www.sappi.com
Inspired by life
“Look deep into nature, and then you will
understand everything better” – Albert Einstein
This inspiration and the insights we gain
informs our technical excellence, our
innovations, our relationships and the use
of our resources. It is the spark that ignites
the passion in our people and makes the
end solutions relevant and successful.
annual report
2010
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Our reporting strategy
Forward-looking statements
The King Report on Governance for South Africa 2009 (King III),
information that is material, relevant, accessible, understandable
which is recognised internationally as a leading governance
and comparable” and to demonstrate that “…strategy, risk,
standard, was adopted by the JSE and became effective on
performance and sustainability are inseparable” in the way Sappi
01 March 2010. As we are headquartered in South Africa with our
manages its business.
primary listing on the JSE Limited we subscribe to King III. In line
with the integrated reporting requirement contained in King III, we
have increased the level of integration in this year’s report. Primarily
we are responding to the guideline to “…transparently disclose
We use 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 2010 and longer term prospects,
stakeholders are directed to the following sources of company information:
Quarterly results announcements and analyst presentations.
Annual reports and accounts, prepared in accordance with International Financial Reporting Standards (IFRS) issued by the
International Accounting Standards Board (IASB).
Form 20-F, prepared in accordance with US Securities and Exchange Commission (SEC) regulations.
Sustainable development report, aimed at giving the reader a broad overview of our sustainability performance.
Our online report (http://sappi.investoreports.com/sappi_sdr_2010) follows the same structure as the printed report, but
incorporates additional detail and includes a comprehensive Global Reporting Initiative (GRI) index which has links to relevant
sections in the annual report, the Form 20-F and previous sustainability reports.
Group website – www.sappi.com
Certain statements in this report that are neither reported fi nancial 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 highly cyclical nature of the pulp and paper industry (and the factors that contribute to such cyclicality, such as levels of demand,
production capacity, production, input costs including raw material, energy and employee costs, and pricing);
the impact on our business of the global economic downturn;
unanticipated production disruptions (including as a result of planned or unexpected power outages);
changes in environmental, tax and other laws and regulations;
adverse changes in the markets for 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;
adverse changes in the political situation and economy in the countries in which we operate or the effect of governmental efforts to
address present or future economic or social problems;
the impact of investments, acquisitions and dispositions (including related fi nancing), any delays, unexpected costs or other problems
experienced in connection with dispositions or with integrating acquisitions and achieving expected savings and synergies; and
Note: Please refer to the glossary of terms used in this report on pages 189 to 191.
currency fl uctuations.
Sappi Limited is listed on the following stock exchanges and is subject to their listing requirements:
JSE Limited, South Africa (primary listing)
New York Stock Exchange, USA (secondary listing)
We undertake no obligation to publicly update or revise any of these forward-looking statements, whether to refl ect new information or
future events or circumstances or otherwise.
This report is printed on
Magno Satin: cover – 250g/m2,
pages 1 to 64 – 150g/m2 and
Triple Green Silk:
pages 65 to 200 – 115g/m2
Sappi is a leading producer of coated fi ne paper used in the printing of high end printed communications.
Cover picture: Wood chips are a renewablle resource from certifi ed forests used at Sappi Saiccor Mill
www.sappi.com
This report has been compiled and produced by Sappi Corporate Affairs® 2010
Sappi House • 48 Ameshoff Street • 2001 Braamfontein • Johannesburg • South Africa
2010 annual report
1
Contents of our report
Who we are
A quick overview of our business showing the geographic spread of our operations and markets.
Performance highlights
An overview of our performance during the year, including fi nancial and other highlights.
Letter to the shareholders from the chairman and chief executive offi cer
The chairman and chief executive offi cer review the group’s performance and strategic developments
against key objectives for the year, as well as our objectives for 2011.
Interview on strategic matters with Ralph Boëttger, chief executive offi cer
Investors’ most frequently asked questions are answered.
Serious about sustainability
A process diagram with explanations that provide a picture of our operations, showing inputs,
and outputs as well as our impact on the environment and communities in which we operate.
Our markets
Describes the wide range of end-uses and showcases some leading brands in each of our main
product segments.
Our leadership
Provides short CVs for the non-executive and executive members of our board, and lists senior
management in Sappi Limited and our operating divisions.
Review of operations
Provides commentary on performance as well as our expectations.
Sappi Fine Paper
Sappi Southern Africa
Chief fi nancial offi cer’s report
The chief fi nancial offi cer discusses our group and regional operating results and provides an analysis
of group cash fl ow statements, balance sheets, net debt, credit ratings, and share listing and share
price performance.
Five-year review
Our key performance measures of the income statement, balance sheet and cash fl ow statement,
as well as profi tability, effi ciency and liquidity ratios, and exchange rates, over a fi ve-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.
Governance and compensation
Risk management
Corporate governance
Compensation report
Annual fi nancial statements
Glossary
Notice to shareholders, Shareholder’s diary, Administration
and Proxy form for annual general meeting
02
04
06
09
10
14
18
22
22
26
30
56
58
60
61
63
69
78
189
192
2
Who we are
Globally Sappi works closely with customers, both direct and
indirect, in over 100 countries to provide them with relevant and
sustainable paper, paper-pulp and chemical cellulose products and
related services and innovations. Our market-leading range of paper-
products includes: coated fi ne papers used by printers, publishers
and corporate end-users in the production of books, brochures,
magazines, catalogues, direct mail and many other print applications;
casting release papers used by suppliers to the fashion, textiles,
automobile and household industries; and in the Southern African
region newsprint, uncoated graphic and business papers, premium
quality packaging papers, paper grade pulp and chemical cellulose.
Our chemical cellulose products are used worldwide by converters
to create viscose fi bre, acetate tow, pharmaceutical products as well
as a wide range of consumer products.
The pulp needed for our products is either produced within Sappi
or bought from accredited suppliers. Across the group, Sappi is
close to ‘pulp neutral’, meaning that we sell almost as much pulp
as we buy.
Key facts
15,600 employees worldwide
Sales in over 100 countries
Manufacturing operations on four continents
Paper production capacity of 6.6 million tons per annum
Paper pulp production capacity of 3.3 million tons per annum
Chemical cellulose production capacity of 800,000 tons per annum
2010 annual report
3
Sappi Fine Paper
North America
21% of group sales
Sappi Fine Paper
Europe
55% of group sales
3 Mills
4 Sales offices
9 Mills
16 Sales offices
Maine
New York
Boston
Minnesota
Ohio
California
Finland
Russia
United Kingdom
The Netherlands
Poland
Belgium
Germany
France
Switzerland
Austria
Hungary
Ukraine
Georgia
Spain
Italy
Greece
Turkey
Sappi
Southern Africa
24% of group sales
Sappi Paper and
Paper Packaging
6 Mills + 1 operation
4 Sales offices
Sappi Forests
555,000 ha
1 Sawmill
Sappi
Chemical Cellulose
1 Mill
Sappi Trading
Sappi Trading
operates a network
for the 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.
