.8
6.2
12.6
9.1
6.0
313
(70)
383
134
249
47
202
6,344
4,608
1,736
–
1,916
1,816
2,257
4,073
585
60
(183)
21
(27)
(68)
388
458
98
688
228.5
360.6
56
55
52
51
32
795
2.8
5.9
13.0
8.3
12.6
91
(34)
125
130
(5)
(1)
(4)
5,517
3,997
1,500
20
1,666
1,386
2,113
3,499
396
(17)
(164)
26
(13)
(68)
160
303
(21)
483
227.0
358.0
(1)
(1)
(7)
(7)
30
611
–
1.8
9.8
2.6
83
192
(109)
80
(189)
(5)
(184)
5,889
4,244
1,645
–
1,753
1,589
2,008
3,597
569
(30)
(162)
35
(43)
(68)
301
345
(37)
507
225.9
357.4
(51)
(51)
13
13
30
703
–
1.7
10.1
2.3
(0.3)
(10.4)
2009 annual report
63
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September
2009
US$ million
September
2008
US$ million
September
2007
US$ million
September
2006
US$ million
September
2005**
US$ million
Debt ratios (%)
Net debt to total capitalisation
58.9
60.0
55.4
60.4
55.8
Efficiency ratios
Asset turnover (times)
Inventory turnover ratio
Liquidity ratios
Current asset ratio
Trade accounts receivable days outstanding
(including receivables securitised)
Cash interest cover (times)
Number of employees
Sales per employee (US$’000)
Exchange rates
US$ per one Euro exchange rate – closing
US$ per one Euro exchange rate
– average (12 month)
ZAR to one US$ exchange rate – closing
ZAR to one US$ exchange rate
– average (12 month)
0.7
6.3
1.3
58
3.2
1.0
6.9
0.9
48
4.4
0.8
6.4
0.9
49
3.8
0.9
6.3
0.9
44
2.9
0.9
6.3
0.9
45
4.6
16,427
327
15,156
387
15,081
352
15,200
325
15,618
321
1.4688
1.4615
1.4272
1.2672
1.2030
1.3657
7.4112
1.5064
8.0751
1.3336
6.8713
1.2315
7.7738
1.2659
6.3656
9.0135
7.4294
7.1741
6.6039
6.2418
Definitions for various terms and ratios used above are included in the glossary on page 199.
Reconciliation of (loss) profit for the year to operating profit excluding special items and EBITDA excluding special items(1).
(Loss) profit for the year
Net finance costs
Taxation (benefit) charge
Special items – losses (gains)
Operating profit excluding special items
Depreciation and amortisation
EBITDA excluding special items(1)
September
2009
US$ million
September
2008
US$ million
September
2007
US$ million
September
2006
US$ million
September
2005**
US$ million
(177)
145
(41)
106
33
398
431
102
126
86
52
366
374
740
202
134
47
(70)
313
375
688
(4)
130
(1)
(34)
91
392
483
(184)
80
(5)
192
83
424
507
(1) In compliance with the US Securities Exchange Commission (SEC) rules relating to ‘Conditions for Use of Non-GAAP Financial Measures’, we have reconciled EBITDA
excluding special items to net profit rather than operating profit. As a result our definition retains minority interest as part of EBITDA, excluding special items.
Operating profit, excluding special items represents earnings before interest (net finance costs), taxation and special items. Net finance costs includes: gross interest
paid interest received, interest capitalised, net foreign exchange gains and net fair value adjustments on interest rate financial instruments. See the group income statement
for an explanation of the computation of net finance costs. Special items cover those items which management believes are material by nature or amount to the operating
results and require separate disclosure. Such items would generally include profit and loss on disposal of property, investments and businesses, asset impairments,
restructuring charges, non-recurring integration costs related to acquisitions, financial impacts of natural disasters, non-cash gains or losses on the price fair value
adjustment of plantations and alternative fuel tax credits receivable in cash.
EBITDA, excluding special items represents operating profit before depreciation, amortisation and special items.
We use both operating profit, excluding special items and EBITDA, excluding special items as internal measures of performance to benchmark and compare performance,
both between our own operations and as against other companies. Operating profit excluding special items and EBITDA, excluding special items are measures used by
the group, together with measures of performance under IFRS, to compare the relative performance of operations in planning, budgeting and reviewing the performances
of various businesses. We believe they are useful and commonly used measures of financial performance in addition to net profit, operating profit and other profitability
measures under IFRS because they facilitate operating performance comparisons from period to period and company to company. By eliminating potential differences
in results of operations between periods or companies caused by factors such as depreciation and amortisation methods, historic cost and age of assets, financing and
capital structures and taxation positions or regimes, we believe both operating profit, excluding special items and EBITDA, excluding special items can provide a useful
additional basis for comparing the current performance of the operations being evaluated. For these reasons, we believe operating profit excluding special items and
EBITDA, excluding special items and similar measures are regularly used by the investment community as a means of comparison of companies in our industry. Different
companies and analysts may calculate operating profit, excluding special items and EBITDA, excluding special items differently, so making comparisons among companies
on this basis should be done very carefully. Operating profit, excluding special items and EBITDA, excluding special items are not measures of performance under IFRS
and should not be considered in isolation or construed as a substitute for operating profit or net profit as indicators of the company’s operations in accordance with IFRS.
(2) Net of treasury shares (refer note 17).
(3) The dividends for all the financial years were declared subsequent to year end.
(4) Restated for the bonus element of the rights issue (refer note 7).
* Special items cover those items which management believe are material by nature or amount to the operating results and require separate disclosure. Such items would
generally include profit and loss on disposal of property, investments and businesses, asset impairments, restructuring charges, non-recurring integration costs related
to acquisitions, financial impacts of natural disasters, non-cash gains or losses on the price fair value adjustment of plantations and alternative fuel tax credits receivable
in cash.
** The year ended September 2005 included 53 weeks.
64
Share statistics
at September 2009
Shareholding
– ordinary shares in issue
1 – 5,000
5,001 – 10,000
10,001 – 50,000
50,001 – 100,000
100,001 – 1,000,000
Over 1,000,000
Shareholder spread
– type of shareholder
Non-public
Group directors
Number of
shareholders
Number
% of shares
%
of shares*
in issue
5,455
236
334
140
339
86
82.8
3.6
5.1
2.1
5.1
1.3
4,107,630
1,709,659
7,778,376
10,135,496
116,634,218
375,367,926
0.8
0.3
1.5
2.0
22.6
72.8
6,590
100.0
515,733,305
100.0
% of shares
in issue
0.02
0.02
–
–
–
–
99.98
100.00
Associates of group directors
Trustees of the company’s share and retirement funding schemes
Shareowners who, by virtue of any agreement, have the right to nominate board members
Shareowners interested in 10% or more of the issued shares
Public (the number of public shareholders as at September 2009 was 6,587)
* The number of shares excludes 21,384,559 treasury shares held by the group.
Sappi has a primary listing on the JSE Limited and a secondary listing on the New York Stock Exchange.
A large number of shares are held by nominee companies for beneficial shareholders. Pursuant to Section 140A of the South African
Companies Act, 1973, as amended, the directors have investigated the beneficial ownership of shares in Sappi Limited, including
those which are registered in the nominee holdings and these investigations revealed as of September 2009, the following beneficial
holders of more than 5% of the issued share capital of Sappi Limited:
Public Investment Commissioner (SA)
Old Mutual Life Assurance Company Limited (ZA)
Shares
43,340,842
25,987,096
%
8.4
5.0
Further, as a result of these investigations, the directors have ascertained that some of the shares registered in the names of the
nominee holders are managed by various fund managers and that, as of September 2009, the following fund managers were
responsible for managing 5% or more of the share capital of Sappi Limited:
Allan Gray Limited
Old Mutual Investment Group South Africa
Rand Merchant Bank
Shares
153,036,665
66,834,079
42,578,535
%
29.7
13.0
8.3
2009 annual report
65
September
2009
US$ million
September
2008
US$ million
September
2007
US$ million
September
2006
US$ million
September
2005**
US$ million
515.7
348
443.40
66.28
229.2
700
241.58
51.04
228.5
795
246.95
49.81
227.0
611
252.60
57.60
225.9
703
264.70
83.60
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12,989.4
22,623.4
27,983.7
20,946.0
20,035.7
259.1
98.8
2,855
3.76
5,403
6.41
1,290
1.24
negative
–
–
634.3
127.7
5,054
6.32
7,661
9.98
4,700
5.72
9.58
2.56
10.43
1,435
770.8
129.9
6,602
9.67
8,824
12.24
6,263
7.88
5.41
3.33
18.48
2,196
715.0
136.7
6,336
8.04
6,389
9.62
3,948
5.98
negative
3.68
–
1,850
999.4
154.2
4,722
7.45
6,008
9.41
3,675
6.00
1.75
4.04
57.08
1,676
Share statistics
Ordinary shares in issue (millions)**
Net asset value per share (US cents)
Number of shares traded (millions)
JSE
New York
Value of shares traded
JSE (ZAR million)
New York (US$ million)
Percentage of issued shares traded
Market price per share(1)
– year end
JSE (South African cents)
New York (US$)
– highest
JSE (South African cents)
New York (US$)
– lowest
JSE (South African cents)
New York (US$)
Earnings yield (%)*
Dividend yield (%)*
Price/earnings ratio (times)*
Total market capitalisation (US$ million)*
1,985
* Based on financial year end closing prices on the JSE Limited. Income statement amounts have been converted at average year-to-date exchange rates.
** The number of shares excludes 21,384,559 treasury shares held by the group.
(1) Historical share prices shown in the table above have been adjusted by 1.58 (an adjustment factor) for the effect of the issuance of 286,886,270 new ordinary shares of
ZAR1.00 each, at a subscription price of ZAR20.27 per rights offer share in the ratio of 6 rights offer shares for every five Sappi shares held. The adjustment factor applied
to historical share prices was based on the theoretical ex-rights price (TERP) calculation shown below.
TERP is the [(number of new shares multiplied by the subscription price) plus the (number of shares held multiplied by the ex-dividend share price)] all divided by the (number
of new shares plus the number of shares held prior to the rights offer). The adjustment factor of 1.58 is calculated using the pre-announcement price dividend by the TERP.
(Refer to note 7).
Note: Definitions for various terms and ratios used above are included in the glossary from page 199 to 201.
Risk management
2009 annual report
67
This table provides the latest review of the significant exposures Sappi faces as it goes forward. The Sappi group risk profile is
reviewed at least twice annually to comply with the company’s Listings Requirements of the various exchanges and to give
management comprehensive risk management information to enable them to make informed risk-based decisions. The risks are
categorised as systemic or business risks and are ranked according to management’s assessment of the likelihood of occurrence
and severity. These risks are further discussed in Sappi’s annual report on Form 20-F filed with the US Securities Exchange which
is available on our website www.sappi.com or in hard copy on request.
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Systemic risks
Risk
Risk description and mitigation
Overall
ranking
1
Global economic conditions may
cause substantial fluctuations in
our results
2
7
8
9
The markets for pulp and paper
products are highly competitive
Continued volatility in equity markets
and declining yields in the bond
markets could adversely affect the
funded status and funding needs of
our post employment benefit funds
The cost of complying with
environmental, health and safety laws
may be significant to our business
New technologies or changes in
consumer preferences may affect our
ability to compete successfully
Our pulp and paper products are significantly affected by cyclical changes in industry capacity
and output levels and by changes in the world economy. As a result of periodic supply and
demand imbalances in the pulp and paper industry, these markets historically have been
cyclical, with volatile pulp and paper prices. In addition, recent turmoil in the world economy
led to sharp reductions in volume and pressure on prices in many of our markets and we acted
rapidly to match our output to demand by curtailing production for extended periods and
ceasing operations at Muskegon Mill. We are working closely with our customers on all these
actions as we adapt our product lines to match market needs and economics. We took actions
to improve efficiencies and reduce costs in all aspects of our business under these difficult
conditions. We continue to maintain a high level of economic pulp integration on a group-wide
basis which reduces the impact of pulp price fluctuations on our results. We will consider taking
further downtime in fiscal 2010 to balance supply and demand
There has been a recent trend towards consolidation in the pulp and paper industry creating
larger, more focused companies. We have expanded Saiccor Mill to strengthen our leading
position in the chemical cellulose market, while the Acquisition enhanced our position in the
woodfree coated paper market. We also continue to drive good customer service, innovation
and efficient manufacturing and logistics
The general outlook for the forthcoming financial years is that bond and equity markets could
remain uncertain, which in turn could result in significant swings in yields on corporate bonds
and government bonds as well as continued volatility within the equity markets. The risk exists
that equity and bond markets will not recover to the level of past highs. As a result we continue
to monitor movements in the global equity and bond markets and pay additional contributions
to meet minimum funding targets where appropriate. We also note and react to existing and
potential changes in statutory funding requirements
We are subject to a wide range of environmental, health and safety laws and regulations in the
various jurisdictions in which we operate and we strive to comply with applicable laws and co-
operate across regions to apply best practices in a sustainable manner. ISO 14000, Forest
Stewardship Council and other recognised programmes are well entrenched across the group.
We have also made significant investments in operational and maintenance activities related
to reductions in air emissions, wastewater discharges and waste generation. We closely
monitor the potential for changes in pollution control laws and take actions with respect to
our operations accordingly. The health and safety of our own employees and contractors
remain a priority
We regularly assess changing consumer preferences and new technologies, which could
impact consumption of our products or their competitiveness. We expect a gradual decline in
demand for paper in developed markets as a result of new media. Nevertheless we expect
that print and coated paper will continue to play an important role in the communication,
advertising and promotional mix, particularly in developing markets where we expect to see
growth in demand. Moreover we design and implement new or improved products, enhanced
product features, or improvements in the level and quality of product servicing. For example,
our Forest Products business continues to work with customers to develop new product and
service solutions, including the design of high-performance packaging using our paper. Our
chemical cellulose business has good growth prospects in terms of existing uses and
innovative uses. In North America an increased proportion of our sales is derived from newly
designed products. Our European operations have successfully launched innovative products
like Tempo™
68
Risk management continued
Business risks
Overall
ranking
Risk
Risk description and mitigation
3
4
5
6
10
11
13
14
15
16
17
The current global liquidity and credit
crises could have a negative impact on
our major customers which in turn could
materially adversely affect our results of
operations and financial position
The current global liquidity and credit crises are having a significant negative impact on
businesses around the world, including some of our major customers. We are working closely
with our customers, providing a high level of service and reliability. We manage and regularly
review credit and other exposures. We also purchase credit insurance to cover a significant
part of our outstanding receivables
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
Sappi is exposed to economic, transaction and translation currency risks. The objective of the
group in managing currency risk is to ensure that foreign exchange exposures are identified
as early as possible and actively managed. In managing currency risk, the group first makes
use of internal hedging techniques, with external hedging being applied thereafter. External
hedging techniques consist primarily of foreign forward exchange contracts and currency
options. Foreign currency capital expenditure on projects is covered as soon as practical
(subject to regulatory approval)
The inability to obtain energy or raw
materials at favourable prices could
adversely affect our operations
We require substantial amounts of wood, chemicals and energy for our production activities.
The prices for and availability of these energy supplies and raw materials may be subject to
change or curtailment. To mitigate the risk, we are improving procurement methods, finding
alternative lower-cost fuels and raw materials, further minimising waste, improving
manufacturing and logistics efficiencies and implementing energy reduction initiatives
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 plantations is high, but under
normal weather conditions this risk is managed through comprehensive fire prevention and
protection plans which include an increased focus on training our people, building community
awareness of the destruction caused by fires, and upgrading fire detection systems and
firefighting equipment
Our indebtedness may impair our
financial and operating flexibility.
Cash generation and improving our balance sheet structure, including a reduction in
borrowings, are priorities for management as outlined in the chief financial officer’s report
We require a significant amount of cash
to fund our business.
12
A limited number of customers account
for a significant amount of our revenues
There are risks relating to the countries
in which we operate that could impact
our earnings
Concerns about the effects of
climate change may have an impact
on our business
Our ability to fund our working capital, capital expenditure, research and development
requirements, and to make payments on our debt principally depends on cash available from
our credit facilities, other debt arrangements and our operating performance. Our year end
cash balance following the refinancing of our debt profile provides us with adequate headroom
to fund our short-term requirements. We are also focusing on profit improvement in our
operations by reducing fixed and variable costs, spending capital prudently and tightly
controlling working capital
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.
We maintain good relationships with our customers and work together with We maintain good
relationships with our customers and work together with our principal customers to address
developments that could adversely affect their business
We own manufacturing operations in six countries in Europe, three states in the United States,
South Africa and Swaziland, and have an investment in a joint venture in China. Country 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. We manage these risks in each country. The broad spread of
countries we operate in helps mitigate the risks in any individual country
Concerns about the global warming and carbon footprint as well as legal and financial
incentives favouring alternative fuels 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
The increased emphasis on water footprint in Southern Africa is causing increased focus on
the sustainable use of water by mills, on ensuring the quality of water released back into the
water systems and on the control of effluent
Because of the nature of our business
and workforce, we may face challenges
in the retention of skilled staff that
could adversely affect our business
We are facing an aging demographic work profile among our staff due to the mature nature of
our industry and the rural and often remote location of our mills, together with the generally
long tenure of employees at the mills. We have put in place a number of initiatives, including
engagement management, performance management and incentives to mitigate this risk
A large percentage of our employees
are unionised and wage increases or
work stoppages by our unionised
employees may have a material adverse
effect on our business
We may not be able to negotiate acceptable new collective bargaining agreements or future
restructuring agreements, which could result in labour disputes. We strive to have good relations
with our employees, even if general economic conditions may lead to strike action from time to
time as happened in South Africa in 2009. Our cordial relations have enabled us to negotiate
acceptable new collective bargaining agreements and we have recently reached agreements
with our employees regarding workforce reductions, closures and other restructurings
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. We have comprehensive programmes designed to mitigate
the impact of the disease on our people and our business and these are addressed more fully
in our sustainability report which can be accessed on our website
2009 annual report
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Insurance
Sappi follows a practice of insuring its assets against unavoidable
loss arising from catastrophic events. These events include fire,
flood, explosion, earthquake and machinery breakdown. External
risk engineers conduct both underwriting surveys as well as
risk control surveys of all the Sappi facilities. The risk control
survey reports rate and rank the identified risks and make
recommendations to address the probability and/or severity
of these risks. This process is focused primarily on the risk
exposures associated with insurable risks.
Insurance also covers business interruption events which may
result from these events. Specific environmental risks are also
insured. In line with previous years, the board decided not to
take separate cover for losses from acts of terrorism, which is
consistent with current practice in the paper manufacturing
industry. Sappi places the insurance for its plantations on a
stand-alone basis into international insurance markets. The
impact of widespread fires on our plantations this year was
substantially less than in 2007 and 2008.
Sappi has a global insurance structure and the bulk of its
insurance is placed with its own captive insurance company in
Stockholm, Sweden; Sappisure Försäkrings AB, which in turn
reinsures those risks outside the company’s self-insurance
capabilities in the global reinsurance markets.
Sappi has negotiated the renewal of its 2010 insurance cover
at rates similar to those of 2009. 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, the
directors believe that the loss limit cover of US$1 billion should
be adequate for what they have determined as the reasonable
foreseeable loss for any single claim.
Insurance cover for credit risks currently applies on a regional
basis to Sappi’s Northern American, European and South
African domestic trade receivables.
Risk philosophy
The Sappi Limited board recognises that risk management
success can only be achieved if all three elements of risk,
namely threat, uncertainty and opportunity, are recognised and
managed in an integrated fashion. The board is also fully
committed to:
(cid:129) complying with the risk management requirements and
mandates of the Code of Conduct of the Second Report of
the King committee on Corporate Governance (King II);
(cid:129) complying with the risk management requirements of the
Sarbanes-Oxley Act;
(cid:129) evaluating its risk management processes in terms of the
COSO framework (adjusted to Sappi’s own needs) to
enhance the overall risk management framework; and
(cid:129) ensuring an integrated risk management system is imple-
mented throughout its operations.
The group risk management team was mandated by the Sappi
Limited board to establish, coordinate and drive the risk
management process throughout Sappi. It has established a
comprehensive risk management system to identify and
manage significant risks.
Complete risk assessments are conducted at least annually in
our divisions (including Sappi Trading) and for the group, and
are updated every six months. The process uses our strategy
as the base against which to assess risk scenarios. The scope
of the risk assessment includes risks that may lead to a
significant loss, or loss of opportunity, or may affect the current
strategic plan. These risks are identified and analysed, and
risk responses to each individual risk are designed, planned,
implemented and monitored. Risks identified as ‘uncontrollable’,
or those risks where the root causes are outside of the control
of Sappi, are identified. The responses to the risks are classified
under the headings of Transfer, Treat, Tolerate, Terminate, Exploit
and Avoid.
The risk assessments are reviewed by the Sappi group risk
management team during facilitated workshops where the
risks are evaluated and ranked. The resultant risk profiles are
reviewed by our group executive and are reported to the audit
committee at least once every six months and are reported to
the board at least annually.
In addition to the above mentioned risks, the risks and
opportunities that may only manifest over the longer term
(three- to five-year horizon), are identified and reported to the
audit committee at least once every six months and are
reported to the board at least annually.
This methodology ensures that risk assessments are undertaken
at least annually; are reviewed every six months; that identified
risks are prioritised according to the potential impact on the
company; and cost-effective responses are designed and
implemented to counter the effects of identified losses.
70
Corporate governance
We are committed to the highest standards of corporate governance and continue to seek areas of improvement by measuring
ourselves against international best practice.
The group endorses the Code of Corporate Practices and Conduct as contained in the South African King II Report issued in 2002,
and continues to apply the principles incorporated therein. The King III Report issued on 01 September 2009 for implementation by
March 2010, is currently being studied within Sappi and preparations are in progress for adoption of incremental new principles
contained therein, to the extent not already adopted. The group maintains its primary listing on the JSE Limited as well as a listing
on the New York Stock Exchange. The group delisted from the London Stock Exchange, effective 02 November 2009. The group
complies in all material aspects with the regulations and codes of these exchanges as they apply to Sappi.
Summary
The following table provides a summary of how we have implemented corporate governance. Discussed are the seven characteristics
of good governance (King II Report) and certain selected international best practices (from the King II Report, the recently issued
King III Report and other sources). Full disclosure is provided on the areas where the board has applied these standards differently.
The board believes that in certain circumstances this is justified when this is in the best interest of the group while the principles of
good governance are maintained.
Element/best practice
Sappi application/comments
King III report implications
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Clear and comprehensive board charter
approved by the board
The board should meet at least once
per quarter
Changes to the governance structure
and compliance thereto subject to
discussion at annual general meeting
Clear disclosure of strategies,
objectives and corporate governance
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Fees for non-executive directors should
be submitted to the shareholders in
general meeting for approval
Full disclosure of directors’
remuneration and additional information
concerning incentive schemes for
senior management
Stakeholder communication
The charter sets out powers, responsibilities,
functions, delegation of authority, and the areas
of authority expressly reserved for the board.
The current charter was reviewed in May 2009
as part of our continuous improvement efforts.
A copy is available on the company website
(www.sappi.com)
Will be revised to reflect incremental new
requirements, for example, by adding
IT governance to the board agenda
The board met five times during the year
√
Changes will be communicated via
the report on corporate governance
Changes relating to corporate governance
will be set out in the annual report
The financial statements, including our report
on corporate governance, as well as the
appointment of directors, their remuneration and
resolutions related to issuance of and re-purchase
of shares are submitted to the annual general
meeting of shareholders for approval. Refer
to page 202 for the notice to shareholders
A summary of the Sappi Limited strategy and
how we measure our progress is available in the
annual report and on the company website
www.sappi.com. Both the progress against
these objectives as well as our corporate
governance are fully disclosed in this annual
report. A disclosure committee comprising
management from various fields of expertise
is responsible for reviewing financial
reporting disclosures
Refer to page 202 for the notice to shareholders
which sets out the proposed fees for 2009/2010
√
Refer to the compensation report for full
disclosure in the directors’ remuneration and
incentive schemes for senior management
Improved disclosure included in
annual report
The investor relations department as well as the
corporate communications department maintain
regular contact with relevant stakeholders and
utilise the company website (www.sappi.com)
as a means of distributing relevant information.
Stakeholders can also contact Sappi directly via a
contact form on the company website. Refer to the
sustainability report summary on pages 8 to 13 for
further description of our communication efforts
Improved focus on sustainability through
the sustainability executive committee and
sustainability reporting via the integrated
annual report
2009 annual report
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Element/best practice
Sappi application/comments
King III report implications
Given the strategic operational role of
the chief executive officer, this function
should be separate from that of the
chairman of the board
The role of chief executive officer is held by
Mr Ralph Boëttger. This role is separate from the
chairman of the board
Audit committee should consist of
independent board members.
Remuneration committee should
consist entirely or mainly of
independent, non-executive directors
At Sappi the functions of a remuneration committee
are split between a compensation committee and
human resources and transformation committee.
Although the chairman of the board is also the
chairman of the human resources and
transformation committee he is not a member of
the compensation committee or the audit
committee. These committees all comprise
independent, non-executive directors
Majority of independent board
members
11 of the 13 board members are independent,
non-executive directors
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In addition, King III recommends that the
memorandum of incorporation of the
company should allow the board to remove
any director from the board, including
executive directors, without shareholder
approval being necessary √
All members of board sub-committees must
be board members √
Regional audit sub-committees may include
executive and non-executive directors
The sustainability executive committee is
chaired by an independent, non-executive
director
A minimum of two executive directors,
specifically the chief executive officer and
chief financial officer must be appointed to
the board √
The chairman should preferably be an
independent non-executive director
The chairman of the board is Dr Danie Cronjé, an
independent, non-executive director
The chairman of the board should not be
the chief executive officer √
Effective sub-committees to assist
the board
Performance related elements should
constitute a substantial portion of the
total remuneration policy
Board and director evaluations
To manage its workload, the board has
appointed sub-committees with the specific
objective of evaluating key areas of business
performance, in particular governance, on a
more detailed basis and to report to the board
regularly on any issues that might arise, although
it is understood that delegation of responsibilities
to sub-committees does not relieve the board of
its ultimate responsibility for the affairs of the
company. The following board committees have
been appointed to deal with specific subjects:
(cid:129) Nomination and governance committee
(cid:129) Audit committee
(cid:129) Compensation committee
(cid:129) Human resources and transformation
committee
In addition, a number of management sub-
committees have been formed to assist the chief
executive officer and chief financial officer in the
discharge of their responsibilities:
(cid:129) Executive management committee
(cid:129) Sustainability executive committee (chaired by
an independent non-executive director)
(cid:129) Sustainability council
(cid:129) Disclosure committee
(cid:129) Treasury committee
(cid:129) Technical committees
(cid:129) Group risk management team
A significant portion of the remuneration of the
executive directors and senior management
consists of a performance bonus and awards in
terms of the Sappi Limited Performance Share
Incentive Scheme to align their objectives with
those of stakeholders. Refer to the compensation
report on page 83 for details of these incentive
schemes
The board, through the nomination and
governance committee, performs regular self-
evaluations of its committees and the
contribution of each individual director. The
composition and effectiveness of the board and
its committees form part of this evaluation
Substantially in place. An IT steering
committee will be established to promote
IT governance throughout the group
It is recommended that audit committee
responsibility be expanded beyond financial
reporting to include sustainability
It is recommended that the remuneration
policy be put forward by the board to the
shareholders to enable shareholders to
express their views on the remuneration
policy
Board has considered whether to continue
to do the evaluation in-house or by
independent service providers and has
decided to contract outside service
providers, every three years
72
Corporate governance continued
Element/best practice
Sappi application/comments
King III report implications
This review is primarily the role of the audit
committee; refer to the further disclosure on its
activities in this section
A combined assurance model will be
formalised during 2010 with oversight by
the audit committee
The board should regularly review
processes and procedures to ensure
the effectiveness of the company’s
internal systems of control, so that its
decision-making capability and the
accuracy of its reporting are maintained
at a high level at all times
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A formally documented holistic review
(based on the combined assurance) of
internal financial controls will be performed
by the audit committee with their
conclusions reported to the board
and stakeholders
Risk management process is currently
being revised with oversight from the audit
committee and board. One of the items to
consider is the recommendation that a risk
committee be appointed by the board as a
standing committee. Sappi is of the view
that the current oversight by the audit
committee and board together with the
group risk management team sufficiently
addresses this aspect
Substantially adopted. Additional training for
directors regarding risk and IT governance
in 2010
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Risk management: the board must
identify key risk areas and monitor
effectiveness of the risk management
process
A management committee is responsible for the
implementation of risk management. The board
monitors the overall process of risk management
in conjunction with the audit committee
Induction and training of directors
Terms should not exceed three years
but re-election by shareholders at
the AGM is allowed, if eligible
Skills, experience, background
and new ideas
Induction programmes are tailored for each
individual director on appointment as a director
and continued individual training is available
thereafter
The board has the right to appoint new directors
during the year and the appointments of such
directors require to be confirmed by shareholders
at the next annual general meeting (AGM) after
the appointment. Such directors are also
required to retire at that AGM and are eligible for
re-election to the board. A programme of
staggered rotation is in place whereby directors
retire by rotation at least every three years and
can be re-elected by shareholders at the AGM.
The nomination and governance committee
makes recommendations to the board as to
eligibility, taking into account past performance
and contribution. The board, in turn, makes
recommendations for re-election to the
shareholders at the AGM
All candidates for board positions are considered
and evaluated by the nomination and
governance committee prior to nomination and
appointment to the board. Factors considered for
new candidates and for existing board members
during annual evaluation, include background,
skills, experience, performance, as well as a
balance between continuity and the need for new
ideas. The evaluation of directors includes an
interview with the chairman and senior
independent, non-executive directors who
report back to the nomination and governance
committee as well as a self-assessment
based evaluation
2009 annual report
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Element/best practice
Sappi application/comments
King III report implications
Equal rights for shareholders and other
stakeholders
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Every listed company should have
a practice regulating dealings in its
securities by directors, officers
and other selected employees
Whistleblowing
Sustainability report
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Legend:
√ In compliance, no changes required.
Each shareholder has the right to one vote for
each share held. The Code of Ethics deals with
the nature of Sappi’s interactions with
stakeholders and further information is included
throughout this report. Shareholders and other
stakeholders have access to communication
material and disclosures by the company
Such a code is in place
Hotlines are available for all our employees to
report anonymously on environmental, safety,
ethics, accounting, auditing, control issues or
other concerns. A web-based anonymous facility
was also established during 2009 to supplement
the Hotlines. A number of tip-offs are received
directly by Internal Audit or by management.
These tip-offs are received and treated
anonymously where requested
The group’s sustainability management
programme and activities are increasingly
becoming embedded in the operations of
Sappi and relevant information is integrated in
the annual report. Sustainability is also covered in
a sustainable development report which will
be issued online simultaneously with this annual
report. (Also see pages 8 to 13 of the annual
report for an summary of key sustainability items)
Substantially in place. Further improvements
will be made via disclosures in the
integrated report
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Further embedding of sustainability
management in the operations of Sappi
and improved integrated reporting
74
Corporate governance continued
The board of directors
The basis for good governance at Sappi is laid out in the charter for the board of directors as
published on the company website (www.sappi.com). This charter sets out the role of the board
and its committees, guidelines and internal rules for board and board committee composition,
frequency of meetings, annual workplans and evaluations of board and board committees and
compliance with board policies. It also specifically defines the roles of the chairman and chief
executive officer.
The board currently comprises two executive and 11 independent, non-executive directors, who
collectively determine major policies and strategies and are responsible for managing risk. The
non-executive directors do not derive any benefits from the company for their services as directors
other than their fees. The business experience and expertise of the non-executive directors enable
them to evaluate strategy and to act in the group’s best interest, and to provide a check and
balance to the executive directors.
The composition of the board in terms of years of board membership reflects a balance between
continuity and the need for new ideas. This forms part of the annual evaluation by the nomination
and governance committee. Refer to the chart alongside:
The composition of the board, its sub-committees and attendance at meetings, including by teleconference and videoconference,
is summarised in the following table:
Name
Status
Board
committee
Governance
sation(5)
Transformation
Board committees
Nomination
Audit
and
Compen-
Human
Resources
and
R Boëttger
M R Thompson
D Cronjé(1)
D C Brink(2)
M Feldberg(3)
J E Healey
D Konar
H C Mamsch
J McKenzie
K R Osar
B Radebe
A N R Rudd
F A Sonn(2)
P Mageza(4)
R Thummer(4)
chief executive officer
chief financial officer
independent non-executive chairman
senior independent non-executive
independent non-executive
independent non-executive
independent non-executive
independent non-executive
independent non-executive
independent non-executive
independent non-executive
independent non-executive
independent non-executive
independent non-executive
non-executive
5/5
5/5
5/5
5/5
5/5
5/5
5/5
5/5
5/5
5/5
5/5
5/5
5/5
B 7/7
B 7/7
7/7
E
6/7
√
√
7/7
√C 7/7
7/7
√
√
7/7
B 5/5
B 4/4
B 2/2
√
√
4/5
5/5
√C 5/5
√
√
4/5
3/5
E
4/4
√C 4/4
4/4
√
√
√
4/4
4/4
√
4/4
√C 2/2
√
√
2/2
2/2
√
1/2
1) Dr D Cronjé will take over the chairmanship of the nomination and governance committee from Mr M Feldberg, effective 01 January 2010.
2) Retires as an independent non-executive director on 31 December 2009.
3) Mr M Feldberg will take over the chairmanship of the compensation committee from Mr D Brink, following his retirement on 31 December 2009.
4) Subsequent to the year end, Mr P N Mageza and Dr R Thummer were appointed to the board with effect from 01 January 2010 and 01 February 2010 respectively.
5) The second meeting was held on 01 October 2009.
√ Indicates board committee membership, C indicates board committee chairman, B indicates attendance by invitation and E indicates attendance ex officio. The figures
in each column indicate the number of meetings attended out of the maximum possible number of meetings.
2009 annual report
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Induction and training of directors
Following appointment to the board, directors receive a comprehensive induction tailored to their
individual needs. This includes meetings with senior management to enable them to build up a
detailed understanding of the group’s business and strategy, and the key risks and issues that it
faces which involved presentations and site visits to major operations as well as meetings with
the chairman, fellow directors and executive management. The company secretary arranges
induction training for the new independent non-executive directors, where appropriate. Additional
training is available so that directors can suitably update their skills and knowledge as appropriate.
Update briefings are provided to directors on important corporate governance and statutory
developments as well as significant operational matters.
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Board committees
The board has established sub-committees to assist it with the discharge of its duties. These
sub-committees operate within written terms of reference set by the board. Each committee
performs an annual self-assessment. The board sub-committees are as follows:
Major external regulations
South African Companies Act as well as the corporate legislation in the regions and countries
where we have operating units
JSE and NYSE Listings Requirements
SEC Rules and Regulations, Sarbanes-Oxley Act
Competition/Antitrust legislation
US Foreign Corrupt Practices Act (FCPA)
US Securities Act and US Securities Exchange Act
King II Report, as well as the recently issued King III Report
Major internal regulations
Articles of Association of Sappi Limited
Board and board sub-committee charters
Policies and procedures
Risk and internal control framework
Code of Ethics
76 Corporate governance continued
Audit committee
The audit committee was established in 1984 and assists the board in discharging its duties
relating to the:
(cid:129) safeguarding of assets;
(cid:129) oversight role for the risk management function;
(cid:129) operation of adequate systems, and control processes;
(cid:129) reviewing of financial information and the preparation of accurate financial reporting and
statements in compliance with all applicable legal requirements and accounting standards;
(cid:129) reviews compliance with the group’s Code of Ethics;
(cid:129) oversight of the external auditors’ qualifications, experience and independence;
(cid:129) consideration and approval of non-audit services provided by the external auditors;
(cid:129) oversight of the performance of the internal and external audit functions;
(cid:129) monitoring of compliance with applicable external legal and regulatory requirements; and
(cid:129) oversight of non-financial risks and controls as well as IT governance matters through a
combined assurance model which will be enhanced during 2010 in line with King III Report
principles.
In terms of the Corporate Laws Amendment Act, which came into effect during the financial year,
the audit committee is required to perform certain duties, including the nomination for
appointment of an independent auditor and the determination of the independence of the auditor.
The audit committee monitors the qualifications, expertise, resources and independence of both
the internal and external auditors and assesses annually the auditor’s performance and
effectiveness. The audit committee approves the external auditor’s engagement letter, nature
and scope of the audit and the audit fee. The audit committee can confirm that it is satisfied with
the independence of the external auditor for the 2009 financial year. The audit committee
considers and approves non-audit services provided by the external auditors. This is only
contemplated for those non-audit services where significant cost or efficiency benefits are
anticipated from utilising external audit as opposed to other service providers. The audit
committee oversees the financial reporting process and is concerned with compliance with
accounting policies, group policies, legal requirements and internal controls within the group.
It reviews compliance with the group’s Code of Ethics and ensures facilities are in place to enable
employees to submit concerns confidentially or anonymously, and ensures independent
investigations are conducted where necessary. The audit committee consists of five independent,
non-executive directors and has satisfied its responsibilities for the year in terms of the mandate.
The adequacy of the mandate is reviewed and reassessed annually. The audit committee meets
with senior management, which includes the chief executive officer and the chief financial officer,
at least four times a year. The audit committee also meets at least once per year with the
management disclosure committee. The external and internal auditors attend these meetings
and have unrestricted access to the committee and its chairman. The external and internal
auditors meet privately with the audit committee on a regular basis. The audit committee chairman
is available at the annual general meeting. Regional committees exist in the three major regions
and are chaired by independent non-executive directors. These committees have a mandate
from the group’s audit committee, to whom they report on a regular basis and they meet at least
four times per year. These regional committees assist the Sappi Limited audit committee in the
discharge of its duties, particularly as regards the requirements of the Corporate Laws
Amendment Act, such as the review of the performance, independence and effectiveness of the
auditors as well as the review of the financial information and systems of internal controls of all
major operations throughout the group.The audit committee also considered and satisfied itself
of the appropriateness of the expertise and experience of the chief financial officer. Dr D Konar
has been designated as the audit committee financial expert as required by the Sarbanes-Oxley
Act of 2002.
Human resources and transformation committee
The responsibilities of the human resources committee are, inter alia, to determine the group’s
human resource policy and strategy, assist with the hiring and setting of terms and conditions of
2009 annual report
77
employment of executives, the approval of retirement policies and succession planning for
management and the chief executive officer as well as employment equity and transformation in
South Africa. The human resources committee consists of three independent non-executive
directors and the independent non-executive chairman of the group (who serves as chairman of
the committee).
Management representation at meetings is by way of invitation and not as members of the
committee. This representation includes the chief executive officer of the company as well as the
Group Head Human Resources.
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Compensation committee
The compensation committee ensures that the compensation philosophy and practices of the
group are aligned to the strategy and performance goals. It reviews and agrees compensation
of executive directors and senior executives. It also reviews and agrees executive proposals on
the compensation of non-executive directors for approval by the board and ultimately by
shareholders. The compensation committee consists of five independent non-executive directors
(one of whom serves as chairman). Directors’ emoluments are disclosed in the compensation
report on pages 83 to 89.
Management representation at meetings is by way of invitation and not as members of the
committee. This representation includes the chief executive officer of the company as well as the
Group Head Human Resources. For further details on compensation and management incentives
at Sappi please refer to the compensation report on pages 83 to 91.
Nomination and governance committee
The nomination and governance committee considers the leadership requirements of the
company and identifies and nominates suitable candidates for appointment to the board for
board and then shareholders’ approval. It reviews the composition of the board and performs
regular self-evaluations of the board and the various board committees. This evaluation includes
board members’ individual as well as collective contributions and performance. The committee
makes appropriate recommendations to the board based on these evaluations, at least annually.
Recommendations are in turn made by the board to the shareholders at the annual general
meeting. A policy detailing the procedures for appointments to the board is in place. The
committee makes recommendations on corporate governance practices and disclosures for
Sappi and reviews compliance with corporate governance requirements. The nomination and
governance committee consists of five independent non-executive directors (one of whom serves
as chairman). The chief executive officer is invited to meetings of the committee.
Management committees
Responsibility for the day-to-day management of the group has been assigned by the board to
the chief executive officer. To assist the chief executive officer in discharging these duties, a
number of management committees have been formed.
78
Corporate governance continued
Sustainability executive committee
A sustainability executive committee has been constituted during 2009 as an executive management
committee with board representation, consisting of senior executive and corporate management
representatives as well as one non-executive director who chairs the committee and acts as a
link between the board and the committee. The sustainability executive committee has a charter
from the board. Its mandate is essentially to oversee the group’s sustainability strategies
and platform.
Sustainability council
A sustainability council constituted in 2008 continues in a support role to the newly formed
sustainability executive committee. The council’s focus is both strategic and operational and
membership is representative of the operational nature of many of its initiatives. Regional
councils were also created to deal with the day-to-day sustainability issues. The council plays a
key role in managing and entrenching sustainability in the business and will continue to develop
ideas and roll out programmes within the business.
Sappi strives to be a trustworthy and valuable corporate citizen. The group encourages open
dialogue, employee participation and a culture of engagement with all our stakeholders.
Sustainability information is integrated in the annual report with a summary provided on pages
8 to 13.
Please also refer to our 2009 sustainable development report available on request or at
www.sappi.com.
Executive committee
This committee comprises executive directors and senior management from Sappi Limited and
the chief executive officers of the three main regional business operations of the group. The chief
executive officer has assigned responsibility to the executive committee for a number of functional
areas relating to the management of the group, including the development of policies and
alignment of initiatives with regards to: strategic, operational, financial, governance and risk
processes. The executive committee meets monthly.
Disclosure committee
This committee comprises members of the executive committee and senior management from
various disciplines whose objective is to review and discuss any financial information prepared
for public release. Membership of the disclosure committee was expanded in 2009 to include
the regional chief financial officers. An open invitation to attend disclosure committee meetings
has been extended to the head of internal audit in line with the strategic repositioning of internal
audit as recommended in the King III Report.
Treasury committee
The treasury committee is an advisory body to the chief financial officer for Sappi’s treasury
activities and operations. The committee meets every second week. The committee comprises
senior financial and treasury managers. The responsibility of the committee is to review and
discuss treasury related matters.
Technical committees
A number of technical committees have been established which focus on global technical
alignment, performance and efficiency measurement as well as new product development.
Knowledge generated is rapidly transferred between regions through the technical committees
who help to ensure that areas of development are targeted, projects are correctly resourced and
global shuts are properly planned.
Group risk management team
The Sappi Limited board recognises that risk management success can only be achieved if all
three elements of risk, namely threat, uncertainty and opportunity, are recognised and managed
in an integrated fashion. The group risk management team is mandated by the Sappi Limited
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board to establish, co-ordinate and drive the risk management process throughout Sappi. It has
established a comprehensive risk management system to identify and manage significant risks.
The group risk management team reports regularly on risks to the audit committee who have an
oversight role with regards to the risk management processes at Sappi as well as to the board.
A full report on Sappi’s risk management can be found on pages 67 to 69.
Financial statements
The directors are responsible for overseeing the preparation and final approval of the group annual
financial statements. The auditors are responsible for auditing the group annual financial statements
and expressing an opinion thereon. While management is responsible for the preparation of the
annual financial statements, the directors have overall responsibility to ensure that suitable
accounting policies, supported by reasonable and prudent judgements and estimates, have been
used in the preparation of the annual financial statements, which fairly present in all material
respects the state of affairs of the group. In 2006, the group adopted International Financial
Reporting Standards as issued by the International Accounting Standards Board. The directors
are responsible for determining that appropriate accounting standards have been applied and
adequate accounting records have been maintained. The directors also oversee the appropriate
adoption of the going concern basis in preparing the annual financial statements, based on the
historical financial performance of the group, the ready access to financial resources and financial
forecasts. The group’s results are reviewed prior to submission to the board as follows:
(cid:129) All four quarters and financial year end – by the disclosure committee and audit committee;
(cid:129) Interim and final quarters – by both the group’s external auditors, and the audit committee;
and
(cid:129) In 2009, additional reviews were performed by the group’s external auditors for quarters one
and three as a result of financing activities during the year.
Internal controls
The board is responsible for the group’s systems of internal financial and operational control. The
group’s internal controls and systems are designed to provide reasonable assurance as to the
integrity and reliability of the annual financial statements, that assets are adequately safeguarded
against material loss and that transactions are properly authorised and recorded. Such controls
are based on established written policies and procedures which are monitored throughout the
group and are applied by trained, skilled personnel with an appropriate segregation of duties
through clearly defined lines of accountability and delegation of authority. The control system
includes comprehensive reporting and analysis of actual results against approved standards and
budgets. All employees are required to maintain the highest ethical standards in ensuring that the
company’s business practices are conducted in a manner which in all reasonable circumstances
is above reproach. As part of an ongoing process, reviews were undertaken across the group of
the effectiveness of various elements of the group’s internal controls, procedures and systems.
Where potential improvements are identified, they are being addressed. The reviews enabled
management to further strengthen the group’s controls and the results of the reviews did not
indicate any material breakdown in the functioning of these controls, procedures and systems
during the year under review. The internal controls in place are considered to be effective. The
internal controls at the four new mills in the Europe region were assessed for adequacy but not
for effectiveness as most of the underlying IT systems and platforms were only moved over to
Sappi during the course of 2009. This transitional phase will be completed in 2010 and effectiveness
testing will be performed. A material breakdown is defined as a critical weakness in process or
financial systems which could result in a material loss, contingency or uncertainty requiring
disclosure in the published annual financial statements. Section 404 of the US Sarbanes-Oxley
Act requires companies listed on the NYSE to complete a comprehensive evaluation and report
on the effectiveness of their internal controls over financial reporting. Sappi has conducted its
fourth evaluation at the end of fiscal 2009 and will include its Section 404 report in its Form 20-F
to be filed with the United States Securities and Exchange Commission.
80 Corporate governance continued
Disclosure controls
Disclosure controls and procedures include controls and procedures designed to ensure that
information required to be disclosed by the group in the reports that it files or submits is
accumulated and communicated to the group’s management, including the chief executive officer
and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
The group has implemented disclosure controls and procedures as deemed appropriate by
management. The disclosure committee reviews all Sappi Limited external financial reports prior
to their release. On occasion these meetings are held jointly with the audit committee.
Internal audit
The group’s internal audit department has a current complement of 18 persons, of which 14 are
experienced with relevant qualifications and four are in training. It has a specific mandate from
the audit committee and independently appraises the adequacy and effectiveness of the group’s
systems, financial internal controls and accounting records, reporting its findings to local and
divisional management, the external auditors as well as the respective audit committees. The
head of internal audit reports to the audit committee on a functional basis and meets privately
with the audit committee and individual board members on a regular basis. The head of internal
audit has direct access to the chief executive officer and chief financial officer as well as other
senior management, as required, and has an open invitation to attend executive and management
committee meetings such as the audit committee, disclosure committee, audit review meetings,
chief financial officer meetings, group risk meetings and regional financial committee meetings.
Internal audit is also invited to attend and participate in strategic workshops at group and regional
levels. This is in line with the strategic positioning of internal audit as recommended by the King III
Report whereby internal audit’s role should not be restricted to a compliance activity but should
be risk-based, aligned with the company’s strategy and risk management process. The internal
audit coverage plan is based on a risk assessment performed for each operating unit. This
incorporates risks identified by management during the group risk assessment process as well
as the results of audit work performed. This process ensures that the audit coverage is focused
on identified high risk areas. During 2009, internal audit focused additional resources on IT
security, forensic investigations and the integration and control readiness projects relating to the
four new mills in the Europe region. The report submitted by internal audit to the audit committee
includes amongst other things an overview of Hotline allegations and forensic activities, a
summary of potentially significant control issues identified, audit risk assessments, audit coverage
plans, actual performance against planned activities, the periodic evaluation of the system of
internal controls and details of any scope restrictions as well as audit resource developments.
Our resources are allocated to audit projects based on a top down risk assessment approach
employing the GAIT methodology, which is a guide to assessing the scope of IT general controls
based on risk. The different types of audit assignments conducted in 2009 are represented in
the chart alongside.
Company secretary
All directors have access to the advice and services of the company secretary and are entitled
and authorised to seek independent and professional advice about affairs of the group at the
group’s expense. The company secretary is responsible for the duties set out in Section 268G
of the South African Companies Act of 1973. Specific responsibilities include the provision of
guidance to directors as to how to discharge their duties in the best interests of the company as
well as arranging for the induction of new directors.
Code of ethics
Sappi requires its directors and employees to act with the utmost good faith and integrity in all
transactions and with all stakeholders with whom they interact. This commitment is reflected in
the group’s Code of Ethics that commits the company and employees to sound business
practices and compliance with legislation.
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As part of continuous improvement the company completed a review of the wording of the code
and communicated a new and revised version to all employees during 2008. The revised code
is also available on the company website.
Hotlines and follow up of tip-offs
‘Hotlines’ have been implemented for all the regions in which the group operates. This service,
operated by various independent companies, enables employees to report anonymously
environmental, safety, ethics, accounting, auditing, control issues or other concerns. The follow-
up of all reported matters is co-ordinated by group internal audit. Matters are resolved
appropriately and reported to the audit committee. Of all complaints reported to the Hotlines
since inception none included fraudulent financial reporting. As the company is listed on the
NYSE and has securities registered under the US Securities Exchange Act of 1934, it is subject
to the US Foreign Corrupt Practices Act (FCPA). The company has ensured that all aspects of
the FCPA have been addressed in its policies.
The pie chart alongside sets out the type of tip-offs received.
There is approximately an even split between allegations that prove founded on investigation and
those where no action is taken as the allegation is unfounded or the evidence available is
inconclusive.
Refer to the pie chart alongside which depicts an analysis of case outcomes during the
2009 financial year.
Legal compliance programme
A legal compliance programme designed to increase awareness of, and enhance compliance
with, applicable legislation is in place. This programme involves the delegation of responsibility
for compliance with country specific legislation to designated people throughout the organisation
and includes a periodic self-assessment process. The self-assessment process includes a review
of any changes in legislation and the impact of these changes on the business. The group
compliance officer reports quarterly to the group audit committee.
IT governance
The need for strong IT governance has been recognised within Sappi and as such the group is
actively involved in reviewing and implementing improved IT governance structures. IT governance
represents one of the pillars of the IT strategy and Sappi adheres to industry recognised best
practices as laid down by the IT governance institute and more specifically the new standard for
governance ISO/IEC 38500. IT governance will be included on the board agenda and will be
subject to audit committee oversight in 2010 in line with King III Report recommendations. The
establishment of an IT steering committee is envisaged for 2010.
Interest in contracts
The group has a policy regulating disclosure of interest in contracts. The policy dictates that all
employees disclose any interest in contracts to assess any possible conflict of interest. The policy
also dictates that directors and senior officers of the group must disclose any interest in contracts
as well as other appointments to assess any conflict of interest in fiduciary duties. During the
year under review, save as disclosed in the financial statements, none of the directors had a
significant interest in any material contract or arrangement entered into by the company or its
subsidiaries.
Insider trading
The company has a code of conduct for dealing in company securities. No employee of Sappi
in possession of material non-public information in respect of Sappi Limited or any of its
subsidiaries, nor any member of his/her family or household may, at any time, buy or sell securities
of Sappi Limited or its subsidiaries, or engage in any other action to take advantage of such
information. All officers, directors and employees who have access to unpublished price-sensitive
information are precluded from trading in Sappi Limited securities during ‘closed periods’, which
82 Corporate governance continued
apply from the end of the financial quarters in March, June, September and December
respectively, until two full business days after the release of the results for the respective quarters.
Prior to dealing in Sappi Limited securities (even outside closed periods), clearance is required
from the Sappi Limited chairman through the Sappi Limited group secretary. In practice, the
chairman clears the transactions of directors of Sappi Limited and its subsidiaries and the
chairman himself requires the clearance of the audit committee chairman for his own transactions.
Fraud and illegal acts
The group does not engage in or accept or condone the engaging in any illegal acts in the
conduct of its business. The directors’ policy is to actively pursue and encourage prosecution of
perpetrators of fraudulent or other illegal activities should they become aware of any such acts.
The group has implemented Hotlines to facilitate reporting any fraudulent, illegal acts or unethical
behaviour which are externally managed and administered. A web-based global facility was
implemented during 2009 to supplement the Hotlines. A fraud and irregularity policy is being
developed by management in discussion with internal audit.
Communication
The board is responsible for presenting a balanced and understandable assessment of the
company’s position in reporting to stakeholders. The reporting addresses material matters of
significant interest and is based on principles of openness and substance over form. We
recognise that the reporting and communication is made in the context that society now demands
greater transparency and accountability from companies regarding non-financial matters. The
board strives to ensure that reports present a comprehensive and objective assessment of the
activities of the company so that stakeholders with a legitimate interest in the company’s affairs
can obtain full, fair and honest information regarding its performance. The board takes cognisance
of the communities in which it operates when communicating to its stakeholders. As such the
annual report is seen as an integrated report as referred to in the King III Report. For further details
of our sustainability communication activities please refer to the sustainability report on pages
8 to 13.
Compensation report
2009 annual report
83
In 2009, the compensation committee consisted of:
Mr D C Brink (chairman of the committee)
Prof M Feldberg
Mr H C Mamsch
Mr J D Mckenzie
Sir A N R Rudd
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Dr D C Cronjé (group chairman) attended meetings ex officio, and at the invitation of the
committee, Mr R J Boëttger (group chief executive officer) and Ms L Swartz (group head human
resources) attended meetings except where matters pertaining to their own compensation were
considered. Mr D J O’Connor (group company secretary) also attended meetings by invitation.
All members of the committee are independent non-executive directors and all were members
of the board and committee at the year end. No committee member has any personal financial
interest (other than as shareholder), conflicts of interest arising from cross-directorships, or day-
to-day involvement in running the business.
During the course of the year, the committee met twice and conducted one teleconference call.
The committee reviewed and approved:
(cid:129) The management incentive plan rules for 2009
(cid:129) The annual incentive plan awards for 2008
(cid:129) The share grants made for 2009
(cid:129) The salary increases effective 01 January 2009
(cid:129) Reviewed and recommended the fees for non-executives directors for approval by shareholders
effective October 2009
Management sought advice from PricewaterhouseCoopers on tax and share scheme services
and reports were tabled at the compensation committee meetings. Kepler and Associates
provided ad hoc advice to management on remuneration practices and trends to assist with
background information and related support in formulating recommendations. Werksmans
Attorneys provided legal advice on the share scheme incentive programmes.
Compensation committee mandate
The compensation committee is responsible for:
(cid:129) Ensuring that the compensation philosophy and practices of the group are aligned to the
strategy and performance goals and that the incentive structures for senior management do
not inadvertently motivate irresponsible or short-term behaviour which impacts on governance,
environmental or social issues;
(cid:129) Reviewing the compensation of executive directors and other senior key personnel to ensure
that they are fairly rewarded based on their level of responsibility, performance and contribution
to the company’s overall performance and that the compensation packages are market related
to attract, motivate and retain individuals;
(cid:129) Satisfying shareholders that the senior executive compensation is set by a committee of
independent directors who give due regard to the interests of shareholders and to the financial
and commercial health of the group that incentive awards will result in superior payments for
superior performance and nothing or very little incentive rewards for under-performance; and
(cid:129) Reviewing and agreeing proposals (submitted by the group executive committee) on the fees
and benefits of non-executive directors, including reference to external benchmarks, and to
make recommendations to the board.
84
Compensation report continued
Executive directors and key management personnel
Compensation policy principles
Our compensation policy for executive directors, including key management personnel, is based on the
following core principles:
(cid:129) Reward individuals fairly and equitably in relation to job levels, experience and the employment market;
(cid:129) Achieve competitive compensation levels, which enables the group to attract and retain talented
individuals;
(cid:129) Creating greater alignment of the interests of management with those of the shareholders; and
(cid:129) Implement a globally consistent pay philosophy with regional application to local market practices.
The manner in which management achieves their goals and objectives is underpinned by the group’s
values (excellence, integrity and respect) and the leadership competencies and behaviours (leading
others, strategic thinking, operational delivery, driving change, commercial insight and self-awareness).
When evaluating the performance of an individual not only do the numbers count but also how the
objectives were achieved.
Compensation structures
The compensation of executive directors and key management personnel comprises fixed and variable
components.
Summary
Component
Objective/policy
Performance period
Commentary
Base salary (fixed)
Market related
Reviewed annually
Target at median levels for comparable
roles in global companies of similar size
and complexity
Market data used to benchmark
salary levels
Takes into account external benchmarking
data; internal equity; individual performance
and financial parameters.
Retirement benefit
(fixed)
Provided to new hires under defined
contribution plans
Not applicable
Market competitive
Social security provisions in place in Europe
are considered
Employees in legacy defined benefit plans
continue to accrue benefits in such plans
for both past and future service
Other benefits
Non-pensionable
Not applicable
Market competitive
Based on local competitive conditions,
eg medical insurance
Short-term incentive
(variable)
Paid annually provided threshold is reached
One year
Target cash award ranges from 50% – 85%
of base salary
Long-term incentive
(variable)
Awarded annually in the form of
performance plan shares
Four-year performance
period
Consistent with corporate objectives and
long-term nature of our business decision-
making
Shareholder alignment
Incentivises long-term value creation
Retention tool for executive director and
key management personnel
For 2009, performance targets for awards
was based on:
48% – operating profit
24% – working capital management
8% – capital expenditure management
20% – individual performance
2009 financial performance resulted in no
bonus awards
Motivates short-term performance linked to
the business plan and strategy
Performance hurdle measures Sappi’s Total
Shareholder Return (TSR) and Cash Flow
Return On Net Assets (CFRONA) relative to
a peer group of 14 other industry related
companies
Payment is subject to the performance
shares vesting and to the extent vesting
payment is made in shares
2009 annual report
85
Balance between fixed and variable pay
The chart alongside shows the ratios of performance related compensation to base salary and
benefits of executive directors and the relative value of the different elements, including the target
bonus and expected value of the long-term share-based compensation awarded in the year
ended 30 September 2009.
Base pay
The committee reviews the salaries of executive directors and other key management personnel
in December each year.
Base salary is targeted at the median of the market for comparable roles in companies of
similar size.
Market data is used to benchmark salary levels and to inform decisions on base salary changes.
Salaries are reviewed annually and individual performance is a key consideration.
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Executive directors
R J Boëttger
M R Thompson
2009
salary
2008
salary
US$551,185
US$261,921
US$669,955
US$299,113
Despite the above US Dollar salary numbers, in South African Rand terms, Mr Boëttger received
a 9.9% increase and Mr Thompson received a 10.5% increase in 2009 over 2008.
Both Mr Boëttger and Mr Thompson are based at the South African Head Office and their salary
increases were reflective of the South African market conditions.
During 2009, the executive directors and the members of the executive committee voluntarily
forfeited one month’s salary in support of employees who experienced hardships as a result of
our difficult financial year.
Retirement benefits
Across the group and based on the location, it is the company’s policy to provide retirement
benefits through either a defined contribution fund or a defined benefit fund.
In certain European countries, retirement benefits are provided by the state through the social
security system. The design of both the defined benefit and contribution schemes in Europe
takes into account these social security benefits when determining the contribution tables and
final pensions earned.
Contributions to the plans differ by geography and are either contributory or non-contributory
plans. Where defined benefit plans continue to exist in the company, they are mainly legacy plans
closed to new hires. Employees who participate in these defined benefit plans continue to accrue
past and future benefits in such plans.
Other benefits
These include benefits such as medical insurance, death and disability insurance, vehicle benefits,
leave and recognition for service, and are applied where applicable in respective regions and
employee categories.
Short-term incentives
The executive directors and other key management personnel throughout the group participate
in an annual management incentive scheme.
Incentive target awards range from 30% to 85% of annual base salary.
At the beginning of the financial year, annual incentive targets are set to take account of current
business plans and conditions and there is a threshold performance below which no award is paid.
The plan rewards the achievement of group financial, regional financial (where applicable),
strategic and individual performance objectives.
86 Compensation report continued
The chief executive officer and chief financial officer may earn a bonus of up to 115% of annual
base salary, and other key management personnel may earn a bonus of up to between 40% and
95% of their annual base salary, depending upon local market practices in the locations in which
they are based.
The key business performance criteria for the 2009 financial year were operating income, working
capital and capital expenditure.
The bonuses reflected in this annual report for Mr Boëttger and Mr Thompson are based on
performance in the 2008 fiscal year, but were only paid out in December 2008 which falls into
fiscal year 2009.
The committee has the right to exercise discretion in authorising adjustments, on both financial
and individual performance, which it deems appropriate when evaluating performance against
targets at the financial year end.
Management incentive awards for executive directors in December 2008 relating to the year
ended September 2008:
Mr Boëttger – 74% of the targeted bonus award
Mr Thompson – 72% of the targeted bonus award
Other key management personnel in Southern Africa and North America received bonus awards
which ranged from 68% to 112% of the target awards depending on the performance of the
region in which they were located.
Key management personnel in the European region were paid a discretionary bonus as they had
not achieved their financial performance threshold despite the strenuous effort and work that
went into addressing the issues in their business.
No bonus awards will be paid under the management incentive scheme in December 2009 as
the group did not meet its financial performance threshold in the year ended September 2009.
Long-term incentives
The group operates two long-term incentive programmes: The Sappi Share Incentive Scheme
and the Performance Share Incentive Plan.
For 2009, approximately 40 key management personnel (including executive directors) were
granted conditional award allocations under the Performance Share Incentive Plan. This award
recognises the contribution they make to shareholder value and is designed to retain and
incentivise sustainable long-term performance.
When the plan was introduced in 2004, awards made under this plan were subject solely to TSR
performance conditions applied after four years from date of grant and relative to a peer group.
In 2006, the plan was amended, and since then 50% of performance share awards to executive
directors and other key management personnel have been subject to a TSR performance condition
and 50% to cash flow return on net assets performance condition relative to a peer group.
The companies comprising the comparator group for all the performance share awards under
the Performance Share Plan which vested in December 2008 are listed below:
AbitibiBowater*
Aracuz Cellulose
Domtar
Holmen
International Paper
* Abitibi and Bowater merged in 2007.
MeadWestvaco
M-real
Nippon Paper
Norske-Skog
Oji Paper
Stora Enso
UPM-Kymmene
Weyerhaeuser
Kepler and Associates undertook the assessment of the company’s TSR performance relative
to the comparator group. Sappi’s performance relative to the comparator group for 2004 – 2008
performance share plan awards were ranked in seventh place out of 15 companies and resulted
in 75% of the shares vesting.
2009 annual report
87
Details of the Sappi Limited Share Incentive Trust and the Sappi Limited Performance Share
Incentive Plan can be found in note 29 to the annual financial statements.
Details of executive directors’ remuneration are set out below:
Information subject to audit.
Executive directors(1)
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Prior year
bonuses and
Contributions
Sums
paid under
performance
paid by way
pension and
related
Salary
payments(2)
of expense
allowance
medical aid
schemes
Total
551,185
261,921
813,106
347,548
102,582
450,130
171,550
152,230
1,070,283
517,090
323,780
1,587,373
–
357
357
2008
Prior year
bonuses and
Contributions
Sums
paid under
performance
paid by way
pension and
related
Salary
payments(2)
of expense
allowance
medical aid
schemes
Total
669,955
299,113
969,068
204,705
180,552
385,257
–
433
433
191,327
99,688
1,065,987
579,786
291,015
1,645,773
Director
US$
R J Boëttger
M R Thompson
Director
US$
R J Boëttger
M R Thompson
(1) Executive directors are paid remuneration packages which aim to be competitive in the countries in which they live and work, and they are generally paid in the currency
of those countries. Average exchange rates for the year concerned are again applied in the tables in converting the currency of payment into US Dollars.
(2) Bonuses and performance related payments are in respect of the previous year’s performance paid in the current year.
88 Compensation report continued
The following table sets out all share options (whether vested or unvested), all other unvested allocation shares and performance
shares granted to, and exercised by, each executive director in terms of the Scheme and the Plan during the year ended September
2009. These interests are also included in ‘Directors’ interests’ in sections of this report. Details of share dealings are included in the
second table. Executive directors who retire have 12 months in which to settle their share options and allocation shares, unless
extension is granted by the remuneration committee of the board of directors. For performance shares there is a formula by which
retired executive directors will receive a proportion of any shares which may have vested at the end of the four-year period.
R J Boëttger
M R Thompson
Total 2009
Total 2008
Allocated
price
Number of
shares
Allocated
price
Number of
shares
Number of
shares
Number of
shares
Outstanding at
beginning of year
Number of shares held
Issue 25
Issue 26
Issue 27
Issue 28a
Issue 29
Performance shares 29(1)
Performance shares 30(1)
Performance shares 30a(1)
Performance shares 31a(1)
Performance shares 32
Offered and accepted
during the year
Issue 25 – rights offer
Issue 26 – rights offer
Issue 27 – rights offer
Issue 28a – rights offer
Issue 29 – rights offer
Performance shares 29
– rights offer(1)
Performance shares 30
– rights offer(1)
Performance shares 30a
– rights offer(1)
Performance shares 31
– rights offer(1)
Performance shares 31a
– rights offer(1)
Performance shares 32
– rights offer
Performance shares 34
150,000
189,000
339,000
249,000
ZAR49.00
ZAR147.20
ZAR112.83
ZAR79.25
ZAR78.00
3,000
15,000
15,000
18,000
18,000
6,000
24,000
50,000
40,000
100,000
50,000
334,000
314,800
648,800
90,000
ZAR20.27
ZAR20.27
ZAR20.27
ZAR20.27
ZAR20.27
3,600
18,000
18,000
21,600
21,600
ZAR20.27
7,200
ZAR20.27
28,800
ZAR20.27
60,000
ZAR20.27
120,000
ZAR20.27
60,000
154,000
ZAR20.27
48,000
88,000
Paid for during the year
Number of shares
Returned, lapsed and forfeited
during the year
Number of shares
–
–
(16,500)
(16,500)
(3,300)
(3,300)
–
–
2009 annual report
89
R J Boëttger
M R Thompson
Total 2009
Total 2008
Allocated
Number of
Allocated
Number of
Number of
Number of
price
shares
price
shares
shares
shares
e
c
n
a
n
r
e
v
o
g
484,000
484,000
968,000
339,000
ZAR11.06
ZAR11.06
220,000
110,000
154,000
33,000
33,000
39,600
39,600
52,800
110,000
88,000
88,000
ZAR77.97
ZAR62.34
ZAR47.08
ZAR46.51
ZAR11.06
ZAR11.06
ZAR11.06
28 Mar 10
13 Feb 11
30 Dec 11
13 Dec 12
13 Dec 09
08 Aug 10
02 Jul 11
12 Dec 11
22 Dec 12
12 Dec 11
22 Dec 12
Outstanding at
end of year
Number of shares held
Issue 26
Issue 27
Issue 28a
Issue 29
Performance shares 30(1)
Performance shares 30a(1)
Performance shares 31a(1)
Performance shares 32(1)
Performance shares 34
Expiry dates
Issue 26
Issue 27
Issue 28a
Issue 29
Performance shares 30(1)
Performance shares 30a(1)
Performance shares 31a(1)
Performance shares 32(1)
Performance shares 34
(1) Performance shares are issued when all conditions per note 29 are met. The position of participants in regard to the rights offer is also explained in note 29.
Dealings in the scheme and the plan
for the year ended September 2009
Number
Date
of shares
Allocation
Market
value at
date of
paid for
paid for
price
payment
Deferred sale
Deferred rights sale
Performance plan
Performance plan rights
17 Dec 08
17 Dec 08
22 Dec 08
22 Dec 08
ZAR49.00
ZAR20.27
ZAR0.00
ZAR20.27
ZAR33.00
ZAR33.00
ZAR36.70
ZAR36.70
3,000
3,600
4,500
5,400
16,500
Dealings in the scheme and the plan
for the year ended September 2008
Director
Executive directors
M R Thompson
Total
None for the 2008 year
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Compensation report continued
Service contracts and notice periods
The group chief executive and his direct reports all have employment contracts which outline the required notice periods in the event
of a termination of employment. A payment in lieu of notice may be made on termination of employment. Such payment takes into
account base salary and benefits less deductions required by law.
The notice periods vary from three months to 18 months.
Non-executive directors
Directors are normally remunerated in the currency of the country in which they live or work from. The remuneration is translated into
US Dollars (the group’s reporting currency) at the average exchange rates prevailing during the reporting year. Directors’ fees are
established in local currencies to reflect market conditions in those countries.
Non-executive directors’ fees reflect their services as directors and services on various sub-committees on which they serve, and the
quantum of committee fees depends on whether the director is an ordinary member or a chairman of the committee.
The extreme volatility of currencies, in particular the Rand/US Dollar exchange rate in the past few years, caused distortion of the
relative fees paid to individual directors.
Non-executive directors’ fees are proposed by the executive committee, agreed by the compensation committee, recommended
by the board and approved at the annual general meeting by the shareholders.
Director
US$
D C Brink
M Feldberg
J E Healey
D Konar
H C Mamsch
B Radebe
A N R Rudd
F A Sonn
K Osar
J McKenzie
D C Cronje(2)
2009
Board
Committee
Travel
fees
fees
allowance
Total
39,496
54,000
54,000
26,350
55,615
26,349
55,615
26,350
54,000
26,350
183,059
38,054
51,700
73,500
51,811
80,072
8,543
47,046
8,543
27,000
23,215
–
5,400
13,500
13,500
5,400
8,100
5,400
8,100
5,400
13,500
5,400
5,400
82,950
119,200
141,000
83,561
143,787
40,292
110,761
40,293
94,500
54,965
188,459
601,185
409,484
89,100
1,099,769
2009 annual report
91
e
c
n
a
n
r
e
v
o
g
2008
Board
Committee
Travel
fees
fees
allowance
Total
52,332
57,200
67,600
34,889
87,535
37,796
74,068
34,889
84,126
67,600
37,796
131,344
42,130
49,700
70,700
57,340
97,041
9,422
47,530
9,422
–
23,835
8,637
–
5,200
10,400
15,600
5,200
10,400
5,200
7,800
5,200
5,000
13,000
5,200
2,600
99,662
117,300
153,900
97,429
194,976
52,418
129,398
49,511
89,126
104,435
51,633
133,944
767,175
415,758
90,800
1,273,733
Director
US$
D C Brink
M Feldberg
J E Healey
D Konar
H C Mamsch
B Radebe
A N R Rudd
F A Sonn
E van As(1)
K Osar
J McKenzie
D C Cronje(2)
(1) Includes board fees received by Mr van As for the period September 2007 to March 2008. Mr van As also received consulting fees of US$16,825 for the same period
not included in the above.
(2) Appointed in January 2008.
Other than the non-executive chairman, Dr Cronjé, none of the other non-executive directors have service contracts with the company.
Executive and non-executive directors’ interests
The following table shows those directors that have interests in the shares in Sappi Limited. For the purpose of this table, directors’
interests are those in shares owned either directly or indirectly as well as those shares in respect of which directors have vested
obligations to purchase shares or repay loans in terms of the Sappi Limited Share Incentive Trust.
2009
Direct interests
Indirect
interests
2008
Direct interests
Indirect
interests
Vested
obliga-
tions to
purchase
or repay
Vested
obliga-
tions to
purchase
or repay
Director
Beneficial
loans
Beneficial
Beneficial
loans
Beneficial
Non-executive director
D C Brink
Executive directors
M R Thompson
R J Boëttger
Total
–
–
22,000
20,517
85,000
89,100
–
–
–
–
–
35,000
–
10,000
39,900
–
–
–
105,517
89,100
22,000
35,000
39,900
10,000
Directors’ interests in contracts
The directors have certified that they had no material interest in any significant transaction with either the company or any of its
subsidiaries. Therefore there is no conflict of interest with regard to directors’ interests in contracts.
92
Annual financial statements
for the year ended September 2009
Auditor’s report
Directors’ approval
Secretary’s certificate
Audit committee report
Directors’ report
Group income statement
Group statement of comprehensive income
Group balance sheet
Group cash flow statement
Group statement of changes in equity
Group income statement in Rands
convenience translation
Group statement of comprehensive income
in Rands convenience translation
Group balance sheet in Rands
convenience translation
Group cash flow statement in Rands
convenience translation
Notes to the group annual financial statements
2.5
1. Business
2. Accounting policies
2.1 Basis of preparation
2.2 Accounting policies
2.3 Critical accounting policies and estimates
2.4
Adoption of accounting standards
in the current year
Potential impact of future changes
in accounting policies
3. Segment information
4.1 Operating profit
4.2 Employment costs
4.3 Other operating expenses (income)
5. Net finance costs
6.
7.
Taxation (benefit) charge
Earnings per share and headline earnings
per share
8. Dividends
9. Property, plant and equipment
10. Plantations
11. Deferred tax
12. Goodwill and intangible assets
13. Joint ventures and associates
14. Other non-current assets
15.
16. Trade and other receivables
17. Ordinary share capital and share premium
18. Other comprehensive income
Inventories
Page
Page
19. Non-distributable reserves
Interest-bearing borrowings
20.
21. Other non-current liabilities
22. Provisions
23. Notes to the cash flow statement
24. Encumbered assets
25. Commitments
26. Contingent liabilities
27. Post-employment benefits – pensions
28. Post-employment benefits
– other than pensions
29. Share-based payments
30. Financial instruments
31. Related party transactions
32. Events after balance sheet date
33. Environmental matters
34. Acquisition
Company auditor’s report
Condensed company income statement
Condensed company statement of
comprehensive income
Condensed company balance sheet
Condensed company statement of
changes in equity
Condensed company cash flow statement
Notes to the condensed company
financial statements
Investments
140
141
146
146
148
149
150
150
151
157
160
166
189
190
190
191
193
194
194
195
196
196
197
198
93
94
94
95
97
100
100
101
102
103
104
104
105
106
107
107
107
107
114
117
117
118
120
121
121
122
122
124
125
126
128
129
132
132
134
134
134
138
140
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2009 annual report
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Independent auditor’s report to the members
of Sappi Limited
We have audited the group annual financial statements of
Sappi Limited, which comprise the directors’ report, the group
balance sheet as at September 2009, the group income
statement, the group statement of comprehensive income, the
group statement of changes in equity and the group cash flow
statement for the year then ended, a summary of significant
accounting policies and other explanatory notes, as set out on
pages 97 to 103, pages 107 to 192 and pages 87 to 91.
internal control relevant to the entity’s preparation and fair
presentation of the financial statements in order to design audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the entity’s internal control. An audit also includes evaluating
the appropriateness of accounting principles used and the
reasonableness of accounting estimates made by the directors,
as well as evaluating the overall financial statement presentation.
We believe that the audit evidence we have obtained is sufficient
and appropriate to provide a basis for our audit opinion.
Directors’ Responsibility for the Financial Statements
The company’s directors are responsible for the preparation
and fair presentation of these financial statements in accordance
with the International Financial Reporting Standards as issued
by the International Accounting Standards Board, and in the
manner required by the Companies Act of South Africa. This
responsibility includes: designing, implementing and maintaining
internal control relevant to the preparation and fair presentation
of financial statements that are free from material misstatement,
whether due to fraud or error; selecting and applying appropriate
accounting policies; and making accounting estimates that are
reasonable in the circumstances.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit in
accordance with International Standards on Auditing. Those
standards require that we comply with ethical requirements and
plan and perform the audit to obtain reasonable assurance whether
the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit
evidence about the amounts and disclosures in the financial
statements. The procedures selected depend on the auditor’s
judgement, including the assessment of the risks of material
misstatement of the financial statements, whether due to fraud
Opinion
In our opinion, the financial statements present fairly, in all
material respects, the financial position of the group as at
September 2009, and of its financial performance and its
cash flows for the year then ended in accordance with the
International Financial Reporting Standards as issued by the
International Accounting Standards Board, and in the manner
required by the Companies Act of South Africa.
Deloitte & Touche
Per M J Comber
Partner
04 December 2009
Deloitte & Touche – Registered Auditors
Buildings 1 and 2, Deloitte Place
The Woodlands, Woodlands Drive, Woodmead Sandton
Johannesburg, South Africa
National Executive: G G Gelink Chief Executive A E Swiegers Chief Operating Officer
G M Pinnock Audit D L Kennedy Tax & Legal and Risk Advisory L Geeringh Consulting
L Bam Corporate Finance C R Beukman Finance T J Brown Clients & Markets
N T Mtoba Chairman of the Board CR Qually Deputy Chairman of the Board.
or error. In making those risk assessments, the auditor considers
A full list of partners and directors is available on request.
94
Directors’ approval
The directors are responsible for the maintenance of adequate
accounting records and the content, integrity and fair presentation
of the annual financial statements of the group and Sappi Limited
company, and the related financial information included in this
report. These have been prepared in accordance with International
Financial Reporting Standards as issued by the International
Accounting Standards Board, the JSE Limited Listing Requirements
and in the manner required by the South African Companies
Act. In preparing the financial statements, the group applied
appropriate accounting policies supported by reasonable judge-
ments and estimates. The auditors are responsible for auditing
the annual financial statements in the course of executing their
statutory duties.
The directors acknowledge that they are ultimately responsible
for the system of internal financial control established by the
group and are committed to maintaining a strong control
environment. Details relating to the group’s internal control
environment, including the requirement to comply with section
404 of the US Sarbanes-Oxley Act (a requirement for companies
listed on the New York Stock Exchange), are set out in the
Corporate Governance section of this report.
The directors are of the opinion, based on the information and
explanations given by the company’s officers and the internal
auditors, that the system of internal control provides reasonable
assurance that the financial records may be relied on for the
preparation of the financial statements. However, any system
of internal financial control can provide only reasonable, and
not absolute assurance against material misstatement or loss.
The directors have reviewed the group’s budget and cash flow
forecasts. This review, together with the group’s financial position,
existing borrowing facilities and cash on hand, has satisfied the
directors that the group will continue as a going concern for the
foreseeable future. Therefore the group continues to adopt the
going concern basis in preparing its financial statements.
The report and annual financial statements of the group and
the company appear on pages 97 to 198 and were approved
by the board of directors on 04 December 2009 and signed on
its behalf by:
R J Boëttger
chief executive officer
M R Thompson
chief financial officer
Sappi Limited
Secretary’s certificate
In terms of section 268G(d) of the Companies Act of South Africa, I hereby certify that, to the best of my knowledge and belief, the
Company has lodged with the Registrar of Companies, for the financial year ended September 2009, all such returns as are required
of a public company in terms of this Act and that such returns are true, correct and up to date.
Sappi Management Services (Pty) Limited
D J O’Connor
group secretary
04 December 2009
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Audit committee report
The legal responsibilities of the Sappi Limited group audit
committee (the committee) are set out in the Companies Act,
61 of 1973 (as amended). These responsibilities, together with
the requirements of compliance with appropriate governance
and international best practice, are incorporated in the committee’s
charter, which is reviewed annually and approved by the board.
Composition of the committee
All independent non-executive directors, with the exception of
the chairman of the board, are eligible to serve on the committee.
The nomination and governance committee recommends to
the board any appointments to or removals from the board,
which in turn is responsible for the composition of the committee.
The committee has three or more members, all of whom are
financially literate, with three members forming a quorum. Access
to training is provided on an ongoing basis to assist members in
discharging their duties.
The committee comprised the following members during the
year and to the date of this report, except where noted otherwise:
• Dr D Konar (Chairman)
• Mr J E Healey
• Mr D C Brink
• Mr H C Mamsch
• Mrs K R Osar
Biographical details of the current members of the committee
are set out on pages 26 to 28.
The chief executive officer, chief financial officer, group risk
manager, group head internal audit and representatives of the
external auditors are invited to attend the committee meetings.
The external auditors attend all committee meetings and separate
meetings are held to afford them the opportunity of discussion
without the presence of management or internal auditors. The
internal auditors attend all committee meetings and are similarly
afforded separate meetings with the committee.
Internal audit
Internal audit is an independent assurance function, forming part
of the Enterprise-wide Risk Management Framework (ERMF).
The group head internal audit has a direct reporting line to the
committee chairman and also meets regularly with the chief
executive officer and the chief financial officer. Further details
on the internal audit function are contained in the corporate
governance report.
External audit
The group’s external auditors are Deloitte & Touche. Fees paid
to the auditors are disclosed in note 4 to the annual financial
2009 annual report
95
• assist the board of directors in its evaluation of the adequacy
and efficiency of the internal control systems, accounting
practices, information systems and auditing processes applied
within the group in the day-to-day management of its business;
• facilitate and promote communication between the board,
management, the external auditors and the group head internal
audit;
• introduce such measures as in the committee’s opinion may
serve to enhance the credibility and objectivity of financial
statements and reports prepared with reference to the affairs
of the group;
• nominate for appointment as auditors the company registered
auditors who, in the opinion of the committee, are independent
of the group;
• determine the fees to be paid to the auditors and the
auditors’ terms of engagement;
• ensure that the appointment of the auditors complies with
the Companies Act and any other legislation relating to the
appointment of auditors;
• determine the nature and extent of any non-audit services
that the auditors may provide to the group;
• approve any contract with the auditors for the provision of
non-audit services to the group;
• receive and deal appropriately with any complaints (whether
from within or outside the group) relating either to the accounting
practices and internal audit of the group or to the contents or
auditing of its financial statements, or any other related matter
thereto; and
• perform such further functions as may be prescribed.
The committee reports that it has adopted appropriate formal
terms of reference to discharge its responsibilities, has regulated
its affairs in compliance with its charter and has discharged all
its responsibilities as contained therein.
Effectiveness of internal control
The committee monitors the group’s internal controls for
effectiveness and adherence to the ERMF.
The emphasis on risk governance is based on the group’s ERMF.
The ERMF places weight on accountability, responsibility, in-
dependence, reporting, communications and transparency, both
internally and with all our key external stakeholders.
Specific responsibilities of the committee include the following:
Internal control
• Monitoring management’s success at creating and maintaining
an effective internal control environment throughout the group
and at demonstrating and stimulating the necessary respect
for this control environment
• Monitoring the identification and correction of weaknesses
statements. Further details are contained in the corporate
and breakdowns of systems and internal controls.
governance report.
Key functions and responsibilities of the committee
The key functions and responsibilities of the committee as
outlined in the charter are to:
Financial control, accounting and reporting
• Monitoring the adequacy and reliability of management
information and the efficiency of management information
systems
Having considered, analysed, reviewed and debated information
provided by management, internal audit and external audit, the
committee confirmed that:
• the internal controls of the group have been effective in all
material respects throughout the year under review;
• these controls have ensured that the group’s assets have
been safeguarded;
• proper accounting records have been maintained;
• resources have been utilised efficiently; and
• the skills, independence, audit plan, reporting and overall
performance of the external auditors are acceptable and
that it recommends their reappointment in 2010.
Appropriateness of the expertise and experience
of the chief financial officer
In terms of the JSE Listings Requirements the audit committee
had, at its meeting held on 05 November 2009, satisfied itself
as to the appropriateness of the expertise and experience of
the chief financial officer.
Annual financial statements
The committee has:
• reviewed and discussed the audited annual financial statements
included in the annual report with the external auditors, the
chief executive officer and the chief financial officer;
• reviewed significant adjustments resulting from external audit
queries and accepted any unadjusted audit differences; and
• received and considered reports from the internal auditors.
The committee concurs with and accepts the external auditors’
conclusions on the annual financial statements and has
recommended the approval thereof to the board. The board
has subsequently approved the financial statements, which
will be open for discussion at the forthcoming annual general
meeting.
Dr D Konar
audit committee chairman
04 December 2009
96
Audit committee report continued
• Monitoring of the adequacy and efficiency of the group’s
information systems and receiving from them reports thereon
• Reviewing quarterly, interim and final financial results and
statements and reporting for proper and complete disclosure
of timely, reliable and consistent information and confirming
the appropriateness of accounting policies used
• Evaluating on an ongoing basis the appropriateness, adequacy
and efficiency of accounting policies and procedures, com-
pliance with generally accepted accounting practice and
overall accounting standards as well as any changes thereto
• Discussing and resolving any significant or unusual accounting
problems
• Reviewing and monitoring capital expenditure throughout the
group for adequate control, monitoring and reporting
• Monitoring the management and reporting of tax-related
matters
• Monitoring the management and effectiveness of the accounting
and taxation risks as set out in the group’s ERMF
• Reviewing and monitoring all key performance indicators to
ensure that decision making capabilities and the accuracy of
the related reporting and financial results they aid are maintained
at industry levels.
Internal audit
• Direct reporting by the group head internal audit to the chairman
of the committee
• Monitoring the effectiveness of the internal audit function
in terms of its scope, plans, coverage, independence,
skills, staffing, overall performance and position within the
organisation
• Monitoring and challenging, where appropriate, action taken
by management with regard to adverse internal audit findings
• Forming a view on the adequacy and effectiveness of the
control environment.
External audit
• Recommending to the board the selection of the external
auditors and approving their audit fees
• Monitoring the effectiveness of external auditors in terms of
their skills, independence, audit plan, reporting and overall
performance
• Approving non-audit services to be rendered by the external
auditors and monitoring conflicts of interest
• Considering whether the extent of reliance placed on internal
audit by the external auditors is appropriate and whether there
are any significant gaps between internal and external audit.
Regulatory reporting
• Reviewing the adequacy of the regulatory reporting processes,
including the quality of that reporting and the adequacy of
systems and people to perform these functions
• Considering the contents of any regulatory reports related to
the key functions of the committee and monitoring management
actions to resolve any issues identified
• Performing such other functions as are prescribed in the
regulations relating to the Act.
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Directors’ report
for the year ended September 2009
Your directors submit their report for the year ended
September 2009.
Business of Sappi Limited (Sappi or the company)
and its operating companies mentioned below
(the group)
The group manufactures and sells a wide range of pulp, paper
and wood products for use in almost every sphere of economic
activity. The group conducts its business through two business
units, namely:
• Sappi Fine Paper; and
• Sappi Forest Products.
Sappi Fine Paper has manufacturing and marketing facilities
in Europe, North America, Southern Africa and Asia and
produces mainly high quality branded coated fine paper. It also
manufactures uncoated graphic and business paper, coated
and uncoated specialities papers, and casting release paper
used in the manufacture of artificial leather and textured
polyurethane applications. Sappi Forest Products, based in
Southern Africa, produces packaging paper and newsprint,
pulp, chemical cellulose, and forest and timber products for
Southern Africa and export markets. Sappi Trading operates a
trading network for the marketing and distribution of chemical
cellulose and market pulp throughout the world and of the
group’s other products in areas outside our core operating
regions of North America, Europe and Southern Africa.
Reporting period
The group’s financial period ends on the Sunday closest to the
year end date and results are reported as if at the year end date.
International Financial Reporting Standards (IFRS)
As a South African company and in terms of the requirements
of the JSE Limited (JSE), Sappi’s financial reporting is based
on IFRS as issued by the International Accounting Standards
Board (IASB).
The US Dollar is the major trading currency of the pulp and
paper industry. The group reports its results in US Dollars in
order to facilitate the understanding of the results.
For the convenience of users, the income statement, the
statement of comprehensive income, balance sheet and cash
flow statement of the group have been translated into South
African Rands on pages 104 to 106.
Share capital
As at September 2009 the authorised and issued share capital
of Sappi were as follows:
Authorised:
725,000,000 ordinary shares of ZAR1 each
for an authorised share capital of
Issued:
537,117,864 ordinary shares of ZAR1 each
for an issued share capital of
Share premium
ZAR725 million
US$70 million
US$1,471 million
2009 annual report
97
The authorised ordinary share capital was increased during the
year from 325,000,000 to 1,325,000,000 ordinary shares with a
par value of ZAR1.00 per share to facilitate the rights offer in
December 2008. The authorised ordinary share capital was then
subsequently reduced from 1,325,000,000 to 725,000,000
ordinary shares with a par value ZAR1.00 per share. The
issued ordinary share capital increased during the year from
ZAR239,071,892 comprising of 239,071,892 shares of ZAR1.00
per share, to ZAR537,117,864 with the issue of 286,886,270
rights offer shares of ZAR1.00 each at a premium of ZAR19.27
and of 11,159,702 shares of ZAR1.00 at a premium of ZAR36.60
each in settlement of part of the consideration for the acquisition
of M-real’s coated graphic paper business. Of the 537,117,864
shares in issue, at year end 21,384,559 shares were held by
the group through a wholly-owned subsidiary company (see
paragraph below).
Purchase of shares by a subsidiary
Through a wholly-owned subsidiary, the Sappi group has to
date acquired approximately 21.4 million Sappi shares (treasury
shares) on the open market of the JSE Limited for approximately
US$186.7 million. This accords with Sappi’s stated intention,
announced on 09 November 2000, and the approval given at all
subsequent annual general meetings of the company’s share-
holders up to and including 2008, for a wholly-owned Sappi
subsidiary to acquire Sappi shares, if prevailing circumstances
(including market conditions) so warrant. None of these shares
were acquired during the 2009 financial year. However, in
December 2008, the subsidiary company acquired a further
11,860,873 shares by exercising its rights in terms of the
rights offer.