Sales offices
Logistics offices
Durban
New York
Bogotá
Hong Kong
Johannesburg
Mexico City
Nairobi
São Paulo
Singapore
Shanghai
Sydney
Taipei
Vienna
Jiangxi Chenming Paper Co (JV)
34% ownership
China
1 Mill
Corporate head office
Regional head offices
Mills
Sales offices
Johannesburg
Durban
Port Elizabeth
Cape Town
4
Performance highlights
2010 was a much improved year for Sappi. Demand for our paper and pulp improved gradually through the year off
the very low levels seen in 2009. Pulp prices rose rapidly during the year, benefi ting our Southern African and North
American businesses, which are net sellers of pulp, but squeezing margins in our European business, which buys
approximately half of its pulp requirements. The European business was able to improve margins in the fi nal quarter
following three sales price increases for coated woodfree paper during the year, but its margins remained well
below acceptable levels. Each of our businesses generated positive operating profi t for the year and in the fi nal
quarter the group achieved its highest quarterly operating profi t (excluding special items) for a number of years.
Sales up 22% to
US$6.6 billion
Operating profi t of
US$339 million
(2009: US$33 million)
excluding special items
Net profi t
US$66 million
(2009: US$177 million loss)
EPS 13 US Cents
(2009: Loss per share
37 US Cents)
Continuing strong
net cash generation
of US$341 million
(2009: US$289 million,
excluding the Acquisition)
Net debt down to
US$2.2 billion
(2009: US$2.6 billion)
Strong liquidity
Black economic
empowerment
deal completed
* Restated for the rights issue in fi scal 2009.
Note: Defi nitions for various terms and ratios used above are included in the glossary on pages 189 to 191.
2010 annual report
5
Specifi c CO2 emissions from purchased fuels (t/adt)
Specifi c (ie per air dry ton of pulp produced) CO2
emissions show a declining trend, refl ecting
an increase in the use of own renewable fuel,
particularly in North America.
Increases in water consumption for 2009 were the
result of decreased production – when production
stops or slows, depending on the duration, water
is still consumed to keep the machines running.
Globally, the total specifi c (ie per air dry ton of product
produced) water use has dropped by approximately
8.2% over the three years.
Safety performance improved for both employees
and contractors. The contractor LTIFR in South
Africa is the lowest ever recorded.
Black Economic Empowerment (BEE) Scorecard
Our Southern African business has improved its performance against the Forestry Sector Charter Code, measured by Empowerdex
in October 2010, to AA.
Code of ethics
Sappi requires it directors and employees to act with the utmost good faith and integrity in all transactions and with all stakeholders
with whom we interact. This commitment is refl ected in the group’s Code of Ethics.
The code is based on Sappi’s core values of Excellence, Integrity and Respect. During the year we conducted a survey,
“Code of Ethics: are we walking the walk?”, which identifi ed that over 85% of all employees were familiar with our Code.
Value added
One measure of wealth created is the amount of value added to the cost of materials and services purchased. Below we have
depicted the value added by the Sappi group and how it was distributed among stakeholders.
6
Letter to the shareholders
from the chairman and chief executive offi cer
Our objectives for 2011
Continue improvement of profi tability and returns
Improve ROCE by >25%
Reduce net debt and fi nance costs
Reduce net debt to total capitalisation to <50%
Improve European operating margins and profi tability
Implement new service model in Europe
Maintain operating profi t and operating margins in North America
Improve profi tability of the Paper and Paper Packaging business
in Southern Africa
Danie Cronjé chairman
Ralph Boëttger chief executive offi cer
2010 was a much improved year for Sappi. We achieved
a gradual improvement in the performance of each of
our businesses from the low base of the previous year
during which the global economic decline led to
reductions in demand of up to 30% for coated paper.
The group returned to profitability for the year,
generating a net profi t of US$66 million. By our fourth
quarter, most of our businesses were operating at
close to full capacity and prices were improving,
resulting in a net profi t of US$84 million for the quarter.
Each of our regional businesses achieved a much
improved and positive operating profi t for the year and
generated signifi cant cash.
Performance against objectives
Our primary objective was to restore the group to profi tability and
to improve returns. Although we are not yet satisfi ed with the returns,
we have made signifi cant progress, achieving a 8% return on
capital employed for the year compared to 1% for 2009. In the fi nal
quarter, we achieved a 13% return on capital employed, which was
ahead of our minimum target of 12%, refl ecting the improvement
through the year aided by an element of seasonality.
The group’s operating profit excluding special items was
US$339 million compared to US$33 million in 2009. Cash
generation after fi nance costs, taxation and capital expenditure was
US$341 million for the year, above the US$289 million (excluding
the Acquisition) achieved in 2009. Our net debt reduced to
approximately US$2.2 billion as a result of the strong cash generation.
Net debt levels have reduced by approximately US$600 million from
their peak in mid-2009 and we believe we are well placed to achieve
a level of below US$2 billion, well ahead of the target date of
September 2012.
2010 annual report
7
Regional performance
The outstanding performer of the year was our North American
business. Following its restructuring in 2009, the business
achieved high operating rates, further improved its collaboration
with customers and increased productivity across our operations.
Coated paper prices in North America were depressed for most of
the year; however, the business benefi ted from its competitive cost
base as well as its surplus pulp position and rapidly increasing pulp
prices through the year. The casting release paper speciality
business performed well as a result of strong demand particularly
from Asia.
Our European business achieved a rapid turnaround in the coated
fi ne paper business with operating rates exceeding 90% for the
year. Three coated fi ne paper price increases were achieved in the
second half of the year, with the latest implemented in September.
The coated mechanical paper market recovery lagged signifi cantly
but, by the fi nal quarter, demand was strong and a small price
increase was achieved. The European business purchases
approximately 50% of its pulp requirements, which resulted in a
signifi cant margin squeeze through the year as pulp prices increased
rapidly. Towards the end of the year, the combination of fl at or even
softer pulp prices and higher paper prices resulted in slightly
improved margins.
The Southern African business achieved good results in the chemical
cellulose sector following the expansion of the Saiccor Mill, strong
demand, good price levels and improving levels of output. The
paper and paper packaging paper business’ performance was
disappointing as a result of weak demand during the fi rst half of
the year and less than optimal operating effi ciencies; however, the
performance improved in the second half. The relative strength of
the Rand to the US Dollar had a signifi cant, unfavourable effect not
only on exports, but also on the domestic business as a result of
the increased competition from imports.
The operating reports and the chief fi nancial offi cer’s report provide
additional detail on the year’s performance.
Strategic review
Our aim is to be, on a sustainable basis, the most profi table company
in paper, pulp and chemical cellulose-based solutions and we
measure this in terms of return on capital employed. Although we
made signifi cant progress during the year, our performance is still
well short of our goal.
Our focus is on improving the performance of our existing businesses
and our balance sheet. Our capital investment has therefore been
targeted at areas required to keep the core business healthy
including cost reduction projects, particularly energy-related. In the
year ahead, we will continue to focus on improving the underlying
business to create a platform for our future growth in the areas of
low cost plantation fi bre, chemical cellulose, and forward integration
in select areas of the value chain.
Our primary objective was to restore
the group to profi tability and to improve
returns. We have made signifi cant progress.
in rehabilitating plantations lost to fi re in 2007 and 2008, including
at Usutu in Swaziland.