Some of the treasury shares, have been, and will continue to
be, utilised to meet the requirements of the Sappi Limited Share
Incentive Trust and the Sappi Limited Performance Share
Incentive Trust from time to time. During the year, approximately
382,975 treasury shares were issued to participants of the
Sappi Limited Share Incentive Trust. Refer to note 29 of the
group annual financial statements for additional details relating
to these treasury shares. Following the rights offer in December
2008, and considering that it is the group’s stated intention to
reduce debt, it is unlikely that the group will seek approval for
the purchase of Sappi shares in the foreseeable future.
Significant announcements during the year under
review and subsequent to year end
During the 2009 financial year, the following significant announce-
ments were made:
• On 31 December 2008, Sappi announced the successful
conclusion of its acquisition of M-real’s coated graphic paper
business. The acquisition was financed through a combination
of equity, assumed debt, the cash proceeds from a fully
subscribed rights offering and a vendor loan note
• On 26 August 2009, Sappi announced that it would per-
manently cease operations at its coated fine paper mill in
98 Directors’ report continued
Muskegon, Michigan, North America. Further details can be
found in note 9 of the group annual financial statements
• On 28 August 2009, Sappi announced the successful
completion of a series of refinancing transactions undertaken
to improve the group’s debt maturity profile and to strengthen
its balance sheet. Further details can be found in note 20
of the group annual financial statements and in the Chief
Financial Officer’s report
• On 31 August 2009, Sappi announced the commencement
of a consultation process with employees and trade unions
at its South African Kraft and Fine Paper mills regarding cost
reduction and efficiency improvement initiatives
• On 02 October 2009, Sappi informed shareholders that it
had decided to delist from the London Stock Exchange. The
cancellation of the UK listing came into effect on Monday
02 November 2009
• On 22 October 2009, Sappi announced that it would enter
into a consultation process with employee representatives
at the Kangas Mill in Finland. The aim of this process is to
identify the best way of improving company profitability, which
may include a full closure of the mill
• On 30 October 2009, Sappi announced the intended closure
of Sappi Usutu Pulp Mill and the restructuring of the forestry
business in Swaziland in response to market conditions and
forest fire damage.
Financing
During the second half of fiscal 2009, the net proceeds of the
€350 million and US$300 million of senior notes due in 2014
were released from escrow and we completed the refinancing
of the €400 million (US$570 million) OeKB loan with a five-year
amortising maturity. We repaid in full all amounts outstanding
under our previous revolving credit facility (RCF) and replaced
it with a new RCF in an amount of €209 million (US$307 million),
all of which remains undrawn. We repaid the entire €220 million
of vendor loan notes (entered into earlier in the year to finance
part of the acquisition of M-real’s coated graphic paper business)
at a discount of 13.5% (approximately €30 million/US$41 million).
During fiscal 2009, Sappi Manufacturing (Pty) Ltd raised
ZAR1 billion (US$135 million) in a combination of long-term
bank and public debt.
Following the refinancing, the group has good liquidity with cash
exceeding the amount of short-term debt and the undrawn RCF
and has no major debt maturities before the US$500 million
2012 bonds become due in 2012.
Covenants of all international term debt are similar and are
detailed in the Chief Financial Officer’s report. All long-term debt
is supported, amongst others, by a Sappi Limited guarantee.
At the end of the 2009 financial year, Sappi’s net debt had an
average time to maturity of 4.8 years.
non-current borrowings are set out in note 20 of the group
annual financial statements.
Dividends
In light of the group’s performance, the priority is to reduce
indebtedness and preserve liquidity. The board has therefore
decided not to declare a dividend for the current financial year
ended September 2009. Refer to the CFO’s report for details
on the restrictions limiting the payment of cash dividends.
The Sappi Limited Share Incentive Trust and The
Sappi Limited Performance Share Incentive Trust
Sappi has in place two share-based incentive programmes.
The first is The Sappi Limited Share Incentive Trust (the Scheme)
which was approved by shareholders in March 1997, and which
has been amended in certain respects from time to time. The
second is The Sappi Limited Performance Share Incentive Trust
(the Plan) which was approved by shareholders in 2005. In
approving the Plan, shareholders fixed the maximum number
of shares which may be allocated in aggregate to the Scheme
and the Plan at 19 million shares (equivalent to 7.95% of the
shares then in issue), subject to adjustment in case of any
increase or reduction of Sappi’s issued share capital on any
conversion, redemptions, consolidations, sub-division and/or
any rights or capitalisation issues of shares. Subsequent to the
rights offering mentioned above, this number has been adjusted
to 42,700,870 shares (still equivalent to 7.95% of the shares
currently in issue), in accordance with the rules of the Scheme
and of the Plan.
In connection with the rights offering, adjustments were made
to outstanding grants to employees to address the dilution
resulting from the change in the number of shares issued as a
result of the rights offering. Full details of this are set out in note
29 of the group’s current financial statements.
Insurance
The group has an active programme of risk management in
each of its geographical operating regions to address and
reduce exposure to property damage and business interruption.
All production and distribution units are subjected to regular
risk assessments by external risk engineering consultants, the
results of which receive the attention of senior management.
The risk mitigation programmes are co-ordinated at group level
in order to achieve a standardisation of methods. Work on
improved enterprise risk management is ongoing and aims to
lower the risk of incurring losses from uncontrolled incidents.
Property, plant and equipment
The major changes in the nature of the property, plant and
equipment relate mainly to the acquisition of M-real’s coated
graphic paper business. Particulars are set out under notes 9
Borrowing facilities
The group’s net debt at September 2009 amounted to
and 34 of the group annual financial statements. There were no
changes to the group’s policy relating to the use of property,
US$2.6 billion (September 2008: US$2.4 billion). Details of the
plant and equipment.
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2009 annual report
99
Litigation
We become involved from time to time in various claims and
at the forthcoming annual general meeting. They will in terms of
the Articles of Association retire from the board at that meeting
lawsuits incidental to the ordinary course of our business. We
and being eligible, will offer themselves for re-election.
are not currently involved in legal proceedings which, either
individually or in the aggregate, are expected to have a material
adverse effect on our business, assets or properties (see
note 26).
Directors and secretaries
The composition of the board of directors is provided on pages
26 to 28. There were no changes to the composition of the
board during the year and there continued to be 13 directors,
two of whom were executive directors. All 11 non-executives
remain independent.
Personal details of Dr D Konar, Mr J D McKenzie, Sir A N R Rudd
and Mr M R Thompson are set out on pages 27 to 28 of this
report and of Mr P N Mageza and Dr R Thummer are set out on
page 205 of this report.
The remuneration and fees of the directors of Sappi Limited
are set out in the Compensation report on pages 87 to 91.
The beneficial interests of directors in the shares of the company
(including options and rights and options in terms of the Scheme
and conditional share awards in terms of the Plan) are disclosed
in the Compensation report on pages 87 to 91.
In terms of the Company’s Articles of Association, Dr D Konar,
Mr J D McKenzie, Sir A N R Rudd and Mr M R Thompson will
A register of interests of directors and other executives in shares
of the company is available to shareholders and the public
retire by rotation from the board at the forthcoming annual
on request.
general meeting and all being eligible, have offered themselves
for re-election. The board recommends each of them for
re-appointment.
Having reached the company’s retirement age of 70 years
for non-executive directors, Mr D C Brink and Mr F A Sonn will
retire from the board on 31 December 2009.
Subsequent to the year end, Mr P N Mageza and Dr R Thummer
were appointed to the board with effect from 01 January 2010 and
01 February 2010 respectively. In terms of the company’s Articles
The secretaries and their business and postal addresses are
set out on page 206.
Special resolutions
A full list of the special resolutions passed by the company
and its subsidiaries during the year will be made available to
shareholders on request.
Subsidiary companies
Details of the company’s significant subsidiaries are set out in
of Association, it will be necessary to confirm their appointments
Annexure A on page 198.
100
Group income statement
for the year ended September 2009
US$ million
Sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Other operating expenses (income)
Share of profit from associates and joint ventures
Operating (loss) profit
Net finance costs
Finance costs
Finance revenue
Finance cost capitalised
Net foreign exchange gains
Net fair value loss on financial instruments
(Loss) profit before taxation
Taxation (benefit) charge
(Loss) profit for the year
Basic weighted average number of ordinary
shares in issue (millions)
Basic (loss) earnings per share (US cents)
Diluted (loss) earnings per share (US cents)
Note
4
4
4
13
4
5
6
7
7
2009
5,369
5,029
340
385
39
(11)
(73)
145
198
(61)
–
(17)
25
(218)
(41)
(177)
2008
5,863
5,016
2007
5,304
4,591
847
385
165
(17)
314
126
181
(38)
(16)
(8)
7
188
86
102
713
362
(22)
(10)
383
134
173
(21)
(14)
(13)
9
249
47
202
482.6
(37)
(37)
362.2
28
28
360.6
56
55
Group statement of comprehensive income
for the year ended September 2009
Note
2009
2008
2007
US$ million
(Loss) profit for the year
Other comprehensive income, net of tax
18
Exchange differences on translation of foreign operations
Actuarial (losses) gains on pension funds
Pension fund assets recognised
Effect of cash flow hedges
Deferred tax on other comprehensive income
Total comprehensive income for the year
(177)
(197)
14
(229)
–
(14)
32
(374)
102
(256)
(262)
7
–
–
(1)
(154)
202
277
151
101
45
–
(20)
479
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Group balance sheet
at September 2009
US$ million
Assets
Non-current assets
Property, plant and equipment
Plantations
Deferred tax assets
Goodwill and intangible assets
Joint ventures and associates
Other non-current assets
Derivative financial instruments
Current assets
Inventories
Trade and other receivables
Derivative financial instruments
Cash and cash equivalents
Total assets
Equity and liabilities
Shareholders’ equity
Ordinary share capital and share premium
Non-distributable reserves
Foreign currency translation reserve
Hedging reserves
Retained earnings
Non-current liabilities
Interest-bearing borrowings
Deferred tax liabilities
Derivative financial instruments
Other non-current liabilities
Current liabilities
Interest-bearing borrowings
Overdraft
Derivative financial instruments
Trade and other payables
Taxation payable
Provisions
Total equity and liabilities
2009 annual report
101
Note
2009
2008
9
10
11
12
13
14
30
15
16
30
17
19
20
11
30
21
20
30
22
4,867
3,934
611
56
32
123
101
10
2,430
792
858
10
770
4,408
3,361
631
41
7
124
168
76
1,701
725
698
4
274
7,297
6,109
1,794
1,541
143
(354)
(14)
478
3,662
2,726
355
24
557
1,841
601
19
14
1,116
56
35
7,297
1,605
707
124
(121)
–
895
2,578
1,832
399
1
346
1,926
821
26
24
959
54
42
6,109
102
Group cash flow statement
for the year ended September 2009
US$ million
Note
2009
2008
2007
23.1
23.2
23.3
23.4
23.5
23.6
34
Cash retained from operating activities
Cash generated from operations
– Decrease in working capital
Cash generated from operating activities
– Finance costs paid
– Finance revenue received
– Taxation paid
Cash available from operating activities
– Dividends paid
Cash utilised in investing activities
Investment to maintain operations
– Replacement of non-current assets
– Proceeds on disposal of non-current assets
– Decrease in other non-current assets
Investment to expand operations
– Additions of non-current assets
– Acquisition
Cash effects of financing activities
Proceeds from interest-bearing borrowings*
Repayment of interest-bearing borrowings*
Rights issue proceeds
Costs directly attributable to the rights issue
Costs directly attributable to the bond offerings
(Decrease) increase in bank overdrafts
Net movement in cash and cash equivalents
Cash and cash equivalents at beginning of year
Translation effects
Cash and cash equivalents at end of year
23.7
* Includes gross cash flows relating to ongoing short-term financing activities.
461
432
152
584
(107)
26
(5)
498
(37)
(762)
(143)
(147)
2
2
(619)
(29)
(590)
707
3,469
(3,222)
575
(31)
(78)
(6)
406
274
90
770
355
623
1
624
(139)
13
(70)
428
(73)
(494)
(239)
(250)
7
4
(255)
(255)
–
49
2,077
(2,032)
–
–
–
4
(90)
364
–
274
388
585
60
645
(183)
21
(27)
456
(68)
(364)
(38)
(116)
50
28
(326)
(326)
–
98
806
(719)
–
–
–
11
122
224
18
364
Group statement of changes in equity
for the year ended September 2009
2009 annual report
103
Number of
ordinary
shares
Ordinary
share
capital
Share
premium
Ordinary
share
capital
and
share
premium
Foreign
currency
translation
reserve
Cash
flow
hedge
accounting
reserve
Non-
distributable
reserves
Retained
earnings
Total
equity
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US$ million
Balance
– September 2006
Transfer to retained
earnings
Share-based payment
Transfers to Sappi Limited
Share Incentive Trust
Total comprehensive
income
Dividends – US$0.30
per share*
Balance
– September 2007
Transfer from retained
earnings
Share-based payment
Transfers to Sappi Limited
Share Incentive Trust
Total comprehensive
income
Dividends – US$0.32
per share*
Balance
– September 2008
Transfer from retained
earnings
Share-based payments
Transfers to Sappi Limited
Share Incentive Trust
Rights issue proceeds
Costs directly attributable
to the rights issue
Issue to M-real
Total comprehensive
income
Dividends – US$0.16
per share*
Balance
– September 2009
Note reference:
227.0
29
686
715
109
(33)
–
–
1.5
–
–
–
–
–
5
–
–
–
14
91
–
–
–
14
96
–
(13)
5
–
13
–
228.5
34
791
825
114
–
–
0.7
–
–
–
–
–
–
–
6
–
–
6
(6)
(118)
(124)
–
–
–
8
10
–
(8)
–
–
–
–
42
–
9
–
–
–
(130)
–
229.2
28
679
707
124
(121)
–
–
–
–
–
–
–
–
0.3
275.0
–
11.2
–
–
–
–
–
28
–
1
–
–
2
547
(31)
44
–
–
2
575
(31)
45
13
230
243
–
–
–
515.7
70
1,471
1,541
17
6
9
–
–
–
–
4
–
143
19
* Dividends relate to the previous financial year’s earnings but were declared subsequent to year-end.
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
595
1,386
13
–
–
–
5
14
328
479
(68)
(68)
868
1,816
(8)
–
–
–
10
6
108
(154)
(73)
(73)
895
1,605
(6)
–
–
–
–
–
–
9
2
575
(31)
45
(233)
(14)
(374)
(374)
–
–
(37)
(37)
(354)
(14)
478
1,794
104
Group income statement in Rands convenience translation
for the year ended September 2009
ZAR million
Sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Other operating expenses (income)
Share of profit from associates and joint ventures
Operating (loss) profit
Net finance costs
Finance costs
Finance revenue
Finance cost capitalised
Net foreign exchange gains
Net fair value loss on financial instruments
(Loss) profit before taxation
Taxation (benefit) charge
(Loss) profit for the year
Basic weighted average number of ordinary shares in issue (millions)
Basic (loss) earnings per share (SA cents)
Diluted (loss) earnings per share (SA cents)
Unaudited
2008
43,559
37,266
6,293
2,860
1,226
(126)
2,333
937
1,345
(282)
(119)
(59)
52
1,396
638
758
362.2
208
208
2009
48,393
45,329
3,064
3,470
351
(99)
(658)
1,307
1,785
(550)
–
(153)
225
(1,965)
(370)
(1,595)
482.6
(333)
(333)
Group statement of comprehensive income in Rands
convenience translation
for the year ended September 2009
ZAR million
(Loss) profit for the year
Other comprehensive income, net of tax
Exchange differences on translation of foreign operations
Actuarial (losses) gains on pension funds
Pension fund assets recognised
Effect of cash flow hedges
Deferred tax on other comprehensive income
Unaudited
2008
758
(1,902)
(1,947)
52
–
–
(7)
2009
(1,595)
(1,776)
126
(2,064)
–
(126)
288
2007
38,051
32,936
5,115
2,597
(158)
(72)
2,748
962
1,241
(151)
(100)
(93)
65
1,786
337
1,449
360.6
402
395
2007
1,449
1,988
1,083
725
323
–
(143)
Total comprehensive income for the year
(3,371)
(1,144)
3,437
Note:
The above financial results have been translated into ZAR from US Dollars using the exchange rates as set out in accounting policies note 2.2.1. The year end rate was used
for translating assets and liabilities and the average rate for translating income, expenditure and cash flow items except for dividends which have been translated at the rate
of exchange on the date of declaration. The translation was made solely for the convenience of the readers and is not defined in IAS 21. It should be noted that the translated
ZAR figures from US Dollars do not necessarily represent that these US Dollar amounts could be converted into ZAR at the time when the transaction occurred.
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Group balance sheet in Rands convenience translation
at September 2009
2009 annual report
105
ZAR million
Assets
Non-current assets
Property, plant and equipment
Plantations
Deferred tax assets
Goodwill and intangible assets
Joint ventures and associates
Other non-current assets
Derivative financial instruments
Current assets
Inventories
Trade and other receivables
Derivative financial instruments
Cash and cash equivalents
Total assets
Equity and liabilities
Shareholders’ equity
Non-current liabilities
Interest-bearing borrowings
Deferred tax liabilities
Derivative financial instruments
Other non-current liabilities
Current liabilities
Interest-bearing borrowings
Overdraft
Derivative financial instruments
Trade and other payables
Taxation payable
Provisions
Total equity and liabilities
Unaudited
2009
2008
36,070
29,156
4,528
415
237
912
748
74
18,010
5,870
6,359
74
5,707
35,594
27,140
5,095
331
57
1,001
1,356
614
13,735
5,854
5,636
32
2,213
54,080
49,329
13,296
27,140
20,203
2,631
178
4,128
13,644
4,454
141
104
8,271
415
259
12,961
20,817
14,794
3,222
8
2,793
15,551
6,630
210
194
7,744
436
337
54,080
49,329
Note:
The above financial results have been translated into ZAR from US Dollars using the exchange rates as set out in accounting policies note 2.2.1. The year end rate was used
for translating assets and liabilities and the average rate for translating income, expenditure and cash flow items except for dividends which have been translated at the rate
of exchange on the date of declaration. The translation was made solely for the convenience of the readers and is not defined in IAS 21. It should be noted that the translated
ZAR figures from US Dollars do not necessarily represent that these US Dollar amounts could be converted into ZAR at the time when the transaction occurred.
106
Group cash flow statement in Rands convenience translation
for the year ended September 2009
ZAR million
Cash retained from operating activities
Cash generated from operations
– Decrease in working capital
Cash generated from operating activities
– Finance costs paid
– Finance revenue received
– Taxation paid
Cash available from operating activities
– Dividends paid
Cash utilised in investing activities
Investment to maintain operations
– Replacement of non-current assets
– Proceeds on disposal of non-current assets
– Decrease in other non-current assets
Investment to expand operations
– Additions of non-current assets
– Acquisition
Cash effects of financing activities
Proceeds from interest-bearing borrowings*
Repayment of interest-bearing borrowings*
Rights issue proceeds
Costs directly attributable to the rights issue
Costs directly attributable to the bond offerings
(Decrease) increase in bank overdrafts
Net movement in cash and cash equivalents
Cash and cash equivalents at beginning of year
Translation effects
Cash and cash equivalents at end of year
Unaudited
2008
2,638
4,586
7
4,593
(1,033)
97
(520)
3,137
(499)
(3,669)
(1,775)
(1,857)
52
30
(1,894)
(1,894)
–
364
15,431
(15,097)
–
–
–
30
(667)
2,501
379
2,213
2009
4,156
3,935
1,370
5,305
(964)
234
(45)
4,530
(374)
(6,868)
(1,289)
(1,325)
18
18
(5,579)
(261)
(5,318)
6,374
31,268
(29,041)
5,183
(279)
(703)
(54)
3,662
2,213
(168)
5,707
2007
2,783
4,234
430
4,664
(1,313)
151
(194)
3,308
(525)
(2,611)
(272)
(832)
359
201
(2,339)
(2,339)
–
703
5,782
(5,158)
–
–
–
79
875
1,741
(115)
2,501
* Includes gross cash flows relating to ongoing short-term financing activities.
Note:
The above financial results have been translated into ZAR from US Dollars using the exchange rates as set out in accounting policies note 2.2.1. The year end rate was used
for translating assets and liabilities and the average rate for translating income, expenditure and cash flow items except for dividends which have been translated at the rate
of exchange on the date of declaration. The translation was made solely for the convenience of the readers and is not defined in IAS 21. It should be noted that the translated
ZAR figures from US Dollars do not necessarily represent that these US Dollar amounts could be converted into ZAR at the time when the transaction occurred.
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Notes to the group annual financial statements
for the year ended September 2009
1. Business
Sappi Limited, a corporation organised under the laws of the
Republic of South Africa (the ‘company’ and, together with its
consolidated subsidiaries, ‘Sappi’ or the ‘group’), was formed
in 1936 and is a major, vertically integrated international pulp
and paper producer. Sappi is a leading global producer of coated
fine paper and chemical cellulose. The group has manufacturing
facilities in ten countries, on four continents, and customers in
over 100 countries across the globe.
The group is comprised of its Sappi Fine Paper and Sappi Forest
Products business units. Sappi Fine Paper has manufacturing
and marketing facilities in North America, Europe, Southern
Africa and Asia and produces mainly high quality branded coated
fine paper. It also manufactures uncoated graphic and business
paper, coated and uncoated speciality paper, and casting release
paper used in the manufacture of artificial leather and textured
polyurethane applications. Sappi Forest Products, based in
Southern Africa, produces commodity paper products, pulp,
chemical cellulose and forest and timber products for Southern
Africa and export markets. The group operates a trading network
called Sappi Trading for the international marketing and
distribution of chemical cellulose and market pulp throughout the
world and of the group’s other products in areas outside its core
operating regions of North America, Europe and Southern Africa.
All sales and costs associated with Sappi Trading are allocated to
our reporting segments.
2. Accounting policies
The following principal accounting policies have been con-
sistently applied in dealing with items that are considered material
in relation to the Sappi Limited group financial statements. The
group has, however, elected to early adopt IAS 1 Presentation of
Financial Statements. This did not have an impact on the group’s
reported results or financial position.
2.1 Basis of preparation
The group’s consolidated financial statements have been
prepared in accordance with:
– International Financial Reporting Standards (IFRS) as issued
by the International Accounting Standards Board (IASB);
– Interpretations issued by the International Financial Reporting
Interpretations Committee (IFRIC) of the IASB; and
– the requirements of the South African Companies Act of 1973.
The financial statements are presented in United States Dollars
(US$), as it is the major trading currency of the pulp and paper
industry, and are rounded to the nearest million except as
otherwise indicated.
The financial statements are prepared on the historical-cost
basis, except for certain financial assets and liabilities and
plantations that are stated at their fair value.
Non-current assets and disposal groups held for sale are
stated at the lower of carrying amount and fair value less costs
to sell.
(i) Fiscal year
The group’s financial year end is on the Sunday closest to the
last day of September.
Accordingly, the last three financial years were as follows:
• 29 September 2008 to 27 September 2009 (52 weeks)
• 01 October 2007 to 28 September 2008 (52 weeks)
• 02 October 2006 to 30 September 2007 (52 weeks)
The group has disclosed two years’ comparative information
for the income statement, statement of comprehensive income
and the cash flow statement to be consistent with its disclosure
in the annual report prepared on Form 20-F.
(ii) Underlying concepts
The financial statements are prepared on the going concern
basis.
Assets and liabilities and income and expenses are not offset
in the income statement or balance sheet unless specifically
permitted by an accounting standard or interpretation.
Changes in accounting estimates are recognised prospectively
in profit or loss, except to the extent that they give rise to changes
in the carrying amount of recognised assets and liabilities where
the change in estimate is recognised immediately.
Prior period errors are retrospectively restated if material.
2.2 Accounting policies
2.2.1 Foreign currencies
(i) Foreign currency transactions
Transactions in foreign currencies are converted into the
functional currency of the group’s individual operations at the
rate of exchange ruling at the date of such transactions.
Monetary and non-monetary assets and liabilities in foreign
currencies are translated into the functional currency of the
entities’ in the group at rates of exchange ruling at the reporting
date.
Exchange gains and losses on the translation and settlement
of foreign currency monetary assets and liabilities during the
period are recognised in the profit or loss in the period in which
they arise.
(ii) Consolidation of foreign operations
The assets and liabilities, including goodwill of entities that have
non-dollar functional currencies are translated at the closing
rate, while the income and expenses are translated using the
average exchange rate. The differences that arise on translation
are reported directly in other comprehensive income. These
translation differences are recycled through profit or loss for the
period on disposal of the foreign operation.
The functional currency of the European business is Euro,
the Southern African business is ZAR and the North American
business is US Dollars. Other minor companies in the group
may have different functional currencies depending on the
business environment in which they operate.
108
Notes to the group annual financial statements continued
The group used the following exchange rates for financial
reporting purposes:
accordance with IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations, which are recognised and measured
Rate at
at fair value less costs to sell.
Sep 09
Sep 08
Sep 07
ZAR to one US$
GBP to one US$
EUR to one US$
7.4112
0.6268
0.6809
8.0751
0.5421
0.6843
6.8713
0.4885
0.7007
Average annual rate
Sep 09
Sep 08
Sep 07
ZAR to one US$
GBP to one US$
EUR to one US$
9.0135
0.6419
0.7322
7.4294
0.5049
0.6638
7.1741
0.5072
0.7499
2.2.2 Group accounting
(i) Subsidiary undertakings and special-purpose entities
The group financial statements include the assets, liabilities and
results of the company and subsidiary undertakings (including
special-purpose entities) controlled by the group. The results of
subsidiary undertakings acquired or disposed of in the year are
included in the consolidated income statement from the date of
acquisition or up to the date of disposal or cessation of control.
Intragroup balances and transactions, and profits and losses
arising from intragroup transactions, are eliminated in the
preparation of the group financial statements. Unrealised losses
are not eliminated to the extent that they provide objective
evidence of impairment.
(ii) Associates and joint ventures
The results and assets and liabilities of associates and joint
ventures are incorporated in the group’s financial statements
using the equity method of accounting. The share of the
associates’ or joint ventures’ retained income, which is the
profit after tax, is determined from their latest financial statements.
The carrying amount of such investments is reduced to recognise
any impairment in the value of individual investments.
Where an entity within the group transacts with an associate
or joint venture of the group, unrealised profits and losses are
eliminated to the extent of the group’s interest in the relevant
associate or joint venture.
(iii) Goodwill
The acquisition of subsidiaries is accounted for using the purchase
method. The cost of the acquisition is measured at the aggregate
of the fair values, at the date of exchange, of assets given, liabilities
incurred or assumed, and equity instruments issued by the
group in exchange for control of the acquiree, plus any costs
directly attributable to the business combination. The acquiree’s
identifiable assets, liabilities and contingent liabilities that meet
the conditions for recognition under IFRS 3 are recognised at
their fair value at the acquisition date, except for non-current
assets (or disposal groups) that are classified as held for sale in
The excess between the fair value of the purchase consideration
and the group’s interest in the net fair value of the identifiable
assets, liabilities and contingent liabilities acquired is recognised
as goodwill in the balance sheet.
Goodwill is subsequently held at cost less any accumulated
impairment losses. Goodwill is not amortised but is tested
for impairment annually or more frequently where there is an
indication of impairment based on an allocation to one or more
cash-generating units (CGUs) in which the synergies from the
business combinations are expected.
Impairment losses recognised in respect of CGUs are allocated
first to reduce the carrying amount of any goodwill allocated
to a CGU and then to reduce the carrying amount of the other
assets in the CGU on a pro rata basis. Impairment losses relating
to goodwill are not reversed.
Critical areas of judgement and the use of estimates are included
in section 2.3 of the accounting policies.
2.2.3 Environmental expenditures and liabilities
Environmental accruals are recorded based on current inter-
pretation of environmental laws and regulations. Amounts
accrued do not include third-party recoveries. All available
information is considered, including the results of remedial
investigation/feasibility studies (RI/FS). In evaluating any disposal
site environmental exposure, an assessment is made of the
company’s potential share of the remediation costs by reference
to the known or estimated volume of the company’s waste that
was sent to the site and the range of costs to treat similar waste
at other sites if a RI/FS is not available.
2.2.4 Financial instruments
(i) Initial recognition
Financial instruments are recognised on the balance sheet
when the group becomes a party to the contractual provisions
of a financial instrument. All purchases of financial assets that
require delivery within the timeframe established by regulation
or market convention (‘regular way’ purchases) are recognised
at transaction date.
(ii) Initial measurement
All financial instruments are initially recognised at fair value plus
transaction costs that are incremental to the group and directly
attributable to the acquisition or issue of the financial asset or
financial liability except for those classified as ‘fair value through
profit and loss’.
(iii) Subsequent measurement
Subsequent to initial measurement, financial instruments are
either measured at fair value or amortised cost, depending on
their classification:
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• Financial assets and financial liabilities at fair value
through profit or loss
investment in an equity instrument classified as available-for-
sale are not reversed through profit or loss.
Financial instruments at fair value through profit or loss consist of
items classified as held for trading. The group has not designated
any financial instruments as at fair value through profit or loss.
• Non-trading financial liabilities
All financial liabilities, other than those at fair value through profit
or loss, are classified as non-trading financial liabilities and are
measured at amortised cost.
• Loans and receivables
Loans and receivables are carried at amortised cost, with interest
revenue recognised in profit and loss for the period using the
effective interest method.
• Available-for-sale financial assets
Available-for-sale financial assets are measured at fair value, with
any gains and losses recognised directly in equity along with the
associated deferred taxation. Any foreign currency translation
gains or losses or interest revenue, measured on an effective-
yield basis, are recognised in profit or loss.
(iv) Embedded derivatives
Certain derivatives embedded in financial and host contracts,
are treated as separate derivatives and recognised on a stand-
alone basis, when their risks and characteristics are not closely
related to those of the host contract and the host contract is not
carried at fair value, with unrealised gains and losses reported in
profit or loss.
(v) Derecognition
(vii) Derivatives and hedge accounting
Hedge accounting recognises the offsetting effects on profit or
loss of changes in the fair values of the hedging instrument and
the hedged item.
Hedging relationships are of three types:
• Fair value hedges
If a fair value hedge meets the conditions for hedge accounting,
any gain or loss on the hedged item attributable to the hedged
risk is included in the carrying amount of the hedged item and
recognised in profit or loss. The changes in the fair value of the
hedging instrument and the hedged item is recognised in net
finance costs in profit or loss.
• Cash flow hedges
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 recognised
directly in equity and the ineffective portion is recognised in
profit or loss.
The gains or losses, which are recognised directly in shareholders’
equity, are transferred to profit or loss in the same period in which
the hedged transaction affects profit or loss.
If the forecasted transaction results in the recognition on a non-
financial asset or non-financial liability, the associated cumulative
gain or loss is transferred from equity to the underlying asset or
liability on the transaction date.
The group derecognises a financial asset when the rights to
receive cash flows from the asset have expired or have been
transferred and the group has transferred substantially all risks
• Hedge of a net investment in a foreign operation
The group does not currently have any hedges of net investments
in foreign operations.
and rewards of ownership.
A financial liability is derecognised when and only when the
liability is extinguished, ie when the obligation specified in the
contract is discharged, cancelled or has expired.
(vi) Impairment of financial assets
• Loans and receivables
An impairment loss is recognised in profit or loss when there is
evidence that the group will not be able to collect all amounts
due according to the original terms of the receivables.
• Available-for-sale financial assets
When there is objective evidence that an available-for-sale
financial asset is impaired, the cumulative unrealised gains and
losses previously recognised in equity are removed from equity
and recognised in profit or loss even though the financial asset
has not been derecognised.
If, in a subsequent period, the fair value of a debt instrument
classified as available-for-sale increases due to an objective
event occurring after the impairment loss was recognised in
profit or loss, the impairment loss is reversed in profit or loss for
the period. Impairment losses recognised in profit or loss for an
Hedge accounting is discontinued on a prospective basis
when the hedge no longer meets the hedge accounting criteria
(including when it becomes ineffective), when the hedge instrument
is sold, terminated or exercised when, for cash flow hedges, the
designation is revoked and the forecast transaction is no longer
expected to occur. Where a forecasted transaction is no longer
expected to occur, the cumulative gain or loss deferred in equity
is transferred to profit or loss.
Critical areas of judgement and the use of estimates involving
hedge accounting are included in section 2.3 of the accounting
policies.
(viii) Offsetting financial instruments and related income
Financial assets and liabilities are offset and the net amount
reported in the balance sheet only when there is a legally
enforceable right to set off and there is an intention of settling
on a net basis or realising the asset and settling the liability
simultaneously. Income and expense items are offset only to
the extent that their related instruments have been offset in the
balance sheet, with the exception of those relating to hedges,
which are disclosed in accordance with the profit or loss effect
of the hedged item.
110
Notes to the group annual financial statements continued
(ix) Interest income and expense
Interest income and expense are recognised in profit or loss
using the effective interest rate method.
2.2.5 Government grants
Government grants are recognised in income over the periods
necessary to match them with the related costs which they
are intended to compensate. Government grants related to
income are recognised in sundry income under Selling, General
and Administrative expenses.
Government grants related to assets are recognised by deducting
the grant from the carrying amount of the related asset.
2.2.6 Intangible assets
(i) Research activities
Expenditures on research activities, internally generated goodwill
and brands are recognised in profit or loss as an expense as
incurred.
(ii) Development activities
Expenditure on engineering projects, computer software and
other development activities, is capitalised if these projects
and activities are technically and commercially feasible and the
group has sufficient resources to complete development.
Computer development expenditure is amortised when the
relevant software is available for use. Intangible assets are stated
at cost less accumulated amortisation and impairment losses.
Intangible assets, which are not yet available for use, are stated
at cost less impairment losses.
Amortisation of engineering projects, computer software and
development costs is charged to profit or loss on a straight-
line basis over the estimated useful lives of these assets, not
exceeding five years.
(iii) Patents
Patents acquired are capitalised and amortised on a straight-
line basis over their estimated useful lives, which is on average
ten years.
2.2.7 Impairment of assets other than goodwill and
financial instruments
The group assesses all assets (other than goodwill and intangible
assets not yet available for use) at each balance sheet date
for indications of an impairment or the reversal of a previously
recognised impairment.
Intangible assets not yet available for use are tested at least
annually for impairment.
Should there be any indications of impairment, the recoverable
amounts of the assets are estimated. Where an impairment
exists, the losses are recognised in profit or loss for the period.
For an asset whose cash flows are largely dependent on those
of other assets, the recoverable amount is determined for the
cash-generating unit (CGU) to which the asset belongs.
A previously recognised impairment loss will be reversed if the
recoverable amount increases as a result of a change in the
estimates used previously to determine the recoverable amount,
but not to an amount higher than the carrying amount that would
have been determined, net of depreciation or amortisation, had
no impairment loss been recognised in prior periods. Reversals
of previously recognised impairment losses are recognised in
profit or loss for the period.
Critical areas of judgement and the use of estimates involving
asset impairments are included in section 2.3 of the accounting
policies.
2.2.8 Inventories
Inventories are stated at the lower of cost or net realisable value.
Cost includes all costs of purchase, costs of conversion and
other costs incurred in bringing the inventories to their present
location and condition. Net realisable value is the estimated
selling price in the ordinary course of business, less the estimated
cost of completion, distribution and selling.
Cost is determined on the following basis:
• First in first out (FIFO): finished goods
• Weighted average: raw materials, work in progress and con-
sumable stores
• The specific identification basis is used to arrive at the cost
of items that are not interchangeable.
2.2.9 Leases
(i) The group as lessee
Leases in respect of which the group bears substantially all
the risks and rewards incidental to ownership are classified as
finance leases. Finance leases are capitalised at the inception
of the lease at the lower of the fair value of the leased asset or
the present value of the minimum lease payments.
Lease payments are allocated between capital repayments
and finance charges using the effective interest rate method.
Capitalised leased assets are depreciated on a consistent
basis as those with owned assets except where the transfer of
ownership is uncertain at the end of the lease period in which
case they are depreciated on a straight-line basis over the shorter
of the lease period and the expected useful life of the asset.
Leases in respect of which a significant portion of the risks and
rewards of ownership are retained by the lessor are classified
as operating leases. Lease payments made under operating
leases are charged to profit or loss on a straight-line basis over
the term of the lease unless another systematic basis is more
representative of the time pattern of the group’s benefit.
(ii) Recognition of lease of land
Leases of land and buildings are classified as operating or finance
leases in the same way as leases of other assets. The land and
buildings elements of a lease are considered separately for the
purpose of lease classification.
If the lease payments cannot be allocated reliably between
these two elements, the entire lease is classified as a finance
lease, where the building is a finance lease, unless it is clear
that both elements are operating leases.
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2.2.10 Non-current assets held for sale
and discontinued operations
Non-current assets (or disposal groups) are classified as held
for sale when their carrying value will be recovered principally
through sale within 12 months rather than use. Non-current
assets held for sale are measured at the lower of carrying amount
and fair value less cost to sell and are not depreciated.
2.2.11 Provisions
Provisions are recognised when the group has a legal or con-
structive obligation arising from past events that will probably
be settled. Where the effect of discounting (time value) is material,
provisions are discounted and the discount rate used is a pre-
taxation rate that reflects current market assessments of the
time value of money and, where appropriate, the risks specific
to the liability.
The following specific policies are applied:
• A provision for onerous contracts is recognised when the
expected benefits to be derived by the group from a contract
are lower than the unavoidable cost of meeting the obligations
under the contract
• A provision for restructuring is recognised only if the group
has created a detailed formal plan and raised a valid expectation,
among those parties directly affected, that the plan will be
carried out, either by having begun implementation or by
publicly announcing the plan’s main features. Future operating
costs or losses are not provided for.
Critical areas of judgement and the use of estimates involving
provisions are included in section 2.3 of the accounting policies.
2.2.12 Pension plans and other post-retirement benefits
(i) Post-employment benefits – pensions
Defined-benefit and defined-contribution plans have been
established for eligible employees of the group, with the assets
held in separate trustee-administered funds.
The present value of the defined benefit obligation and related
current service cost are calculated annually by independent
actuaries using the projected unit method.
The group’s policy is to recognise actuarial gains and losses,
which can arise from differences between expected and actual
outcomes or changes in actuarial assumptions, in other compre-
hensive income. Any increase in the present value of plan liabilities
expected to arise due to current service costs is charged to
operating profit.
Gains or losses on the curtailment or settlement of a defined
benefit plan are recognised in profit or loss when the group is
demonstrably committed to the curtailment or settlement. Past
service costs are recognised immediately to the extent that the
benefits are already vested, and otherwise are amortised on a
straight-line basis over the vesting period of those benefits.
The net liability recognised in the balance sheet represents
the present value of the defined benefit obligation adjusted for
unrecognised past service costs, reduced by the fair value of
the plan assets. Where the calculation results in a benefit to the
group, the recognised asset is limited to the net total of past
service costs and the present value of any future refunds from
the plan or reductions in future contributions to the plan.
Contributions in respect of defined-contribution plans are
recognised as an expense in profit or loss as incurred.
(ii) Post-employment benefits – medical
The projected unit credit method is used in determining the
present value of post employment medical benefits. The estimated
cost of retiree health care and life insurance benefit plans is
accrued during the participants’ actual service periods up to
the dates they become eligible for full benefits. Experience
adjustments and plan amendments in respect of existing
employees are treated in a similar manner as described in the
preceding paragraph, in the statement of comprehensive income.
(iii) Workmen’s compensation insurance
Sappi Fine Paper North America has a combination of self-
insured and insured workers’ compensation programmes.
The self-insurance claim liability for workers’ compensation is
based on claims reported and actuarial estimates of adverse
developments and claims incurred but not reported.
Critical areas of judgement and the use of estimates involving
pension plans and other post-retirement benefits are included
in section 2.3 of the accounting policies.
2.2.13 Plantations
Plantations are stated at fair value less estimated cost to sell at
the harvesting stage. Fair value is determined using the present
value of expected future cash flows for immature timber and
the standing value method for mature timber. The age threshold
used for quantifying immature timber is dependent on the
rotation period of the specific timber genus which varies between
eight to 18 years. In the Southern African region softwood less
than eight years and hardwood less than five years is classified
as immature timber. All changes in fair value are recognised in the
period in which they arise.
The fair value of immature timber calculation takes into account
unadjusted current market prices, estimated projected growth
over the rotation period for the existing immature timber volumes
in metric ton, cost of delivery and estimated maintenance costs
up to the timber becoming mature. The standing value for
mature timber is based on unadjusted current market prices in
available markets and estimated timber volumes in metric tons
less cost of delivery.
Cost of delivery includes all costs associated with getting the
harvested agricultural produce to the market, being harvesting,
loading, transport and allocated fixed overheads.
Trees are generally felled at the optimum age when ready for
intended use. At the time the tree is felled it is taken out of
plantations and accounted for under inventory and reported as
depletion cost (fellings).
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Notes to the group annual financial statements continued
Depletion costs 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. These costs are accounted
for on a cost per metric ton allocation method multiplied by
unadjusted current market prices. Tons are calculated using
the projected growth to rotation age and are extrapolated to
current age on a straight-line basis.
Sappi directly manages plantations established on its own
land that the company either owns or leases from a third party.
Indirectly managed plantations represents plantations established
on land held by independent commercial farmers where Sappi
provides technical advice on the growing and tendering of trees.
The associated costs for managing the plantations are recognised
as silviculture costs in cost of sales (see note 4.1).
Critical areas of judgement and the use of estimates involving
plantations are included in section 2.3 of the accounting policies.
2.2.14 Property, plant and equipment
Items of property, plant and equipment are stated at cost less
accumulated depreciation and impairment losses. Cost includes
the estimated cost of dismantling and removing the assets,
where specifically required in terms of legislative requirements or
a constructive obligation exists.
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
capitalised in accordance with the group’s accounting policy.
Depreciation commences, on the same basis as other property
assets, when the assets are ready for their intended use.
Subsequent expenditure is capitalised 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 capitalised to the cost of the item of
owner-occupied property and equipment and the part replaced
is derecognised. All other expenditure is recognised in profit or
loss as an expense when incurred.
Depreciation is charged 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.
Assets, liabilities, revenues or expenses that are not directly
attributable to a particular segment are allocated between
segments where there is a reasonable basis for doing so. The
group accounts for inter-segment revenues and transfers as if
the transactions were with third parties at current market prices.
2.2.16 Share-based payments
(i) Equity-settled share-based payment transactions
with employees
The services received in an equity-settled share-based payment
transaction with employees are measured at the fair value of
the equity instruments granted. The fair value of those equity
instruments is measured at grant date.
If the equity instruments granted vest immediately and an
employee is not required to complete a specified period of
service before becoming unconditionally entitled to those
instruments, the services received are recognised in profit
or loss for the period in full on grant date with a corresponding
increase in equity.
Where the equity instruments do not vest until the employee
has completed a specified period of service, it is assumed that
the services rendered by the employee, as consideration for
those equity instruments, will be received in the future during
the vesting period. These services are accounted for in profit
or loss as they are rendered during the vesting period, with
a corresponding increase in equity. Share-based payment
expenses are adjusted for non-market related performance
conditions.
(ii) Measurement of fair value of equity instruments granted
The equity instruments granted by the group are measured at
fair value at the measurement date using modified binomial
option pricing valuation models. The valuation technique is
consistent with generally acceptable valuation methodologies
for pricing financial instruments and incorporates all factors
and assumptions that knowledgeable, willing market participants
would consider in setting the price of the equity instruments.
2.2.17 Shareholders’ equity
(i) Share capital
Share capital issued by the company is recorded as the proceeds
received, net of direct issue costs.
Shares repurchased by the issuing company are cancelled.
(ii) Treasury shares
Critical areas of judgement and the use of estimates involving
property, plant and equipment are included in section 2.3 of
the accounting policies.
When share capital recognised as equity is repurchased by
the company or other members of the group, the amount of
the consideration paid, including directly attributable costs, is
2.2.15 Segment reporting
The primary business segments are Sappi Fine Paper and Sappi
Forest Products. On a secondary segment basis, significant
geographic regions have been identified based on the location
of the productive assets, being Asia, Southern Africa, Europe
and North America.
recognised as a change in equity.
Shares repurchased by group companies are classified as
treasury shares and are held at cost. These shares are treated
as a deduction from the issued and weighted average number
of shares and the cost price of the shares is presented as a
deduction from total equity.
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(iii) Dividends
Dividends are recognised as distributions within equity in the period
in which they are payable to shareholders. Dividends for the year
that are declared after the balance sheet date are disclosed
in the dividends note. Taxation costs incurred on dividends are
recognised in the period in which the dividend is declared.
2.2.18 Taxation
Taxation on the profit or loss for the year comprises current
and deferred taxation. Taxation is recognised in profit or loss
except to the extent that it relates to items recognised directly
to equity, in which case it is recognised in equity.
(i) Current taxation
Current taxation is the expected taxation payable on the
taxable income, which is based on the results for the period
after taking into account the necessary adjustments, for the
year, using taxation rates enacted or substantively enacted
at the balance sheet date, and any adjustment to taxation
payable in respect of previous years.
Secondary Tax on Companies (STC) is a South African income
tax, that arises from the distribution of dividends and is recognised
in profit or loss at the same time as the liability to pay the
related dividend.
(ii) Deferred taxation
Deferred taxation is provided using the balance sheet liability
method, based on temporary differences. The amount of
deferred taxation provided is based on the expected manner
of realisation or settlement of the carrying amount of assets
and liabilities using taxation rates enacted or substantively
enacted at the balance sheet date. Deferred taxation is charged
to profit or loss for the period, except to the extent that it
relates to a transaction that is recognised directly in equity, or
a business combination that is an acquisition. The effect on
deferred taxation of any changes in taxation rates is recognised
in profit or loss, except to the extent that it relates to items
previously charged or credited directly to equity.
A deferred taxation asset is recognised to the extent that it is
probable that future taxable income will be available against
which the unutilised taxation losses and deductible temporary
differences can be used. The carrying amount of deferred tax
assets is reviewed at each balance sheet date and is reduced
to the extent that it is no longer probable that sufficient taxable
profits will be available to allow all or part of the asset to
be recovered.
When dividends received in the current year can be offset
against future dividend payments to reduce the STC liability, a
deferred tax asset is recognised to the extent of the future
reduction in STC.
Critical areas of judgement and the use of estimates involving
taxation are included in section 2.3 of the accounting policies.
2.2.19 Borrowing costs
Borrowing costs directly attributable to the acquisition, construction
and production of qualifying assets are capitalised as part of
the costs of those assets.
Capitalisation of borrowing costs continues up to the date when
the assets are substantially ready for their use or sale.
Borrowing costs capitalised are calculated at the group’s
average funding cost, except to the extent that funds are
borrowed specifically for the purpose of obtaining a qualifying
asset. Where this occurs, actual borrowing costs incurred less
any investment income on the temporary investment of those
borrowings are capitalised.
2.2.20 Cost of sales
When inventories are sold, the carrying amount is recognised
as part of cost of sales. Any write down of inventories to net
realisable value and all losses of inventories or reversals of
previous write downs or losses are recognised in cost of sales
in the period the write down, loss or reversal occurs.
2.2.21 Revenue
Revenue is recognised when the significant risks and rewards
of ownership have been transferred, when delivery has been
made and title has passed, when the amount of the revenue
and the related costs can be reliably measured and when it is
probable that the debtor will pay for the goods. For the majority
of local and regional sales, transfer occurs at the point of off-
loading the shipment into the customer warehouse, whereas
for the majority of export sales transfer occurs when the goods
have been loaded into the relevant carrier, unless the contract
of sale specifies different terms.
Revenue is measured at the fair value of the amount received
or receivable which is arrived at after deducting trade and
settlement discounts, rebates, and customer returns.
Shipping and handling costs, such as freight to our customers’
destination are included in cost of sales. These costs, when
included in the sales price charged for our products are
recognised in net sales.
2.2.22 Emission trading
The group accounts for grants allocated by governments for
emission rights as an intangible asset with an equal liability at
the time of the grant. The asset and liability are recognised at
a nominal amount when the grants are issued.
The group does not recognise a liability for emissions to the
extent that it has sufficient allowances to satisfy emission
liabilities incurred. Where there is a shortfall of allowances that
the group would have to deliver for emissions, a liability is
recognised at the current market value of the shortfall.
Where the group has allowances that exceed actual emissions
and the excess allowances are sold to parties outside the
group, a gain is recognised in profit or loss for the period.
2.2.23 Black Economic Empowerment (BEE) transaction
The group has entered into a transaction that introduces
empowered black ownership to the group’s land portfolio in
South Africa. This empowerment transaction has resulted in
our empowerment partner obtaining an undivided 25% interest
of this land portfolio via a swap arrangement for the continued
right of use of the land. This transaction was based on the fair
value of the 25% undivided interest in the share of the land.
114
Notes to the group annual financial statements continued
In terms of the agreement, both Sappi and the empowerment
partner have issued preference shares, for the purchase of
an undivided share of land and the continued right of use of
the land respectively, the terms of which require payment of
dividends on an annual basis. Sappi’s liability for dividends will
vary in relation to the value of 25% of the undivided share of
the land not paid for by redemption of the preference shares
issued to the empowerment partner.
The group has recognised a financial derivative liability in terms
of IAS 39: Financial Instruments Recognition and Measurement.
The liability is initially recognised at fair value. Subsequently,
the liability will continue to be measured at fair value with changes
in fair value recognised in profit or loss in each financial reporting
period.
2.2.24 Alternative fuel mixture credits
The US Internal Revenue Code allows an excise tax credit for
alternative fuel mixtures produced by a taxpayer for sale, or for
use as a fuel in a taxpayer’s trade or business. The credit is
scheduled to expire on 31 December 2009. During fiscal 2009,
the company was notified that its registration as an alternative
fuel mixer was approved by the Internal Revenue Service.
The group, through its North American operations qualifies for
the alternative fuel mixtures tax credit because it uses a bio-
fuel known as black liquor, which is a by-product of its wood
pulping process, to power its mills.
The group recognises income for the alternative fuel mixture
credits when its right to receive the credit is established. This
occurs when the group has complied with the requirements
of the Internal Revenue Code and has submitted a claim
for the credits due. This is recorded in profit and loss under
other operating income.
2.3 Critical accounting policies and estimates
The preparation of financial statements 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 judgement based on various assumptions
and other factors such as historical experience, current and
expected economic conditions, and in some cases, actuarial
techniques. The group constantly re-evaluates these significant
factors and makes adjustments where facts and circumstances
dictate. The group believes that the following accounting policies
are critical due to the degree of estimation required and/or the
potential material impact they may have on the group’s financial
position and performance.
Asset impairments
The group evaluates its 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.
Judgements regarding the existence of impairment indicators
are based on market conditions and the 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, the group estimates
the future cash flows expected to result from the use of the
asset(s) and its eventual disposition. The group takes into
account its ability to carousel products across different operating
units within a region when it performs an asset impairment test.
Considerable management judgement is necessary to estimate
discounted future cash flows, including appropriate bases for
making judgements and estimates as to future product pricing in
the appropriate markets, raw material and energy costs, volumes
of product sold, the planned use of machinery or equipment
or closing of facilities. The calculation of appropriate pre-tax
discount rates (impairment discount factor) 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 out comes 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.
Business combinations and goodwill impairments
The group uses judgement, estimates and involves external
specialists in determining the fair value of identifiable assets
and liabilities acquired in a business combination, as well as
calculating the fair value of the purchase consideration on
acquisition. The highest and best use of the acquired assets
by market participants (as opposed to Sappi’s business
intentions) is taken into account in determining the fair value of
assets acquired in a business combination.
Goodwill is tested for impairment based on an allocation to one
or more cash-generating units (CGUs) in which the synergies
from the business combinations are expected. The group takes
into account its ability to carousel products across different
operating units in allocating goodwill to CGUs. Goodwill
impairment testing is conducted at reporting unit levels of our
business and is based on a cash flow valuation model to
determine the fair value of the CGU.
The assumptions used in estimating future cash flows are
based on business forecasts and incorporated external
information from industry sources, where applicable. Actual
outcomes could vary significantly from business forecasts.
Changes in certain estimates could have a material effect on
the estimated fair value of the reporting unit. In addition to the
judgments described above, significant judgements in estimating
discounted cash flows also include the selection of the pre-tax
discount rate (impairment discount factor) and the terminal
value (net present value at end of period where there is a willing
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buyer and seller) multiple used in our valuation model. The
determining the provision for income taxes, deferred tax assets
discount rate used in our valuation model generally considers
the debt and equity mix, a market risk premium, and other
factors consistent with valuation methodologies. The terminal
value multiple used in our valuation model generally also
considers the valuations for comparable companies.
Small changes in our valuation model would generally not have
a significant impact on 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
Where significant parts of an item of property, plant and
equipment 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 on an annual basis and are revised when the current
estimate is different from the existing estimate. Depreciation
rates for similar items of plant or equipment could vary significantly
based on the location and use of the asset.
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 the year to
depreciate property, plant and equipment to estimated residual
values:
Land
No depreciation
Buildings
Plant
Vehicles
Furniture and equipment
straight-line 40 years
straight-line 5 to 20 years
straight-line 5 to 10 years
straight-line 3 to 6 years
For material items of property, plant and equipment an internal
engineer is used to assist in determining the remaining useful
lives and residual values.
Taxation
The group estimates its income taxes in each of the jurisdictions
in which it operates. 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.
The group then assesses 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
recognised. In recognising deferred tax assets, the group
considers profit forecasts, including the effect of exchange rate
and liabilities.
Deferred tax assets have been recognised where management
believes there are sufficient taxable temporary differences or
convincing other evidence that sufficient taxable profits will be
available in future to realise deferred tax assets. Although the
deferred tax assets which have been recognised are considered
realisable, actual amounts could be reduced if future taxable
income is not achieved. This can materially affect our reported
results and financial position.
Hedge accounting for financial instruments
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.
External market data is applied in measuring the hedge effective-
ness of financial instruments. Hedge ineffectiveness is recognised
immediately against income.
Refer to note 30 of the group annual financial statements
contained elsewhere in this annual report for details of the fair
value hedging relationships as well as the impact of the hedge
on the pre-tax profit or loss for the period.
Plantations
The fair value of immature timber is the present value of the
expected future cash flows taking into account unadjusted
current market prices in available markets, estimated projected
growth over the rotation period for the existing immature timber
volumes in metric ton, cost of delivery and estimated maintenance
costs up to the timber becoming 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 assumption and judgement 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 in available markets and
estimated timber volumes in metric tons less cost of delivery at
current market prices.
Management focuses their attention on good husbandry
techniques which include ensuring that the rotation of plantations
is met with adequate planting activities for future harvesting.
The rotation periods vary from eight to 18 years in Southern Africa.
Assumptions and estimates are used in the recording of
fluctuations on sales and external market conditions. Where it
plantation volumes, maintenance cost per metric ton, and
is probable that a position may be successfully challenged by
depletion. Changes in the assumptions or estimates used in
revenue authorities, a tax provision is raised for the tax on the
these calculations may affect the group’s results, in particular,
probable adjustment. Management’s judgement is required in
our plantation valuation and depletion costs.
116
Notes to the group annual financial statements continued
A key assumption and estimation is the projected growth
estimation over a period of eight to 18 years per rotation. The
inputs to our immature timber growth model are complex
and involve estimations and judgements, all of which are
regularly updated. Sappi 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 into our growth
estimation. Periodic adjustments are made to existing models for
new genetic material.
Sappi manages its plantations on a rotational basis and by
implication, the respective increases by means of growth are,
over the rotation period, negated by depletions for the group’s
own production or sales. Estimated volume changes, on a
rotational basis, amount to approximately five million tons
per annum.
The group is 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. The plantations have an integrated management
system that is certified to ISO 9001, ISO 14001, OHSAS 18001
and FSC standards.
Ruling unadjusted current market prices and costs to sell 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 profit or loss 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:
US$ million
2009
2008
2007
Market price changes
1% increase in market prices
1% decrease in market prices
12
(12)
17
(17)
17
(17)
Discount rate
(for immature timber)
1% increase in rate
1% decrease in rate
Volume assumption
1% increase in estimate of volume
1% decrease in estimate of volume
Costs to sell
1% increase in costs to sell
1% decrease in costs to sell
Growth assumptions
1% increase in rate of growth
1% decrease in rate of growth
(3)
3
6
(6)
(9)
9
1
(1)
(4)
4
6
(6)
(10)
10
1
(1)
(4)
4
6
(6)
(10)
10
2
(2)
For further information see note 10 of our group annual
financial statements.
Post-employment benefits
The group accounts for its pension benefits and its 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 profit or loss 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 the group’s
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 judgement 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 recognised
in the financial statements.
Refer to notes 27 and 28 for the key assumptions, the benefit
obligations, plan assets, net periodic pension cost and the impact
on the future financial results of the group in relation to post
employment benefits that may arise due to changes in economic
conditions, employee demographics and investment performance
as at the end of September 2009 and September 2008.
Provisions
Provisions are recognised when a reliable estimate can be
made of the amount that the group would rationally pay to
settle the liability. Risks, uncertainties and future events, such
as changes in law and technology, are taken into account by
management in determining the best estimates.
The establishment and review of the provisions requires
significant judgement 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.
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.
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– Revision to IFRS 3: Business Combinations
(September 2010)
– Amendments to IAS 27 Consolidated and Separate
Financial Statements, IAS 28 Investments in
Associates and IAS 31 Investments in Joint Ventures
(September 2010)
– Amendments to IFRS 2 Vesting Conditions
and Cancellations
(September 2010)
– Amendments to IFRS 2 Group Cash-settled Share-
based Payment Transactions (September 2010)
– Amendments to IFRS 7 Financial Instruments:
Disclosure (September 2010)
– Amendment to IAS 39 Financial Instruments:
Recognition and Measurement on Eligible Hedged Items
(September 2010)
– Amendments to IFRIC 9 Reassessment of Embedded
Derivatives and IAS 39 Financial Instruments:
Recognition and Measurement (September 2010)
– Various improvements to IFRSs
The group is currently evaluating the impact of the adoption
of these standards, amendments and interpretations in future
periods.
2.4 Adoption of accounting standards in the
current year
The following standards, interpretations and significant amend-
ments or revisions to standards have been adopted by the
group in the current year:
SAICA Circular 3/2009 – Headline earnings
This circular provides rules for calculating headline earnings per
accounting standard. In addition, the circular requires a detailed
disclosure reconciling headline earnings to the earnings applied
in the earnings per share calculation.
The main change from the previous circular 8/2007 on headline
earnings was to update the rules for calculating headline earnings
for the changes, amendments and revisions that were made
to International Financial Reporting Standards. These changes
did not result in adjustments to previously published headline
earnings.
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 compre-
hensive income; and
• reclassification adjustments relating to components of other
comprehensive income.
The early adoption of the revised standard did not have an
impact on the group’s reported results or financial position.
2.5 Accounting standards, interpretations and
amendments to existing standards that are not
yet effective
The group has not yet adopted certain new standards, amend-
ments and interpretations to existing standards, which have
been published but are only effective for our accounting periods
beginning on or after 01 October 2009 or later periods. These
new standards, and their effective dates for the group’s annual
accounting periods are listed below:
– IFRS 8 – Operating Segments
(September 2010)
– IFRIC 15 – Agreements for the Construction of Real Estate
(September 2010)
– IFRIC 17 – Distributions of Non-cash Assets to Owners
(September 2010)
– IFRIC18 – Transfers of Assets from Customers
(September 2010)
118
Notes to the group annual financial statements continued
3.
Segment information
The group has two reporting segments which operate as separate business units: Sappi Fine Paper and Sappi Forest Products.
These divisions are the basis on which the group reports its primary segment information. Sappi Fine Paper produces
coated and uncoated fine paper and speciality paper grades. Sappi Forest Products produces commodity paper products,
pulp, forest and timber products.
The secondary segments have been determined by the geographical location of the production facilities: North America,
Europe and Southern Africa.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies
(refer to note 2.2).
The group accounts for intragroup sales and transfers as if the sales or transfers were to third parties, that is, at current
market prices. All such sales and transfers are eliminated on consolidation.
US$ million
Income statement
External sales(1)
Inter-segment sales
Total sales
Segment result(2)
Share of profit of equity investments
Depreciation
Amortisation and fellings
Asset impairments
Other non-cash expenses (including fair
value adjustment on plantations)
Balance sheet
Capital expenditures
Total assets(6)
Operating assets(3)(6)
Operating liabilities(4)
Net operating assets(5)(6)
Property, plant and equipment
Sappi Fine Paper
Sappi Forest Products
Corporate and eliminations
Group
2009
2008
2007
2009
2008
2007
2009
2008
2007
2009
2008
2007
4,508
478
4,986
(17)
3
326
2
74
4,764
677
5,441
34
2
300
–
82
4,256
602
4,858
119
3
298
1
2
861
532
1,393
(52)
4
70
69
5
1,099
657
1,756
273
5
73
80
37
1,048
658
1,706
264
3
75
70
–
136
151
(11)
2
(150)
(117)
(38)
(58)
(14)
100
(57)
(142)
124
4,500
4,413
870
3,526
2,856
216
3,724
3,678
706
2,955
2,353
158
3,931
3,836
682
3,121
2,503
60
2,002
1,916
223
1,686
1,078
290
2,049
1,972
241
1,721
1,008
299
2,096
1,984
251
1,654
988
(1,010)
(1,334)
(1,260)
–
–
–
5,369
5,863
5,304
(1,010)
(1,334)
(1,260)
5,369
5,863
5,304
(4)
–
4
–
–
–
–
795
142
72
38
–
–
7
10
1
–
–
1
336
144
78
39
–
–
–
4
1
–
–
1
317
99
66
21
–
(73)
11
396
71
79
184
7,297
6,471
1,165
5,250
3,934
314
17
374
80
119
507
6,109
5,794
1,025
4,715
3,361
383
10
374
71
2
458
6,344
5,919
999
4,796
3,491
US$ million
2009
2008
2007
2009
2008
2007
2009
2008
2007
2009
2008
2007
2009
2008
2007
2009
2008
2007
Sappi Fine Paper
Sappi Forest Products
North America
Europe
Southern Africa
Southern Africa
Corporate and other
Group
Sales(1)
Segment result(2)
Capital expenditures
Operating assets(3)
Net operating assets(5)
Property, plant and equipment
53
31
1,295 1,664 1,511
22
92
44
125
1,145 1,285 1,263
981 1,087 1,031
864
879
810
(64)
82
(67)
82
2,895 2,720 2,387
88
102
3,008 2,226 2,371
2,340 1,758 1,941
1,928 1,363 1,502
318
(3)
11
260
205
118
380
6
9
167
110
111
358
9
12
202
149
137
861 1,099 1,048
(52)
60
273
290
264
299
1,686 1,721 1,654
1,078 1,008
988
(4)
–
–
38
–
–
7
1
39
–
–
–
1
99
21
–
5,369 5,863 5,304
(73)
184
314
507
383
458
6,471 5,794 5,919
5,250 4,715 4,796
3,934 3,361 3,491
1,916 1,972 1,984
142
144
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119
3.
Segment information
The group has two reporting segments which operate as separate business units: Sappi Fine Paper and Sappi Forest Products.
These divisions are the basis on which the group reports its primary segment information. Sappi Fine Paper produces
coated and uncoated fine paper and speciality paper grades. Sappi Forest Products produces commodity paper products,
pulp, forest and timber products.
Europe and Southern Africa.
(refer to note 2.2).
The secondary segments have been determined by the geographical location of the production facilities: North America,
The accounting policies of the segments are the same as those described in the summary of significant accounting policies
The group accounts for intragroup sales and transfers as if the sales or transfers were to third parties, that is, at current
market prices. All such sales and transfers are eliminated on consolidation.
US$ million
Income statement
External sales(1)
Inter-segment sales
Total sales
Segment result(2)
Share of profit of equity investments
Depreciation
Amortisation and fellings
Asset impairments
Other non-cash expenses (including fair
value adjustment on plantations)
Balance sheet
Capital expenditures
Total assets(6)
Operating assets(3)(6)
Operating liabilities(4)
Net operating assets(5)(6)
Property, plant and equipment
4,508
478
4,986
(17)
326
3
2
74
136
124
4,500
4,413
870
3,526
2,856
4,764
677
5,441
34
2
300
–
82
151
216
3,724
3,678
706
2,955
2,353
4,256
602
4,858
119
298
3
1
2
(11)
158
3,931
3,836
682
3,121
2,503
861
532
1,393
(52)
4
70
69
5
2
60
2,002
1,916
223
1,686
1,078
1,099
657
1,756
273
5
73
80
37
290
2,049
1,972
241
1,721
1,008
1,048
658
1,706
264
3
75
70
–
299
2,096
1,984
251
1,654
988
US$ million
Sales(1)
Segment result(2)
Capital expenditures
Operating assets(3)
Net operating assets(5)
1,295 1,664 1,511
2,895 2,720 2,387
318
380
358
53
31
92
125
22
44
(67)
82
(64)
82
88
102
1,145 1,285 1,263
3,008 2,226 2,371
981 1,087 1,031
2,340 1,758 1,941
(3)
11
260
205
118
6
9
167
110
111
9
12
202
149
137
Property, plant and equipment
810
879
864
1,928 1,363 1,502
Sappi Fine Paper
Sappi Forest Products
Corporate and eliminations
Group
2009
2008
2007
2009
2008
2007
2009
2008
2007
2009
2008
2007
–
(1,010)
(1,010)
(4)
4
–
–
–
–
(1,334)
(1,334)
7
10
1
–
–
–
(1,260)
(1,260)
–
4
1
–
–
5,369
–
5,369
(73)
11
396
71
79
5,863
–
5,863
314
17
374
80
119
5,304
–
5,304
383
10
374
71
2
(150)
(117)
(38)
(58)
(14)
100
(57)
(142)
–
795
142
72
38
–
1
336
144
78
39
–
1
317
99
66
21
–
184
7,297
6,471
1,165
5,250
3,934
507
6,109
5,794
1,025
4,715
3,361
458
6,344
5,919
999
4,796
3,491
Sappi Fine Paper
Sappi Forest Products
North America
Europe
Southern Africa
Southern Africa
Corporate and other
Group
2009
2008
2007
2009
2008
2007
2009
2008
2007
2009
2008
2007
2009
2008
2007
2009
2008
2007
861 1,099 1,048
264
273
(52)
299
290
60
1,916 1,972 1,984
1,686 1,721 1,654
988
1,078 1,008
–
(4)
–
142
38
–
–
7
1
144
39
–
–
–
1
99
21
–
(73)
184
5,369 5,863 5,304
383
314
458
507
6,471 5,794 5,919
5,250 4,715 4,796
3,934 3,361 3,491
120
Notes to the group annual financial statements continued
3.
Segment information continued
Sales by geographical location of customers
US$ million
North America
Europe
Southern Africa
Asia and other
2009
1,298
2,557
678
836
5,369
2008
1,716
2,319
883
945
5,863
2007
1,559
2,078
789
878
5,304
(1) Sales where the product is manufactured.
(2) Segment result is operating profit (loss).
(3) Operating assets consist of property, plant and equipment, plantations, non-current assets (excluding deferred taxation) and current assets (excluding cash).
(4) Operating liabilities consist of trade and other payables, provisions and current derivative financial instruments.
(5) Net operating assets consist of operating assets less operating liabilities, adjusted for taxation payable and dividends payable.
(6) Corporate includes the group’s treasury operations and the investment in the Chinese joint venture.
2009
2008
2007
Selling,
general
and
admini-
strative
expenses
Cost of
sales
Selling,
general
and
admini-
strative
expenses
Selling,
general
and
admini-
strative
expenses
Cost of
sales
Cost of
sales
2,868
663
584
868
543
210
(73)
67
882
376
454
250
205
–
–
5,029
–
–
–
–
–
–
–
–
164
20
–
–
–
102
99
385
3,073
722
558
935
702
156
(70)
(120)
864
350
509
252
158
–
–
5,016
–
–
–
–
–
–
–
–
153
24
–
–
–
105
103
385
2,685
635
438
676
623
313
(76)
(54)
809
350
453
235
189
–
–
4,591
–
–
–
–
–
–
–
–
116
24
–
–
–
91
131
362
US$ million
4.1 Operating profit
Operating profit has been arrived
at after charging (crediting):
Raw materials, energy and other
direct input costs
Wood
(includes felling adjustment(1))
Energy
Chemicals(2)
Pulp(2)
Other variable costs(2)
Fair value adjustment
on plantations(1)
Growth
Price
Employment costs
Depreciation
Delivery charges
Maintenance
Other overheads
Marketing and selling expenses
Administrative and general
expenses
(1) Disclosed separately below.
(2) Costs included in pulp in 2008 have been reallocated to chemicals and other variable costs.
2009 annual report
121
2009
2008
2007
US$ million
4.1 Operating profit continued
Fair value adjustment on plantations(1)
Changes in volumes
Fellings
Growth
Plantation price fair value adjustment
Silviculture costs (included within cost of sales)
Leasing charges for premises
Leasing charges for plant and equipment
Remuneration paid other than to employees of the company
in respect of:
– technical services
– administration services
Auditors’ remuneration:
– audit and related services
– tax planning and tax advice
– acquisition and refinancing related services*
Government grants towards environmental expenditure
Research and development costs
Amortisation
Cost on derecognition of loans and receivables**
Directors’ remuneration
– executive directors – salaries and benefits
– non-executive directors – fees
4.2
Employment costs
Wages and salaries
Defined-contribution plan expense (refer to note 27)
Pension costs (refer to note 27)
Post-employment benefits other than pensions expense (refer to note 28)
Share-based payment expense
Other
69
(73)
(4)
67
63
50
16
15
27
11
16
8
6
1
1
(2)
31
2
16
2
1
936
33
21
10
9
37
80
(70)
10
(120)
(110)
50
16
32
33
15
18
10
6
1
3
(1)
34
–
22
2
1
921
23
9
14
10
40
4.3 Other operating expenses (income)
Included in other operating expenses are the following:
Asset impairments (refer to note 9)
Profit on sale and write-off of property, plant and equipment
Restructuring provisions raised (released) and closure costs
Fuel tax credit
1,046
1,017
79
(1)
34
(87)
119
(5)
41
–
* These costs have been capitalised.
** The cost on derecognition of trade receivables relates to the derecognition of trade receivables related to the securitisation programme in South Africa and to
the sale of letters of credit in Hong Kong.
i
l
s
a
c
n
a
n
fi
70
(76)
(6)
(54)
(60)
41
16
43
31
15
16
7
5
2
–
–
34
1
15
3
1
816
18
20
13
5
53
925
2
(24)
(11)
–
122
Notes to the group annual financial statements continued
5.
Net finance costs
Gross interest and other finance costs on liabilities carried
at amortised cost
– Interest on bank overdrafts
– Interest on redeemable bonds and other loans
– Interest cost on finance lease obligations
Finance revenue received on assets carried at amortised cost
– Interest on bank accounts
– Discount on early redemption of vendor loan note
– Interest revenue on other loans and investments
Interest capitalised to property, plant and equipment
Net foreign exchange gains
Net fair value loss on financial instruments
– Realised loss on unwind of interest rate swaps
– (Gain) loss on non-hedged swaps and loans
– Amortisation of cost of de-designated hedges
– Hedge ineffectiveness
– gain on hedging instrument (derivative)
– loss on hedged item
6.
Taxation (benefit) charge
Current taxation:
– Current year
– Prior year over provision
– Other company taxes*
Deferred taxation: (refer to note 11)
– Current year*
– Prior year under (over) provision
– Attributable to tax rate changes
* Includes Secondary Tax on Companies (STC)(1)
Due to the utilisation of previously unrecognised tax assets, the
deferred taxation expense for the year has been reduced by
2009
2008
2007
198
6
190
2
(61)
(16)
(41)
(4)
–
(17)
25
18
(2)
–
(41)
50
145
181
4
174
3
(38)
(22)
–
(16)
(16)
(8)
7
–
2
5
(30)
30
126
173
8
161
4
(21)
(3)
–
(18)
(14)
(13)
9
–
7
2
(14)
14
134
2009
2008
2007
6
(7)
4
(44)
3
(3)
(41)
4
22
23
(19)
2
89
–
(9)
86
7
19
44
(7)
1
36
(8)
(19)
47
8
11
In addition to income taxation expense charges to profit and loss, deferred tax relief of US$32 million (2008: US$1 million
charge; 2007: US$18 million charge) has been recognised directly in equity (refer to note 11).
i
l
s
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a
n
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2009
2008
2007
2009
2008
2007
2009 annual report
123
6.
Taxation (benefit) charge continued
Reconciliation of the tax rate
(Loss) profit before taxation
Profit-making regions
Loss-making regions
Taxation at the average statutory tax rate
Profit-making regions at 28% (2008: 30%; 2007: 28%)
Loss-making regions at 28% (2008: 26%; 2007: 29%)
Net exempt income and non-tax deductible expenditure
Effect of tax rate changes
Deferred tax asset not recognised
Utilisation of previously unrecognised tax assets
Secondary Tax on Companies (STC)
Prior year adjustments
Other taxes
Taxation (benefit) charge
Effective tax rate for the year
(218)
133
(351)
(60)
38
(98)
(32)
(3)
72
(22)
4
(4)
4
(41)
19%
188
560
(372)
72
167
(95)
(51)
(9)
103
(19)
7
(19)
2
86
46%
249
424
(175)
68
119
(51)
(34)
(19)
49
(11)
8
(15)
1
47
19%
Our effective tax rate reflects the benefits from reduced tax rates in South Africa (2009: nil; 2008: US$9 million; 2007: nil),
Germany (2009: US$3 million; 2008: nil; 2007: US$19 million ) and the Netherlands (2009: nil; 2008: nil; 2007: US$2 million).
The corporate tax rate in South Africa was reduced from 29% in 2007 to 28% in 2008. The corporate tax rate (including
trade tax) in Germany was reduced from 38% in 2006 to 30% in 2007 and 28.6% in 2009. In the Netherlands, the corporate
tax rate was reduced from 29.6% in 2006 to 25.5% in 2007. In addition, a taxation charge of US$2 million was recognised
in 2007 as a result of the substantively enacted STC rate adjustment from 12.5% to 10% (effective date: 01 October 2007).
On 09 November 2009, the directors decided not to declare a dividend in respect of the 2009 financial year (refer to note 8).
(1) The imposition of Secondary Tax on Companies (STC) effectively means that a dual corporate taxation system exists in South Africa comprising a normal
income taxation and STC. Liability for STC is determined independently from normal income taxation and is paid by South African companies at the flat rate
of 10% in respect of the amount of dividends declared less all dividends which accrued to them (but subject to certain exclusions) during the relevant ‘dividend
cycle’. ‘Dividend cycle’ means the period commencing on the day following the date of accrual to a company’s shareholders of the last dividend declared by
that company and ending on the date on which the dividend in question accrues to the shareholder concerned. An excess of dividends accruing to a company
over dividends paid may be carried forward to subsequent dividend cycles as an STC credit.
5.
Net finance costs
at amortised cost
Gross interest and other finance costs on liabilities carried
– Interest on bank overdrafts
– Interest on redeemable bonds and other loans
– Interest cost on finance lease obligations
Finance revenue received on assets carried at amortised cost
– Interest on bank accounts
– Discount on early redemption of vendor loan note
– Interest revenue on other loans and investments
Interest capitalised to property, plant and equipment
Net foreign exchange gains
Net fair value loss on financial instruments
– Realised loss on unwind of interest rate swaps
– (Gain) loss on non-hedged swaps and loans
– Amortisation of cost of de-designated hedges
– Hedge ineffectiveness
– gain on hedging instrument (derivative)
– loss on hedged item
6.
Taxation (benefit) charge
Current taxation:
– Current year
– Prior year over provision
– Other company taxes*
Deferred taxation: (refer to note 11)
– Current year*
– Prior year under (over) provision
– Attributable to tax rate changes
198
190
6
2
(61)
(16)
(41)
(4)
–
(17)
25
18
(2)
–
(41)
50
145
6
(7)
4
(44)
3
(3)
(41)
4
22
181
174
4
3
(38)
(22)
–
(16)
(16)
(8)
7
–
2
5
(30)
30
126
23
(19)
2
89
–
(9)
86
7
19
173
161
8
4
(21)
(3)
–
(18)
(14)
(13)
9
–
7
2
(14)
14
134
44
(7)
1
36
(8)
(19)
47
8
11
2009
2008
2007
* Includes Secondary Tax on Companies (STC)(1)
Due to the utilisation of previously unrecognised tax assets, the
deferred taxation expense for the year has been reduced by
In addition to income taxation expense charges to profit and loss, deferred tax relief of US$32 million (2008: US$1 million
charge; 2007: US$18 million charge) has been recognised directly in equity (refer to note 11).
124
Notes to the group annual financial statements continued
7.
Earnings per share and headline earnings per share
Earnings per share
In November and December 2008, Sappi conducted a renounceable rights offer of 286,886,270 new ordinary shares of
ZAR1.00 each to qualifying Sappi shareholders recorded in the shareholders’ register at the close of business on Friday
21 November 2008, at a subscription price of ZAR20.27 per rights offer share in the ratio of six rights offer shares for every
five Sappi shares held. The rights offer was fully subscribed and the shareholders received their shares on 15 December 2008.
The rights offer raised ZAR5.8 billion (US$575 million) which was used to partly finance the acquisition of the coated graphic
paper business of M-real and the related costs. In accordance with IAS 33, prior period basic, headline and diluted earnings
per share have been restated to take into account the bonus element of the rights offer. The prior period weighted average
number of shares has been adjusted by a factor of 1.58 (the adjustment factor). The adjustment factor is calculated using
the pre-announcement share price divided by the theoretical ex-rights price (TERP). TERP is the (number of new shares
multiplied by the subscription price) plus the (number of shares held multiplied by the ex-dividend share price) all divided
by the (number of new shares plus the number of shares held prior to the rights offer).
Basic earnings per share (EPS)
EPS is based on the group’s (loss) profit for the year divided by the weighted average number of shares in issue during the
year under review.
2009
2008
2007
Loss
US$
million
Shares
millions
Loss
per
share
US
cents
Earnings
per
share
US
cents
Earnings
per
share
US
cents
Profit
US$
million
Shares
millions
Profit
US$
million
Shares
millions
(177)
482.6
(37)
102
362.2
28
202
360.6
56
–
–
–
–
3.6
–
–
4.3
–
(177)
482.6
(37)
102
365.8
28
202
364.9
55
Basic EPS
calculation
Share options and
performance shares
under Sappi Limited
Share Trust
Diluted EPS
calculation
The diluted EPS calculations are based on Sappi Limited’s daily average share price of ZAR30.12 (2008: ZAR94.08;
2007: ZAR114.42) and exclude the effect of certain share options granted under the Sappi Share Incentive Scheme as they
would be anti-dilutive.
The number of share options not included in the weighted average number of shares (as they would have been anti-dilutive)
are 2.3 million (September 2008: 2.3 million; September 2007: 0.8 million).
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2009 annual report
125
7.
Earnings per share and headline earnings per share continued
Headline earnings per share*
Headline earnings per share is based on the group’s headline earnings divided by the weighted average number of shares
in issue during the year. This is a JSE Limited required measure.
Reconciliation between (loss) profit for the year and headline earnings:
2009
2008
2007
Gross
Tax
Net
Gross
Tax
Net
Gross
Tax
Net
Attributable (loss)
earnings to ordinary
shareholders
Profit on sale and
write-off of property,
plant and
equipment
Impairment of plant
and equipment
Headline (loss)
earnings
Basic weighted
average number of
ordinary shares in
issue (millions)
Headline (loss)
earnings per share
(US cents)
Diluted weighted
average number of
shares (millions)
Diluted headline
(loss) earnings per
share (US cents)
(218)
(41)
(177)
188
86
102
249
47
202
(1)
79
–
–
(1)
(5)
79
119
–
–
(5)
(24)
(6)
(18)
119
2
–
2
(140)
(41)
(99)
302
86
216
227
41
186
482.6
362.2
360.6
(21)
60
52
482.6
365.8
364.9
(21)
59
51
* Headline earnings – as defined in circular 3/2009 issued by the South African Institute of Chartered Accountants, separates from earnings all separately
identifiable remeasurements. It is not necessarily a measure of sustainable earnings. It is a Listings Requirement of the JSE Limited to disclose headline earnings
per share.
US$ million
2009
2008
2007
8.
Dividends
Dividend number 85 paid on 28 November 2008: 16 US cents per share
(2008: 32 US cents per share; 2007: 30 US cents per share), net of
dividends attributable to treasury shares
The board decided not to declare a dividend in respect of the 2009
financial year.
(37)
(73)
(68)
126
Notes to the group annual financial statements continued
US$ million
2009
2008
9.
Property, plant and equipment
Land and buildings
At cost
Accumulated depreciation and impairments
Plant and equipment*
At cost
Accumulated depreciation and impairments
Capitalised leased assets**
At cost
Accumulated depreciation and impairments
Aggregate cost
Aggregate accumulated depreciation and impairments
Aggregate book value
1,686
887
799
7,863
4,914
2,949
795
609
186
10,344
6,410
3,934
* Plant and equipment includes vehicles and furniture, the book value of which does not warrant disclosure in a separate class of assets.
** Capitalised leased assets consist primarily of plant and equipment.
The movement of property, plant and equipment is reconciled as follows:
US$ million
Net book value at September 2007
Additions(1)
Disposals
Depreciation
Impairment
Translation difference
Net book value at September 2008
Additions(1)
Acquisition
Disposals
Transfers
Depreciation
Impairment
Translation difference
Net book value at September 2009
Land and
buildings
Plant and
equipment
Capitalised
leased
assets
619
59
–
(34)
(13)
(19)
612
33
169
(3)
–
(37)
–
25
799
2,703
446
(6)
(316)
(106)
(113)
2,608
150
508
–
11
(339)
(79)
90
2,949
169
2
–
(24)
–
(6)
141
1
73
(1)
(11)
(20)
–
3
186
(1) No interest was capitalised in fiscal 2009 (2008: US$16 million capitalised at 10%).
1,457
845
612
7,056
4,448
2,608
751
610
141
9,264
5,903
3,361
Total
3,491
507
(6)
(374)
(119)
(138)
3,361
184
750
(4)
–
(396)
(79)
118
3,934
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2009 annual report
127
9.
Property, plant and equipment continued
Details of land and buildings are available at the registered offices of the respective companies who own the assets (refer to
note 24 for details of encumbrances).
Asset impairments
September 2009
Usutu Mill
Usutu Mill is an unbleached pulp mill and forms part of the Sappi Forest Products reporting segment. In 2008, forest fires
caused by severe weather conditions resulted in the loss of approximately 28% of the mill’s fibre supply and 40% of its
plantations, resulting in insufficient fibre for the mill to continue operating in the long term under its existing regime. An
impairment loss of US$37 million was recognised in 2008 and subsequent capital expenditure of US$5 million, incurred in
2009, has been impaired. The recoverable amount of the various assets has been determined on the basis of value in use.
The value in use was established using a pre-tax real discount rate of 10.92%.
Muskegon Mill
On 26 August 2009, Sappi announced that it would permanently cease operations at its coated fine paper mill in Muskegon,
Michigan, North America. The property, plant and equipment at the mill had already been fully impaired in prior years.
European mechanical coated cash-generating unit
The mechanical coated cash-generating unit forms part of the Fine Paper segment. Due to the downturn in the market, the
net present value of the future cash flows of the cash-generating unit was lower than its carrying amount. As a result, a non-
cash impairment charge of US$74 million has been recognised. The recoverable amount of the various assets within the
cash-generating unit has been determined on the basis of value in use. The value in use was established using a pre-tax
real discount rate of 7.22%.
September 2008
Blackburn and Maastricht Mills
Maastricht and Blackburn Mills form part of Sappi Fine Paper Europe. Maastricht Mill produces coated fine and label paper
while Blackburn produces coated fine and board paper. Due to the ongoing increases in input costs and the overcapacity
in the European market, Blackburn Mill and Maastricht Paper Machine No 5 have been unable to produce acceptable
returns on investment, despite significant efforts to curb costs and improve profitability. Production at Blackburn Mill ceased
on 17 October 2008. No alternative to the closure of the mill was found during the employee representative consultation
process, which ended on 11 November 2008. In respect of Paper Machine No 5 at Maastricht Mill, consultations and social
plan negotiations with works council and unions were concluded in early October 2008. Production on Paper Machine
No 5 at Maastricht Mill ceased on 19 December 2008. A non-cash impairment charge of US$78 million was recognised as
a result of these closures.
128
Notes to the group annual financial statements continued
US$ million
2009
2008
10.
Plantations
Fair value of plantations at beginning of year
Gains arising from growth
Fire, hazardous weather and other damages
Additions
(Loss) gain arising from fair value price changes
Harvesting – agriculture produce (fellings)
Translation difference
Fair value of plantations at end of year
631
73
(2)
1
(67)
(69)
44
611
636
70
(10)
–
120
(80)
(105)
631
Sappi manages the establishment, maintenance and harvesting of its plantations on a compartmentalised basis. These
plantations are comprised of pulpwood and sawlogs and are managed in such a way so as to ensure that the optimum fibre
balance is supplied to its paper and pulping operations in Southern Africa.
Sappi owns approximately 371,000 (2008: 369,000) hectares of plantation directly and indirectly manages a further
156,000 (2008: 166,000) hectares. 380,000 (2008: 389,000) hectares of this land is forested with approximately 34 million
(2008: 35 million) standing tons of timber.
As Sappi manages its plantations on a rotational basis, the respective increases by means of growth are negated by
depletions over the rotation period for the group’s own production or sales. Estimated volume changes on a rotational basis
amount to approximately five million tons per annum.
We own plantations on land that we own, as well as on land that we lease. We disclose both of these as directly
managed plantations.
With regard to indirectly managed plantations, Sappi has several different types of agreements with over 4,300 independent
farmers. The agreements depend on the type and specific needs of the farmer and the areas planted. These agreements
range in time from one to more than 20 years. In certain circumstances we provide loans to farmers, which are disclosed as
accounts receivable in the group balance sheet (these loans are considered immaterial to the group). If Sappi provides
seedlings, silviculture and/or technical assistance, the costs are expensed when incurred by the group.
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2009 annual report
129
US$ million
Assets
Liabilities
Assets
Liabilities
2009
2008
11.
Deferred tax
Other liabilities, accruals and prepayments
Inventory
USA alternative minimum taxation credit carry forward
Unutilised Secondary Tax on Companies (STC) credits(1)
Tax loss carry forward
Property, plant and equipment
Plantations
Other non-current assets
Other non-current liabilities
(111)
5
11
–
360
(141)
(20)
26
(74)
56
8
(4)
–
–
69
(292)
(145)
–
9
(355)
(106)
2
11
2
389
(163)
(11)
35
(118)
41
6
–
–
–
27
(254)
(162)
–
(16)
(399)
(1) Refer to note 6 ‘Taxation (benefit) charge’ for a description of STC credits.
Negative asset and liability positions
These balances reflect the impact of tax assets and liabilities arising in different tax jurisdictions, which cannot be netted
against tax assets and liabilities arising in other tax jurisdictions.
Deferred tax assets recognised on the balance sheet
The recognised deferred tax assets relate mostly to available unused tax losses. It is expected that there will be sufficient
future taxable profits against which these losses can be recovered. In the estimation of future taxable profits, future product
pricing and production capacity utilisation are taken into account.
Unrecognised deferred tax assets
Deferred tax assets are not recognised for carry-forward of unused tax losses when it cannot be demonstrated that it is
probable that taxable profits will be available against which deductible temporary differences can be utilised.
130
Notes to the group annual financial statements continued
US$ million
2009
2008
11.
Deferred tax continued
Unrecognised deferred tax assets relate to the following:
Other non-current liabilities
Tax losses
Property, plant and equipment
Attributable to the following tax jurisdictions:
Belgium
The Netherlands
Finland
United Kingdom
United States of America
Swaziland
South Africa
Austria
Expiry after five years
Indefinite life
The following table shows the movement in the unrecognised
deferred tax assets for the year
Balance at beginning of year
Unrecognised deferred tax assets originating during the current year
Utilisation of previously unrecognised tax assets
Prior year adjustments
Rate adjustments
Movement in foreign exchange rates
Balance at end of year
66
634
–
700
49
10
39
65
222
28
2
285
700
152
548
700
591
129
(22)
1
2
(1)
700
29
538
24
591
6
20
–
75
188
27
2
273
591
165
426
591
506
108
(19)
4
–
(8)
591
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US$ million
2009
2008
11.