At the start of 2009, we acquired the M-real coated paper business
to improve our market position and the supply/demand balance.
The business has been successfully integrated with our European
business and the target synergies have been achieved. With demand
levels now closer to the levels achieved in 2008, before the
unprecedented collapse in early 2009, we believe the business is
well positioned to take full advantage of the acquisition. We continue
to explore further strategic changes in order to ensure we rapidly
achieve targeted return levels of at least 12% return on capital
employed.
How we do business is as important to us as what business we
do. In Europe, our Project Breakthrough is based on detailed input
from our customers throughout the value chain, academics, and
our turnaround experience in North America. We have recently
started the implementation of new service offerings, which are
supported by our tailor-made support infrastructure and leading
products. Throughout the group, we aim to be easier to do
business with. Excellence, Integrity and Respect are the core
values we apply to how we conduct our business.
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.
The safety of our people is prioritised throughout the group in order
to ensure that everyone contributing to our success returns home
safely to their families. Regrettably, four people died in work-related
accidents during the year. Two of the accidents were in our
plantation operations, one at Saiccor Mill in South Africa, and one
at Kirkniemi Mill in Finland. We continue to emphasise the
importance of leadership, the application of behaviour-based
safety systems and of specific protocols to prevent fatalities
throughout our operations.
In our approach to sustainability, we recognise that as a major
industrial producer we have an impact on our people, on the
communities in which we operate and on the environment. We
strive to continuously improve our footprint with particular emphasis
on carbon emissions, the quality of water and the quality of air. We
are advantaged by the nature of our major raw material, which is
renewable wood fi bre from sustainably managed forests and
During the year, we acquired 14,500 hectares of developed softwood
plantations. We aim to maximise this advantage while simultaneously
plantations close to Ngodwana Mill and have made good progress
reducing our other impacts.
8
Letter to the shareholders from the chairman and chief executive offi cer continued
Black economic empowerment
We completed a share-based Broad-based Black Economic
Empowerment (BBBEE) transaction in June following shareholder
approval in April. In the fi rst part of the transaction, Lereko
Investments, our strategic empowerment partner, exchanged its
interest in Sappi’s plantation land for Sappi Limited shares. The
second and major part of the transaction, which is fully described
on our website, is primarily for the benefi t of our employees in
South Africa. Our southern African business has improved its
overall empowerment scorecard performance measured by an
independent rating agency, from BB last year to AA in October
2010. We continue to grapple with the challenge of improving the
diversity of our middle to senior management, which is essential to
the success of the business in South Africa.
Looking forward
We expect continued gradual improvement in global economic
conditions during the year ahead; however, we remain cautious as
a result of factors such as expected ongoing volatility of exchange
rates which could result in varying levels of growth in the various
regions in which we operate or sell our products.
We expect demand for coated paper to continue its recovery next
year and for operating margins in our North American and
European coated paper businesses to refl ect the improvement in
demand. Our businesses are likely to be faced with continued high
input costs and the margin improvement will require continued
cost management and revenue growth through volume, mix and
the achievement of higher price levels.
Our chemical cellulose business is well placed as a result of the
strong growth in demand for viscose fi bres based on strong
demand for textile fi bres, and more particularly, as a result of the
need for a sustainable supply of absorbent cellulosic fi bres in fi bre
blends. The primary cellulosics which fulfi ll this role are viscose and
cotton. Cotton is currently in short supply and it is likely to remain
so as a result of the need for land for food security.
Our capital expenditure will be focused on areas required to
maintain the business; however, we foresee a modest increase in
the year ahead compared to the 2010 level of expenditure, which
was approximately US$200 million, in order to take advantage of
high return projects, particularly relating to energy costs.
We expect further improvements in operating profi t excluding
special items in 2011. The improvement of our European business
remains a key focus and we aim to build on the achievements over
the past year to return it to acceptable returns. With both
economic conditions and our performance improving, we will not
need to hold as much cash as we did last year and will therefore
continue to repay debt, thereby reducing our fi nance costs. We
expect that our cash generation during the year will reduce our net
debt and further reduce our fi nance costs.
Our customers place enormous trust
in us and our ability to meet their
changing and growing requirements,
and we undertake to continue to work
closely with them to ensure we meet
their and our needs for value.
and new paper capacity in China, which could impact the supply
demand balance in our markets.
(A fuller discussion of risks is available on pages 61 to 62.)
We have a positive view of the year ahead and are looking forward
to an improvement in returns for the year.
Appreciation
Many participants have contributed to our improving performance
over the past year and we value their support.
Our customers place enormous trust in us and our ability to meet
their changing and growing requirements, and we undertake to
continue to work closely with them to ensure we meet their and
our needs for value.
Our people continue to display a persistence and determination to
produce sustainable profi ts. The initiative and resourcefulness of
our people has made it possible to raise our sights and launch into
2011 with ever improving prospects. We thank you.
Our board has continued to provide insight and encouragement as
we tackled the challenges of the past two years, and we thank
them for their professionalism and openness.
Helmut Mamsch will be retiring from the board at the end of
December 2010 after seven years of service. He has contributed
considerable expertise and wisdom to the deliberations of our
board and audit and compensation committees and as chairman
of the Sappi Fine Paper Europe audit committee, and we thank
him for his guidance.
We welcomed Peter Mageza, Valli Moosa and Rudolf Thummer to
the board during the year. They each bring wide and varied
experience to the board. In addition, Mr Moosa’s appointment will
further strengthen the group’s relationship with our strategic
empowerment partner, Lereko Investments.
We thank our shareholders for their support and look forward to
their participation at the annual general meeting on 09 February
2011.
Factors that could upset our expected improvement include, lower
than predicted global economic growth which could lead to lower
demand and prices for our products, increased currency volatility
Danie Cronjé
Chairman
03 December 2010
Ralph Boëttger
Chief executive offi cer
Interview on strategic matters with Ralph Boëttger, chief executive offi cer
2010 annual report
9
Last year you said that you expected demand in your coated
markets to improve to around 10% short of 2007/2008
levels. How is the recovery progressing?
Our view has been well supported by the recovery in demand
in Europe and North America. In Europe, demand for coated
woodfree paper in the fi rst nine calendar months of 2010 grew 4%
compared to 2009 and in North America, 20%. In our fi nancial
year, our European business operated at 93% for coated woodfree
paper and North America was effectively fully sold for the whole
year. Demand for coated mechanical paper in Europe recovered
more slowly but by September 2010, shipments were at a high
level. Inventory levels for coated paper remain at relatively low
levels compared to prior years.
There is strong evidence that marketing
campaigns will integrate print not
eliminate it from the media mix. Print is
recognised as a leading and trusted part
of the mix.
What is the excitement about chemical cellulose?
Importantly, it is a renewable resource with a multitude of uses,
from textile fi bres, cigarette fi lters, plastics, pharmaceutical binders,
While we expect recovery to continue in 2011, we continue to
food thickeners and almost certainly more to come.
expect a gradual decline in coated paper demand in the developed
markets from the highs achieved in 2007/2008 as a result of new
choices of media.
Do you have greater clarity on what impact ‘new media’ will
have on coated paper consumption?
We have more and more evidence that coated paper will continue
to play an important role in communication, advertising and
promotion. Many of the 2010 festive season communication
programmes were launched in September magazines and
catalogues. Magazines such as Elle and Vogue achieved record
and near-record size issues. There is strong evidence that marketing
campaigns will integrate print not eliminate it from the media mix.
Print is recognised as a leading and trusted part of the mix.
Where will Sappi’s future growth come from?
Firstly, our European and Southern African businesses are not yet
achieving their full potential returns. In particular, we aim to achieve
returns of at least our cost of capital in Europe, our largest
business, which will allow the whole group to achieve more than
its cost of capital. As far as asset growth is concerned, that will
come from increased investment in chemical cellulose and pulp,
low cost plantation fi bre, some of our speciality businesses and
growth along the supply chain.
Viscose fi bre producers are our largest customers. Viscose fibres
either alone, or in blends with oil-based fibres are important in
the overall textile mix because they are absorbent and therefore
comfortable to wear. They are an excellent substitute for cotton,
which has long-term supply limitations. The growth in viscose and
similar cellulosic fi bres is expected to be signifi cantly faster than
the overall growth in textiles fi bres.
Your debt is declining in line with your target but your fi nance
costs remain a burden. What can you do about it?
Our net debt came down by US$355 million to close to
US$2.2 billion over the year and we repaid certain long-term debt
early. Out of prudence, we have continued to hold a higher than
historic cash balance, but with the improved performance of our
business and the greater stability of fi nancial markets, we aim to
gradually reduce cash on hand by repaying debt. This will contribute
to reducing our fi nance costs. We also aim to reduce our gearing
further to reduce the proportion of our profi t paid out to lenders.
Do you have any other comments?
Thank you. I think it is important to record that our people’s hard
work and persistence is paying off; we are seeing the benefi ts of
the actions we have taken over the past couple of years and it is
pleasing to note that we are going into the new year with a run rate
As our business grows, we foresee a decline in the relative
performance at close to our target of achieving returns of at least
proportion of fi ne paper, which currently represents 76% of our
our cost of capital. We are looking forward to improved returns and
sales and about 68% of EBITDA.
to growth.
10
Serious about sustainability
Sappi’s commitment to sustainability is intrinsic to the way we
manage our business. We recognise that sustainable profi tability
can only be achieved if we create value for current and future
stakeholders. As we have an impact on our people, on the
communities in which we operate and on the environment, it is
necessary for us to act in terms of our core values of Excellence,
Integrity and Respect in all interactions. We have a Sustainability
Charter in place, which sets out our commitments in relation to
Prosperity, People and Planet, and we integrate sustainability
objectives into our daily business.
As a responsible corporate citizen, we have a well-
established governance structure for sustainability,
which we continue to strengthen. In addition,
we use international, independently verifi ed
management systems throughout our
business to ensure best practices in
safety, quality, environmental protection,
forestry, lean manufacturing and
continuous improvement, as indicated
in the pages that follow.
G
ULPIN
P
Digester
Chipper
INPUTS
Energy
Chemicals
Water
Fibre
Wood fibre, logs, thinnings
and sawmill by-products for
integrated mills which do their
own pulping.
Bagasse (sugar cane waste
residue) – Stanger Mill (Triple
Green range and Masuga).
Recovered fibre
We are driving the use of
W
recovered fi bre throughout our
operations. The majority of our
products are recyclable.
Integrated mills
r
t e
+ W a
a l s
e m i c
y + C h
e r g
n
E
Lime mud
Lime mud, a
by-product of the
pulping process, is
used by farmers to
control soil pH.
Bleaching
plant
Recovery
boiler
Ash
The ash created by burning
bark, branches and other
biomass from trees in some
form of our mill boilers, can be
used as fertiliser and a soil
additive
solid waste
Lignosulphanate
A joint venture in South Africa and a wholly-
owned subsidiary in Europe produces
lignosulphanate which is based on the binding
agent of wood and is a co-product of pulp
production. Lignin-based products are used as
dispersing agents in concrete, textile dyes,
pesticides, ceramics and as binding agents in
briquetting, animal feed and dust suppression.
Tall oil
At some mills, tall oil from organic soaps is sold to a
convertor and used to make lubricants, detergents and
paint additives.
solid waste
Energy + Chemicals + Water
CO2
Our mills emit carbon dioxide (CO2),
one of the main greenhouse gases
(GHGs) responsible for global
warming. Globally our CO2 emissions
from fossil fuels have declined by
25% over the last five years.
Energy
Chemicals
Water
In integrated mills, 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 power which
is used in the mill.
Chemicals are
re-used wherever
possible, otherwise
they enter the
waste stream or
are beneficiated.
90% of water drawn is returned to
the environment and is treated
before it exits the process. Globally,
total suspended solids (TSS) and
chemical oxygen demand (COD)
– indicators of water quality
in effluent – show a declining trend.
OUTPUTS (Recycling)
Energy, chemicals and water are recycled throughout the process
Integrated and non-integrated mills
Screens
Papermaking
2010 annual report
11
Pulp
Waste fi bre
recycling
Energy + Che
micals + W
ater
PA
P
E
R
De-inking sludge
De-inking sludge,
containing ink and
varnishes, is used
as a fuel substitute.
M
A
KIN
G
A
N
D
F
I
N
I
S
H
I
N
G
Waste sludge
Waste sludge can be
combusted for heat gain
or used in applications
such as the manufacture
of bricks, cement or
household products
such as cat litter. Dried
residual sludge can also
be used as animal
bedding material.
Coating
and
calendaring
Coarse pigments
At some mills, coating colour
is also recovered from
effluent and reprocessed.
G
PIN
P
A
R
D W
N
G A
T I N
C U T
s
o
l
i
d
w
a
s
t
e
Solid waste – all mills
This shows our five top categories of waste.
Boiler ashes are the most significant waste
category, resulting from the use of coal.
Methane
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 we send 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). Since 2006, specific solid waste sent
to landfill has dropped by 4.6%.
Delivery
Our markets
See our markets on
pages 14 to 17
To mitigate our carbon footprint, we are increasingly moving
our product by rail rather than road.
collection
(for recycling)
de-inking
cleaning and
screening
recycled fibre
12
Serious about sustainability continued
Sustainable fi bre
Over 15 years, we have increased our fibre yield per
hectare of eucalyptus plantation in South Africa by 60%.
In collaboration with the University of Pretoria, Sappi’s
tree breeders at the Tweedie Research Centre developed
a reliable DNA fingerprinting tool to improve breeding
effi ciency in 2010.
Fibre base
Fibre is an important resource and we continue to invest in developing
our low cost fi bre base in South Africa by acquiring new land holdings,
rehabilitating areas lost to fire and improving fibre yield and
characteristics through world-leading tree breeding programmes.
In Europe and North America, fi bre is sourced from small and large
forest owners close to each operation, with whom we have long-
standing relationships. In these regions, we mitigate our fi bre supply
risk through a combination of approaches which include both short-
and long-term wood supply agreements and shareholdings in wood
sourcing co-operatives.