Deferred tax continued
Reconciliation of deferred tax
Deferred tax balances at beginning of year
Deferred tax assets
Deferred tax liabilities
Deferred taxation benefit (charge) for the year (refer to note 6)
Other liabilities, accruals and prepayments
Inventory
Utilisation of Secondary Tax on Companies (STC) credits
Tax loss carry forward
Property, plant and equipment
Plantations
Other non-current assets
Other non-current liabilities
Amounts recorded directly against equity
Rate adjustments
Translation differences
Deferred tax balances at end of year
Deferred tax assets
Deferred tax liabilities
41
(399)
(358)
41
(6)
5
(2)
30
(10)
18
–
6
32
3
(17)
(299)
56
(355)
60
(385)
(325)
(89)
(11)
–
(7)
19
(37)
(29)
(2)
(22)
(1)
9
48
(358)
41
(399)
Secondary Tax on Companies (STC)
Current and deferred tax are measured at the tax rate applicable to undistributed
income and therefore only take STC into account to the extent that dividends have
been received or declared.
Undistributed earnings that would be subject to STC
Tax effect if distributed
Available STC credits at end of year
465
42
–
895
81
2
132
Notes to the group annual financial statements continued
US$ million
Goodwill
fees Patents Brands
Total Goodwill
fees Patents Brands
Total
2009
Licence
2008
Licence
12. Goodwill and
intangible assets
Cost net of
accumulated
amortisation and
impairment at
beginning of year
Acquisition
Amortisation
Translation difference
Net carrying amount
Cost (gross carrying
amount)
Accumulated
amortisation and
impairment
Net carrying amount
4
–
–
–
4
3
–
–
–
3
–
–
–
–
–
–
25
(2)
2
7
25
(2)
2
25
32
4
–
–
–
4
3
–
–
–
3
–
–
–
–
–
–
–
–
–
–
7
–
–
–
7
4
3
21
27
55
4
3
21
–
28
–
4
–
3
(21)
(2)
(23)
–
25
32
–
4
–
3
(21)
–
–
–
(21)
7
US$ million
13.
Joint ventures and associates*
Cost of equity investments
Share of post-acquisition profit, net of distributions received
Foreign currency translation effect
Summarised financial information in respect of the group’s equity investments is set
out below:
Total assets
Total liabilities
Net assets
Group’s share of equity investments net assets
2009
2008
99
24
–
99
14
11
123
124
638
312
326
123
659
338
321
124
Sales
Profit for the period
Group’s share of equity investments’ profit for the period
2009
2008
2007
756
28
11
902
46
17
749
20
10
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13.
Joint ventures and associates*
Jiangxi Chenming
Sappi owns 34% of Jiangxi Chenming Paper Company Limited (Jiangxi Chenming) under a joint venture arrangement.
Jiangxi Chenming is established in the People’s Republic of China and is principally engaged in the manufacturing and sales
of paper and paper products. The financial statements of Jiangxi Chenming are to 31 December of each year which was
the reporting date when the company was established. The last audited financials were to 31 December 2008.
Umkomaas Lignin (Pty) Ltd
A joint venture agreement with Borregaard Industries Limited for the construction and operation of a lignin plant at Umkomaas
and the development, production and sale of products based on lignosulphates in order to build a sustainable lignin
business. The financial statements of Umkomaas Lignin (Pty) Ltd are to 31 December of each year which is the year end of
Borregaard. The last audited financials were to 31 December 2008.
Sapin SA
A joint venture with Sapin SA located in Belgium for the buying and selling of wood and wood chips to Sappi and other
paper manufacturers. The financial statements of Sapin SA are to 31 December of each year which is the year end of Sapin
SA. The last audited financials were to 31 December 2008.
Papierholz Austria GmbH
A joint venture agreement for the buying and selling of wood and wood chips to Sappi and other paper and pulp
manufacturers. The financial statements of Papierholz Austria GmbH are to 31 December of each year which is the year end
of Papierholz Austria GmbH. The last audited financials were to 31 December 2008.
VOF Warmtekracht
A joint venture in the Netherlands between Sappi and Essent for a co-generation electricity and steam producing plant. The
financial statements of VOF Warmtekracht are to 31 December of each year which is the year end of VOF Warmtekracht.
The last audited financials were to 31 December 2008.
Timber IV
A special purpose entity (SPE) into which Sappi contributed promissory notes (relating to certain Timberlands, equipment
and machinery sold by Sappi to a third-party timber company) which were pledged as collateral for the SPE to issue bonds.
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. Sappi’s investment in the SPE is US$6 million as of September 2009
(2008: US$11 million). The financial statements of Timber IV are to 30 September of each year. The results are unaudited.
The directors believe that the book values of the joint ventures and associates equates to the market values.
* Where the year ends of joint ventures and associates are different to Sappi’s, the unaudited management accounts of the joint ventures and associates are
used for the periods to Sappi’s year end.
134
Notes to the group annual financial statements continued
US$ million
14. Other non-current assets
Loans to the Sappi Limited Share Incentive Trust participants
Financial assets*
Post-employment benefits – pension asset (refer to note 27)
Acquisition costs**
Other loans
2009
2008
6
33
52
–
10
101
6
22
117
10
13
168
** Details of investments are available at the registered offices of the respective companies.
** Acquisition costs relate to the acquisition of M-real’s coated graphic paper business. These costs were recorded as non-current assets in 2008 pending the
successful completion of the Acquisition. In 2009, the costs were recorded as part of the purchase consideration of the Acquisition (refer to note 34).
US$ million
15.
Inventories
Raw materials
Work in progress
Finished goods
Consumable stores and spares
2009
2008
155
83
347
207
792
163
62
324
176
725
The charge to the group income statement relating to the write down of inventories to net realisable value amounted to
US$10 million (2008: US$11 million and 2007: US$12 million).
The cost of inventories recognised as an expense and included in cost of sales amounted to US$4,467 million (September
2008: US$4,552 million and September 2007: US$4,150 million).
US$ million
16.
Trade and other receivables
Trade accounts receivable, gross
Allowance for credit losses
Trade accounts receivable, net
Prepayments and other receivables
2009
2008
682
(15)
667
191
858
579
(5)
574
124
698
Management rate the quality of the trade and other receivables, which are neither past
due nor impaired, periodically against its internal credit rating parameters. The quality
of these trade receivables is such that management believe no impairment provision
is necessary, except in situations where they are part of individually impaired trade
receivables.
The carrying amount of US$858 million (2008: US$698 million) represents the group’s
maximum credit risk exposure from trade and other receivables.
Prepayments and other receivables primarily represent prepaid insurance and other
sundry receivables.
Trade receivables (including securitised trade receivables) to turnover (%)
16%
13%
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US$ million
2009
2008
Trade and other receivables
16.
16.1 Reconciliation of the allowance for credit losses
Balance at beginning of year
Raised during the year
Released during the year
Utilised during the year
Balance at end of year
5
16
(6)
–
15
13
3
(9)
(2)
5
An allowance has been made for estimated irrecoverable amounts from the sale of goods of US$15 million (2008: US$5 million).
This allowance has been determined by reference to past default experience.
16.2 Analysis of amounts past due
September 2009
The following provides an analysis of the amounts that are past the due contractual maturity dates:
Less than 7 days overdue
Between 7 and 30 days overdue
Between 30 and 60 days overdue
More than 60 days overdue
Not impaired
Impaired
Total
9
29
9
19
66
–
–
–
15
15
9
29
9
34
81
September 2008
The following provides an analysis of the amounts that are past the due contractual maturity dates:
Less than 7 days overdue
Between 7 and 30 days overdue
Between 30 and 60 days overdue
More than 60 days overdue
Not impaired
Impaired
Total
15
18
6
7
46
–
–
–
5
5
15
18
6
12
51
All amounts due which are beyond their contractual repayment terms are reported to regional management on a regular
basis. Any provision for impairment is required to be approved by the regional credit controller. All provisions for impairment
greater than US$50,000 are required to be approved by regional management.
The group has a provision of US$15 million (2008: US$5 million) against trade receivables that are past due.
The group holds collateral of US$17 million (2008: US$17 million) against these trade receivables that are past due.
The group has granted facilities to customers to buy on credit for the following amounts:
Less than US$0.5 million
Less than US$1 million but equal to or greater than US$0.5 million
Less than US$3 million but equal to or greater than US$1 million
Less than US$5 million but equal to or greater than US$3 million
Equal to or greater than US$5 million
2009
2008
332
275
495
212
951
280
246
426
207
812
2,265
1,971
136
Notes to the group annual financial statements continued
Trade and other receivables continued
16.
16.3 Fair value
The directors consider that the carrying amount of trade and other receivables approximates their fair value.
16.4 Trade receivables pledged as security
Trade receivables with a value of US$460 million (2008: US$415 million) have been pledged as collateral for amounts
received from the banks in respect of the securitisation programme. The value of the associated liabilities at year end
amounted to US$400 million (2008: US$360 million). The group is restricted from selling and repledging the trade receivables
that have been pledged as collateral for the liability.
16.5 Off balance sheet structures
Letters of credit discounting
To improve the group working capital, the group sells certain letters of credit to ABN AMRO Hong Kong and DBS Bank
(London) at every financial month end on a non-recourse basis.
‘Scheck-Wechsel’
The Scheck-Wechsel is a financial guarantee supplied by Sappi to the bank of certain customers (trade receivables) who
wish to obtain a loan to finance early payment of specified trade receivables (thereby benefiting from an early settlement
discount). By signing the Scheck-Wechsel, Sappi provides a financial guarantee to the bank of the customer.
This financial guarantee contract is initially recognised at fair value. At inception the risk for Sappi having to reimburse the
bank is nil because 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 is zero
at inception. Subsequently, the financial guarantee contract is 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 recognised less any cumulative amortisation.
As no event of default has occurred, no provision has been set up and the fair value at year end remains at zero. However,
according to IAS 37 a contingent liability of US$25 million (2008: US$20 million) has been disclosed in this respect.
Trade receivables securitisation
To improve their cash flows in a cost-effective manner, Sappi Fine Paper North America, Sappi Fine Paper Europe and Sappi
Trading sell all eligible trade receivables on a non-recourse basis to special purpose entities (SPEs) that are owned and
controlled by third party financial institutions. These SPEs are funded with us but securitise assets on behalf of their
sponsors for a diverse range of unrelated parties. We have a servicing agreement with the entities acquiring our receivables,
acting as servicers for the collection of cash and administration of the trade receivables sold.
Sappi Forest Products securitisation facility
Sappi sells the majority of its ZAR receivables to FirstRand Bank Limited, which issues commercial paper to finance the
purchase of the receivables. Sappi does not guarantee the recoverability of any amounts, but shares proportionately with
FirstRand Bank Limited the credit risk of each underlying receivable, after all recoveries, including insurance recoveries, with
Sappi bearing 15% of such risk (and FirstRand Bank Limited the remainder). Sappi administers the collection of all amounts
processed on behalf of the bank that are due from the customer. The purchase price of these receivables is adjusted dependent
on the timing of the payment received from the client. The rate of discounting that is charged on the receivables is JIBAR
(Johannesburg Interbank Agreed Rate) plus a spread. This structure is currently treated as an off balance sheet arrangement.
The total amount of trade receivables sold at the end of September 2009 amounted to US$171 million (September 2008:
US$194 million). Details of the securitisation programme at the end of fiscal 2009 and 2008 are disclosed in the
tables below.
If this securitisation facility were to be terminated, we would discontinue further sales of trade receivables and would not
incur any losses in respect of receivables previously sold in excess of the 15% mentioned above. There are a number of
events which may trigger termination of the facility, amongst others, an amount of defaults above a specified level; terms
and conditions of the agreement 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.
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Trade and other receivables continued
16.
16.5 Off balance sheet structures continued
Details of the securitisation facility at September 2009 and 2008 are set out below:
Bank
Currency
Value
Facility
Discount charges
2009
FirstRand Bank Limited
2008
FirstRand Bank Limited
ZAR
ZAR
ZAR1,268 million
Unlimited*
Linked to 3 month JIBAR
ZAR1,568 million
Unlimited*
Linked to 3 month JIBAR
* The facility in respect of the securitisation facility is unlimited, but subject to the sale of qualifying receivables to the bank.
Details of the on balance sheet securitisation facilities that are applicable to Sappi Fine Paper are described in note 20.
A significant portion of the group’s sales and accounts receivable are from major groups of customers. None (2008: two) of
the group’s major customers represented more than 10% of our sales during the year ended September 2009. The sales of
these two customers in 2008 were recorded in Sappi Fine Paper and amounted to US$1,242 million and the outstanding
balance, net of securitisation, at September 2008 was US$83 million. Where appropriate, credit insurance has been taken
out over the group’s trade receivables.
None of the group’s other receivable financial instruments represent a high concentration of credit risk because the group
has dealings with a variety of major banks and customers worldwide.
The group has the following amounts due from single customers:
Greater than US$10 million
Between US$5 million
and US$10 million
Less than US$5 million
2009
2008
Number of
customers
US$m Percentage
Number of
customers
US$m Percentage
6
9
2,519
2,534
82
55
530
667
12%
8%
80%
100%
6
122
21%
9
1,713
1,728
62
390
574
11%
68%
100%
None of the trade receivables, with balances of equal to or greater than US$5 million as at year end have breached their
contractual maturity terms. No impairment charges have been recognised in respect of customers who owe the group more
than US$5 million.
Refer to note 30 for further details on credit risk.
138
Notes to the group annual financial statements continued
US$ million
2009
2008
17. Ordinary share capital and share premium
Authorised share capital:
725,000,000 (September 2008: 325,000,000) shares of ZAR1 each
Issued share capital:
537,117,864 (September 2008: 239,071,892) shares of ZAR1 each
Share premium
70
1,471
1,541
28
679
707
The authorised ordinary share capital was increased during the year from 325,000,000 to 1,325,000,000 ordinary shares
with a par value of ZAR1.00 per share prior to the rights offer in December 2008. The authorised ordinary share capital
was then subsequently reduced from 1,325,000,000 to 725,000,000 ordinary shares with a par value ZAR1.00 per share.
The issued ordinary share capital increased during the year from ZAR239,071,892 to ZAR537,117,864 with the issue of
286,886,270 rights offer shares and 11,159,702 shares in settlement of part of the consideration for the acquisition of the
M-real graphic paper business.
Included in the issued ordinary shares above are 21,384,559 (September 2008: 9,906,661) shares held as treasury shares
by group entities, including The Sappi Limited Share Incentive Trust (the Scheme). These may be utilised to meet the
requirements of the Scheme.
The movement in the number of treasury shares is set out in the table below:
Treasury shares at beginning of year (including Scheme shares)
Rights issue shares subscribed
Treasury shares issued to participants of the Scheme
– Share options (per note 29)
– Share plan options (per note 29)
– Allocation shares (per note 29)
– Restricted shares (per note 29)
– Scheme shares forfeited, released and other
Treasury shares at end of year
Number of shares
9,906,661
11,860,873
(382,975)
10,600,811
–
(694,150)
(206,140)
(165,491)
(214,660)
(22,000)
225,316
(452,200)
–
(273,750)
–
31,800
21,384,559
9,906,661
Included in the 187,882,136 unissued shares and in the 537,117,864 issued shares are a total of 42,700,870 shares (adjusted
for the rights issue) which may be used to meet the requirements of the Scheme and/or The Sappi Limited Performance Share
Incentive Trust (the Plan). In terms of the rules of the Scheme and the Plan the maximum number of shares which may be
acquired in aggregate by the Scheme and/or the Plan and allocated to participants of the Scheme and/or the Plan from time to
time is 42,700,870 shares, subject to adjustment in case of any increase or reduction of Sappi’s issued share capital on any
conversion, redemption, consolidation, sub-division and/or any rights or capitalisation issue of shares. Sappi is obliged to
reserve and keep available at all times out of its authorised but unissued share capital such number of shares (together with any
treasury shares held by Sappi subsidiaries which may be used for the purposes of the Scheme and/or the Plan) as shall then
be required in terms of the Scheme and/or the Plan. Authority to use treasury shares for the purposes of the Scheme and/or
the Plan was granted by shareholders at the annual general meeting held on 07 March 2005.
2009 annual report
139
17. Ordinary share capital and share premium continued
Since March 1994, 2,970,582 (September 2008: 6,752,522) shares have been allocated to the Scheme participants and
paid for and 11,910,172 (September 2008: 5,772,812) shares have been allocated to the Scheme participants and not yet
paid for. In terms of the Plan, 9,736,450 (September 2008: 3,961,100) shares have been allocated and remain unpaid for
and 165,491 shares have been allocated and paid for by the Plan participants.
Shares allocated and accepted more than ten years ago are added back to the number of shares that the Scheme and/or
the Plan may acquire.
The net after tax loss on sale of treasury shares to participants written off against share premium for September 2009 was
US$0.5 million (September 2008: US$1 million).
Capital risk management
The capital structure of the group consists of:
– issued share capital and premium and accumulated profits disclosed above and in the statement of changes in equity
respectively;
– debt, which includes interest-bearing borrowings and obligations due under finance leases disclosed under note 20; and
– cash and cash equivalents.
The group’s capital management objective is to achieve an optimal weighted average cost of capital while continuing to
safeguard the group’s ability to meet its liquidity requirements (including capital expenditure commitments), repay borrowings
as they fall due and continue as a going concern.
The group monitors its gearing through a ratio of net debt (interest-bearing borrowings and overdraft less cash and cash
equivalents) to total capitalisation (shareholders’ equity plus net debt).
The group has entered into a number of debt facilities which contain certain terms and conditions in respect of capital management.
During fiscal 2009 and 2008, we were in compliance with the financial covenants relating to the material loans payable.
The group’s strategy with regard to capital risk management remains unchanged from 2008.
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Notes to the group annual financial statements continued
US$ million
2009
2008
2007
18. Other comprehensive income
Exchange differences on translation
Gross amount
Tax
Actuarial (losses) gains on pensions and post-employment benefits
Gross amount (refer to notes 27 and 28)
Tax
Pension fund assets recognised
Gross amount
Tax
Cash flow hedge reserves
Gross amount
Tax
Other comprehensive (expense) income recorded directly in equity
(Loss) profit for the year
Total comprehensive (expense) income for the year
14
14
–
(197)
(229)
32
–
–
–
(14)
(14)
–
(197)
(177)
(374)
(262)
(262)
–
6
7
(1)
–
–
–
–
–
–
(256)
102
(154)
151
151
–
81
101
(20)
45
45
–
–
–
–
277
202
479
US$ million
2009
2008
19.
Non-distributable reserves
Reduction in capital arising from the transfer of share premium under a special
resolution dated 14 April 1975
Capitalisation of distributable reserves
Legal reserves in subsidiaries
Share-based payment reserve
1
12
82
48
1
13
75
35
143
124
2009
2008
Capitali-
sation
reserve
Capital
reduction
Legal
reserves
Share-
based
payment
reserve
Capital
reduction
Total
Capitali-
sation
reserve
Legal
reserves
Share-
based
payment
reserve
Total
Opening balance
Transfer from
retained earnings
Share-based
payment expense
Translation difference
1
–
–
–
1
13
75
35
124
–
–
(1)
6
–
1
–
9
4
6
9
4
12
82
48
143
1
–
–
–
1
15
66
32
114
–
–
(2)
8
–
1
–
8
10
(7)
10
(8)
13
75
35
124
The amounts recorded as ‘Capitalisation of distributable reserves’ and ‘Legal reserves in subsidiaries’ represent equity of
the company that is not available for distribution as a result of appropriations of equity by subsidiaries and legal requirements
respectively.
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US$ million
2009
2008
20.
Interest-bearing borrowings
Secured borrowings
– Mortgage and pledge over trade receivables and certain assets
(refer to note 24 for details of encumbered assets)
– Capitalised lease liabilities (refer to note 24 for details of encumbered assets)
Total secured borrowings
Unsecured borrowings
Total borrowings (refer to note 30)
Less: Current portion included in current liabilities
The repayment profile of the interest-bearing borrowings is as follows:
Payable in the year ended September:
2009*
2010*
2011
2012
2013
2014 (September 2008: thereafter)
Thereafter
1,321
29
1,350
1,977
3,327
601
2,726
–
601
261
890
338
895
342
468
29
497
2,156
2,653
821
1,832
821
65
629
615
159
364
–
3,327
2,653
* Included in the US$601 million reflected as payable in 2010 is US$400 million debt relating to securitisation funding (2009: US$360 million included in
US$821 million) which has the character of a short-term revolving facility but is expected to run until 2012 under the existing contractual arrangements.
Capitalised lease liabilities
Finance leases are primarily for plant and equipment. Lease terms generally range from five to ten years with options to
make early settlements or renew at varying terms. At the time of entering into capital lease agreements, the commitments
are recorded at their present value using applicable interest rates. As of September 2009, the aggregate amounts of
minimum lease payments and the related imputed interest under capitalised lease contracts payable in each of the next five
financial years and thereafter are as follows:
2009
2008
Minimum
lease
payments
Interest
Present
value of
minimum
lease
payments
Minimum
lease
payments
Interest
Present
value of
minimum
lease
payments
Payable in the year
ended September:
2009
2010
2011
2012
2013
2014 (September 2008: thereafter)
Thereafter
Total future minimum
lease payments
–
23
17
18
15
6
7
86
–
(4)
(3)
(2)
(2)
(1)
(1)
(13)
–
19
14
16
13
5
6
73
10
4
4
5
5
12
–
40
(3)
(2)
(2)
(2)
(1)
(1)
–
(11)
7
2
2
3
4
11
–
29
142
Notes to the group annual financial statements continued
20.
Interest-bearing borrowings continued
Set out below are details of the more significant non-current interest-bearing borrowings in the group at September 2009:
Interest
rate(8)
Principal
amount
outstanding
Balance
sheet
value
Currency
Security/
cession
Expiry
Financial
covenants
Redeemable bonds
Public high
yield bond
Public high
yield bond
EUR
Fixed(7)
EUR350 million
EUR313 million(2,6)
US$
Fixed(7)
US$300 million(7) US$268 million(2,6)
August 2014
August 2014
Property,
plant and
equipment,
intercompany
receivables
and shares
in subsidiaries
Property,
plant and
equipment,
intercompany
receivables
and shares
in subsidiaries
Public bond
US$
Fixed
US$500 million US$520 million(2,3,6) Unsecured
June 2012
Public bond
US$
Fixed
US$250 million US$254 million(2,3,6) Unsecured
June 2032
EBITDA to net
interest and
net debt to
EBITDA(5)
EBITDA to net
interest and
net debt to
EBITDA(5)
No financial
covenants
No financial
covenants
No financial
covenants
Town of
Skowhegan
Town of
Skowhegan
Michigan
Strategic Fund
and City of
Westbrook
US$
Fixed
US$35 million
US$38 million(6)
US$
Fixed
US$28 million
US$30 million(6)
US$
Fixed
US$44 million
US$48 million(6)
Land and
buildings
(partially)
Land and
buildings
(partially)
Land and
buildings
(partially)
October 2015
November 2013 No financial
covenants
January 2022
No financial
covenants
Public bond
ZAR
Fixed
ZAR1,000 million ZAR1,000 million
Unsecured
June 2013
Public bond
ZAR
Fixed
ZAR999 million
ZAR999 million
Unsecured
October 2011
No financial
covenants
No financial
covenants
Bravura/
Sanlam
Bravura/
Sanlam
Bravura/
Sanlam
Bravura/
Sanlam
Bond
Nedbank
Secured loans
State Street
Bank
ZAR
Fixed
ZAR121 million
ZAR121 million
Unsecured
November 2012 No financial
ZAR
Fixed
ZAR120 million
ZAR120 million
Unsecured
January 2013
ZAR
Fixed
ZAR30 million
ZAR30 million
Unsecured
March 2013
covenants
No financial
covenants
No financial
covenants
ZAR
Fixed
ZAR54 million
ZAR54 million(6)
Unsecured
December 2013 No financial
ZAR
Fixed
ZAR497 million
ZAR497 million(6)
Unsecured
June 2012
EUR
Variable EUR185 million
EUR185 million
Trade
receivables
Revolving
facility
covenants
No financial
covenants
EBITDA to net
interest and
net debt to
EBITDA(5)
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20.
Interest-bearing borrowings continued
Interest
rate(8)
Principal
amount
outstanding
Balance
sheet
value
Currency
Security/
cession
Expiry
Financial
covenants
Secured loans continued
State Street
Bank
State Street
Bank
US$
Variable US$61 million
US$61 million
Trade
receivables
Revolving
facility
US$
Variable US$67 million
US$67 million
Trade
receivables
Revolving
facility
Österreichische
Kontrollbank
EUR
Fixed
EUR400 million EUR386 million(2,6)
Österreichische
Kontrollbank
US$
Fixed
US$38 million
US$38 million(2,6)
April 2014
June 2010
Property, plant
and equipment,
intercompany
receivables
and shares in
subsidiaries
Property, plant
and equipment,
intercompany
receivables
and shares in
subsidiaries
EBITDA to net
interest and
net debt to
EBITDA(5)
EBITDA to net
interest and
net debt to
EBITDA(5)
EBITDA to net
interest and
net debt to
EBITDA(5)
EBITDA to net
interest and
net debt to
EBITDA(5)
Capitalised leases
Fortum
EUR
Variable EUR29 million
EUR29 million
Unsecured
November 2012 No financial
Molsindra
EUR
Fixed
EUR5 million
EUR5 million
Coating
machine
January 2010
covenants
No financial
covenants
Rand Merchant
Bank
ZAR
Fixed
ZAR160 million
ZAR160 million(1)
Buildings
September 2015 No financial
covenants
Unsecured bank term loans
Österreichische
Kontrollbank
EUR
Variable EUR58 million
EUR58 million(1)
December 2009 No financial
ABN AMRO
US$
Fixed
US$20 million
US$20 million
June 2010
Nedbank
ZAR
Fixed
ZAR349 million ZAR349 million(1)
January 2011
Nedbank
ZAR
Fixed
ZAR479 million ZAR479 million
March 2014
Commerzbank
ZAR
Fixed
ZAR149 million ZAR149 million(1)
March 2010
Calyon
ZAR
Variable ZAR11 million
ZAR11 million(1,4)
October 2009
PSG
ZAR
Fixed
ZAR12 million
ZAR12 million(1)
June 2014
covenants
No financial
covenants
No financial
covenants
Gearing ratio/
interest and
dividend cover
No financial
covenants
EBITDA to net
interest and
net debt to
EBITDA(5)
No financial
covenants
RZB Bank
EUR
Fixed
EUR3 million
EUR3 million
December 2009 No financial
covenants
144
Notes to the group annual financial statements continued
20.
Interest-bearing borrowings continued
The analysis of the currency per debt is:
US$
EUR
ZAR
Local
currency
million
1,342
986
3,981
US$ million
1,342
1,448
537
3,327
(1) The value outstanding equals the total facility available.
(2) In terms of the agreement, limitations exist on liens, sale and leaseback transactions and mergers and consolidation. Sappi Limited must maintain a majority
holding in Sappi Papier Holding GmbH group.
(3) Sappi Papier Holding GmbH, Sappi Limited or Sappi International SA may at any time redeem the June 2012 and 2032 public bonds (the ‘Securities’) in whole
or in part at a redemption price equal to the greater of (i) 100% of the principal amount of the Securities to be redeemed and (ii) a make-whole amount based
upon the present values of remaining payments at a rate based upon yields of specified US treasury securities plus 25 basis points, with respect to the 2012
Securities, and 30 basis points, with respect to the 2032 Securities, together with, in each case, accrued interest on the principal amount of the securities to
be redeemed to the date of redemption.
(4) The financial covenant relates to the financial position of Sappi Manufacturing, a wholly-owned subsidiary of Sappi Limited.
(5) Financial covenants relate to the Sappi Limited group.
(6) The principal value of the loans/bonds corresponds to the amount of the facility, however, the outstanding amount has been adjusted by the discounts paid
upfront and the fair value adjustments relating to hedge accounting.
(7) US$ fixed rates have been swapped into Euro fixed rates. These swaps are subject to hedge accounting in order to reduce as far as possible the foreign
exchange exposure.
(8) The nature of the rates for the group bonds is explained in note 30 to the financial statements. The nature of the interest rates is determined with reference to
the underlying economic hedging instrument.
A detailed reconciliation of total interest-bearing borrowings has been performed in note 30.
Other restrictions
As is the norm for bank loan debts, a portion of Sappi Limited’s financial indebtedness is subject to cross default provisions.
Breaches in bank covenants in certain subsidiaries, if not corrected in time, might result in a default in group debt, and in
this case, a portion of Sappi Limited consolidated liabilities might eventually become payable on demand.
During fiscal 2009 and 2008, we were in compliance with the financial covenants relating to the material loans payable.
Regular monitoring of compliance with applicable covenants occurs. If there is a possible breach of a financial covenant in
the future, negotiations are commenced with the applicable institutions before such breach occurs.
Borrowing facilities secured by trade receivables
The group undertakes several trade receivable securitisation programmes due to the cost-effectiveness of such structures.
These structures, with the exception of the South African scheme, are treated as on balance sheet, with a corresponding
liability (external loan) being recognised and corresponding interest is recognised as finance cost.
The trade receivables are legally transferred, however, most of the market risk (foreign exchange risk and interest rate risk)
and the credit risk is retained by Sappi. As a consequence, based on the risks and rewards evaluation, these securitisations
do not qualify for derecognition under IAS 39.
Further detail of the value of trade receivables pledged as security for these loans is included in note 16 of the financial
statements.
Sappi Fine Paper North America
Sappi sells the majority of its US$ receivables to Galleon Capital LLC on a non-recourse basis. Credit enhancement includes
a 3% deferred purchase price plus a letter of credit in the amount of US$18 million that relates to the uninsured portion of
those obligors with concentrations above 3% (Sappi, as servicer of the receivables, is responsible for the collection of all
amounts that are due from the customer). The rate of discounting charged on the receivables is LIBOR (London Interbank
Offered Rate) plus a margin for receivables to customers located in OECD countries.
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20.
Interest-bearing borrowings continued
Sappi Fine Paper Europe and Sappi Trading
Under a combined securitisation arrangement for Sappi Fine Paper Europe and Sappi Trading, Sappi sells receivables to
Galleon Capital LLC on a non-recourse basis. Credit enhancement is calculated by deducting a deferred purchase price of
14%. Sappi is responsible for the collection of all amounts that are due from the customer. The rate of discounting that is
charged on the receivables is LIBOR (London Interbank Offered Rate) plus a margin for receivables to customers located in
OECD countries plus a further margin for receivables to customers located in non-OECD countries.
Non-utilised facilities
The group monitors its availabilty to funds on a weekly basis. The group treasury committee determines the amount of
unutilised facilities to determine the headroom which it currently operates in. The net cash balances included in current
assets and current liabilities are included in the determination of the headroom available.
Non-utilised committed facilities
US$ million
Currency
Interest rate
2009
2008
Commercial paper*
Syndicated loan**
ZAR
EUR
Variable (JIBAR)
Variable (EURIBOR)
–
307
307
25
580
605
** Commercial paper programme has been terminated.
** Syndicated loan with a consortium of banks with JP Morgan as agent with a remaining revolving facility available of EUR209 million, which is subject to financial
covenants which relate to the Sappi Limited group and is secured by the same assets as the public high yield bonds maturing in 2014.
These committed facilities represent amounts that the group could utilise. The syndicated loan facility matures in May 2012.
We have paid a total commitment fee of US$0.8 million (2008 US$1 million) in respect of the syndicated loan facility.
Non-utilised uncommitted facilities
Geographic region
Currency
Interest rate
2009
2008
Southern Africa
Group Treasury – Europe
Europe
ZAR
EUR
EUR
Variable (JIBAR)
Variable (EURIBOR)
Variable (EURIBOR)
Total non-utilised facilities, excluding cash
Fair value
The fair value of all interest-bearing borrowings is disclosed in note 30 on financial instruments.
445
54
–
499
806
205
143
130
478
1,083
146
Notes to the group annual financial statements continued
US$ million
21. Other non-current liabilities
Post-employment benefits – pension liability (refer to note 27)
Post-employment benefits other than pension liability (refer to note 28)
Long-term employee benefits
Workmen’s compensation
Long service awards
Land restoration obligation
Deferred income
Other
US$ million
22.
Provisions
Restructuring provisions
Other provisions
Balance at September*
* These are all included in current liabilities.
Restructuring provisions
Balance at September 2007
Increase in provisions
Utilised
Released during the year
Other movements
Translation effect
Balance at September 2008
Increase in provisions
Utilised
Released during the year
Other movements
Translation effect
Balance at September 2009
2009
2008
308
172
9
8
27
19
3
11
557
144
141
6
7
18
16
4
10
346
2009
2008
32
3
35
41
1
42
Severance,
retrenchment
and related
costs
Lease
cancellation
and penalty
costs
Other
restructuring
Total
15
23
(8)
(4)
1
–
27
17
(24)
(1)
(1)
–
18
–
5
–
–
–
(1)
4
–
(1)
–
(1)
1
3
1
19
–
–
(10)
–
10
21
(10)
(4)
(5)
(1)
11
16
47
(8)
(4)
(9)
(1)
41
38
(35)
(5)
(7)
–
32
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22.
Provisions continued
September 2009 restructuring plans
Sappi Fine Paper Europe
Kangas Mill. During the financial year ended September 2009, the company announced that it had entered into a
consultation process with employees’ representatives with a view to restructuring working models. The consultation process
with employee representatives came to an end in July resulting in nine employees being made redundant. After the term of
notice and remodelling, employment contracts will end in April 2010. A provision of approximately US$1 million relating to
retrenchment costs has been raised.
Kirkniemi Mill. The mill started consultation negotiations with the employee representatives on 06 April 2009 for production
and economical reasons. Negotiations came to an end on 19 May 2009 resulting in 63 employees being made redundant. The
timeframe for the reductions is that 44 employees will leave by the end of calendar year 2009. The remaining 19 employees will
retire or relocate by the end of calendar year 2010. A provision of approximately US$2 million has been raised.
Sappi Fine Paper North America
Muskegon Mill. During the financial year ended September 2009, Sappi Fine Paper North America announced the
decision to permanently close the Muskegon Mill and integrate the mill’s products into the production lines at the Somerset
and Cloquet Mills. A total of 190 employees were affected by the closure of the Muskegon Mill. Muskegon Mill had an annual
capacity of 170,000 tons of coated fine paper. A provision of approximately US$21 million relating to restructuring charges
has been raised.
Sappi Southern Africa
Regional Restructuring. During the financial year ended September 2009, Sappi Southern Africa announced that it had
entered into a process of consultations with employees at Tugela, Ngodwana and Enstra Mills regarding proposals for cost
reduction and efficiency improvement initiatives. The restructuring will affect approximately 227 employees. A total provision
of approximately US$2 million was raised.
September 2008 restructuring plans
Sappi Fine Paper Europe
Regional restructuring. The regional restructuring plan was introduced in fiscal 2006. The original number of employees
expected to be impacted by this plan was 650. From a total of 650, 450 employees were expected to receive termination
benefits. The remaining number of 200 employees comprised of those who were employed on a contractual basis as well
as employees nearing retirement. The number of employees expected to receive termination benefits was revised from 450
to 357 at September 2007 and further revised to 347 at the end of fiscal 2008 of which 333 were already impacted. The
total provision relating to the restructuring plan at the end of fiscal 2008 was approximately US$5 million.
Blackburn Mill. During the financial year ended September 2008, Sappi Fine Paper Europe announced that it had entered
into a consultation process with employee representatives with a view to cease production at Blackburn Mill which had an
annual production capacity of 120,000 tons of graphic coated fine paper. Whilst various ancillary production and selling
activities are ongoing, the mill ceased production of paper in October 2008, and on 11 November 2008, the consultation
process with employee representatives came to an end resulting in 95 employees being made redundant. A further 14
employees were made redundant in 2009. A provision of US$23 million relating to severance, retrenchment and other
related closure costs was raised in 2008.
Maastricht Mill. During the financial year ended September 2008, Sappi Fine Paper Europe announced that it had entered
into a consultation process with employee representatives with a view to shutting down one of its coated paper machines with
an annual production capacity of 60,000 tons of graphic coated fine paper at Maastricht Mill. Negotiations with unions and the
Works Council were concluded in October 2008. Production ceased on 19 December 2008 affecting 175 employees. A
provision of US$24 million relating to severance, retrenchment and other related closure costs was raised.
148
Notes to the group annual financial statements continued
US$ million
2009
2008
2007
23.
Notes to the cash flow statement
23.1 Cash generated from operations
(Loss) profit for the year
Adjustment for:
– Depreciation
– Fellings
– Amortisation
– Taxation (benefit) charge
– Net finance costs
– Asset impairments
– Fair value adjustment gains and growth on plantations
– Post employment benefits funding
– Other non-cash items
23.2 Movement in working capital
Decrease (increase) in inventories
Decrease (increase) in receivables
(Decrease) increase in payables
23.3
23.4
Finance costs paid
Gross interest and other finance costs
Net foreign exchange gains
Net loss on marking to market of financial instruments
Non-cash movements included in items above
Taxation paid
Amounts unpaid at beginning of year
Translation effects
Amounts charged to profit or loss
Reversal of non-cash movements
Net amounts unpaid at end of year
Cash amounts paid
23.5 Replacement of non-current assets
Property, plant and equipment
Plantations
23.6 Proceeds on disposal of non-current assets
Book value of property, plant and equipment disposed of
Profit on disposal
23.7 Cash and cash equivalents
Cash and deposits on call
Money market instruments
(177)
396
69
2
(41)
145
79
(6)
(62)
27
432
116
175
(139)
152
(198)
17
(25)
99
(107)
(54)
(2)
(3)
–
54
(5)
(146)
(1)
(147)
–
2
2
727
43
770
102
374
80
–
86
126
119
(190)
(88)
14
623
(38)
(19)
58
1
(181)
8
(7)
41
(139)
(125)
7
(6)
–
54
(70)
(250)
–
(250)
2
5
7
221
53
274
202
374
70
1
47
134
2
(130)
(101)
(14)
585
44
(38)
54
60
(173)
13
(9)
(14)
(183)
(101)
(12)
(38)
(1)
125
(27)
(116)
–
(116)
23
27
50
354
10
364
2009 annual report
149
US$ million
2009
2008
24.
Encumbered assets
The book values of assets which are mortgaged, hypothecated or subject to a pledge
as security for borrowings, subject to third-party ownership in terms of capitalised
leases or suspensive sale agreements are as follows:
Land and buildings
Plant and equipment
Inventory
Trade receivables
322
1,385
164
460
2,331
17
4
–
415
436
Suspensive sale agreements are instalment sale agreements which the group has entered into in respect of certain property,
plant and equipment and the assets purchased are encumbered as security for the outstanding liability until such time as
the liability is discharged.
The increase in encumbered assets in 2009 relates to the security provided under the facilities entered into in July and
August 2009 (Public High Yield Bonds of US$300 million and EUR350 million; Österreichische Kontrollbank term loans of
EUR400 million and US$38 million, respectively, and the committed revolving credit facility of EUR209 million). The security
consists substantially of (i) the land, plant and equipment located at Sappi’s production facilities in Gratkorn, Austria;
Kirkniemi, Finland; Maastricht, The Netherlands; Nijmegen, The Netherlands; Skowhegan/Somerset, Maine, USA, and
Cloquet, Minnesota, USA and (ii) certain inventory owned by SD Warren Company and Sappi Cloquet LLC. The security also
includes certain shares in subsidiaries and certain intercompany receivables which are not reflected in the total above.
Refer to note 9 for details on property, plant and equipment.
l
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150
Notes to the group annual financial statements continued
US$ million
25.
Commitments
Capital commitments
Contracted but not provided
Approved but not contracted
Future forecasted cash flows of capital commitments:
2009
2010
2011 (September 2008: thereafter)
Thereafter
The capital expenditure is expected to be financed by funds generated by the business,
existing cash resources and borrowing facilities available to the group.
Lease commitments
Future minimum obligations under operating leases:
Payable in the year ended September:
2009
2010
2011
2012
2013
2014 (September 2008: thereafter)
Thereafter
2009
2008
62
126
188
–
102
48
38
188
–
31
14
7
4
2
2
60
76
130
206
154
35
17
–
206
28
14
9
4
2
35
–
92
Environmental matters: Further information on capital commitments relating to environmental matters can be found in
note 33.
US$ million
26.
Contingent liabilities
Guarantees and suretyships
Other contingent liabilities
2009
2008
44
8
38
7
Included under guarantees and suretyships are bills of exchange where Sappi has guaranteed third-party funding of payments
to Sappi for certain German accounts receivables.
Other contingent liabilities mainly relate to taxation queries to which certain group companies are subject.
The group is involved in various lawsuits and administrative proceedings. The relief sought in such lawsuits and proceedings
includes injunctions, damages and penalties. Although the final results in these suits and proceedings cannot be predicted
with certainty, it is the present opinion of management, after consulting with legal counsel, that they are not expected to
have a material effect on the group’s consolidated financial position, results of operations or cash flows.
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151
27.
Post-employment benefits – pensions
Defined-contribution plans
The group operates defined-contribution schemes of various sizes for all qualifying employees in most regions throughout
the group. The assets of the schemes are held separately from those of the group in funds under the control of trustees. In
addition, the group participates in country-wide union/industry schemes in certain locations open to eligible employees. The
number of schemes increased following an acquisition during the year.
The total cost charged to profit or loss of US$33 million (September 2008: US$23 million; September 2007: US$18 million)
represents contributions payable to these schemes by the group, based on the rates specified in the rules of these schemes.
As at September 2009, US$2 million (September 2008: US$2 million; September 2007: nil) was the net position of
contributions in the current reporting period that had not yet been paid over to the schemes and prepayments made for
contributions due in the next fiscal year.
Defined-benefit plans
The group operates 14 principal defined-benefit plans plus a number of smaller plans. The number of plans has increased
following an acquisition during the year. This includes plans closed to new entrants and plans closed to future accrual for
existing members. Plans still open to new entrants or future accrual, cover all qualifying employees. All plans have been
established in accordance with applicable legal requirements, customs and existing circumstances in each country. Plans
remain open to new members except for the following: Plans in Southern Africa, Austria, some in Germany and one in North
America are closed to new entrants. Schemes in the UK are closed to future accrual.
Benefits are generally based upon compensation and years of service, with varying definitions of compensation such as
average salary close to retirement or career average salary. Exceptions are for some of our German and Austrian plans
which provide fixed benefits and some of our North American plans that provide benefits based on years of service and a
‘$ multiplier’, which historically has increased from time to time. Our pension plan in Switzerland is a defined contribution
plan with guaranteed minimum investment returns and pays pensions. The scheme has a liability under IAS19 which is
disclosed with other defined benefit plan liabilities in this note.
With the exception of our German and Austrian plans (which are unfunded), the assets of these plans are held in separate
trustee administered funds, which are subject to varying statutory requirements in the particular countries concerned. In
terms of these requirements, periodic actuarial valuations of these funds are performed by independent actuaries. Actuarial
valuations of the European and North American funds are performed annually. Actuarial assessments on the funding bases
are performed triennially for the South African and United Kingdom funds.
As at September 2009, the number of active members in plans is approximately 8,000.
Group companies have no other significant post employment benefit liabilities, except for the following:
– healthcare benefits provided to persons in North America and in South Africa (refer to note 28); and
– jubilee (long service award schemes) provided in continental Europe, an early retirement (termination) plan in Belgium and
ATZ liabilities in Germany totalling US$36 million (included within other non-current liabilities in note 21).
All obligations and assets were measured at the end of this financial year.
152
Notes to the group annual financial statements continued
27.