An important consideration on fi bre supply is the potential impact of
climate change on forests and wood plantations. In South Africa, we
mitigate the risk of drought and pest attacks through an intensive focus
on species and hybrid development that can be adapted to changing
climatic regimes. In addition, we conduct extensive research into pest
control and disease immunity. Our fi re prevention strategy is based on
community co-operation and fuel load management.
In North America, the climate change risk is not as immediate as it is in
Southern Africa and is more likely to affect us only in the medium- to
long-term.
Europe’s non-integrated mills which source fi bre from South America,
where conditions are similar to Southern Africa, could be affected by
climatic conditions in the medium-term.
Fibre certifi cation
We are advantaged by the nature of our major raw material, which
is renewable wood fi bre from sustainably managed forests and
plantations. Our operations are certified in accordance with
internationally-recognised, independent programmes, such as Forest
Stewardship Council (FSC), Programme for the Endorsement of Forest
Certifi cation (PEFC) and Sustainable Forestry Initiative (SFI®). Our
certifi cation assures stakeholders that we can trace fi bre from its
source to the end product. This gives our customers the assurance
that the pulp and paper products they buy from us originate from
plantations and forests that are managed in accordance with stringent
environmental and social practices.
In southern Africa, all our tree plantations are 100% FSC certifi ed and
82% of the fi bre used in operations in the reporting period was FSC
certifi ed. In Europe and North America, our total fi bre procured was
certifi ed to the level of 75.4% (PEFC and FSC) and 61% (SFI® and
FSC), respectively.
Not only is wood fi bre a renewable resource, it is recyclable and
biodegradable – attributes which give our products a competitive edge
in markets which are becoming increasingly environmentally aware.
Supporting local communities
Developing our people
Recognising that there is a direct link between our people and our
sustained business performance, we aim to develop our employees’
skills and abilities and provide them with opportunities to gain new
experiences. Global training spend in 2010 was US$9.8 million
(2009: US$9.1 million).
Many of our mills are located in non-urban areas. We draw our
workforce from local communities. Whenever possible, we employ the
services of small- and medium-sized enterprises situated in the areas
around our plantations and operations. Through our corporate social
responsibility (CSR) programme, we invest in the socio-economic
development of these communities. CSR spend in 2010 amounted to
US$2.1 million, or 3.2% of net profi t after tax.
2010 annual report
13
Energy
Between 2005 and 2010, the amount of specifi c (per ton
of pulp produced) energy we purchased for the mills in
operation in 2005 decreased by 33% and fossil-based
carbon dioxide emissions have reduced by 30% (20% and
24% when taking into account all the mills in operation in
2005 and all the mills in operation in 2010 respectively).
As paper and pulp production is highly energy intensive, the cost and
availability of competitive and environmentally-friendly energy sources
has both a fi nancial and reputational impact on Sappi. Our high use
of renewable energy (approximately 49% globally), derived from black
liquor, sludges and biomass gives us a major advantage over other
industrial companies. This results in high levels of energy self-suffi ciency,
lower levels of greenhouse gas emissions from fossil fuels and helps
cushion us from proposed carbon taxes or other limits on fossil fuel use.
As a result of reducing fossil base fuels, switching to combined heat
and power generation (CHP) plants in Europe, as well as increasing our
biomass co-generation, we have succeeded over the past fi ve years
in decreasing the amount of specifi c (per ton of pulp produced)
purchased energy and specifi c fossil-based carbon dioxide emissions.
We will continue to identify and evaluate renewable energy, co-
generation and biorefi ning opportunities.
Our sustainability report is available on our website, www.sappi.com
and on request in printed form.
The black liquor produced in Sappi’s integrated mills is renewable and is the
dominant fuel for Sappi’s operations (30.7%). ‘Own renewable fuel’ does
not fall within the EN-3 defi nition for direct fuel, but is included here for
its relevance to Sappi’s energy self-suffi ciency. As it is a biomass-derived
fuel, it promotes reduced consumption of fossil fuels resulting in a decrease
in greenhouse gas emissions. The next most dominant fuel is coal, used
extensively in southern Africa. The decreasing trend in coal use is due to
Gratkorn Mill which converted from coal to gas use.
The increase in purchased steam is due to its use in Biberist Mill which was
acquired by Sappi in 2009 as well as Cape Kraft Mill, which converted from
coal-fired boilers to purchased steam. The decrease in own renewable fuel
in 2010 was due to the closure of Usutu Mill, responsible for approximately
four million GJ/annum. The declining trend in purchased HFO is due to our
North American mills replacing HFO with purchased biomass. ‘Own
renewable fuel’ does not fall within the EN-3 definition for direct fuel, but is
included here for its relevance to Sappi’s sustainability. As this definition
includes biomass-derived fuel, it indicates the extent to which we are able to
generate our own fuel and hence reduce our consumption of fossil fuels.
The North American Book Drive
supported the cause for literacy
Education outreach from the Sappi KwaDukuza
Resource Centre in KwaZulu Natal
New to the job – apprentices in Europe
14
Our markets
Woodfree
paper made
from pulp
produced in
a chemical
process
Description and typical uses
Coated
Higher level of smoothness than uncoated paper achieved by applying a typically clay-
based coating on the surface of the paper. As a result, higher reprographic quality and
printability is achieved. Uses include marketing promotions and brochures, catalogues,
corporate communications materials, direct mail, textbooks and magazines.
Uncoated
Uses include business forms, business stationery, tissue and photocopy paper as well
as cut-size, preprint and offi ce paper. Certain brands are used for books, brochures
and magazines.
Speciality
Can be either coated or uncoated. Uses include bags, labels, fl exible and rigid packaging
and release paper for casting innovative surface textures (eg artifi cial leather, decorative
laminates) for use in the textile, automotive, furniture and engineering fi lm markets.
Mechanical
paper made
from pulp
produced in
a mechanical
process
Coated
A coated mechanical fi bre-based paper, primarily used for magazines, catalogues
and advertising material.
Uncoated
Mechanical fi bre-based printing paper used primarily for the printing of books,
and advertising inserts.
Newsprint
Uses include newspapers and advertising and inserts.
Packaging
products
Packaging paper
Heavy and lightweight grades of paper and board mainly used for primary and secondary
packaging of fast moving consumer goods, agricultural and industrial products. Products
include containerboard (corrugated shipping containers), sack kraft (multi-walled
shipping sacks) and machine glazed kraft (grocery bags). Can be coated to enhance
barrier and aesthetics properties.
key brands
Europe
2010 annual report
15
Our market in 2010
Demand trends
Demand is still recovering from the low levels
of 2009 (as the economy improves), although
at a slower pace than in the fi rst half of fi nancial
2010. Magazine advertising pages and
increased mailing of catalogues and direct mail
have helped the demand recovery.
Demand for coated woodfree paper is expected to continue
to grow on a global level, but the impact of electronic media
is likely to result in a gradual decline in paper consumption in
developed economies over the long-term. Advertising, retail
sales, and consumer demand for printed products are primary
drivers of demand.