Post-employment benefits – pensions continued
US$ million
Change in present value of
defined benefit obligation
Defined benefit obligation at
beginning of year
Current service cost
Past service (credit) cost
Interest cost
Plan participants’ contribution
Actuarial loss (gain) experience
Actuarial loss (gain)
assumptions
Gain on curtailment and
settlement
Acquisition
Benefits paid
Translation difference
Defined benefit obligation
at end of year
Present value of wholly
unfunded obligations
Present value of wholly and
partly funded obligations
Change in fair value
of plan assets
Fair value of plan assets at
beginning of year
Expected return on plan assets
Actuarial (loss) gain on plan
assets
Employer contribution*
Plan participants’ contribution
Acquisition
Benefits paid
Loss on curtailment and
settlement
Translation difference
Fair value of plan assets
at end of year
2009
2008
Southern
Africa
Europe
(incl UK)
North
America
Southern
Africa
Europe
(incl UK)
North
America
Total
Total
271
6
–
22
3
17
765
10
(5)
53
1
(13)
378
5
1
28
–
5
1,414
21
(4)
103
4
9
305
8
–
24
4
11
889
12
1
47
–
(2)
413
6
–
26
–
7
1,607
26
1
97
4
16
5
130
110
245
(11)
(127)
(51)
(189)
–
–
(28)
30
(1)
225
(54)
5
–
–
(24)
–
(1)
225
(106)
35
–
–
(26)
(44)
(1)
–
(50)
(4)
–
–
(23)
–
(1)
–
(99)
(48)
326
1,116
503
1,945
271
765
378
1,414
–
186
4
190
–
114
3
117
326
930
499
1,755
271
651
375
1,297
332
28
(6)
7
3
–
(28)
–
31
693
48
18
30
2
173
(54)
(1)
1
362
28
1,387
104
398
36
763
46
384
33
1,545
115
35
17
–
–
(24)
–
–
47
54
5
173
(106)
(1)
32
(30)
9
4
–
(26)
–
(59)
(93)
33
–
–
(50)
–
(6)
(66)
34
–
–
(23)
–
–
(189)
76
4
–
(99)
–
(65)
367
910
418
1,695
332
693
362
1,387
* Includes ‘additional employer contribution’ of US$1 million disclosed in 2008.
27.
Post-employment benefits – pensions continued
27.
Post-employment benefits – pensions continued
2009
2008
2009 annual report
153
US$ million
Africa
(incl UK)
America
Total
Africa
(incl UK)
America
Total
US$ million
Southern
Africa
Europe
(incl UK)
North
America
Surplus (deficit)
Unrecognised past service cost
41
–
(206)
(6)
(85)
–
Total
(250)
(6)
Southern
Africa
Europe
(incl UK)
North
America
(72)
–
(16)
–
i
l
s
a
c
n
a
n
fi
Total
(27)
–
Recognised pension plan
asset (liability)
Reconciliation of pension
asset (liability) movement
in the balance sheet
Recognised pension plan asset
(liability) at beginning of year
Pension liability acquired during
the year
Net pension (gain) cost for the
year
Employer contributions paid
Net actuarial (loss) gain
Translation difference
Recognised pension plan asset
(liability) at end of year
Periodic pension cost
recognised in income
statement
Current service cost
Past service cost
Fund administration costs
Interest cost
Expected return on plan assets
Amortisation of past service cost
Gain on curtailment
and settlement
Net periodic pension cost (gain)
charged to cost of sales
and selling, general and
administrative expenses
41
(212)
(85)
(256)
(72)
(16)
(27)
61
–
61
61
(72)
(16)
(27)
93
(126)
(28)
(61)
–
(52)
–
(52)
–
–
–
–
–
7
(28)
1
(15)
30
(99)
(4)
(6)
17
(80)
–
(21)
54
(207)
(3)
4
9
(30)
(15)
(13)
33
36
(2)
–
34
(22)
–
(9)
76
(16)
(17)
41
(212)
(85)
(256)
61
(72)
(16)
(27)
6
–
–
22
(28)
–
–
–
10
–
–
53
(48)
–
–
15
5
–
–
28
(28)
1
–
6
21
–
–
103
(104)
1
–
8
–
–
24
(36)
–
–
12
1
–
47
(46)
–
(1)
21
(4)
13
6
–
–
26
(33)
1
–
–
26
1
–
97
(115)
1
(1)
9
2009
2008
Southern
Europe
North
Southern
Europe
North
271
765
378
1,414
305
889
413
1,607
130
110
245
(11)
(127)
(51)
(189)
6
–
22
3
17
5
–
–
(28)
30
332
28
(6)
7
3
–
(28)
–
31
10
(5)
53
1
(13)
(1)
225
(54)
5
693
48
18
30
2
173
(54)
(1)
1
28
5
1
–
5
–
–
–
(24)
21
(4)
103
4
9
(1)
225
(106)
35
362
28
35
17
(24)
–
–
–
–
1,387
104
47
54
5
173
(106)
(1)
32
8
–
24
4
11
–
–
(26)
(44)
398
36
(30)
9
4
–
(26)
–
(59)
12
1
47
–
(2)
(1)
–
(50)
(4)
763
46
(93)
33
–
–
–
(6)
26
6
–
–
7
–
–
–
(23)
26
1
97
4
16
(1)
–
(99)
(48)
384
33
(66)
34
–
–
–
–
1,545
115
(189)
76
4
–
(99)
–
(65)
(50)
(23)
Change in present value of
defined benefit obligation
Defined benefit obligation at
beginning of year
Current service cost
Past service (credit) cost
Interest cost
Plan participants’ contribution
Actuarial loss (gain) experience
Actuarial loss (gain)
assumptions
Gain on curtailment and
settlement
Acquisition
Benefits paid
Translation difference
Defined benefit obligation
at end of year
Present value of wholly
unfunded obligations
Present value of wholly and
Change in fair value
of plan assets
Fair value of plan assets at
beginning of year
Expected return on plan assets
Actuarial (loss) gain on plan
assets
Employer contribution*
Plan participants’ contribution
Acquisition
Benefits paid
Loss on curtailment and
settlement
Translation difference
Fair value of plan assets
at end of year
326
1,116
503
1,945
271
765
378
1,414
–
186
4
190
–
114
3
117
partly funded obligations
326
930
499
1,755
271
651
375
1,297
* Includes ‘additional employer contribution’ of US$1 million disclosed in 2008.
367
910
418
1,695
332
693
362
1,387
154
Notes to the group annual financial statements continued
27.
Post-employment benefits – pensions continued
US$ million
Actual return (loss) on plan
assets
Actual return (loss) on plan
assets (%)
Amounts recognised
in statement of other
comprehensive income
Actuarial (losses) gains
Cumulative actuarial gains
and losses recognised
in statement of other
comprehensive income
Actuarial gains (losses)
Weighted average
actuarial assumptions
at balance sheet date:
Discount rate (%)
Compensation increase (%)*
Expected return on assets (%)
Weighted average
actuarial assumptions
used to determine
periodic pension cost:
Discount rate (%)
Compensation increase (%)*
Expected return on assets (%)
2009
2008
Southern
Africa
Europe
(incl UK)
North
America
Southern
Africa
Europe
(incl UK)
North
America
Total
Total
22
66
63
151
6
(47)
(33)
(74)
6.6
7.6
17.5
9.9
1.3
(6.2)
(9.0)
(5.0)
(28)
(99)
(80)
(207)
(30)
36
(22)
(16)
24
(197)
(161)
(334)
52
(98)
(81)
(127)
9.00
6.70
9.90
4.90
2.60
5.30
5.50
3.50
8.00
9.00
6.45
9.40
6.90
3.10
6.75
7.60
3.50
8.25
9.00
6.45
9.40
6.90
3.10
6.75
7.60
3.50
8.25
8.25
6.24
9.66
5.30
3.05
6.00
6.30
3.50
8.25
* Weighted average of schemes that use a compensation increase assumption.
Illustrating sensitivity
The discount and salary increase rates can have a significant effect on the amounts reported. The table below illustrates
the effect of changing key assumptions:
2009
2008
1%
increase
in
discount
rate
1%
decrease
in
discount
rate
1%
increase
in salary
increase
rate
1%
decrease
in salary
increase
rate
1%
increase
in
discount
rate
1%
decrease
in
discount
rate
1%
increase
in salary
increase
rate
1%
decrease
in salary
increase
rate
(Decrease) increase in defined
benefit obligation
(Decrease) increase in net
periodic pension cost
(204)
245
2
–
45
–
(43)
(141)
167
–
(2)
7
37
–
(34)
–
l
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s
a
c
n
a
n
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27.
Post-employment benefits – pensions continued
Pension plan liability is presented on the balance sheet as follows:
Pension liability (refer to note 21)
Pension asset (refer to note 14)
2009 annual report
155
2009
2008
308
(52)
256
144
(117)
27
In determining the expected long-term return assumption on plan assets, Sappi considers the relative weighting of plan
assets to various asset classes, the historical performance of total plan assets and individual asset classes and economic
and other indicators of future performance. Peer data and historical returns are reviewed to check for reasonableness and
appropriateness. In addition, Sappi may consult with and consider the opinions of financial and other professionals in
developing appropriate return benchmarks.
Plan fiduciaries set investment policies and strategies for the local trusts. Long-term strategic investment objectives include
preserving the funded status of the trusts and balancing risk and return while keeping in mind the regulatory environment in
each region. The plan fiduciaries oversee the investment allocation process, which includes selecting investment managers,
setting long-term strategic targets and rebalancing assets periodically. Target versus actual weighted average allocations
(by region) are shown below:
2009
2008
Southern
Africa
Europe
(incl UK)
North
America
Southern
Africa
Europe
(incl UK)
North
America
Weighted average target asset
allocation by region
Equity
Debt securities
Real estate
Other
Weighted average actual asset
allocation by region
Equity
Debt securities
Real estate
Other
%
21
57
0
22
%
25
57
0
18
%
25
60
6
9
%
20
67
5
8
%
38
49
0
13
%
41
46
0
13
%
40
44
0
16
%
25
52
0
23
%
38
58
0
4
%
34
50
4
12
%
38
22
0
40
%
35
22
0
43
Actual company contributions paid over in 2009 were US$55 million and expected company contributions for 2010 are
US$73 million.
Expected benefit payments for pension benefits are as follows:
US$ million
Payable in the year ending September:
2010
2011
2012
2013
2014
2015 – 2019
Southern
Africa
Europe
(incl UK)
North
America
14
15
15
16
17
96
62
64
65
64
63
344
22
23
24
25
27
165
Total
98
102
104
105
107
605
156
Notes to the group annual financial statements continued
27.
Post-employment benefits – pensions continued
Aggregate total of present value of the defined benefit obligation, fair value of assets and the surplus or deficit
in the defined-benefit plans
for the current annual period and for the previous four annual periods (ignoring unrecognised adjustments):
Defined benefit obligations
Fair value of assets
2009
1,945
1,695
2008
1,414
1,387
2007
1,607
1,545
2006
1,513
1,285
2005
1,589
1,222
(Deficit)
(250)
(27)
(62)
(228)
(367)
Aggregate gains and losses arising on plan liabilities and plan assets
for the current annual period and for the previous four annual periods:
2009
2008
2007
2006
2005
173
(189)
(16)
60
41
101
73
27
100
(141)
82
(59)
Plan liabilities (losses) gains
Plan assets gains (losses)
Net (losses) gains
Reconciliation of gains and losses
in statement of other comprehensive
income
Net losses from pensions
Net losses from post employment benefits
other than pensions (note 28)
Net losses in statement of other
comprehensive income
(254)
47
(207)
(207)
(22)
(229)
i
l
s
a
c
n
a
n
fi
27.
Post-employment benefits – pensions continued
Aggregate total of present value of the defined benefit obligation, fair value of assets and the surplus or deficit
in the defined-benefit plans
for the current annual period and for the previous four annual periods (ignoring unrecognised adjustments):
Defined benefit obligations
Fair value of assets
2009
1,945
1,695
2008
1,414
1,387
2007
1,607
1,545
2006
1,513
1,285
2005
1,589
1,222
(Deficit)
(250)
(27)
(62)
(228)
(367)
Aggregate gains and losses arising on plan liabilities and plan assets
for the current annual period and for the previous four annual periods:
2009
2008
2007
2006
2005
173
(189)
(16)
60
41
101
73
27
100
(141)
82
(59)
Plan liabilities (losses) gains
Plan assets gains (losses)
Net (losses) gains
Reconciliation of gains and losses
in statement of other comprehensive
income
Net losses from pensions
Net losses from post employment benefits
other than pensions (note 28)
Net losses in statement of other
comprehensive income
(254)
47
(207)
(207)
(22)
(229)
2009 annual report
157
28.
Post-employment benefits – other than pensions
The group sponsors two defined benefit post-employment plans that provide certain healthcare and life insurance benefits
to eligible retired employees of the North American and South African operations. Employees are generally eligible for
benefits upon retirement and completion of a specified number of years of service.
Actuarial valuations of all the plans are performed annually.
The North American and the South African post-employment obligations were measured at the end of this financial year.
The following schedule provides the plans’ funded status and obligations for the group:
2009
2008
South
Africa
North
America
Total
South
Africa
North
America
Total
Change in present value of
defined benefit obligation
Defined benefit obligations at
beginning of year
Current service cost
Interest cost
Actuarial loss (gain) experience
Actuarial loss (gain) assumptions
Gain on curtailment and
settlements
Benefits paid
Translation difference
Defined benefit obligation
at end of year
Present value of wholly unfunded
obligations
Unrecognised past service credit
Recognised post-employment
benefit liability
Reconciliation of pension liability
movement in the balance sheet
Recognised pension plan liability
at beginning of year
Net pension cost for the year
Employer contributions paid
Net actuarial (loss) gain
Translation difference
Recognised pension plan liability
at end of year
66
1
5
8
2
–
(3)
9
88
88
–
77
1
5
(5)
17
(1)
(7)
–
87
87
(4)
143
2
10
3
19
(1)
(10)
9
175
175
(4)
78
2
6
(1)
(4)
–
(3)
(12)
66
66
–
95
2
5
(10)
(8)
–
(7)
–
77
77
(5)
173
4
11
(11)
(12)
–
(10)
(12)
143
143
(5)
(88)
(91)
(179)
(66)
(82)
(148)
2009
2008
South
Africa
North
America
Total
South
Africa
North
America
Total
(66)
(6)
3
(10)
(9)
(82)
(4)
7
(12)
–
(148)
(10)
10
(22)
(9)
(78)
(8)
3
5
12
(101)
(6)
7
18
–
(179)
(14)
10
23
12
(88)
(91)
(179)
(66)
(82)
(148)
158
Notes to the group annual financial statements continued
28.
Post-employment benefits – other than pensions continued
2009
2008
2007
South
Africa
North
America
Total
South
Africa
North
America
South
Africa
North
America
Total
Total
Periodic post-
employment
benefit cost
recognised in
income statement
Current service cost
Interest cost
Amortisation of
past service credit
Gain on curtailments
and settlements
Net periodic
post-employment
benefit cost charged
to cost of sales
and selling, general
and administrative
expenses
1
5
–
–
1
5
(1)
(1)
2
10
(1)
(1)
2
6
–
–
2
5
(1)
–
4
11
(1)
–
1
6
–
–
2
5
(1)
(1)
3
11
(1)
(1)
6
4
10
8
6
14
7
5
12
2009
2008
South
Africa
North
America
Total
South
Africa
North
America
Total
Amounts recognised
in the statement of other
comprehensive income
Actuarial gains (losses)
Cumulative actuarial gains
and losses recognised
in the statement of other
comprehensive income
Actuarial losses
(10)
(12)
(22)
5
18
23
(29)
(25)
(54)
(19)
(13)
(32)
Weighted average actuarial assumptions
at balance sheet date:
Discount rate
Healthcare cost trend initial rate
which gradually reduces to an ultimate rate of
over a period of (years)
2009
2008
South
Africa
North
America
South
Africa
North
America
%
9.00
7.25
7.25
–
%
5.20
8.00
5.00
5
%
9.00
7.00
7.00
–
%
7.60
9.00
5.00
4
l
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2009 annual report
159
28.
Post-employment benefits – other than pensions continued
Weighted average actuarial assumptions used to
determine periodic post-employment benefit cost:
Discount rate
Healthcare cost trend initial rate
which gradually reduces to an ultimate rate of
over a period of (years)
2009
2008
South
Africa
North
America
South
Africa
North
America
%
9.00
7.00
7.00
–
%
7.60
9.00
5.00
4
%
8.25
6.75
6.75
–
%
6.30
9.50
5.00
5
Sensitivity analysis
The discount rate and healthcare cost trend rate can have a significant effect on the amounts reported. The table below
illustrates the effect by changing key assumptions:
2009
2008
1%
increase
in
discount
rate
1%
decrease
in
discount
rate
1%
increase
in health-
care
cost
trend
rate
1%
decrease
in health-
care
cost
trend
rate
1%
increase
in
discount
rate
1%
decrease
in
discount
rate
1%
increase
in health-
care
cost
trend
rate
1%
decrease
in health-
care
cost
trend
rate
(17)
20
17
(14)
(14)
16
13
(11)
(1)
2
2
(1)
(1)
1
1
(1)
(Decrease) increase in
defined benefit obligation
(Decrease) increase
in net periodic
post-employment
benefit cost
Post-employment benefits other than pension liabilities are presented
on the balance sheet as follows:
Post-employment benefits other than pension liability (refer to note 21)
Post-employment benefits other than pension included in other payables (receivables)
2009
2008
172
7
179
141
7
148
Actual employer contribution paid for 2009 was US$9 million and expected employer contribution for 2010 is US$11 million.
160
Notes to the group annual financial statements continued
28.
Post-employment benefits – other than pensions continued
Expected benefit payments for other than pension benefits are as follows:
Payable in the year ending September:
2010
2011
2012
2013
2014
Years 2015 – 2019
South
Africa
North
America
4
4
4
4
4
24
8
8
8
7
7
35
Aggregate total of present value of the defined benefit obligation in the benefit plans
for the current annual period and for the previous four annual periods (ignoring unrecognised adjustments):
Defined benefit obligations
2009
175
2008
143
Aggregate gains and losses arising on plan liabilities
for the current annual period and for the previous four annual periods:
Plan liabilities (losses) gains
2009
(22)
2008
23
2007
173
2007
–
2006
164
2006
(1)
Total
12
12
12
11
11
59
2005
178
2005
–
29.
Share-based payments
The Sappi Limited Share Incentive Trust and The Sappi Limited Performance Share Incentive Trust
At the annual general meeting of shareholders held on 07 March 2005, shareholders adopted The Sappi Limited Performance
Share Incentive Trust (the Plan) in addition to The Sappi Limited Share Incentive Trust (the Scheme) which had been adopted
on 05 March 1997, and fixed the aggregate number of shares which may be acquired by all participants under the Plan
together with the Trust at 19,000,000 shares (equivalent to 7.95% of the shares then in issue), subject to adjustment in case
of any increase or reduction of Sappi’s issued share capital on any conversion, redemptions, consolidations, sub-division
and/or any rights or capitalisation issues of shares. Subsequent to the December 2008 rights offering, this number has been
adjusted to 42,700,870 shares (still equivalent to 7.95% of the shares currently in issue), in accordance with the rules of the
Scheme and of the Plan.
The Sappi Limited Share Incentive Trust (the Scheme)
Under the rules of the Scheme, participants (a) may be offered the opportunity to acquire ordinary shares (Scheme shares),
(b) may be offered options to acquire ordinary shares (Share options), or (c) may be granted options to enter into agreements
with the company to acquire ordinary shares (Allocation shares).
Under the rules of the Scheme, participants may be offered options to acquire ordinary shares (Share options). This entails
that employees are offered options to purchase or subscribe for shares. Each share option will confer to the holder the right
to purchase or subscribe for one ordinary share. This is based on the terms and conditions of the Scheme. Share options
may only be released to participants as described below.
Under the rules of the Scheme, participants may be granted options to enter into agreements with the company to acquire
ordinary shares (Allocation shares). These options need to be exercised by the employee within 12 months, failing which the
option will automatically lapse. The exercise of the option must be accompanied by a deposit (if any) as determined by the
board of directors of Sappi (the board). The participant will be entitled to take delivery of and pay for Allocation shares which
are subject to the rules as described below.
l
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2009 annual report
161
29.
Share-based payments continued
The Sappi Limited Share Incentive Trust (the Scheme) continued
Certain managerial employees are eligible to participate in the Scheme. The amount payable by a participant for Scheme
shares, Share options or Allocation shares is the closing price at which shares are traded on the JSE Limited on the trading
date immediately preceding the date upon which the board authorised the grant of the opportunity to acquire relevant
Scheme shares, Share options or Allocation shares, as the case may be, to a participant. Pursuant to resolutions of the
board passed in accordance with the rules of the Scheme, Scheme shares may be released from the Scheme to participants,
Share options may be exercised by participants and Allocation shares may be delivered to participants as follows for
allocations prior to November 2004:
(i) 20% of the total number of shares after one year has elapsed from the date of acceptance by the participant of the grant;
(ii) up to 40% of the total number of shares after two years have elapsed from the date of acceptance by the participant of
the grant;
(iii) up to 60% of the total number of shares after three years have elapsed from the date of acceptance by the participant
of the grant;
(iv) up to 80% of the total number of shares after four years have elapsed from the date of acceptance by the participant of
the grant; and
(v) the balance of the shares after five years have elapsed from the date of acceptance by the participant of the grant;
and for allocations subsequent to November 2004 as follows:
(i) 25% of the total number of shares after one year has elapsed from the date of acceptance by the participant of the grant;
(ii) up to 50% of the total number of shares after two years have elapsed from the date of acceptance by the participant of
the grant;
(iii) up to 75% of the total number of shares after three years have elapsed from the date of acceptance by the participant
of the grant; and
(iv) the balance of the shares after four years have elapsed from the date of acceptance by the participant of the grant;
provided that the board may, at its discretion, anticipate or postpone such dates. Prior to the annual general meeting held
on 02 March 2000, the Scheme provided that Share options will lapse, among other reasons, if they remain unexercised
after the tenth anniversary of the acceptance and that Scheme shares and Allocation shares must be paid for in full by
participants by no later than the tenth anniversary of the acceptance. However, the annual general meeting approved an
amendment to decrease the aforesaid ten-year period to eight years, in respect of offers made since 03 December 1999.
The board has resolved that the benefits under the Scheme of Participants will be accelerated in the event of a change of
control of the company, as defined in the Scheme, becoming effective (a) if, in concluding the change of control, the board
in office at the time immediately prior to the proposed change of control being communicated to the board ceases to be
able to determine the future employment conditions of the group’s employees or (b) unless the change of control is initiated
by the board. Participants are entitled to require such acceleration by written notice to the company within a period of
90 days after the date upon which such change of control becomes effective.
The Scheme provides that appropriate adjustments are to be made to the rights of Participants in the event that the group,
inter alia, undertakes a rights offer, a capitalisation issue, or consolidation of ordinary shares or any reduction in its ordinary
share capital.
The Sappi Limited Performance Share Incentive Trust (the Plan)
Under the rules of the Plan, participants who will be officers and other employees of the company may be awarded
conditional contracts to acquire shares for no cash consideration. If the performance criteria from time to time determined
by the human resources committee or compensation committee of the board (Performance Criteria) applicable to each
Conditional Contract, are met or exceeded, then Participants shall be entitled to receive such number of shares as specified
in the Conditional Contract for no cash consideration after the fourth anniversary of the date on which the board resolves to
award a Conditional Contract to that Participant. The Performance Criteria shall entail a benchmarking of the company’s
performance against an appropriate peer group of companies.
If the board determines that the Performance Criteria embodied in a Conditional Contract have not been satisfied or
exceeded, the number of shares to be allotted and issued and/or transferred to a Participant under and in terms of such
Conditional Contract shall be adjusted downwards.
162
Notes to the group annual financial statements continued
29.
Share-based payments continued
The Sappi Limited Performance Share Incentive Trust (the Plan) continued
Provision is made for appropriate adjustments to be made to the rights of Participants in the event that the company, inter
alia, undertakes a rights offer, is a party to a scheme of arrangement affecting the structuring of its issued share capital or
reduces its share capital if, (a) the company undergoes a change in control after an Allocation date other than a change in
control initiated by the board itself, or (b) the person/s (or those persons acting in concert) who have control of the company
as at an Allocation date, take/s any decision, pass/es any resolution and/or take/s any action the effect of which is to delist
the company from the JSE Limited and the company becomes aware of such decision, resolution and/or action, the
company is obligated to notify every Participant thereof on the basis that such Participant may within a period of one month
(or such longer period as the board may permit) take delivery of those shares which he/she would have been entitled to had
the Performance Criteria been achieved.
Rights offer
Following the December 2008 rights offer and in accordance with the provisions of the Scheme and the Plan, adjustments
were made to the rights of the Participants so that they were neither better nor worse off than prior to the rights offer. This
resulted in additional offers being made to Participants in respect of all outstanding offers at the time of the rights offer. As
in the case of shareholders that exercised their rights, the Participants of the Plan will be required to pay the rights offer price
of ZAR20.27 per share should the shares vest. Similarly, the Participants of the Scheme may only exercise their additional
options, awarded as a result of the rights offer, in conjunction with exercising their pre-rights offer options and upon payment
of the rights offer price of ZAR20.27 per share.
The following table separates the adjustments made to the rights of the Participants following the rights offer from the
annual awards:
Allocations (number of shares)
During the year, the following offers
were made to employees:
Share options
Allocation shares
Performance shares**
Scheme shares
Restricted shares**
Share options and performance
shares declined
Annual
awards
2,192,410
–
1,815,000
–
–
Rights offer
2009
2008
3,847,680
1,345,500
4,725,240
1,577,834
12,000
6,040,090
1,345,500
6,540,240
1,577,834
12,000
925,700
–
730,000
–
–
(62,080)
(63,840)
(125,920)
(14,000)
3,945,330
11,444,414
15,389,744
1,641,700
2009 annual report
163
29.
Share-based payments continued
Scheme shares, Share options, Restricted shares, Performance shares and Allocation shares activity was as follows
during the financial years ended September 2009 and 2008:
Scheme
Restricted
Share
Perfor-
mance
Weighted
average
exercise
price
Allocation
shares***
shares
options(1)
shares(2)
(ZAR)*
shares(1)
Weighted
average
exercise
price
(ZAR)*
Total
shares
l
i
s
a
c
n
a
n
fi
Outstanding at September 2007
1,442,662
10,000
3,128,950
3,317,400
1,408,550
98.20
9,307,562
– Offered and accepted
– Paid for/released
– Returned, lapsed and forfeited
– Back into Trust
–
(90,800)
(31,800)
31,800
–
–
–
–
911,700
730,000
(452,200)
(355,750)
–
(96,300)
–
–
147.20
–
Outstanding at September 2008
– Offered and accepted
– Paid for/released
1,351,862
1,577,834
10,000
12,000
3,232,700
3,951,100
5,951,970
6,540,240
(75,060)
(22,000)
(206,140)
(165,491)
(734,150)
(360,289)
–
–
– Returned, lapsed and forfeited
– Back into Trust
5,736
–
Outstanding at September 2009
2,860,372
Exercisable at September 2007
Exercisable at September 2008
Exercisable at September 2009
587,600
491,300
752,600
–
–
–
–
–
–
8,244,380
9,965,560
29.33
1,845,950
65.24
22,916,262
2,104,550
1,906,330
4,835,090
–
5,000
–
96.21
96.97
55.60
1,196,650
1,032,300
1,845,950
99.71
3,888,800
110.22
3,434,930
65.24
7,433,640
49.01
52.02
63.47
93.76
–
(273,750)
(29,350)
46.00
19.96
20.95
41.69
–
1,105,450
1,307,700
(214,660)
(352,540)
–
–
–
–
–
98.20
20.27
30.68
54.12
–
1,641,700
(816,750)
(513,200)
31,800
9,651,112
15,389,744
(683,351)
(1,441,243)
–
*** The Share options are issued in South African Rands.
*** Restricted shares (awarded on an ad-hoc basis to certain individuals on various terms and conditions) and Performance shares are issued for no cash
consideration. The value is determined on the day the shares are taken up.
*** The number of Scheme shares, which are not subject to credit sales amounts to 2,107,772 (2008: 855,662), includes 1,026,794 rights offer Scheme shares
taken up at ZAR20.27 per share, included in offered and accepted in the current fiscal year.
(1) Issued in terms of the Scheme.
(2) Issued in terms of the Plan.
The fair value of Scheme shares held at September 2009 was US$8.1 million (September 2008: US$8.7 million).
164
Notes to the group annual financial statements continued
29.
Share-based payments continued
The following table sets out the number of share options outstanding at the end of September, excluding the scheme shares:
Vesting
2009
2008
conditions
Vesting date
Expiry date
14 December 1998
03 February 1999
15 January 2001
04 February 2002
28 March 2002 (ii)
13 February 2003 (ii)
30 December 2003 (ii)
14 January 2004 (ii)
25 March 2004 (ii)
–
–
–
–
1,128,700
1,383,000
267,190
1,311,680
2,200
48,300
1,000
213,800
7,000
623,000
743,800
150,250
630,700
1,000
13 December 2004 (ii)
2,115,560
1,029,500
Time
Time
Time
Time
Time
Time
Time
Time
Time
Time
(i)
(i)
(i)
(i)
(i)
(i)
(i)
(i)
(i)
(i)
13 December 2004
–
148,000
Performance
13 December 2008
13 December 2005 (ii)
3,030,060
1,413,800
Performance
13 December 2009
08 August 2006 (ii)
15 January 2007 (ii)
15 January 2007 (ii)
15 January 2007 (ii)
29 January 2007 (ii)
31 May 2007 (ii)
02 July 2007 (ii)
10 September 2007 (ii)
10 September 2007 (ii)
12 December 2007 (ii)
12 December 2007 (ii)
19 March 2008 (ii)
19 March 2008 (ii)
22 December 2008
23 December 2008
110,000
50,000
Performance
08 August 2010
–
–
11,000
110,000
5,000
Performance
31 December 2007
5,000
Performance
31 December 2008
5,000
Performance
31 December 2009
50,000
Performance
29 January 2011
3,008,500
1,419,300
Performance
31 May 2011
220,000
100,000
Performance
02 July 2011
–
10,000
Time
10 September 2008
25,000
Performance
10 September 2011
55,000
1,233,680
1,155,000
555,060
451,000
2,093,260
1,815,000
610,600
Time
12 December 2011
12 December 2015
525,000
Performance
12 December 2011
N/A
279,200
Time
19 March 2012
19 March 2016
205,000
Performance
12 March 2012
N/A
–
–
Time
22 December 2012
22 December 2014
Performance
22 December 2012
N/A
14 December 2008
03 February 2009
15 January 2009
04 February 2010
28 March 2010
13 February 2011
30 December 2011
14 January 2012
25 March 2012
13 December 2012
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Exercise
price (ZAR)
22.10
22.35
49.00
131.40
77.97
62.34
47.08
47.08
86.60
46.51
–
–
–
–
–
–
–
–
–
–
–
91.32
–
98.80
–
35.50
–
20,055,890
8,299,250
i(i) These vest over four or five years depending on the date of allocation.
(ii) During the year, there was a rights issue of six shares for every five shares held at ZAR20.27 per share. According to the rules of the Scheme this was also
offered to participants. Not all the participants took up their rights.
l
i
s
a
c
n
a
n
fi
2009 annual report
165
29. Share-based payments continued
The following assumptions have been utilised to determine the fair value of the shares granted in the financial period in terms
of the Scheme and the Plan:
Date of grant
Type of award
Share Price at grant date
Strike Price of share
Vesting Period
Vesting conditions
Expected life of options (years)
Market related vesting conditions
Percentage expected to vest
Number of shares offered
Volatility
Risk free discount rate
Expected dividend yield
Expected percentage of issuance
Model used to value
Fair value of option
Issue 34
Issue 34
Issue 34
22 Dec 08
Normal Option
ZAR36.7
ZAR35.5
4 years
Proportionately
over time
8 years
N/A
N/A
2,152,330
37.6%
11.8%
(US yield)
4.40%
95%
Binomial
ZAR11.88
22 Dec 08
Performance
US$7.66
–
4 years
Market related
relative to peers
N/A
Yes
41.5%
912,500
41.8%
1.96%
(US yield)
4.24%
95%
Modified
binomial
ZAR20.12
22 Dec 08
Performance
US$7.66
–
4 years
Cash flow return
on net assets
relative to peers
N/A
No
100%
912,500
N/A
N/A
4.24%
95%
Market
price
ZAR19.39
Volatility has been determined with reference to the historic volatility of the Sappi share price over the expected period.
Share options, Allocation shares, Restricted shares and Performance shares to executive directors, which are included in
the above figures, are as follows:
At beginning of year
Share options, Restricted shares and Performance shares granted for rights issue
Share options, Restricted shares and Performance shares granted
Share options and Allocation shares declined
Shares removed on resignation or retirement of directors
At end of year
2009
2008
Number
of options/
shares
Number
of options/
shares
339,000
406,800
242,000
(16,500)
(3,300)
249,000
–
90,000
–
–
968,000
339,000
166
Notes to the group annual financial statements continued
29.
Share-based payments continued
The following table sets forth certain information with respect to the 968,000 Share options and Performance shares
granted by Sappi to executive directors:
Issue date
28 March 2002
13 February 2003
30 December 2003
13 December 2004
13 December 2005*
08 August 2006*
02 July 2007*
12 December 2007*
22 December 2008*
Number of
options/shares** Expiry date
Exercise price
(ZAR)**
28 March 2010
13 February 2011
30 December 2011
13 December 2012
13 December 2009
08 August 2010
02 July 2011
12 December 2011
13 December 2012
33,000
33,000
39,600
39,600
52,800
110,000
220,000
198,000
242,000
968,000
77.97
62.34
47.08
46.51
–
–
–
–
** Performance shares.
** Adjusted for the share options, restricted shares and performance shares granted as a result of the rights issue.
Refer to the compensation report for further information on directors’ participation in the Scheme and the Plan.
No new loans have been granted to the executive directors since 28 March 2002.
30.
Financial instruments
The group’s financial instruments consist mainly of cash and cash equivalents, accounts receivable, certain investments,
accounts payable, borrowings and derivative instruments.
Introduction
The principal risks to which Sappi is exposed through financial instruments are:
a) market risk (the risk of loss arising from adverse changes in market rates and prices), arising from:
– interest rate risk
– currency risk
– commodity price risk
b) credit risk
c)
liquidity risk
The group’s main financial risk management objectives are to identify, measure and manage the above risks as more fully
discussed under the individual risk headings below.
Sappi’s Group Treasury is comprised of two components: Sappi International, located in Brussels, which manages the
group’s non-South African treasury activities and, for local regulatory reasons, the operations based in Johannesburg which
manage the group’s Southern African treasury activities.
These two operations collaborate closely and are primarily responsible for the group’s interest rate, foreign currency, liquidity
and credit risk (in so far as it relates to deposits of cash, cash equivalents and financial investments).
Commodity risk and credit risk (in so far as it relates to trade receivables) are primarily managed regionally but are co-
ordinated on a group basis.
The group’s Limits of Authority framework delegates responsibility and approval authority to various officers, committees
and boards based on the nature, duration and size of the various transactions entered into by, and exposures of, the group,
including the exposures and transactions relating to the financial instruments and risks referred to in this note.
2009 annual report
167
30.
Financial instruments continued
a) Market risk
Interest rate risk
Interest rate risk is the risk that an investment’s value will change due to a change in the absolute level of interest rates, in
the spread between two rates, in the shape of the yield curve or in any other interest rate relationship.
The group is exposed to interest rate risk as it borrows funds at both fixed and floating interest rates. The group monitors
market conditions and may utilise approved interest rate derivatives to alter the existing balance between fixed and variable
interest rate loans in response to changes in the interest rate environment. Hedging of interest rate risk for periods greater
than one year is only allowed if income statement volatility can be minimised by means of hedge accounting, fair value
accounting or other means. The group’s exposure to interest rate risk is set out below.
Interest-bearing borrowings
The table below provides information about Sappi’s current and non-current borrowings that are sensitive to changes in
interest rates. The table presents cash flows by expected maturity dates and estimated fair value of the borrowings. The
average fixed effective interest rates presented below are based on weighted average contract rates applicable to the
amount expected to mature in each respective year. Forward-looking average variable effective interest rates for the financial
years ended September 2009 and thereafter are based on the yield curves for each respective currency as published by
Reuters on 27 September 2009. The information is presented in US$, which is the group’s reporting currency.
A detailed analysis of the group’s borrowings is presented in note 20.
Expected maturity date
i
l
s
a
c
n
a
n
fi
2008
Carry-
ing
value
2008
Fair
value
(US$ equivalent in millions)
2010
2011
2012
2013
2014
2015+
US Dollar
Fixed rate
Average interest rate (%)
Variable rate(1)
Average interest rate (%)
Euro
Fixed rate
Average interest rate (%)
Variable rate(2)
Average interest rate (%)
Rand
Fixed rate
Average interest rate (%)
Variable rate(3)
Average interest rate (%)
59
4.84
128
2.08
13
5.86
368
2.68
32
9.31
1
10.55
2
–
–
–
186
9.29
11
5.35
62
9.21
–
–
522
6.47
–
–
137
9.26
12
5.35
219
11.11
–
–
2
–
–
–
29
5.64
–
–
600
10.04
–
–
137
9.27
9
5.35
190
9.74
–
–
572
12.72
–
–
26
10.99
–
–
3
1.87
–
–
7
11.67
–
–
Total
Carry-
ing
value
1,214
8.12
128
2.08
1,048
11.09
400
2.89
536
10.30
1
10.55
2009
Fair
value
1,281
128
1,290
399
59
4.31
979
6.61
603
4.62
488
4.43
524
1
366
9.88
7
10.67
58
885
582
488
350
7
168
Notes to the group annual financial statements continued
30.
Financial instruments continued
Expected maturity date
(US$ equivalent in millions)
2010
2011
2012
2013
2014
2015+
Total
carry-
ing
value
2009
fair
value
2008
carry-
ing
value
2008
fair
value
Swiss Franc
Fixed rate
Average interest rate (%)
Variable rate
Average interest rate (%)
Total
Fixed rate
Average interest rate (%)
Variable rate
Average interest rate (%)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
104
6.34
497
2.55
250
9.21
11
5.35
878
8.06
12
5.35
329
9.49
9
5.35
627
12.32
–
–
610
10.02
–
–
2,798
9.65
529
2.72
3,095
528
151
990
1,531
151
3.26
1,028
6.47
1,625
5.66
Fixed and variable
601
261
890
338
627
610
3,327
3,623
2,653
2,521
Current portion
Long-term portion
601
2,726
602
3,021
821
1,832
821
1,700
Total interest-bearing borrowings (refer to note 20)
3,327
3,623
2,653
2,521
The values reported under US Dollar fixed rates (2011 and 2013) represent fair value adjustments to hedged items which
are non-interest-bearing, which is why there are no average rates stated for these amounts.
The fair value of non-current borrowings is estimated by Sappi based on the rates from market quotations for non-current
borrowings with fixed interest rates and on quotations provided by internationally recognised pricing services for notes,
exchange debentures and revenue bonds.
The above mentioned fair values include Sappi’s own credit risk. Please refer to the sensitivity analysis regarding interest rate
risk for additional information regarding Sappi’s rating.
(1) The US Dollar floating interest rates are based on the London Interbank Offered Rate (LIBOR).
(2) The Euro floating interest rates are based on the European Interbank Offered Rate (EURIBOR).
(3) The Rand floating interest rates are predominately based on the Johannesburg Interbank Agreed Rate (JIBAR).
The range of interest rates in respect of all non-current borrowings comprising both fixed and floating rate obligations, is
between 5.35% and 12.32% (depending on currency). At September 2009, 84% of Sappi’s borrowings were at fixed rates
of interest, and 16% were at floating rates. Fixed rates of interest are based on contract rates.
Sappi’s Southern African operations have in the past been particularly vulnerable to adverse changes in short-term domestic
interest rates, as a result of the volatility in interest rates in South Africa. During 2009, domestic interest rates have decreased
from 12.05% to 7.02% for the three-month JIBAR.
i
l
s
a
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fi
2009 annual report
169
30.
Financial instruments continued
Interest rate derivatives
Sappi uses interest rate options, caps, swaps (IRS) and interest rate and currency swaps (IRCS) as a means of managing
interest rate risk associated with outstanding debt entered into in the normal course of business. Sappi does not use these
instruments for speculative purposes. Interest rate derivative financial instruments are measured at fair value at each
reporting date with changes in fair value recorded in profit or loss for the period or in equity, depending on certain hedge
designations carried out by the group in a documented hedging strategy.
Until June 2009, the group had in total seven US$ interest rate swaps, converting fixed rates to floating rates for a total
amount of US$857 million.
In June 2009, these swaps were sold for a total positive value of US$55 million and the underlying debt now carries the
original fixed interest rates. The total difference between Sappi’s valuation on the date of sale and the effective sales price
of the swaps amounted to US$20 million. This difference predominately related to the payment of certain selling costs
(breakage fees of US$13 million, a liquidity reduction and some smaller trading rate differences).
In August 2009, Sappi entered into seven new fixed for fixed interest and currency swaps with different banks, which have
been designated as cash flow hedges of future cash flows linked to fixed rate debt denominated in foreign currency. Each
swap corresponds to the hedged portion of the underlying US$300 million senior secured notes due 2014. The swaps
convert all future US$ cash flows into Euro.
The effective gains and losses from changes in fair value of these derivatives are recorded in other comprehensive income.
These accumulated gains and losses will be recycled to profit or loss in the same line as the hedged item at the moment the
hedged item affects the income statement (interest expense and foreign currency revaluation).
In order to measure hedge effectiveness, a hypothetical derivative with identical critical terms as the hedged item, has been
built as a perfect hedge. The changes in fair value of the actual derivatives are compared with the changes in fair value of
the hypothetical derivative.
As at September 2009, the effectiveness tests for the above mentioned hedges showed a 100% hedge effectiveness.
The swaps showed a total negative fair value of US$24 million, the negative fair value of the currency leg of the swap of
US$10 million was booked to profit or loss to offset the corresponding foreign currency unrealised gain of the revaluation of
the underlying hedged item, whereas the remaining negative fair value of the interest leg of the swap of US$14 million was
deferred in equity.
The existing interest rate and currency swap contract converting future US$ cash flows into GBP and fixed US$ interest
rates into fixed GBP interest rates (2008: US$233 miilion with a fair value of US$57 million) has an outstanding amount of
US$117 million at September 2009 with a positive fair value of US$10 million. This derivative is not designated as a hedge
in a documented hedge strategy. The changes in fair value of this instrument are booked in profit or loss for the period.
170
Notes to the group annual financial statements continued
30.
Financial instruments continued
See details of the swaps in the table below:
Instrument
Interest rate
Maturity date
Nominal
value
US$ million
Fair value*
favourable
(unfavourable)
US$ million
Sales
value
IRS:
IRCS:
6.75% to variable (LIBOR)
6.75% to variable (LIBOR)
6.75% to variable (LIBOR)
7.50% to variable (LIBOR)
5.90% to variable (LIBOR)
7.38% to variable (LIBOR)
6.65% to variable (LIBOR)
June 2012
June 2012
June 2012
June 2012
November 2013
July 2014
October 2014
250
200
50
250
28
44
35
US Dollar 6.30% into
Pound Sterling 6.66%
US Dollar 12% into
EUR 12.2375%
US Dollar 12% into
EUR 12.3175%
US Dollar 12% into
EUR 12.1375%
US Dollar 12% into
EUR 12.3375%
US Dollar 12% into
EUR 11.8375%
US Dollar 12% into
EUR 12.0875%
US Dollar 12% into
EUR 12.0875%
December 2009
117
August 2014
August 2014
August 2014
August 2014
August 2014
August 2014
August 2014
90
50
45
40
25
25
25
15
12
3
15
3
4
3
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
10
(7)
(4)
(3)
(4)
(2)
(2)
(2)
Total
* This refers to the carrying value.
55
(14)
The fair value of the IRCS is the estimated amount that Sappi would pay or receive to terminate the agreement at the
balance sheet date, taking into account current interest rates and the current creditworthiness of the counterparties
considering the specific relationships of the Sappi group with those counterparties. However, this amount excludes the
possible breakage and other fees which would be incurred in case of a sale before the maturity date.
i
l
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a
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n
fi
2009 annual report
171
30.
Financial instruments continued
Summary sensitivity analyses external interest rate derivatives
The following is a sensitivity analysis of the impact on profit or loss in US Dollars due to the change in fair value of interest
rate derivative instruments due to changes in the interest rate basis points (bps). The sensitivity analysis of floating rate debt
is carried out separately (see below).
1. IRCS converting fixed US$ rates into GBP fixed rates
Scenario name
–50bps GBP-LIBOR-6M
+50bps GBP-LIBOR-6M
Scenario name
–50bps USD-LIBOR-3M
+50bps USD-LIBOR-3M
Base
value
128.6
128.6
Base
value
(118.5)
(118.5)
Scenario
value
128.8
128.4
Scenario
value
(118.7)
(118.3)
Change
% Change
0.2
(0.2)
0.2
(0.2)
Change
% Change
(0.2)
0.2
0.2
(0.2)
The derivative converts fixed US$ interest payments of 6.30% into fixed GBP interest income of 6.66%, as well as the redemption
of principal amounts at maturity. The fair value of the instrument is subject to changes of both the inherent exchange rates and
interest rates. Fair value changes of the derivative caused by currencies are neutralised by currency changes in the underlying
intragroup loan. This intragroup loan has been reimbursed before its maturity date in September 2009.
At 27 September 2009 the net fair value of the derivative amounted to US$10.1 million (Gross ‘Base Values’ in the table
above: US$128.6 million for the GBP leg and US$ –118.5 million for the US$ leg) of which US$9.8 million was due to the
exchange rate movement between inception and the reporting date. This amount is compensated by the opposite
movement of the underlying loan (or the underlying cash paid in the same currency as the loan has been reimbursed) and
therefore has no impact on profit or loss. The portion of the fair value due to interest rate movements, which has impacted
profit or loss, amounts to a positive value of US$0.3 million. This value will reduce to zero at maturity.
For the period outstanding, the table above shows the impact that a shift of 50bps on the LIBOR curve would have on the
fair value. An increase in the USD LIBOR adds to the fair value, as does a decrease of the GBP LIBOR. When the GBP and
the US$ interest rates move the same way, the one roughly compensates the other. If the rates would drift in opposite
directions this would have an impact of approximately US$0.4 million for a shift of 50bps.
The largest shift experienced over the last 12-month period was a negative net shift of 2.67%, due to a decrease in US$
rates of 1.25 % and a decrease in the GBP rates of 3.92%. Applied to the fair value as per 27 September 2009, this would
have resulted in a positive change in fair value of US$0.9 million.
172
Notes to the group annual financial statements continued
30.
Financial instruments continued
Scenario name
–125bps USD-LIBOR-3M
–392bps GBP-LIBOR-6M
Total
Base
value
(118.5)
128.6
Scenario
value
(118.9)
129.9
2. IRCS converting fixed US$ rates into EUR fixed rates
Scenario name
–50bps EURIBOR-6M
+50bps EURIBOR-6M
Total
Scenario name
–50bps USD-LIBOR-3M
+50bps USD-LIBOR-3M
Total
Base
value
(452.7)
(452.7)
Base
value
429.1
429.1
Scenario
value
(461.8)
(443.8)
Scenario
value
437.8
420.6
Change
% Change
(0.4)
1.3
0.9
0.3
1.0
Change
% Change
(9.1)
8.9
(0.2)
2.0
(2.0)
Change
% Change
8.7
(8.5)
0.2
2.0
(2.0)
The derivative converts fixed US$ interest payments of 12% into fixed EUR interest coupons, as well as the redemption of
principal amounts at maturity. The fair value of the instrument is subject to changes of both the inherent exchange rates and
interest rates. Fair value changes of the derivative caused by currencies are neutralised by currency changes in the underlying
external debt.
At 27 September 2009, the net fair value of the seven derivatives amounted to a negative amount of US$23.6 million (Gross
‘Base Values’ in the table above: US$-452.7 million for the EUR leg and US$429.1 million for the US$ leg) of which a
negative amount of US$9.9 million was due to the exchange rate movement between inception and the reporting date. This
amount is compensated by the opposite movement of the underlying US$ external debt and therefore has no impact on
profit or loss. The portion of the fair value due to interest rate movements which has been recorded into equity, amounts to
a negative value of US$13.8 million. This value will reduce to zero at maturity.
For the period outstanding, the table above shows the impact that a shift of 50bps on the LIBOR/EURIBOR curve would
have on the fair value. A decrease in the USD LIBOR adds to the fair value, as does an increase of the EURIBOR. When the
EUR and the US$ interest rates move the same way, the one roughly compensates the other. If the rates would drift in
opposite directions this would have an impact of approximately US$17.6 million for a shift of 50bps.
The largest shift experienced over the last 12-month period was a negative net shift of 2.26%, due to a decrease in US$
rates of 2.51 % and a decrease in the EUR rates of 0.25%. Applied to the fair value as per 27 September 2009, this would
have resulted in a positive change in fair value of US$40.9 million.
Scenario name
–251bps USD-LIBOR-3M
–25bps EURIBOR-6M
Total
Base
value
429.1
(452.7)
Scenario
value
474.6
(457.3)
Change
% Change
45.5
(4.6)
40.9
10.6
1.0
The above analysis measures the impact on profit or loss that a change in fair value of the interest rate derivatives would
have, if the specified scenarios were to occur.
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30.
Financial instruments continued
Sensitivity analysis of interest rate risk – in case of a credit rating downgrade of SAPPI
The following table shows the sensitivity of securitisation debt to changes in the group’s own credit rating. The securitisation
agreement stipulates that if the company were downgraded below our current grading, an additional margin would be agreed
between the bank and the company. In this respect we assumed a hypothetical increase of 1.5%.
Please note that the change in value of the securitisation debt is included in the sensitivity analysis of floating rate debt in
the table below:
Securitisation in Europe and Hong Kong
Europe
Hong Kong
Sub-total
Impact calculated on total portfolio amounts to:
Impact on
income statement
of downgrade
below BB
credit rating
4,078
1,000
5,078
Notional
271,863
66,650
338,513
1.50%
The pricing of the securitisation contracts in Europe and Hong Kong would be impacted as set out in the table above if
the company were to be downgraded below the current rating. Based on the existing agreement, the US securitisation
arrangement would not be impacted by a possible downgrade, as there are sufficient other credit enhancements to mitigate
the co-mingling risk. All other external debt would not be impacted by a possible downgrading of Sappi.
The table below shows the sensitivity of certain fixed rate debt to changes in the group’s own credit rating. The agreements
of these specific external loans stipulate that if the company were downgraded below our current grading, an additional
margin would be added to the contractual funding rate.
External loan agreements sensitive to the group’s own credit rating
Commitment fee on unused revolving credit facility
Interest on utilised bank syndicated loan
Sub-total
Impact calculated on total portfolio amounts to:
Sensitivity analysis of interest rate risk of floating rate debt
Impact on
income statement
of downgrade
below BB ‘secured’
credit rating
690
3,000
3,690
Notional
209,000
400,000
609,000
0.61%
Total debt
Ratio fixed/floating
to total debt
Total
3,327.4
Fixed rate
Floating rate
2,798.8
84%
528.6
16%
Impact on
income statement
of 50bps interest
2.6
The floating rate debt represents 16% of total debt. If interest rates were to increase (decrease) by 50bps the finance cost
on floating rate debt would increase (decrease) by US$2.6 million.
174
Notes to the group annual financial statements continued
30.
Financial instruments continued
Currency risk
Sappi is exposed to economic, transaction and translation currency risks. The objective of the group in managing currency
risk is to ensure that foreign exchange exposures are identified as early as possible and actively managed.
– Economic exposure consists of planned net foreign currency trade in goods and services not yet manifested in the form
of actual invoices and orders;
– Transaction exposure arises due to transactions entered into, which result in a flow of cash in foreign currency, such as
payments under foreign currency long- and short-term loan liabilities, purchases and sales of goods and services, capital
expenditure purchases and dividends. Where possible, commercial transactions are only entered into in currencies that
are readily convertible by means of formal external forward exchange contracts; and
– Translation exposure arises when translating the group’s assets, liabilities, income and expenditure into the group’s
presentation currency. Borrowings are taken out in a range of currencies which are based on the group’s preferred ratios
of gearing and interest cover based on a judgement of the best financial structure for the group. On consolidation this
gives rise to translation exposure which is not hedged.
In managing currency risk, the group first makes use of internal hedging techniques with external hedging being applied
thereafter. External hedging techniques consist primarily of foreign currency forward exchange contracts and currency options.
Foreign currency capital expenditure on projects must be covered as soon as practical (subject to regulatory approval).
Currency risk analysis
In the preparation of the currency risk analysis the derivative instrument has been allocated to the currency which the
underlying instrument has been hedging.
2009
Financial assets
Other non-current assets
Non-current derivative
financial assets*
Trade and other
receivables
Current derivative
financial assets*
Cash and cash
equivalents
Financial liabilities
Non-current interest-
bearing borrowings
Non-current derivative
financial liabilities*
Current interest-bearing
borrowings
Overdraft
Current derivative
financial liabilities*
Trade and other payables
Foreign exchange gap
Total
Total in
scope
USD
EUR
ZAR
GBP
101
10
858
10
770
43
10
734
10
770
1,567
2
(120)
277
10
299
468
11
–
339
–
383
733
29
–
22
–
84
135
2,726
2,726
1,154
1,068
504
24
601
19
14
1,116
24
601
19
14
860
(429)
187
3
2
182
452
380
5
–
402
4,244
(2,677)
1,099
(631)
2,307
(1,574)
1
34
–
–
216
755
(620)
–
130
45
–
–
175
–
–
–
3
11
19
33
142
Other
(con-
verted
into
USD)
1
–
51
–
4
56
–
–
–
8
1
41
50
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30.
Financial instruments continued
Total
Total in
scope
USD
EUR
ZAR
GBP
Other
(con-
verted
into
USD)
168
76
44
76
2
(223)
5
–
37
–
–
299
–
–
698
626
287
275
4
4
1
–
274
274
1,024
82
149
101
381
22
–
91
150
32
10
3
–
–
–
334
10
1,832
1,832
875
597
360
1
1
–
–
821
26
24
959
821
26
24
756
164
–
24
196
494
10
–
297
3,460
1,259
1,398
1
12
2
–
239
614
–
–
–
4
–
8
–
–
151
10
–
16
12
177
2008
Financial assets
Other non-current assets
Non-current derivative
financial assets*
Trade and other
receivables
Current derivative
financial assets*
Cash and cash
equivalents
Financial liabilities
Non-current interest-
bearing borrowings
Non-current derivative
financial liabilities*
Current interest-bearing
borrowings
Overdraft
Current derivative
financial liabilities*
Trade and other payables
Foreign exchange gap
(2,436)
(1,110)
(1,017)
(464)
322
(167)
* The amount disclosed with respect to derivative instruments, reflects the currency which the derivative instrument is covering.
The above table does not indicate the group’s foreign exchange exposure, it only shows the financial instruments assets and
liabilities classified per underlying currency.
176
Notes to the group annual financial statements continued
30.
Financial instruments continued
The group’s foreign currency forward exchange contracts at September 2009 are detailed below:
2009
2008
Contract
amount
(notional
amount)
Fair value*
(unfavourable)
favourable
Contract
amount
(notional
amount)
Fair value*
(unfavourable)
favourable
473
213
–
(132)
(16)
(1)
537
(13)
(1)
–
9
–
–
(5)
2
13
11
(168)
(735)
–
(877)
–
–
–
(3)
(17)
–
(20)
US$ million
Foreign currency
Bought:
Sold:
US Dollar
Euro
ZAR
US Dollar
Euro
ZAR
* This refers to the fair value.
The fair value of foreign currency contracts has been computed by the group based upon the market data valid at
September 2009.
All forward currency exchange contracts are valued at fair value with the resultant profit or loss included in the net finance
costs for the period.
Forward exchange contracts are used to hedge the group from potential unfavourable exchange rate movements that may
occur on recognised financial assets and liabilities or planned future commitments.
The foreign currency forward exchange contracts have different maturities, with the most extended maturity date being
April 2010.
As at the year end there was an open exposure of US$35.6 million which has since been hedged.
Sensitivity analysis in USD gain (loss)
Base currency
EUR
GBP
CHF
SEK
JPY
ZAR
Other currencies
Total
Exposure
+10%
–10%
(7.4)
1.5
6.8
2.6
2.4
(32.1)
0.4
(25.8)
(0.7)
0.1
0.6
0.2
0.2
(2.9)
–
(2.5)
0.8
(0.2)
(0.8)
(0.3)
(0.3)
3.6
–
2.8
Based on the exposure as at 27 September 2009, if the foreign currency rates had moved 10% upwards or downwards
compared to the closing rates, the result would have been impacted by a loss of US$2.5 million (increase of 10%) or a gain
of US$2.8 million (decrease of 10%).
During 2009, we have contracted non-deliverable average rate forex transactions for a total notional value of US$30 million
which were used as an overlay hedge of export sales. Since these contracts have all matured before 27 September 2009,
these constitute non-representative positions. The total impact on profit or loss amounts to a loss of US$4.0 million.
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30.
Financial instruments continued
Commodity risk
Commodity risk arises mainly from price volatility and threats to security of supply.
A combination of contract and spot deals are used to manage price volatility and contain costs. Contracts are limited to the
group’s own use requirements. The group aims to improve its understanding of the direction, magnitude and duration of
future commodity price changes and to develop commodity specific expertise.
During 2009, we have not contracted any derivatives with respect to commodities.
b) Credit risk
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in a financial loss to the
group. The group faces credit risk in relation to trade receivables, cash deposits and financial investments.
Credit risk relating to trade debtor management is the responsibility of regional management and is co-ordinated on a
group basis.
The group’s objective in relation to credit risk is to limit the exposure to credit risk through specific group-wide policies and
procedures. Credit control procedures are designed to ensure the effective implementation of best trade receivable practices,
the comprehensive maintenance of all related records, and effective management of credit risk for the group.
The group assesses the credit worthiness of potential and existing customers in line with the credit policies and procedures.
Appropriate collateral is obtained to minimise risk. Exposures are monitored on an ongoing basis utilising various reporting
tools which highlight potential risks.
In the event of deterioration of credit risk, the appropriate measures are taken by the regional credit management. All known
risks are required to be fully disclosed, accounted for, and provided for as bad debts in accordance with the applicable
accounting standards.
Quantitative disclosures on credit risk are included in note 16 of the annual financial statements.
A large percentage of our trade receivables are credit insured.
Hedge accounting
1. Fair value hedges
Until June 2009, the group had the following fair value hedges which qualified for hedge accounting.
Bonds at fixed interest rates for a total notional amount of US$856 million were hedged by seven external interest rate
swaps (IRS). These interest rate swaps converted the USD fixed interest rates into floating six-month LIBOR set in arrears.
The hedged risk was designated to be the interest rate risk arising from fluctuations in the US LIBOR swap curve. The effect
of this transaction was to convert fixed rate debt into floating rate debt.
In June 2009, these swaps were sold for a total positive value of US$55 million (on a clean basis, excluding interest accruals)
and the underlying debt now carries the original fixed interest rates. A net loss of US$18 million was booked to the income
statement.
178
Notes to the group annual financial statements continued
30.
Financial instruments continued
1. Fair value hedges continued
The final life-to-date fair value adjustment of the underlying bonds on the date of the sale of the swaps was booked in June
2009 will be amortised over the life of the initial hedge designation period and amounted to US$46.2 million. The future profit
and loss account will be impacted as follows:
Accounting year
Fourth quarter 2009
2010
2011
2012
2013
2014
2015
Total
in millions
US$
0.6
13.2
13.9
14.7
1.8
1.7
0.3
46.2
As at September 2009, the group does not have any outstanding fair value hedges.
The following is an analysis of the impact on pre-tax profit and loss for the period based on the consolidated accounts
translated at average rates:
(unfavourable) favourable
Fair value hedges
Net P/L impact of sale of interest rate swaps
Realised result on sold hedging instruments
Reversal of life to date fair value adjustment on hedging instruments
Reversal unrealised interest accrual on IRS
Amortisation
Residual ineffectiveness
– gain on hedging instruments
– loss on hedged item
Total
2009
2008
US$ million
at average
rate
US$ million
at average
rate
(18)
52
(59)
(11)
–
(9)
41
(50)
(27)
–
–
–
–
(5)
–
30
(30)
(5)
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30.
Financial instruments continued
2. Cash flow hedges
In August 2009, Sappi entered into seven fixed for fixed interest and currency swaps with different banks, which have been
designated as cash flow hedges of future cash flows linked to fixed rate debt denominated in foreign currency. Each swap
corresponds to the hedged portion of the underlying US$300 million senior secured notes due 2014. The swaps convert all
future US$ cash flows into Euro.
The effective gains and losses from changes in fair value of these derivatives are recorded in equity under other comprehensive
income. These accumulated gains and losses will be recycled to profit or loss in the same line as the hedged item at the
moment the hedged item affects profit or loss (interest expense and foreign currency revaluation).
Sappi uses the REVALHedgeRx module (REVAL), a web-based application providing treasury and risk management solutions
supplied by Reval.Com, Inc., a financial technology company based in New York to assess the fair value of the IRCS and to
measure the effectiveness of the cash flow hedge relationship.
At inception and at the beginning of each quarterly reporting period, the future effectiveness of the hedge relationship is
assessed using the critical terms match.
In order to measure retrospective hedge effectiveness a hypothetical derivative with identical critical terms as the hedged
item, has been built as a perfect hedge. The periodic Dollar-offset retrospective hedge effectiveness test is based on the
comparison of the actual past periodical changes in fair value between the hedging derivative and the hypothetical derivative.
The ratio of the periodic change in fair value of the hedging instrument since inception or since the last quarterly measurement
divided by the periodic change in fair value of the hypothetical derivative since inception or since the last quarterly
measurement for the hedge falls with the range of 80% to 125%. If, however, both changes in fair value are less than 1% of
the notional amount of the IRCS, these changes in fair value are considered to be both immaterial and the hedge effectiveness
test is met.
The counterparties of the hedging instruments are tested for creditworthiness on a quarterly basis. If the credit risk of a given
counterparty would fall under the minimum required rating, any positive fair value of the hedging instrument would be
adjusted to cater for the additional credit risk. This would not affect the hypothetical derivative.
c) Liquidity risk
Liquidity risk is the risk that the group will be unable to meet its current and future financial obligations as they fall due.
The group’s objective is to manage its liquidity risk by:
– managing its bank balances, cash concentration methods and cash flows;
– managing its working capital and capital expenditure;
– ensuring the availability of a minimum amount of short-term borrowing facilities at all times, to meet any unexpected
funding requirements; and
– ensuring appropriate long-term funding is in place to support the group’s long-term strategy.
Details of the group’s borrowings, including the maturity profile thereof, as well as the group’s committed and uncommitted
facilities are set out in note 20.
The group is in compliance with all material financial covenants applicable to its borrowing facilities.
180
Notes to the group annual financial statements continued
30.
Financial instruments continued
Liquidity risk management – September 2009
Total
financial
assets
and
liabilities
Fair
value of
financial
instru-
ments
43
43
10
10
Financial assets
Other non-current assets
Non-current derivative
financial assets
Receive leg
Pay leg
13
10
130
(120)
Trade and other receivables
Current derivative
financial assets
734
734
734
10
10
11
Receive leg
Pay leg
262
(251)
Cash and cash equivalents
770
770
770
1,538
Undiscounted cash flows
0 – 6
months
6 – 12
months
1 – 2
years
2 – 5
years
> 5
years
Total
1
–
–
–
–
–
–
–
–
1
8
–
–
–
–
–
–
–
–
8
7
–
–
–
–
–
–
–
–
7
15
44
–
–
–
–
–
–
–
–
10
130
(120)
734
11
262
(251)
770
15
1,569
Financial liabilities
Interest-bearing borrowings
Non-current derivative
financial liabilities
Pay leg
Receive leg
Interest-bearing borrowings
Overdraft
Current derivative
financial liabilities
Pay leg
Receive leg
2,726
3,021
97
100
494
2,716
123
3,530
24
24
601
19
602
19
1
19
(18)
549
19
14
14
14
620
(606)
1
19
(18)
106
–
–
–
–
–
2
38
(36)
–
–
–
–
–
–
17
425
(408)
–
–
–
–
–
–
1
1
–
–
–
–
–
–
–
22
502
(480)
655
19
14
620
(606)
818
Trade and other payables
860
860
818
Liquidity gap
40
(206)
(488)
(2,726)
(109)
(3,489)
1,498
207
496
2,733
124
5,058
2009 annual report
181
30.
Financial instruments continued
Liquidity risk management – September 2008
Total
financial
assets
and
liabilities
Fair
value of
financial
instru-
ments
44
76
44
76
Financial assets
Other non-current assets
Non-current derivative
financial assets
Receive leg
Pay leg
Trade and other receivables
Current derivative financial
assets
626
626
609
4
4
5
Receive leg
Pay leg
335
(330)
Cash and cash equivalents
274
274
257
921
Undiscounted cash flows
0 – 6
months
6 – 12
months
1 – 2
years
2 – 5
years
> 5
years
12
–
14
38
186
(148)
10
35
(25)
17
–
–
–
17
44
37
211
(174)
–
–
–
–
–
51
5
–
127
(127)
–
–
–
–
–
5
6
1
8
(7)
–
–
–
–
–
7
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Total
37
86
567
(481)
626
5
335
(330)
274
1,028
Financial liabilities
Interest-bearing borrowings
Non-current derivative
financial liabilities
Pay leg
Receive leg
Other non-current liabilities
Interest-bearing borrowings
Overdraft
Current derivative financial
liabilities
Pay leg
Receive leg
1,832
1,719
57
55
186
1,658
762
2,718
1
1
821
26
821
26
–
–
–
–
709
26
24
24
23
578
(555)
–
–
–
–
128
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1
1
–
–
–
–
–
–
–
–
1
1
–
–
837
26
23
578
(555)
737
Trade and other payables
756
756
695
42
Liquidity gap
(589)
(181)
(135)
(1,653)
(756)
(3,314)
1,510
225
186
1,658
763
4,342
182
Notes to the group annual financial statements continued
30.
Financial instruments continued
Derivative financial instruments with maturity profile
The following tables indicate the different types of derivative financial instruments for 2009 and 2008, included within the
various categories on the face of the balance sheet.
The reported maturity analysis is calculated on an undiscounted basis.
Classes of financial
instruments
September 2009
Assets
Fair value of derivatives
by risk factor
Interest rate risk
Interest rate swaps
receiving leg
paying leg
Foreign exchange risk
FX forward contracts
receiving leg
paying leg
Liabilities
Fair value of derivatives
by risk factor
Interest rate risk
Interest rate swaps
paying leg
receiving leg
Foreign exchange risk
FX forward contracts
paying leg
receiving leg
Fair
value
hedge
Cash
flow
hedge
Total
Maturity analysis
Undiscounted cash flows
<6M >6M <1Y
>1Y <2Y
>2Y <5Y
>5Y
10
10
130
(120)
10
260
(250)
24
453
(429)
14
619
(605)
130
(120)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
24
453
(429)
–
–
–
10
130
(120)
11
262
(251)
1
19
(18)
14
620
(606)
–
–
–
–
–
–
1
19
(18)
–
–
–
–
–
–
–
–
–
2
38
(36)
–
–
–
–
–
–
–
–
–
17
425
(408)
–
–
–
–
–
–
–
–
–
1
1
–
–
–
–
l
i
s
a
c
n
a
n
fi
2009 annual report
183
30.
Financial instruments continued
Classes of financial
instruments
September 2008
Assets
Fair value of derivatives
by risk factor
Interest rate risk
Interest rate swaps
receiving leg
paying leg
Foreign exchange risk
FX forward contracts
receiving leg
paying leg
Liabilities
Fair value of derivatives
by risk factor
Interest rate risk
Interest rate swaps
paying leg
receiving leg
Foreign exchange risk
FX forward contracts
paying leg
receiving leg
Fair
value
hedge
Cash
flow
hedge
Total
Maturity analysis
Undiscounted cash flows
<6M >6M <1Y
>1Y <2Y
>2Y <5Y
>5Y
76
76
532
(456)
532
(456)
4
334
(330)
–
(11)
11
(1)
(1)
–
(24)
(576)
552
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
38
186
(148)
5
335
(330)
–
–
–
(23)
(578)
555
10
35
(25)
37
–
211
(174)
127
(127)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1
8
(7)
–
–
–
(1)
(1)
–
–
–
–
184
Notes to the group annual financial statements continued
30.
Financial instruments continued
Fair values
All financial instruments are carried at fair value or amounts that approximate fair value, except the non-current interest-
bearing borrowings at fixed rates of interest. The carrying amounts for cash, cash equivalents, accounts receivable, certain
investments, accounts payable and current portion of interest-bearing borrowings approximate fair value due to the short-
term nature of these instruments. Where these fixed rates of interest have been hedged into variable rates of interest and
fair value hedge accounting has been applied, then the non-current interest-bearing borrowings are carried at fair value
calculated by discounting all future cash flows at market data valid at closing date. The same data is used to value the
related hedging instrument.
No financial assets were carried at an amount in excess of fair value.
Direct and incremental transaction costs are included in the initial fair value of financial assets and financial liabilities, other
than those at fair value through profit or loss. The best evidence of the fair value of a financial asset or financial liability at
initial recognition is the transaction price, unless the fair value of the instrument is evidenced by comparison with other
current observable market transactions. Where market prices or rates are available, such market data is used to determine
the fair value of financial assets and financial liabilities.
If quoted market prices are unavailable, the fair value of financial assets and financial liabilities is calculated using pricing
models or discounted cash flow techniques. Where discounted cash flow techniques are used, estimated future cash flows
are based on management’s best estimates and the discount rate used is a market-related rate at the balance sheet date
for an instrument with similar terms and conditions. Where pricing models are used, market-related inputs are used to
measure fair value at the balance sheet date.
Investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot
be reliably measured, and derivatives that are linked to and have to be settled by delivery of such unquoted equity
instruments, are not measured at fair value but at cost.
Fair values of foreign exchange and interest rate derivatives are calculated by using recognised treasury tools which use
discounted cash flow techniques based on effective market data valid at closing date.
The fair value of loan commitments are based on the commitment fees effectively paid.
30.
Financial instruments continued
September 2009
Total
balance
Out of
scope
IAS 39
2009 annual report
185
Total
in
scope
Fair
value
Categories according to IAS 39
Loans
and
receiv-
ables
Held for
trading
Held to
maturity
Available
for sale
i
l
s
a
c
n
a
n
fi
Classes of financial instruments
Non-current assets
Other non-current assets
Loans to associates (minority
interests)
AFS – Club debentures
AFS – (Investment) funds
Other assets
101
58
–
–
–
58
–
–
–
–
–
20
4
–
–
16
–
Derivative financial instruments
10
–
10
Current assets
Trade and other receivables
858
124
Trade receivables
Other accounts receivable – current
Derivative financial instruments
Cash (and cash equivalents)
Overnight deposits and current
accounts (incl petty cash)
Time deposits (<3 months)
Money market funds
10
770
–
124
–
–
–
–
–
–
–
–
734
667
67
10
–
–
770
–
–
–
99
628
43
–
–
–
–
–
–
–
–
–
–
–
–
–
–
23
43
43
–
2
19
2
–
–
–
–
–
–
–
–
–
4
2
19
18
10
4
2
19
18
10
734
734
667
67
667
67
10
10
770
770
99
628
43
99
628
43
186
Notes to the group annual financial statements continued
30.
Financial instruments continued
September 2009
Classes of financial instruments
Non-current liabilities
Interest-bearing borrowings
Bank loans payable (>1 year) – incl syndicated loans
Bonds
Financial leasing liabilities
Derivative financial instruments
Current liabilities
Interest-bearing borrowings
Bank loans payable (<1 year) – incl syndicated loans
Current portion of other non-current loans payable
Financial leasing liabilities
Secured loans (<1 year)
Securitisation debt
Other current loans – external
Overdraft
Bank overdrafts (<3 months)
Derivative financial instruments
Total
balance
Out of
scope
IAS 39
Categories
according to IAS 39
Held for
trading
Other
financial
liabilities
Total
in
scope
Fair
value
2,726
24
601
19
14
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,726
2,726
3,021
720
1,952
54
720
1,952
54
804
2,161
56
24
–
24
24
601
601
602
–
–
–
–
–
–
–
149
32
19
67
333
1
–
19
14
–
149
32
19
67
333
1
19
14
150
32
19
67
333
1
19
14
Trade and other payables
1,116
256
Accruals
Accounts payable to associates
Other accounts payable – current
255
–
1
–
–
–
–
860
860
860
262
1
597
262
1
597
262
1
597
30.
Financial instruments continued
September 2008
Total
balance
Out of
scope
IAS 39
2009 annual report
187
Total
in
scope
Fair
value
Categories according to IAS 39
Loans
and
receiv-
ables
Held for
trading
Held to
maturity
Available
for sale
i
l
s
a
c
n
a
n
fi
Classes of financial instruments
Non-current assets
Other non-current assets
Loans to associates (minority
interests)
AFS – Club debentures
AFS – (Investment) funds
Other assets
168
124
–
–
–
124
–
–
–
–
–
Derivative financial instruments
76
–
76
Current assets
Trade and other receivables
Trade receivables
Other accounts receivable – current
Derivative financial instruments
Cash (and cash equivalents)
Overnight deposits and current
accounts (incl petty cash)
Time deposits (<3 months)
Money market funds
698
4
274
72
–
72
–
–
–
–
–
–
–
–
4
–
–
–
–
30
3
–
–
27
–
626
574
52
–
274
59
162
53
–
–
–
–
–
–
–
–
–
–
–
–
–
–
14
44
44
–
2
12
–
–
–
–
–
–
–
–
–
–
3
2
12
27
76
3
2
12
27
76
626
626
574
52
574
52
4
4
274
274
59
162
53
59
162
53
188
Notes to the group annual financial statements continued
30.
Financial instruments continued
September 2008
Classes of financial instruments
Non-current liabilities
Interest-bearing borrowings
Bank loans payable (>1 year) – incl syndicated loans
Bonds
Financial leasing liabilities
Other
Derivative financial instruments
Current liabilities
Interest-bearing borrowings
Bank loans payable (<1 year) – incl syndicated loans
Current portion of other non-current loans payable
Financial leasing liabilities
Secured loans (<1 year)
Securitisation debt
Other current loans – external
Overdraft
Bank overdrafts (<3 months)
Derivative financial instruments
Total
balance
Out of
scope
IAS 39
Categories
according to IAS 39
Held for
trading
Other
financial
liabilities
Total
in
scope
Fair
value
1,832
1
821
26
24
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1
–
–
–
–
–
–
–
1,832
1,832
1,719
664
1,084
21
63
664
1,084
21
63
642
998
21
58
–
1
1
821
821
821
446
6
2
142
220
5
446
6
2
142
220
5
446
6
2
142
220
5
–
26
26
26
24
–
24
24
–
–
–
–
756
756
756
233
1
522
233
1
522
233
1
522
Trade and other payables
959
203
Accruals
Accounts payable to associates
Other accounts payable – current
202
–
1
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2009 annual report
189
31.
Related-party transactions
Transactions between Sappi Limited and its subsidiaries, which are related parties of the group, have been eliminated on
consolidation and are not disclosed in this note. Details of transactions between the group and related parties are disclosed
below:
US$ million
Sale of goods
Purchases of goods
Amounts owed
by related parties
Amounts owed
to related parties
Joint ventures
2009
2008
2007
2009
2008
2007
2009
2008
2009
2008
Jiangxi Chenming
Sapin SA
VOF Warmtekracht
Umkomaas Lignin
(Pty) Ltd
Papierholz Austria
GmbH
2.0
0.4
38.1
4.0
0.3
44.2
3.8
–
41.4
1.5
21.3
25.0
2.6
30.9
32.8
2.2
28.2
30.5
–
–
–
–
–
–
3.7
0.9
–
7.6
1.1
–
0.9
1.1
0.9
–
–
–
0.9
0.7
–
–
–
–
–
68.5
92.7
90.4
41.4
49.6
46.1
116.3
159.0
151.3
–
0.9
–
6.1
5.3
0.7
10.7
14.0
Sales of goods and purchases to and from related parties were made on an arm’s length basis. The amounts outstanding
at balance sheet date are unsecured and will be settled in cash. Guarantees given by the group are disclosed in note 26.
No expense has been recognised in the period for bad or doubtful debts in respect of the amounts owed by related parties.
Directors
Details relating to executive and non-executive directors’ emoluments, interests and participation in the Scheme and Plan
are disclosed in the compensation report.
Interest of directors in contracts
None of the directors have a material interest in any transaction with the company or any of its subsidiaries, other than those
on a normal employment basis. Professor Meyer Feldberg, a non-executive director of the company, disclosed his role as
senior advisor of Morgan Stanley & Co Limited, a financial advisor to Sappi, and Morgan Stanley South Africa (Pty) Ltd, a
transaction sponsor to Sappi Limited.
Key management personnel
Compensation for key management was as follows:
US$ million
Short-term benefits
Post employment benefits
Share-based payments
Total excluding directors
Total including directors
2009
2008
2007
2009
2008
2007
2.9
0.7
–
3.6
2.9
0.4
–
3.3
2.5
0.3
0.2
3.0
4.3
0.9
–
5.2
4.3
0.7
–
5.0
4.1
0.8
0.2
5.1
The number of key management personnel included above for 2009 was nine (2008: ten).
190
Notes to the group annual financial statements continued
32.
Events after balance sheet date
On 22 October 2009, Sappi announced that it will enter into a consultation process with the employee representatives at its
Kangas Mill in Finland. The aim of this process is to identify the best way of improving company profitability, which may
include a full closure of the mill. Kangas Mill has the capacity to produce 210,000 tons of coated magazine paper annually.
On 30 October 2009, Sappi announced that it will begin the process of consulting with staff and all other relevant stakeholders
regarding its intention to close the Usutu Pulp Mill in the Kingdom of Swaziland on 31 January 2010. With the closure of the
mill, Sappi would exit the unbleached softwood flash-dried pulp market served by Usutu Pulp Mill. The mill has a capacity
of 190,000 tons annually. Sappi will continue to seek future beneficiation opportunities for the profitable utilisation of the
Usutu forests. This could include the introduction of new investors.
At the end of September 2009, no provision had been raised in respect of the proposed restructuring above.
33.
Environmental matters
We are subject to a wide range of environmental laws and regulations in the various jurisdictions in which we operate, and
these laws and regulations have tended to become more stringent over time. Violations of environmental laws could lead to
substantial costs and liabilities, including civil and criminal fines and penalties. Environmental compliance is an increasingly
important consideration in our businesses, and we expect to continue to incur significant capital expenditures and operational
and maintenance costs for environmental compliance, including costs related to reductions in air emissions including carbon
dioxide and other greenhouse gases (GHG), wastewater discharges and waste management. We closely monitor the
potential for changes in pollution control laws and take actions with respect to our operations accordingly. Sappi spent
approximately US$5 million in the financial year ended September 2009 (September 2008: US$15 million) on capital projects
that control air or water emissions or otherwise create an environmental benefit.
Sappi Fine Paper North America is subject to stringent environmental laws in the United States. These laws include the
Federal Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental
Response, Compensation and Liability Act and their respective state counterparts and implementing regulations. On
29 June 2009, the State of Maine, Department of Inland Fisheries and Wildlife, issued a decision requiring Sappi Fine Paper
North America to install a fish passage at its Cumberland mills dam on the Presumpscot River. A second hearing that began
on 18 November 2009 to determine further fishway requirements, including design and operation, has been continued until
January 2010, and a decision is expected during the second quarter of 2010. The installation of a fishway on the Cumberland
Mills dam will trigger the obligation to install fishways at Sappi Fine Paper North America’s dams upstream of the Cumberland
Mills dam as well, to allow natural fish migration and thus promote the restoration of native species to the river. The total cost
of all these projects is estimated to be in the range of approximately US$18 million to US$28 million, part of which is
expected to be incurred in the near future and part of which will be incurred over a number of years. Because the proceedings
regarding fishway design and operation are still pending, we do not know when the construction phase at the Cumberland
Mills dam will begin, or the precise timing for incurring related costs.
We closely monitor state, regional and Federal GHG initiatives in anticipation of any potential effects on our operations.
Although the United States has not ratified the Kyoto Protocol, and has not yet adopted a Federal programme for controlling
GHG emissions, Congress is considering comprehensive Federal legislation regarding climate change. In addition, the US
Environmental Protection Agency has proposed several rules relating to emissions reporting and reductions, and various
regional initiatives regarding climate change are in effect or proposed. The nature, scope and timing of such climate change
legislation is highly uncertain and, currently, we do not know what effect, if any, such legislation will have on our financial
condition and operations.
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2009 annual report
191
33.
Environmental matters continued
Our European facilities are subject to extensive environmental regulation in the various countries in which we operate.
For example:
• The Integrated Pollution Prevention and Control directive regulates air emissions, water discharges and defines permit
requirements and best available techniques for pollution control
• The national European laws regulate the waste disposal framework and place restrictions on landfilling materials in order
to reduce contaminated leachate and methane emissions. Prevention, re-use and recycling (material or thermal) are the
preferred waste management methods. In Austria, Germany and the Netherlands only inert ash or slag from thermal
recycling and incineration processes may be placed in landfills
• The EU Chemicals Regulation REACH (1907/2006/EC) intended to harmonise existing European and national regulations
to provide a better protection of human health and our environment is not directly applicable to pulp and paper. It does
apply to a number of raw materials that we source. We will also register some intermediate substances in our pulp
production processes. Registration requirements for intermediates are rather limited so that the registration costs are not
expected to be material
• In The Netherlands we, together with other paper manufacturers, have signed an agreement with the national government
to improve environmental management and further limit emissions.
The countries within which we operate in Europe have all ratified the Kyoto Protocol and we have developed a GHG strategy
to comply with applicable GHG restrictions and to manage emission reductions cost effectively. Our expenditures related to
GHG compliance in Europe are not expected to be material.
In South Africa, requirements under the National Water Act, National Environmental Management Act and the Air Quality Bill
may result in additional expenditures and/or operational constraints. South Africa is also a signatory of the Kyoto Protocol
and Sappi is currently identifying and initiating Clean Development Mechanism projects at a number of our South African
mills. Although we are uncertain as to the ultimate effect on our South African operations, our current assessment of the
legislation is that any compliance expenditures or operational constraints will not be material to our financial condition.
34.
Acquisition
On 31 December 2008, Sappi acquired M-real’s coated graphic paper business for an enterprise value of €750 million
(approximately US$1.1 billion). The final purchase consideration was reduced by assumed debt and other adjustments
(including working capital) amounting to €102 million in total. The transaction included M-real’s coated graphic paper
business, including brands and company knowledge, as well as four coated graphic mills. This transaction has been
accounted for by the purchase method of accounting.
The acquisition was financed through a combination of equity, assumed debt, the cash proceeds from a rights offering and
a vendor loan note.
The acquired business contributed sales of US$890 million, net operating profit of US$33 million and net profit of US$38 million
to the group results for the period from acquisition to 27 September 2009. Included in the net profit of the acquired business
for the year, is the US$41 million discount received on the settlement of the vendor loan notes.
192
Notes to the group annual financial statements continued
34.
Acquisition continued
Details of net assets acquired and goodwill are as follows:
Purchase consideration:
Cash consideration
Shares issued*
Vendor loan note
Adjustments to working capital
Gain on forward exchange contract covering purchase consideration
Direct costs relating to the acquisition
Total purchase consideration
Provisional fair value of net identifiable assets acquired (see below)
Provisional goodwill**
The assets and liabilities arising from the acquisition are as follows:
EUR
million
US$
million
401
32
220
(4)
(24)
23
648
648
–
565
45
307
(6)
(32)
32
911
911
–
EUR
million
EUR
million
US$
million
US$
million
Acquiree’s
carrying
amount
Provisional
fair value
Acquiree’s
carrying
amount
Provisional
fair value
Property, plant and equipment
Information technology related intangibles
Brand names
Inventories
Trade receivables
Prepayments and other debit balances
Cash and cash equivalents
Trade payables
Pension liabilities
Borrowings
Provisions
Other payables and accruals
Net deferred tax (liabilities) assets
Net identifiable assets acquired
634
2
–
118
200
15
5
(85)
(37)
(46)
(4)
(60)
(11)
731
531
2
18
115
192
18
5
(85)
(37)
(42)
(4)
(65)
–
648
Outflow of cash to acquire business, net of cash acquired:
Cash consideration
Direct costs relating to acquisition
Cash and cash equivalents in subsidiary acquired
Net cash outflow on acquisition
892
3
–
166
281
21
7
(120)
(52)
(65)
(6)
(84)
(15)
1,028
EUR
million
401
23
(5)
419
747
3
25
162
270
25
7
(120)
(52)
(59)
(6)
(91)
–
911
US$
million
565
32
(7)
590
** 11,159,702 Sappi shares were issued to M-real as partial payment of the acquisition price. The fair value of US$45 million (€32 million) was determined using
Sappi’s published market price at the date of exchange.
** The initial accounting for the business combination has been determined provisionally as at the end of September 2009 because the group is still in the process
of finalising the fair values of the identifiable assets and liabilities of the acquired business of M-real.
i
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2009 annual report
193
Company auditor’s report
for the year ended September 2009
Independent auditor’s report to the members of Sappi Limited
The condensed annual financial statements of Sappi Limited set out on pages 194 to 198 have been derived from the annual
financial statements of the company for the year ended September 2009. We have audited the annual financial statements in
accordance with International Standards on Auditing. In our report dated 04 December 2009, we expressed an unqualified opinion
on the annual financial statements from which the condensed financial statements were derived.
Opinion
In our opinion, the accompanying condensed financial statements are consistent, in all material respects, with the annual financial
statements from which they were derived.
For a better understanding of the scope of our audit and the company’s financial position, the results of its operations and cash
flows for the period, the condensed financial statements should be read in conjunction with our audit report and the annual financial
statements from which they were derived.
Deloitte & Touche
Per M J Comber
Partner
04 December 2009
Deloitte & Touche – Registered Auditors
Buildings 1 and 2, Deloitte Place
The Woodlands, Woodlands Drive, Woodmead Sandton
Johannesburg, South Africa
National Executive: G G Gelink Chief Executive A E Swiegers Chief Operating Officer G M Pinnock Audit D L Kennedy Tax & Legal and Risk Advisory L Geeringh Consulting L Bam
Corporate Finance C R Beukman Finance T J Brown Clients & Markets N T Mtoba Chairman of the Board CR Qually Deputy Chairman of the Board.
A full list of partners and directors is available on request.
194
Condensed Sappi Limited company income statement
for the year ended September 2009
ZAR million
Operating loss
Income from subsidiaries
Net finance income
(Loss) profit before taxation
Taxation – Current
Taxation – Deferred
(Loss) profit for the year
Note
2009
1
2
3
(38)
–
21
(17)
25
19
(61)
2008
(154)
611
5
462
(44)
61
445
Condensed Sappi Limited company statement
of comprehensive income
for the year ended September 2009
ZAR million
(Loss) profit for the year
Other comprehensive income, net of tax
Total comprehensive income for the year
2009
2008
(61)
–
(61)
445
–
445
l
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fi
Condensed Sappi Limited company balance sheet
at September 2009
2009 annual report
195
ZAR million
Assets
Non-current assets
Property, plant and equipment
Investments in subsidiaries
Intercompany receivables
Loan to Executive Share Purchase Trust
Project cost capitalised
Deferred tax asset
Current assets
Receivables
Intercompany receivables
Total assets
Equity and liabilities
Shareholders’ equity
Ordinary share capital
Share premium
Non-distributable reserves
Retained earnings
Non-current liabilities
Intercompany payables
Current liabilities
Trade and other payables
Intercompany payables
Taxation payable
Total equity and liabilities
2009
2008
20,424
14,950
2
18,142
2,199
81
–
–
42
8
34
3
12,319
2,420
104
85
19
41
5
36
20,466
14,991
20,334
14,750
537
12,062
333
7,402
31
101
44
42
15
239
6,427
247
7,837
30
211
123
75
13
20,466
14,991
(Annexure A)
(Annexure A)
(Annexure A)
(Annexure A)
(Annexure A)
196
Condensed Sappi Limited company statement of changes in equity
for the year ended September 2009
Ordinary
share
capital
Share
premium
Non-
distri-
butable
reserves
Distri-
butable
reserves
ZAR million
Balance – September 2007
Share-based payment
Profit for the year
Dividends*
Balance – September 2008
Share-based payment
Profit for the year
Dividends*
Rights issue proceeds
Costs directly attributable
to the rights issue
Issue to M-real
Number
of
ordinary
shares
239.1
–
–
–
239.1
–
–
–
286.8
–
11.2
6,427
–
–
–
6,427
–
–
–
5,528
239
–
–
–
239
–
–
–
287
–
11
Ordinary
share
capital
and
share
premium
6,666
–
–
–
6,666
–
–
–
5,815
Total
equity
14,575
229
445
(499)
14,750
86
(61)
(374)
5,815
7,891
–
445
(499)
7,837
–
(61)
(374)
–
18
229
–
–
247
86
–
–
–
–
–
(302)
(302)
409
420
–
–
(302)
420
Balance – September 2009
537.1
537
12,062
12,599
333
7,402
20,334
* Dividends relate to the previous financial year’s earnings but were declared subsequent to year end.