After a slow start in the fi rst few months, the
uncoated market in Europe rebounded strongly
throughout 2010.
Over the last few years, strong demand in the cut-size
business has helped the uncoated offi ce markets. There is
a growing trend to print some brochures and magazines on
uncoated grades such as Tauro.
Strong recovery versus 2009 in the packaging
and labelling markets. The release market also
had a good recovery, particularly in terms of
Asian demand.
Flexible paper packaging driven by steady consumption
growth in the healthy food and drink markets. Paper-based
packaging is highly regarded as a sustainable solution.
Release paper demand is expected to grow along with
the textile and automotive industry, as well as in new and
innovative applications.
Share of sales
51%
7%
7%
Demand still below 2008 levels, but a strong
recovery from the low levels of 2009,
particularly in the second half of fi nancial 2010.
Magazines, one of the main end-uses related to this product
group, is doing marginally better than last year mainly due to
growing consumption in special interest magazines. As with
CWF, advertising expenditure is a key demand driver.
13%
The changing school curriculum in South Africa
is resulting in increased demand for book
printing grades.
As woodfree grades become more expensive, the demand
for improved newsprint and mechanical uncoated grades
increases.
Some recovery in demand in South Africa
for newsprint, but pagination is still low.
Demand is highly dependent on newspaper circulation
and retail advertising. Electronic media has led to newsprint
demand declines in most markets across the globe.
7%
After a weak start to 2010, global packaging
markets and our primary market in South Africa
started to recover as economic conditions
improved.
Packaging demand is driven by population growth, higher
standards of living, urbanisation and globalisation. Paper
packaging is seen as playing an increasingly important role
in an environmentally-conscious world.
North America
South Africa
16 Our markets continued
Pulp
Description and typical uses
Paper pulp
Main raw material used in production of printing, writing and packaging paper. Pulp is
the generic term that describes the cellulose fi bre derived from wood. These cellulose
fi bres may be separated by mechanical, thermo mechanical or chemical processes.
The chemical processes involve removing the glues (lignins) which bind the wood fi bres,
to leave cellulose fi bres. Paper made from chemical pulp is generally termed ‘woodfree’.
Uses include paper, paperboard and tissue.
Chemical cellulose
Manufactured by a similar process to paper grade pulp, but purifi ed further to leave
virtually pure cellulose fi bres. Chemical cellulose is used in the manufacture of a variety
of cellulose textile and non-woven fi bre products, including viscose staple fi bre (rayon),
solvent spun fi bre (lyocell) and fi lament. It is also used in various other cellulose-based
applications in the food, fi lm, cigarette, chemical and pharmaceutical industries. These
include the manufacture of acetate fl ake, microcrystalline cellulose, cellophane, ethers
and moulding powders. The various grades of chemical cellulose are manufactured in
accordance with the specifi c 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 with the purer grades of chemical cellulose generally supplied
into the speciality segments.
Timber
products
Sawn timber for construction and furniture manufacturing purposes.
Publications printed on coated fi ne paper continue to play an important role in communications, advertising
Publications printed on coated fi ne paper continue to play an important role in communications, advertising
and promotion
and promotion
Light and heavyweight paper and
board is widely used in packaging
for consumer goods
2010 annual report
17
Our market in 2010
Demand trends
Share of sales
The global pulp market was characterised by
increasing demand, rapidly increasing prices
and some supply shocks in 2010.
With gradually improving global demand for paper products,
demand for paper pulp is expected to continue to recover.
The global chemical cellulose market remained
strong throughout 2010 and demand in many
cases exceeded supply.
Chemical cellulose has a wide range of applications, demand
for many of which are expected to continue growing at good
rates. The textile uses in particular are predicted to show
increasing levels of growth as the growth in the supply of
cotton becomes increasingly constrained.
14%
The South African timber market was weak
in 2010 with lower demand and an excess
of supply.
As consumer and housing markets recover in South Africa,
demand for timber products is expected to recover.
1%
Our chemical cellulose business is well
placed as a result of the strong growth
in demand for viscose fi bres.
Viscose fashion garments are manufactured from textiles made
from chemical cellulose
18
Our leadership
Independent non-executive directors
Daniël (Danie)
Christiaan
Cronjé
Chairman
Professor
Meyer
Feldberg
Lead independent director
Daniël (Danie) Christiaan Cronjé
Age: 64
Qualifi cations: BCom (Hons), MCom, DCom
Nationality: South African
Appointed: January 2008
Sappi board committee memberships
Human resources and transformation
committee (Chairman)
Nomination and governance committee
(Chairman)
(Attends audit committee meetings and
compensation committee meetings ex offi cio)
Other board and organisation
memberships
Die Dagbreek Trust (Chairman)
Eqstra Holdings Limited (Chairman)
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 4 years and chairman for 10 years.
Prior to that Dr Cronjé was lecturer in Money
and Banking at Potchefstroom University.
Professor Meyer Feldberg
Age: 68
Qualifi cations: BA, MBA, PhD
Nationality: American
Appointed: March 2002
Sappi board committee memberships
Compensation committee (Chairman)
Nomination and governance committee
Other board and organisation
memberships include
British American Business Council (Advisory
Board member)
Columbia University Business School
Macy’s, Inc
Morgan Stanley (Senior Adviser)
New York City Ballet
New York City Global Partners (President)
PRIMEDIA, Inc
James (Jim)
Edward
Healey
Nkateko
(Peter)
Mageza
Deenadayalen
(Len) Konar
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 signifi cant
contribution to American life.
James (Jim) Edward Healey
Age: 69
Qualifi cations: BSc (Public Accounting), Honorary
Doctor (Commercial Science), Certifi ed Public
Accountant (USA)
Nationality: American
Appointed: July 2004
Sappi board committee memberships
Audit committee
Human resources and transformation
committee
Sappi Fine Paper North America audit
committee (Chairman)
Skills, expertise and experience
He has held various senior fi nancial 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 fi nancial offi cer of Nabisco Holdings
Inc, one of the world’s largest snack food
manufacturers, a position from which
he retired at the end of 2000.
Deenadayalen (Len) Konar
Age: 56
Qualifi cations: BCom, MAS, DCom, CA (SA)
Nationality: South African
Appointed: March 2002
Sappi board committee memberships
Audit committee (Chairman)
Nomination and governance committee
Human resources and transformation
committee
Other board and organisation
memberships include
Exxaro Resources Limited (Chairman)
Illovo Sugar Limited
Lonmin plc
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 and the SA Institute of Directors, past
member and chairman of the external audit
committee of the International Monetary Fund
and member of the Safeguards Panel and
Implementation Oversight Panel of the
World Bank (Co-Chairman).
Nkateko (Peter) Mageza
Age: 55
Qualifi cations: FCCA (UK)
Nationality: South African
Appointed: January 2010
Sappi board committee memberships
Audit committee
Human resources and transformation
committee
Other board and organisation
memberships
Bidvest Group Limited
Ethos Private Equity Fund
Rainbow Chickens Limited
Remgro Limited
MTN Group Limited
Skills, expertise and experience
Mr Peter Mageza joined the Sappi Board after
having held senior executive positions across a
wide range of industries. He is a former Group
Chief Operating Offi cer and Executive Director of
ABSA Group Limited, Assistant General Manager
at Nedcor Limited and Chief Executive Offi cer of
Autonet, the Road Passenger and Freight
Logistics Division of Transnet Limited.
2010 annual report
19
Independent non-executive directors continued
Helmut
Claus-Jurgen
Mamsch*
Karen Rohn
Osar
Sir Anthony
Nigel Russell
Rudd
John (Jock)
David
McKenzie
Bridgette
Radebe
Bridgette Radebe
Age: 50
Qualifi cations: BA (PolSc and Socio)
Nationality: South African
Appointed: May 2004
Helmut Claus-Jurgen Mamsch*
Age: 66
Nationality: German
Appointed: January 2004
Sappi board committee memberships
Audit committee
Compensation committee
Sappi Fine Paper Europe audit committee
(Chairman)
Other board and organisation
memberships
Anita-Thyssen-Stiftung
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, as 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. Until July 2010
he was non-executive Chairman of
Electrocomponents pls.
* Retiring at the end of December 2010.
John (Jock) David McKenzie
Age: 63
Qualifi cations: BSc Chemical Engineering
(cum laude), MA
Nationality: South African
Appointed: September 2007
Sappi board committee memberships
Compensation committee
Sustainability committee (Chairman)
Other board and organisation
directorships
Accelerate Cape Town (Chairman)
Coronation Fund Managers
University of Cape Town Foundation (Chairman)
WESGRO
Save the Children (Cape)
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 offi cer of the
Caltex Corporation. He was a Member of the
Singapore Economic Development Board from
2000 – 2003.
Karen Rohn Osar
Age: 61
Qualifi cations: MBA (Finance)
Nationality: American
Appointed: May 2007
Sappi board committee memberships
Audit committee
Other board and organisation
memberships
Innophos Holdings, Inc. (also Chairperson
of Audit Committee)
Reader’s Digest Association
Webster Financial Corporation
Skills, expertise and experience
Ms Osar was executive vice president and chief
fi nancial offi cer of specialty chemicals company
Chemtura Corporation until her retirement in
March 2007. Prior to that, she held various
senior management and board positions in her
career. She was vice president and treasurer for
Tenneco, Inc and also served as chief fi nancial
offi cer of Westvaco Corporation and as senior
vice president and chief fi nancial offi cer 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.
Sappi board committee memberships
Human resources and transformation
committee
Other board and organisation
memberships
Mmakau Mining (Pty) Ltd
(Executive Chairperson)
South African Mining Development Association
(President)
Mineral and Mining Development Board
(Former Vice Chairman)
New Africa Mining fund
(founder and Board Trustee)
Skills, expertise and experience
Ms Radebe was the fi rst 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.
Sir Anthony Nigel Russell Rudd
Age: 63
Qualifi cations: DL, Chartered Accountant
Nationality: British
Appointed: April 2006
Sappi board committee memberships
Compensation committee
Nomination and governance committee
Other board and organisation
memberships
BAA Limited (Chairman)
Invensys 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
Accountants. He is a Deputy Lieutenant of
Derbyshire and a Freeman of the City of London.
20 Our leadership continued
Non-executive directors
Executive directors
Mohammed
Valli (Valli)
Moosa
Rudolf
Thummer
Roeloff (Ralph)
Jacobus
Boëttger
Rudolf Thummer
Age: 63
Qualifi cations: Dr Techn, Dipl-Ing
Nationality: Austrian
Appointed: February 2010
Sappi board committee memberships
Sustainability committee
Skills, expertise and experience
Dr Thummer joined the Sappi Board 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 served
as Group Head Technology of Sappi Limited from
1 January 2006 up to his retirement at the end
of December 2007.
Mohammed Valli (Valli) Moosa
Age: 53
Qualifi cations: BSc (Mathematics)
Nationality: South African
Appointed: August 2010
Other board and organisation
memberships
Auditor General’s Advisory Committee
(South Africa)
Anglo Platinum Limited (deputy chairperson
and lead independent director)
Imperial Holdings Limited
Lereko Investment (Pty) Ltd and various
other associate companies of Lereko
Investment (Pty) Ltd
Real Africa Holdings Limited (Chairman)
Sanlam Limited
Sun International Limited (Chairman)
Skills, expertise and experience
Mr Moosa is currently the Deputy Chairman of
Lereko Investments (Pty) Ltd, Sappi’s Strategic
Black Economic Environmental Affairs and
Tourism, partner. He has held numerous
leadership positions across business,
Government, politics and civil society in South
Africa. To name but a few, he was South African
Minister of Environmental Affairs and Tourism,
the President of the IUCN (International Union
for the Conservation of Nature), Chairman of the
UN Commission for Sustainable Development,
and he was a long serving National Executive
Committee member of the African National
Congress (ANC).
Chief executive offi cer
Mark Richard
Thompson
Chief fi nancial offi cer
Roeloff (Ralph) Jacobus Boëttger
Age: 49
Qualifi cations: BAcc Hons, CA (SA)
Nationality: South African
Appointed: July 2007
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 offi cer of Safair and the next year
appointed to the executive committee of
Safmarine Limited. From 1998 until July 2007
he was with Imperial Holdings when Imperial
acquired 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 fi eld 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.
Mark Richard Thompson
Age: 58
Qualifi cations: BCom, BAcc, LLB, CA (SA)
Nationality: South African
Appointed: August 2006
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 prior
to that head of the corporate fi nance division
of Central Merchant Bank.