Condensed Sappi Limited company cash flow statement
at September 2009
ZAR million
(Loss) profit before interest and taxation
Adjustments:
Dividends received pre-acquisition
Impairment of investment
Subsidiary transactions
Other
Cash generated from operations
Movement in working capital
Net finance income
Taxation paid
Dividends paid
Cash (utilised in) retained from operating activities
Fixed asset purchases
Increase in non-current assets
Increase in investments
Increase in equity and reserves
Proceeds from share option deliveries
Net movement in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
2009
(38)
82
–
306
13
363
(82)
21
(23)
(374)
(95)
–
–
(5,493)
5,513
75
–
–
–
2008
457
136
113
(123)
13
596
57
5
18
(499)
177
(1)
(80)
(315)
–
218
(1)
1
–
i
l
s
a
c
n
a
n
fi
Notes to the condensed Sappi Limited company financial statements
for the year ended September 2009
ZAR million
2009
2008
2009 annual report
197
1.
2.
3.
4.
5.
6.
Operating loss
The operating loss is arrived at after taking into account the items detailed below:
Depreciation
Technical and administrative services paid other than
to bona fide employees of the company
Auditors’ remuneration
– fees for audit and related services
– fees for other services
– fees for acquisition and related services
Directors’ remuneration
Staff costs
Management fees received from subsidiaries
Impairment of investment
Income from subsidiaries
Dividends received from subsidiaries
Less pre-acquisition portion
Net finance income
Interest paid
Interest received
Net foreign exchange losses
Commitments
Revenue commitments
Operating leases and rentals
Payable within one year
Payable in two to five years
Contingent liabilities
Guarantees and suretyships
2
10
12
8
4
–
19
96
211
–
82
(82)
–
–
35
(14)
21
1
1
2
2
10
35
8
5
22
18
89
224
113
747
(136)
611
(1)
15
(9)
5
1
1
2
20,581
13,099
Basis of preparation
The annual financial statements from which these condensed financial statements have been derived have been prepared
in accordance with the International Financial Reporting Standards (IFRS) as issued by the International Accounting
Standards Board.
198
Investments
at September 2009
Annexure A
Investments in subsidiaries
and joint venture
Set out below are the more
significant subsidiaries and joint
ventures or those that have a loan
with Sappi Limited
Share
capital
Effective holding
2009
2008
%
%
Book value
of investment
Loan to
subsidiary
Loan from
subsidiary
2009
ZAR
million
2008
ZAR
million
2009
ZAR
million
2008
ZAR
million
2009
ZAR
million
2008
ZAR
million
M
O
O
O
O
O
O
O
O
O
H
O
O
M
H
F
O
O
O
O
O
O
H&O
O
F
O
ZAR100
ZAR12,026,250
ZAR1,000
SZL10,000,000
USD1,000
– (1)
100
100
100
100
100
100
100
100
100
100
100
100
EUR31,200,000
100
100
EUR35,000
EUR25,565
EUR20,800,000
EUR1,000,000
EUR15,130,751
EUR2,500
GBP50,000
EUR72,700
EUR1,200,603,930
EUR51,377,000
EUR57,179,613
EUR31,992
EUR59,037
CHF10,000
EUR40,000
EUR72,700
CHF100,000
EUR35,000
GBP74,020,000
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
–
100
100
100
100
100
100
100
–
–
100
100
–
100
JV RMB1,424,160,000
34
34
H
F
US$3,385,401
US$656,000
100
100
100
100
Southern Africa
Sappi Management Services
(Pty) Ltd
Sappi Manufacturing (Pty) Ltd
Sappi Share Facilitation
Company (Pty ) Ltd
Usutu Pulp Company Ltd
America
SD Warren Company
Sappi Cloquet LLC
Europe
Sappi Alfeld GmbH
Sappi Austria Produktions
GmbH and CoKG
Sappi Deutschland GmbH
Sappi Ehingen GmbH
Sappi Esus
Beteiligungsverwaltungs GmbH
Sappi Europe SA
Sappi Finland 1 Oy
Sappi Fine Paper plc
Sappi Holding GmbH
Sappi International SA
Sappi Lanaken NV
Sappi Lanaken Press Paper NV
Sappi Maastricht BV
Sappi Nijmegen BV
Sappi Schweiz AG
Sappi Stockstadt GmbH
Sappi Papier Holding GmbH
Sappi Trading Pulp AG
PE Paper Escrow GmbH
Sappi UK Ltd
Asia
Jiangxi Chenming Paper
Co Ltd
Other
Brocas Ltd
Lignin Insurance Co Ltd(2)
Employee share participation
Trusts
Various other companies
Write down of investment
in subsidiaries
Holding companies
Operating companies
Finance companies
H Management companies
O Joint venture
F
M
JV
(1) No issued share capital, only additional paid in capital of US$488 million.
(2) Declared a dividend out of pre-acquisition reserves.
–
1,851
–
1,851
504
906
456
1,357
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1
–
–
–
1
16,288 10,375
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2
–
–
–
–
85
–
7
789
–
607
–
–
–
–
–
–
–
–
–
–
–
–
34
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
32
–
–
–
–
–
–
1
–
–
–
–
–
3
–
–
–
–
–
–
(7)
–
–
–
–
–
–
(22)
–
–
–
–
–
–
–
–
–
–
(1)
(9)
–
–
–
–
–
–
–
–
–
(35)
–
–
–
–
–
–
(31)
–
–
(6)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(31)
(3)
(30)
(3)
18,142 12,319
2,233
2,456
(73)
(105)
–
–
–
–
–
–
18,142 12 319
2,233
2,456
(73)
(105)
l
i
s
a
c
n
a
n
fi
Share
capital
Effective holding
of investment
Book value
Loan to
subsidiary
Loan from
subsidiary
2009
2008
2009
ZAR
2008
ZAR
2009
ZAR
2008
ZAR
2009
ZAR
2008
ZAR
%
%
million
million
million
million
million
million
EUR31,200,000
100
100
ZAR100
ZAR12,026,250
ZAR1,000
SZL10,000,000
USD1,000
– (1)
EUR35,000
EUR25,565
EUR20,800,000
EUR1,000,000
EUR15,130,751
EUR2,500
GBP50,000
EUR72,700
EUR1,200,603,930
EUR51,377,000
EUR57,179,613
EUR31,992
EUR59,037
CHF10,000
EUR40,000
EUR72,700
CHF100,000
EUR35,000
GBP74,020,000
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
–
100
100
100
100
100
100
100
–
–
–
100
100
100
16,288 10,375
34
32
1,851
1,851
504
906
456
1,357
789
607
–
–
–
–
–
–
–
–
–
–
–
–
1
–
–
–
–
–
–
–
–
–
–
–
–
–
2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1
–
–
–
–
–
–
–
–
–
–
–
–
–
7
–
(22)
(31)
–
–
–
–
(7)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1)
(9)
–
–
–
–
–
(35)
–
–
–
–
–
–
–
–
–
–
–
–
(6)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1
–
–
–
–
–
3
–
–
–
18,142 12,319
2,233
2,456
(73)
(105)
18,142 12 319
2,233
2,456
(73)
(105)
(31)
(3)
(30)
(3)
–
–
JV RMB1,424,160,000
34
34
US$3,385,401
US$656,000
100
100
100
100
–
85
Annexure A
Investments in subsidiaries
and joint venture
Set out below are the more
significant subsidiaries and joint
ventures or those that have a loan
with Sappi Limited
Southern Africa
Sappi Management Services
(Pty) Ltd
Sappi Manufacturing (Pty) Ltd
Sappi Share Facilitation
Company (Pty ) Ltd
Usutu Pulp Company Ltd
America
SD Warren Company
Sappi Cloquet LLC
Europe
Sappi Alfeld GmbH
Sappi Austria Produktions
GmbH and CoKG
Sappi Deutschland GmbH
Sappi Ehingen GmbH
Sappi Esus
Beteiligungsverwaltungs GmbH
Sappi Europe SA
Sappi Finland 1 Oy
Sappi Fine Paper plc
Sappi Holding GmbH
Sappi International SA
Sappi Lanaken NV
Sappi Lanaken Press Paper NV
Sappi Maastricht BV
Sappi Nijmegen BV
Sappi Schweiz AG
Sappi Stockstadt GmbH
Sappi Papier Holding GmbH
H&O
Sappi Trading Pulp AG
PE Paper Escrow GmbH
Sappi UK Ltd
Jiangxi Chenming Paper
Asia
Co Ltd
Other
Brocas Ltd
Lignin Insurance Co Ltd(2)
Employee share participation
Trusts
Various other companies
Write down of investment
in subsidiaries
M
O
O
O
O
O
O
O
O
O
H
O
O
M
H
F
O
O
O
O
O
O
O
F
O
H
F
F
Holding companies
Operating companies
Finance companies
H Management companies
O Joint venture
M
JV
(1) No issued share capital, only additional paid in capital of US$488 million.
(2) Declared a dividend out of pre-acquisition reserves.
Glossary
General definitions
bleached pulp – pulp that has been bleached by means of
chemical additives to make it suitable for fine paper production
chemical cellulose – highly purified chemical pulp intended
primarily for conversion into chemical derivatives of cellulose
and used mainly in the manufacture of viscose staple fibre,
solvent spin fibre and filament
chemical pulp – a generic term for pulp made from wood fibre
that has been produced in a chemical process
coated fine paper – coated paper made from chemical pulp.
Also referred to as coated free sheet
coated papers – papers that contain a layer of coating material on
one or both sides. The coating materials, consisting of pigments
and binders, act as a filler to improve the printing surface of the
paper
coated mechanical – coated paper made from groundwood
pulp which has been produced in a mechanical process, primarily
used for magazines, catalogues and advertising material
coated woodfree – coated paper made from chemical pulp
which is made from wood fibre that has been produced in a
chemical process, primarily used for high end publications and
advertising material
corrugating medium – paperboard made from chemical and
semi-chemical pulp, or waste paper, that is to be converted to
a corrugated board by passing it through corrugating cylinders.
Corrugating medium between layers of linerboard form the
board from which corrugated boxes are produced
COSO – the Committee of Sponsoring Organisations of the
Treadway Commission
fibre – fibre is generally referred to as pulp in the paper industry.
Wood is treated chemically or mechanically to separate the
fibres during the pulping process
fine paper – paper usually produced from chemical pulp for
printing and writing purposes and consisting of coated and
uncoated paper
FSC – in terms of the Forest Stewardship Council (FSC) scheme,
there are two types of certification. In order for land to achieve
FSC endorsement, its forest management practices must
meet the FSC’s ten principles and other assorted criteria. For
manufacturers of forest products, including paper manu fac turers
like Sappi, Chain-of-Custody certification involves indepen dent
verification of the supply chain, which identifies and tracks the
timber through all stages of the production process from the tree
farm to the end product
Greenhouse gases (GHGs) – the GHGs included in the Kyoto
Protocol are carbon dioxide, methane, nitrous oxide, hydro-
fluoro carbons, perfluorocarbons and sulphur hexafluoride
ISO – developed by the International Standardisation Organi-
sation (ISO), ISO 9000 is a series of standards focused on
2009 annual report
199
quality management systems, while the ISO 14001 series is
focused on environmental performance and management
JSE Limited – the main securities exchange in South Africa,
previously known as the Johannesburg Stock Exchange
kraft paper – packaging paper (bleached or unbleached) made
from kraft pulp
kraft pulp – chemical wood pulp produced by digesting wood
by means of the sulphate pulping process
Kyoto Protocol – a document signed by over 160 countries at
Kyoto, Japan in December 1997 which commits signatories to
reducing their emission of greenhouse gases relative to levels
emitted in 1990
Lost Time Injury
Rate (LTIFR)
Frequency
=
number of lost time injuries x 200,000
manhours
linerboard – the grade of paperboard used for the exterior
facings of corrugated board. Linerboard is combined with
corrugating medium by converters to produce corrugated
board used in boxes
market pulp – pulp produced for sale on the open market,
as opposed to that produced for own consumption in an
integrated mill
mechanical pulp – pulp produced by means of the mechanical
grinding or refining of wood or wood chips
NBSK – Northern Bleached Softwood Kraft pulp. One of the
main varieties of market pulp, produced from coniferous trees
(ie spruce, pine) in Scandinavia, Canada and northern USA.
The price of NBSK is a benchmark widely used in the pulp and
paper industry for comparative purposes
newsprint – paper produced for the printing of newspapers
mainly from mechanical pulp and/or recycled waste paper
OHSAS – is an international health and safety standard aimed
at minimising occupational health and safety risks firstly, by
conducting a variety of analyses and secondly, by setting
standards
packaging paper – paper used for packaging purposes
PEFC – the world’s largest forest certification system, the PEFC
is focused on promoting sustainable forest management.
Using multi-stakeholder processes, the organisation develops
forest management certification standards and schemes which
have been signed by 37 nations in Europe and other inter-
govern mental processes for sustainable forestry management
around the world
pulpwood – wood suitable for producing pulp – usually not of
sufficient standard for saw-milling
release paper – embossed paper used to impart design in
polyurethane or polyvinyl chloride plastic films for the production
of synthetic leather and other textured surfaces. The term also
applies to backing paper for self adhesive labels
200
Glossary continued
sackkraft – kraft paper used to produce multiwall paper sacks
silviculture costs – growing and tending costs of trees in
forestry operations
speciality paper – a generic term for a group of papers intended
for commercial and industrial use such as flexible packaging,
metallised base paper, coated bag paper, etc
thermo-mechanical pulp – pulp produced by processing wood
fibres using heat and mechanical grinding or refining wood or
wood chips
tons – term used in this report to denote a metric ton of 1,000kg
uncoated woodfree paper – printing and writing paper made
from bleached chemical pulp used for general printing, photo-
copying and stationery, etc. Referred to as uncoated as it does
not contain a layer of pigment to give it a coated surface
woodfree paper – paper made from chemical pulp
General financial definitions
acquisition – the acquisition of M-real’s coated graphic paper
business on 31 December 2008
acquisition date – the date on which control in respect of sub-
sidiaries, joint control in joint ventures and significant influence
in associates commences
associate – an entity, other than a subsidiary or joint venture,
over which the group has significant influence over financial and
operating policies
basic earnings per share – net profit for the year divided by the
weighted average number of shares in issue during the year
commissioning date – the date that an item of property, plant
and equipment, whether acquired or constructed, is brought
into use
control – the ability, directly or indirectly, to govern the financial
and operating policies of an entity so as to obtain economic
benefit from its activities. When assessing the ability to control
an entity, the existence and effect of potential voting rights that
are presently exercisable or convertible are taken into account
diluted earnings per share – is calculated by assuming
conversion or exercise of all potentially dilutive shares, share
options and share awards unless these are anti-dilutive
discount rate – the rate used for purposes of determining
discounted cash flows. This pre-tax interest rate reflects the
current market assessment of the time value of money. In
determining the cash flows the risks specific to the asset or
liability are taken into account in determining those cash flows
and are not included in determining the discount rate
disposal date – the date on which control in respect of sub-
sidiaries, joint control in joint ventures and significant influence
in associates ceases
fair value – the value for which an asset could be exchanged
or a liability settled in a market related transaction
financial results – comprise the financial position (assets,
liabilities and equity), results of operations (revenue and expenses)
and cash flows of an entity and of the group
functional currency – the currency of the primary economic
environment in which the entity operates
foreign operation – an entity whose activities are based or
conducted in a country or currency other than that of the
reporting entity
group – the group comprises Sappi Limited, its subsidiaries
and its interest in joint ventures and associates
joint venture – an economic activity over which the group
exercises joint control established under a contractual
arrangement
operation – a component of the group:
• that represents a separate major line of business or geo-
graphical area of operation; and
• is distinguished separately for financial and operating
purposes
presentation currency – the currency in which financial results
of an entity are presented
qualifying asset – an asset that necessarily takes a substantial
period (normally in excess of six months) to get ready for its
intended use
recoverable amount – the amount that reflects the greater of
the net selling price and the value in use that can be attributed
to an asset as a result of its ongoing use by the entity. In
determining the value in use, expected future cash flows are
discounted to their present values using the discount rate
related party – parties are considered to be related if one
party directly or indirectly has the ability to control the other
party or exercise significant influence over the other party in
making financial and operating decisions or is a member of the
key management of Sappi Limited
share-based payment – a transaction in which Sappi Limited
issues shares or share options to group employees as compen-
sation for services rendered
significant influence – the ability, directly or indirectly, to
participate in, but not exercise control over, the financial and
operating policy decisions of an entity so as to obtain economic
benefit from its activities
Non-GAAP financial definitions
The group believes that it is useful to report these non-GAAP
measures for the following reasons:
• these measures are used by the group for internal per-
formance analysis;
• the presentation by the group’s reported business segments
of these measures facilitates comparability with other com-
panies in our industry, although the group’s measures may
i
l
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c
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2009 annual report
201
not be comparable with similarly titled profit measure ments
reported by other companies; and
• it is useful in connection with discussion with the investment
ordinary dividend cover – profit for the period divided by the
ordinary dividend declared multiplied by the actual number of
shares in issue at period end
ordinary shareholders’ interest per share – shareholders’
equity divided by the actual number of shares in issue at
year end
price/earnings ratio – the financial year end closing prices
on the JSE Limited converted to US cents using the closing
financial year end exchange rate divided by headline earnings
per share
ROE – return on average equity. Profit for the period divided by
average shareholders’ equity
ROCE – return on average capital employed. Operating profit,
excluding special items divided by average capital employed
RONOA – return on average net operating assets. Operating
profit, excluding special items divided by average net operating
assets
sales per employee – sales for the year divided by the average
number of employees
SG&A – selling, general and administrative expenses
special items – special items cover those items which
management believe are material by nature or amount to the
operating results and require separate disclosure. Such items
would generally include profit or loss on disposal of property,
investments and businesses, asset impairments, restructuring
charges, non-recurring integration costs related to acquisitions,
financial impacts of natural disasters, non-cash gains or losses
on the price fair value adjustment of plantations and alternative
fuel tax credits receivable in cash
total market capitalisation – ordinary number of shares in
issue (excluding treasury shares held by the group) multiplied
by the financial year end closing prices on the JSE Limited
converted to US cents using the closing financial year end
exchange rate
trade receivables days outstanding (including securitised
balances) – gross trade receivables, including receivables
securitised, divided by sales multiplied by the number of days
in the year
analyst community and debt rating agencies
These non-GAAP measures should not be considered in
isolation or construed as a substitute for GAAP measures in
accordance with IFRS
asset turnover (times) – sales divided by total assets
average – averages are calculated as the sum of the opening
and closing balances for the relevant period divided by two
capital employed – shareholders’ equity plus net debt
cash interest cover – cash generated by operations divided
by finance costs less finance revenue
current asset ratio – current assets divided by current liabilities
dividend yield – dividends per share, which were declared
after year end, in US cents divided by the financial year end
closing prices on the JSE Limited converted to US cents using
the closing financial year end exchange rate
earnings yield – headline earnings per share divided by the
financial year end closing prices on the JSE Limited converted
to US cents using the closing financial year end exchange rate
EBITDA, excluding special items – earnings before interest
(net finance costs), tax, depreciation, amortisation and special
items
fellings – the amount charged against the income statement
representing the standing value of the plantations harvested
headline earnings – as defined in circular 3/2009 issued by
the South African Institute of Chartered Accountants, separates
from earnings all separately identifiable remeasurements. It is
not necessarily a measure of sustainable earnings. It is a Listings
Requirement of the JSE Limited to disclose headline earnings
per share
inventory turnover (times) – cost of sales divided by inventory
on hand at balance sheet date
net assets – total assets less total liabilities
net asset value per share – net assets divided by the number
of shares in issue at balance sheet date
net debt – current and non-current interest-bearing borrowings,
and bank overdraft (net of cash, cash equivalents and short-
term deposits)
net debt to total capitalisation – net debt divided by capital
employed
net operating assets – total assets (excluding deferred taxation
and cash) less current liabilities (excluding interest-bearing
borrowings and overdraft)
202
Notice to shareholders
Notice of annual general meeting
Ordinary resolution number 2.4
THIS DOCUMENT IS IMPORTANT AND REQUIRES
YOUR IMMEDIATE ATTENTION
If you are in any doubt as to what action you should take,
please consult your stockbroker, banker, attorney, accountant
or other professional advisor immediately.
Sappi Limited
(Registration No 1936/008963/06)
(Sappi)
The seventy-third annual general meeting of Sappi will be held
in the Auditorium, Ground Floor, 48 Ameshoff Street, Braam-
fontein, Johannesburg on Monday, 01 March 2010, at 15:00.
The following business will be transacted and resolutions
proposed with or without modification.
1. Annual financial statements: Receive and consider the
annual financial statements for the year ended September
2009.
2. Ordinary resolutions numbers 1.1 and 1.2: confirmation
of appoint ment of directors appointed subsequent to the
last annual general meeting and subsequent to the financial
year end, and re-election of those directors (see notes below).
Ordinary resolution number 1.1: resolved that the appointment
of Mr Peter Nlkateko Mageza with effect from 01 January 2010
is confirmed and as, in terms of the Articles of Association of
Sappi Limited, he retires from office at the conclusion of the
annual general meeting at which this resolution is considered, he
is re-elected as a director of Sappi Limited.
Ordinary resolution number 1.2: resolved that the appointment
of Dr Rudolf Thummer with effect from 01 February 2010
is confirmed and as, in terms of the Articles of Association of
Sappi Limited, he retires from office at the conclusion of the
annual general meeting at which this resolution is considered,
he is re-elected as a director of Sappi Limited.
3. Ordinary resolutions numbers 2.1 to 2.4: Re-election of
the directors retiring by rotation in terms of Sappi’s Articles
of Association (see notes below). The board has evaluated
the performances of each of the directors who are retiring
by rotation, and recommends and supports the re-election
of each of them.
It is intended that all the directors who retire by rotation
will, if possible, attend the annual general meeting, either in
person or by means of videoconferencing.
Ordinary resolution number 2.1
‘Resolved that Dr Deenadayalen Konar is re-elected as a
director of Sappi Limited.’
Ordinary resolution number 2.2
‘Resolved that Mr John David McKenzie is re-elected as a
director of Sappi Limited.’
Ordinary resolution number 2.3
‘Resolved that Sir Anthony Nigel Russell Rudd is re-elected
as a director of Sappi Limited.’
‘Resolved that Mr Mark Richard Thompson is re-elected
as a director of Sappi Limited.’
4. Ordinary resolution number 3: Re-appointment of auditors
The board has evaluated the performance of Deloitte &
Touche and recommends and supports their re-appointment
as auditors of Sappi.
‘Resolved to re-appoint Deloitte & Touche (with the desig-
nated registered auditor currently being Mr M J Comber)
as the auditors of Sappi Limited for the year ending
September 2010’.
5. Ordinary resolution number 4: Placing of unissued shares
and treasury shares under the control of the directors
‘Resolved that, subject the provisions of the Companies
Act 61 of 1973, as amended and the Listings Requirements
of the JSE Limited, a total of 25,000,000 ordinary shares in
Sappi Limited (comprising ordinary shares in the authorised
but issued share capital of Sappi and/or treasury shares
owned by one or more subsidiaries of Sappi from time to
time), be and are hereby placed under the control of the
directors of Sappi, who are authorised by way of a general
authority to allot and issue or otherwise dispose of all or
any of such shares to such person/s on such terms and
conditions and at such times as the directors of Sappi may
from time to time in their discretion deem fit.’
It is recorded that the Listings Requirements (Listings
Requirements) of the JSE Limited (JSE) currently require,
inter alia, that a company may only undertake a general issue
for cash or be generally authorised to use treasury shares if:
1. authorised to do so by a general authority, which shall
only be valid until the next annual general meeting of the
company or for 15 months from the date of passing of
such resolution, whichever period is the shorter;
2. such shares are issued or sold, as the case may
be, to public shareholders (as defined in the Listings
Requirements) and not to related parties;
3. such shares do not in any one financial year in the
aggregate exceed 15% of the company’s issued shares,
as determined in accordance with paragraph 5.52(c) of
the Listings Requirements. It is recorded that the shares
contemplated in ordinary resolution number 4 constitute
approximately 4.65% of the issued share capital of Sappi;
4. the maximum discount at which such shares may be
issued or sold (as the case may be) is 10% of the weighted
average trading price of such shares on the JSE over the
30 business days prior to the date of determination of the
issue or sale price, as the case may be; and
5. such general authority is approved by a 75% majority of
the votes cast in favour of such resolution by all equity
securities holders present or represented by proxy at
the general meeting convened to approve such resolution.
2009 annual report
203
No issue and/or sale of these shares is contemplated at
present nor will be made which could effectively transfer
control of Sappi without the prior approval of shareholders
in general meeting.
6. Ordinary resolution number 5:
Non-executive directors’ fees
‘Resolved that, with effect from 01 October 2009 and until
otherwise determined by Sappi Limited (‘Sappi’) in general
meeting, the remuneration of the non-executive directors
for their services shall be increased as follows:
From
To
3. Human resources committee, compensation committee,
nomination and governance committee and any
additional committees
Chairperson
If South African
resident
ZAR148,000 pa
ZAR158,400 pa
If European resident
GBP21,500 pa
GBP21,900 pa
If USA resident
US$32,000 pa
US$32,600 pa
From
To
Other members
1. Sappi board fees
Chairperson
ZAR1,650,000 pa*
ZAR1,765,500 pa*
* Inclusive of all committee fees.
If South African
resident
ZAR77,000 pa
ZAR82,400 pa
If European resident
GBP15,100 pa
GBP15,400 pa
If USA resident
US$19,500 pa
US$19,900 pa
Senior independent non-executive director
Regional audit committees
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If South African
resident
If European resident
If USA resident
Other directors
If South African
resident
ZAR356,000 pa
ZAR380,900 pa
GBP54,600 pa
US$82,700 pa
Chairperson
If South African
resident
If European resident
ZAR237,500 pa
ZAR254,100 pa
If USA resident
If European resident
GBP35,700 pa
GBP36,400 pa
If USA resident
US$54,000 pa
US$55,100 pa
From
To
2. Audit committees
Group committee
Chairperson
If South African
resident
ZAR237,500 pa
ZAR254,100 pa
If European resident
GBP35,700 pa
GBP36,400 pa
If USA resident
US$54,000 pa
US$55,100 pa
Other members
If South African
resident
ZAR118,000 pa
ZAR126,300 pa
If European resident
GBP17,900 pa
GBP18,300 pa
If USA resident
US$27,000 pa
US$27,500 pa
Regional audit committees
Chairperson
If South African
resident
If European resident
If USA resident
ZAR30,000
per meeting
GBP4,600
per meeting
US$6,750
per meeting
ZAR32,100
per meeting
GBP4,700
per meeting
US$6,900
per meeting
ZAR30,000
per meeting
GBP4,600
per meeting
US$6,750
per meeting
ZAR32,100
per meeting
GBP4,700
per meeting
US$6,900
per meeting
From
To
4. Additional meeting fees, board meetings in excess of five
meetings per annum (whether attended in person or by
teleconference/videoconference)
If South African
resident
If European resident
If USA resident
ZAR23,700
per meeting
GBP3,500
per meeting
US$5,400
per meeting
ZAR25,400
per meeting
GBP3,600
per meeting
US$5,500
per meeting
From
To
5. Travel compensation (increase of 3.7%)
For more than ten
flight hours return
US$2,700
per meeting
US$2,800
per meeting
Sappi indicated in the notice to shareholders dated
06 December 2004 that it planned to review directors’ fees
annually in future. Ordinary resolution number 5 increases the
remuneration currently paid to non-executive directors and
board committee members by between approximately 2%
and 7% per annum depending generally on the domicile of
the directors and the currency in which they are paid, with
effect from 01 October 2009. The fees were last increased
with effect from 01 October 2008 and have been reviewed
enable him to attend such meeting; or
• vote but not to attend the annual general meeting, must
provide his CSDP or broker with his voting instructions
in terms of the relevant custody agreement between him
and his CSDP or broker.
Such a shareholder must not complete the attached form
of proxy.
When authorised to do so, CSDPs or brokers recorded in
Sappi’s sub-register or their nominees should vote either
by appointing a duly authorised representative to attend
and vote at the annual general meeting to be held on
01 March 2010 or any adjournment thereof or by completing
the attached form of proxy and returning it to one of the
addresses indicated on the form of proxy in accordance
with the instructions thereon.
Questions
The board invites shareholders to ask questions at the annual
general meeting. In order to facilitate the answering of questions
at the meeting, shareholders who wish to ask questions in
advance are encouraged to submit their questions in writing to
the Group Secretary by 17:00 on Thursday, 25 February 2010 at:
7th Floor
48 Ameshoff Street
Braamfontein
Johannesburg 2001
or
PO Box 31560
Braamfontein
2017
or
by e-Mail to Denis.O’connor@sappi.com
Sappi Management Services (Pty) Limited
Secretaries: per D J O’Connor
48 Ameshoff Street
Braamfontein, Johannesburg 2001
04 December 2009
204
Notice to shareholders continued
to ensure that Sappi’s fees remain generally comparable
with those of its peer companies in the various countries in
which its directors are domiciled.
The responsibility of non-executive directors continues to
increase substantially flowing from legislative, regulatory and
corporate governance requirements. The proposed fees are
considered reasonable in the circumstances.
The practice has been and will continue to be that directors’
and board committee fees are paid to non-executive
directors only.
In line with their international responsibilities, directors
resident in South Africa will be entitled to be paid up to one
third of their directors’ fees in either United States Dollars
or British Pounds Sterling.
As at the date of this notice, the board has not made a
decision on retaining the position of senior non-independent
director after the retirement of the present incumbent,
Mr D C Brink, at the end of December 2009. Further
information on this will be provided at the meeting. For the
purposes of flexibility, the latest fee proposals for the
position include the provision for fees not only in rands as
in the past, but also in British Pound Sterling and US dollars
in the event that the position is retained and a non-
South African is appointed. The proposed fees are in the
same ratio to the Chairman’s fee as the existing senior
independent non-executive fee.
7. Ordinary resolution number 6: Signature of documents
‘Resolved that any director of Sappi Limited is authorised
to sign all such documents and do all such things as may
be necessary for or incidental to the implementation of the
resolutions passed at the annual general meeting held on
01 March 2010 or any adjournment thereof.’
Proxies
A shareholder is entitled to appoint one or more proxies to
attend, speak and on a poll to vote in his stead. A proxy
need not be a shareholder. For the convenience of share-
holders, a form of proxy is enclosed.
The attached form of proxy is only to be completed by a
shareholder who holds Sappi shares in certificated form or
has dematerialised his shares (ie has replaced the paper
share certificates with electronic records of ownership under
JSE’s electronic settlement system (Strate Limited) and is
recorded in the sub-register in ‘own name’ dematerialised
form (ie a shareholder who has specifically instructed his
Central Securities Depositary Participant (CSDP) or broker
to hold his shares in his own name on Sappi’s sub-register).
A shareholder who has dematerialised his shares and
who is not registered as an ‘own name’ dematerialised
shareholder and who wishes to:
• attend the annual general meeting must instruct his CSDP
or broker to provide him with a letter of representation to
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2009 annual report
205
Notes
Confirmation of appointment of Directors appointed since the
last annual general meeting and subsequent to the year end,
and the re-election of these directors
Peter Nlkateko Mageza (54) ACCA (UK)
Mr Mageza joins the Sappi board on 01 January 2010 as an
independent non-executive director after having held senior
executive positions across a wide range of industries. He is a
former Group Chief Operating Officer of ABSA Group Limited;
Assistant General Manager for Process Management at Nedcor
Limited; and Chief Executive Officer of Autonet, the road
passenger and freight logistics division of Transnet Limited. He
serves as a non-executive director on the boards of Bidvest
Group Limited, Remgro Limited and Rainbow Chickens Limited.
He is a Chartered Certified Accountant and a fellow of the
Association of Chartered Certified Accountants (ACCA) in the
UK. Mr Mageza will turn 55 years on 28 December 2009.
Dr Rudolf Thummer (61) (Austrian) Dr Techn, Dipl – Ing
Dr Thummer joins the Sappi board on 01 February 2010 as a
non-executive director after having served many years in the
pulp and paper industry. He joined Hannover Papier in 1979
(later purchased by Sappi) as Manager of Research and
Development. In 1982, he became the Paper Mill Manager at
Alfeld Mill. In 1990, he was appointed technical director of Alfeld
Mill. In 1992, Dr Thummer became an executive board member
of the Hannover Papier Group, responsible for Manufacturing at
the Alfeld and Ehingen Mills. In 1998, he moved to Sappi Fine
Paper Europe based in Brussels, as technical director and
executive board member. He was appointed as Sappi Limited
group head technology from 01 January 2006 and retired from
that position at the end of December 2007. He holds a doctorate
in Technical Sciences, and a qualified engineer’s degree from
the Graz Technical University in Austria. He will turn 62 years on
10 December 2009.
Directors retiring by rotation who are seeking
re-election
Please refer to the undermentioned pages of this report for
details of the directors who are retiring by rotation and seeking
re-election at the annual general meeting on 01 March 2010 :
1. Dr Deenadayalen Konar – page 27
2. Mr John (Jock) David McKenzie – page 27
3. Sir Anthony Nigel Russell Rudd – page 28
4. Mr Mark Richard Thompson – page 28
206
Shareholders’ diary
Annual general meeting
First and third quarter reports released
Second quarter and half-year report released
Financial year-end
Preliminary results for the fourth quarter and year released, dividend announcement
Annual report posted to shareholders
01 March 2010
January and August 2010
May 2010
September 2010
November 2010
December 2010
United States ADR Depositary
The Bank of New York Mellon
Investor Relations
PO Box 11258
Church Street Station
New York, NY 10286-1258
Telephone (US only) 1 888 BNYADRS
Telephone (outside the US) +1 201 680 6825
e-Mail shrrelations@bnymellon.com
Website www.bnymellon.com/shareowner
Corporate affairs
André Oberholzer – Group Head
Telephone +27 (0)11 407 8111
Fax +27 (0)11 403 8236
e-Mail Andre.Oberholzer@sappi.com
Investor relations
Graeme Wild – Group Investor Relations Manager
Telephone +27(0)11 407 8391
Fax +27(0)11 403 1493
e-Mail Graeme.Wild@sappi.com
Administration
Sappi Limited
Registration number 1936/008963/06
JSE code: SAP
ISIN code: ZAE 000006284
NYSE code: SPP
Group secretary
Denis O’Connor
Secretaries
Sappi Management Services (Pty) Limited
48 Ameshoff Street
2001 Braamfontein
South Africa
PO Box 31560
2017 Braamfontein
South Africa
Telephone +27 (0)11 407 8111
Fax +27 (0)11 339 1881
e-Mail Denis.O’Connor@sappi.com
Website www.sappi.com
Transfer secretaries
South Africa
Computershare Investor Services (Pty) Limited
70 Marshall Street
2001 Johannesburg
PO Box 61051
2107 Marshalltown
Telephone +27 (0)11 370 5000
Fax +27 (0)11 370 5217
e-Mail registrar@computershare.co.za
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2009 annual report
207
Proxy form for annual general meeting
SAPPI LIMITED
(Registration number 1936/008963/06)
(Incorporated in the Republic of South Africa)
(Sappi or the company)
Issuer Code: SAP JSE Code: SAP ISIN Code: ZAE000006284
For use by shareholders who:
– hold shares in certificated form; or
– hold dematerialised shares (ie where the paper share certificates representing the shares have been replaced with electronic records of ownership
under the electronic settlement and depositary system (Strate Limited) of the JSE Limited and are recorded in Sappi’s sub-register with ‘own name’
registration) (ie shareholders who have specifically instructed their Central Securities Depository Participant (CSDP) to record the holding of their
shares in their own name in Sappi’s sub-register).
If you are unable to attend the seventy-third annual general meeting of the members to be held at 15:00 on Monday, 01 March 2010 in the Auditorium,
Ground Floor, 48 Ameshoff Street, Braamfontein, Johannesburg, 2001, Republic of South Africa, you should complete and return the form of proxy
as soon as possible, but in any event to be received by not later than 15:00 South African time on Saturday 27 February 2010, to Sappi’s transfer
secretaries, Computershare Investor Services (Pty) Limited, by way of hand delivery to 70 Marshall Street, Johannesburg, 2001, Republic of South
Africa or by way of postal delivery to PO Box 61051, Marshalltown, 2107 Republic of South Africa.
Shareholders who have dematerialised their shares and who do not have ‘own name’ registration and wish to attend the annual general meeting,
must instruct their CSDP or broker to provide them with the relevant letter of representation to enable them to attend such meeting, or, alternatively,
should they wish to vote but not to attend the annual general meeting, they must provide their CSDP or broker with their voting instructions in terms
of the relevant custody agreement entered into between them and the CSDP or broker. Such shareholders must not complete this form of proxy.
I/We
of
being a shareholder(s) of Sappi holding
Sappi shares and entitled to vote at the above mentioned
annual general meeting, appoint
or failing him/her
or failing him/her
or failing him/her, the chairman of the meeting as my/our proxy to attend and speak and, on a poll, to vote for me/us on the resolutions to be proposed
(with or without modification) at the annual general meeting of Sappi to be held at 15:00 on Monday 01 March 2010 or any adjournment thereof, as follows:
Number of shares
For
Against
Abstain
Ordinary resolution number 1 – confirmation of appointment and re election of directors appointed
since the last annual general meeting*
Ordinary resolution number 1.1 – Mr Peter Nlkateko Mageza
Ordinary resolution number 1.2 – Dr Rudolf Thummer
Ordinary resolution number 2 – Re-election of directors retiring by rotation in terms of Sappi’s Articles
of Association*
Ordinary resolution number 2.1 – Re-election of Dr Deenadayalen Konar as a director of Sappi Limited
Ordinary resolution number 2.2 – Re-election of Mr John David McKenzie as a director of Sappi Limited
Ordinary resolution number 2.3 – Re-election of Sir Anthony Nigel Russel Rudd as a director of Sappi
Limited
Ordinary resolution number 2.4 – Re-election of Mr Mark Richard Thompson as a director of Sappi Limited
Ordinary resolution number 3 – Re-appointment of Deloitte & Touche as auditors for the year ending
30 September 2010
Ordinary resolution number 4 – Placing a total of 25,000,000 unissued Sappi shares and/or treasury
shares (constituting approximately 4,65% of Sappi’s issued share capital) under the control of the
directors of Sappi with the authority to allot and/or issue and/or otherwise dispose of same in terms of
the SA Companies Act and the Listings Requirements of the JSE Limited
Ordinary resolution number 5 – Increase in non-executive directors’ fees
Ordinary resolution number 6 – Authority for directors to sign all documents and do all such things
necessary to implement the above resolutions
Insert ‘X’ in the appropriate block if you wish to vote all your shares in the same manner. If not, insert the number of votes in the appropriate block.
If no indication is given, the proxy will vote as he/she thinks fit.
Signed at
on
Assisted by me (where applicable)
Each shareholder is entitled to appoint one or more proxies (who need not be shareholders of Sappi) to attend, speak, and on a poll, vote in place of
that shareholder at the annual general meeting or any adjournment thereof.
* Refer note to notice of meeting on page 202.
208
Notes to proxy
The form of proxy must only be used by certificated shareholders or shareholders who hold dematerialised shares with ‘own name’ registration.
Other shareholders are reminded that the onus is on them to communicate with their CSDP or broker.
Instructions on signing and lodging the annual general meeting proxy form
1.
A deletion of any printed matter (only where a shareholder is allowed to choose between more than one alternative option) and the completion
of any blank spaces need not be signed or initialled. Any alteration must be signed, not initialled.
2.
The chairman shall be entitled to decline to accept the authority of the signatory:
2.1 under a power of attorney; or
2.2 on behalf of a company,
if the power of attorney or authority has not been lodged at the offices of the company’s transfer secretaries, Computershare Investor Services
(Pty) Limited, 70 Marshall Street, Johannesburg, 2001, Republic of South Africa or posted to PO Box 61051, Marshalltown, 2107, Republic
of South Africa.
The signatory may insert the name(s) of any person(s) whom the signatory wishes to appoint as his/her proxy in the blank spaces provided for
that purpose.
When there are joint holders of shares and if more than one of such joint holders is present or represented, the person whose name stands first
in the register in respect of such shares or his/her proxy, as the case may be, shall alone be entitled to vote in respect thereof.
The completion and lodging of the form of proxy will not preclude the signatory from attending the meeting and speaking and voting in person
thereat to the exclusion of any proxy appointed in terms hereof should such signatory wish to do so.
Forms of proxy must be lodged with, or posted to, the offices of the company’s transfer secretaries, Computershare Investor Services (Pty)
Limited, at 70 Marshall Street, Johannesburg, 2001, Republic of South Africa, (for hand delivery) or PO Box 61051, Marshalltown, 2107, Republic
of South Africa (for postal delivery), to be received by not later than 15:00 on Saturday 27 February 2010.
If the signatory does not indicate in the appropriate place on the face hereof how he/she wishes to vote in respect of a particular resolution, his/
her proxy shall be entitled to vote as he/she deems fit in respect of that resolution.
The chairman of the annual general meeting may reject any proxy form which is completed other than in accordance with these instructions and
may accept any proxy form when he is satisfied as to the manner in which a member wishes to vote.
3.
4.
5.
6.
7.
8.
forward-looking statements
Certain statements in this release that are neither reported financial results nor other historical information, are forward-
looking statements, including but not limited to statements that are predictions of or indicate future earnings, savings,
synergies, events, trends, plans or objectives. The words ‘believe’, ‘anticipate’, ‘expect’, ‘intend’, ‘estimate’, ‘plan’,
‘assume’, ‘positioned’, ‘will’, ‘may’, ‘should’, ‘risk’ and other similar expressions, which are predictions of or indicate
future events and future trends, which do not relate to historical matters, identify forward-looking statements. Undue
reliance should not be placed on such statements because, by their nature, they are subject to known and unknown
risks and uncertainties and can be affected by other factors that could cause actual results and company plans and
objectives to differ materially from those expressed or implied in the forward-looking statements (or from past results).
Such risks, uncertainties and factors include, but are not limited to, the impact of the global economic downturn, the
risk that the Acquisition will not be integrated successfully or such integration may be more difficult, time-consuming
or costly than expected, expected revenue synergies and cost savings from the Acquisition may not be fully realized
or realized within the expected time frame, revenues following the Acquisition may be lower than expected, any
anticipated benefits from the consolidation of the European paper business may not be achieved, the highly cyclical
nature of the pulp and paper industry (and the factors that contribute to such cyclicality, such as levels of demand,
production capacity, production, input costs including raw material, energy and employee costs, and pricing), adverse
changes in the markets for the group’s products, consequences of substantial leverage, including as a result of
adverse changes in credit markets that affect our ability to raise capital when needed, changing regulatory
requirements, possible early termination of alternative fuel tax credits, unanticipated production disruptions (including
as a result of planned or unexpected power outages), economic and political conditions in international markets, the
impact of investments, acquisitions and dispositions (including related financing), any delays, unexpected costs or
other problems experienced with integrating acquisitions and achieving expected savings and synergies and currency
fluctuations. We undertake no obligation to publicly update or revise any of these forward-looking statements, whether
to reflect new information or future events or circumstances or otherwise.
We have included in this announcement an estimate of total synergies from the Acquisition and the integration of the
acquired business into our existing business. The estimate of synergies is based on assumptions which in the view
of our management were prepared on a reasonable basis, reflect the best currently available estimates and judgments,
and present, to the best of our management’s knowledge and belief, the expected course of action and the expected
future financial impact on our performance due to the Acquisition. However, the assumptions about these expected
synergies are inherently uncertain and, though considered reasonable by management as of the date of preparation,
are subject to a wide variety of significant business, economic and competitive risks and uncertainties that could
cause actual results to differ materially from those contained in this estimate of synergies. There can be no assurance
that we will be able to successfully implement the strategic or operational initiatives that are intended, or realise the
estimated synergies. This synergy estimate is not a profit forecast or a profit estimate and should not be treated as
such or relied on by shareholders or prospective investors to calculate the likely level of profits or losses for Sappi.
www.sappi.com
This report has been compiled and produced by Sappi Corporate Affairs© 2009
Sappi House (cid:129) 48 Ameshoff Street (cid:129) 2001 Braamfontein (cid:129) Johannesburg (cid:129) South Africa
10032
Getting from A to B can sometimes be a little tricky,
but not when you have paper and the power of
imagination building bridges between ideas and
reality. Who knows what divide paper will help us
cross next?
www.sappi.com