2010 annual report
21
Corporate and divisional management
Sappi Limited
Chief executive offi cer
*Ralph Boëttger (49) BAcc Hons, CA (SA)
Chief fi nancial offi cer
*Mark Thompson (58) BCom, BAcc, LLB, CA (SA)
Group fi nancial manager
John Shaw (34) BCom, PG Dip Man Acc, PG Dip Acc, CA (SA)
Group fi nancial controller
Laurence Newman (54) BCom, BAcc, CA (SA)
Group head internal audit
Roland Agar (46) BCom BAcc, CA (SA)
Group internal control and risk manager
Wouter van den Heever (47) BCom Hons, BCompt, MCom,
CA (SA), CPA
Group management accountant
Wikus van Zyl (42) BCom Hons, CA (SA)
Group tax manager
Bernd Ross (51) MS (Economics and Business Administration)
Group treasurer
Jörg Pässler (50) BCom Hons, MCom, HDip Tax, CAIB (SA)
Group head technology
*Andrea Rossi (56) BSc (Engineering) Hons, C Eng
Chief information offi cer
Bradley Coward (55) Grad Dip (Corporate Direction and
Business Management), Cert (Senior Management and
Leadership Development)
Group head strategic development
*Robert Hope (58) BA Hons (Economics), MRICS
Group investor relations manager
Graeme Wild (38) BSc (Forestry), MBA
Group head human resources
*Lucia Swartz (53) BA, Dip HR
Group head corporate affairs
André Oberholzer (44) BCom (Law)
Group head legal and sustainability
Ria Sanz (45) BCom, LLB, HDip Tax, Admitted Attorney
Group Secretary
Denis O’Connor (59) BA LLB
Sappi Fine Paper Europe
Chief executive offi cer
*Berry Wiersum (55) MA (Medieval and Modern History)
Chief fi nancial and IT offi cer
Glen Pearce (47) BCom Hons, CA (SA)
General counsel
Hannes Boner (47) lic iur, DHEE, Admitted Attorney
Human resources director
Rainer Neumann (48) MS (Administrative Sciences),
MS (Industrial Relations and HRM)
Manufacturing, research and development director
Mat Quaedvlieg (60) BS (Electronics)
Marketing and sales director
Marco Eikelenboom (43) MS (Economics and Business
Administration)
Supply chain, procurement and speciality paper director
Gregory Gettinger (48) PhD (Economics and Business
Administration)
Sappi Fine Paper North America
President and chief executive offi cer
*Mark Gardner (55) BSc (Industrial Technology)
Vice president and chief fi nancial offi cer
Annette Luchene (48) BS (Accounting), MBA
Executive vice president strategic marketing
and chief sustainability offi cer
Jennifer Miller (55) BA (Economics), Juris Doctor
Vice president corporate development and
chief information offi cer
Anne Ayer (45) BA (Psychology), MBA
Vice president human resources and general counsel
Sarah Manchester (45) BA (History), Juris Doctor
Vice president manufacturing
John Donahue (55), BS (Chemical Engineering)
Vice president release and technical specialties businesses
Bob Weeden (59) BS (Chemistry), MS (Management)
Vice president sales
Bob Forsberg (48) BA (Economics and Art History)
Vice president supply chain
Randy Rotermund (48) BS, Imaging Technology, MBA
Sappi Southern Africa
Chief executive offi cer
*Alex Thiel (49) BSc (Mechanical Engineering), MBA (Financial
Management and IT)***
Finance director
Colin Mowatt (53) BCom Acc, CA (SA), EDP, MBL
Human resources director
Esther Letlape (43) BAdmin Hons (Industrial Psychology)
Information technology director
Deon van Aarde (50) BCompt
Technical director
Bertus van der Merwe (57) BSc, MBA, HDip (Engineering)
Regional procurement director
Nat Maelane (51) MDP, SEP
Strategy and business development director
Tyrone Hawkes (43) BCom Hons, CA (SA)
Sappi Chemical Cellulose
Managing director
Alan Tubb (60) BSc (Electrical Engineering), GCC (Mines and
Works), BCom**
Sappi Forests
Managing director
Hendrik de Jongh (55), NDip (Elec), GCC (Elec), MDP
Sappi Paper and Paper Packaging
Marketing executive director
Dinga Mncube (50) Dip (Forestry), BSc (Forest Management),
MSc (Forest Products), Dip (Business Management), MCom
Manufacturing director
Pat McGrady (53), BSc (Electrical Engineering), GCC
(Factories), EDP
Sappi Trading
Chief executive offi cer
Wayne Rau (48) HND (Marketing), Senior Executive Programme
Financial director
Henri Kirsten (57) BCom, BCompt Hons, CA (SA)
* Group executive committee.
** On 01 January 2011 Gary Bowles (50) BSc (Electrical Engineering), GCC (Electrical), Global Executive Development Programme, Production Management Diploma,
will replace Alan Tubb who will be retiring at the end December 2010.
*** Appointed on 01 December 2010.
22
Review of operations
Sappi Fine Paper
Quality control is an ongoing commitment in producing our products
Review of operations
Sappi Fine Paper
2010 annual report
23
Printed communication remains effective, cost-effi cient and powerful in delivering messages to and eliciting
actions from target audiences. Printers use Sappi’s coated graphics papers because of its quality and the technical
support that we provide. Publishers, advertising agencies, designers and corporate end-users rely on Sappi’s
innovations, sustainable practices and quality products when choosing paper for calendars, catalogues, brochures,
books, premium magazines, direct mailings and annual reports. Suppliers, converters and end-use customers also
rely on our coated and uncoated speciality paper, such as paper used in fl exible packaging, and casting release
paper, used in the manufacture of synthetic leather and decorative laminate products. Our range of uncoated
graphic and business papers, our technical support services and research and development facilities, as well as
our close interaction with our customers across the globe, ensure that we help these customers thrive in their
businesses.
Sappi Fine Paper is approximately 68% integrated in terms of pulp supply. On a regional basis, we purchase
approximately half of our pulp requirements in Europe and are net sellers of pulp in North America.
Divisions
Mills
Products produced
Capacity (’000 tons)
Paper
Pulp
Employees*
Sappi
Fine Paper
North
America
Cloquet Mill
Bleached chemical pulp for own consumption and market pulp
Coated woodfree paper
Somerset Mill
Bleached chemical pulp for own consumption and market pulp
Coated woodfree paper
Westbrook Mill
Coated speciality paper
Total Sappi Fine Paper North America
Alfeld Mill
Bleached chemical pulp for own consumption
Coated woodfree paper, coated and uncoated speciality paper
Biberist Mill
Coated woodfree paper, uncoated woodfree paper
Ehingen Mill
Bleached chemical pulp for own consumption and market pulp
Coated woodfree paper
Gratkorn Mill
Bleached chemical pulp for own consumption
Coated woodfree paper
Kirkniemi Mill
Bleached mechanical pulp for own consumption
Coated mechanical paper
Sappi
Fine Paper
Europe
Lanaken Mill
Bleached chemi-thermo mechanical pulp for own consumption
Coated mechanical paper
Maastricht Mill
Coated woodfree paper
Nijmegen Mill
Coated woodfree paper
Stockstadt Mill
Bleached chemical pulp for own consumption and market pulp
Coated woodfree paper, uncoated woodfree paper
Total Sappi Fine Paper Europe
Total Sappi Fine Paper
* Rounded to nearest 10 and excludes corporate head offi ce employees.
2,250
455
490
945
125
135
255
330
180
150
1,175
2,120
6,660
8,910
330
795
35
1,160
330
500
250
950
730
500
280
240
430
4,210
5,370
24
Sappi Fine Paper continued
* Where the product is manufactured.
Europe
Our primary objective was to return the business to profi tability.
Achieving the target level of synergies related to the acquisition
of M-real’s coated graphic paper business at the end of 2008
was an important element in this. We achieved our target level of
EUR120 million of synergies during the year, well ahead of the
target date. The synergies achieved include procurement benefi ts,
sales and administration cost reductions, asset optimisation
(including the benefi ts of acquiring order books), product recipe
changes and manufacturing effi ciency. Despite these achievements
and the signifi cant improvement in the business’ performance, we
have not yet delivered acceptable profi tability or returns from the
business.
In response to continued weak demand for coated mechanical
paper, we undertook further restructuring during the year, closing
the 210,000 ton per annum Kangas Mill in Finland.
We are currently implementing our innovative service offering
which will allow customers to select the combination of
service value level most appropriate to their requirements. The
implementation follows extensive interaction with our customers
and application of lessons learnt in the turnaround of our North
American business. Our goal is to fi nd further ways to improve our
and our customer’s profi tability.
We anticipate having to comply with lower carbon emissions
targets over the next few years. We are currently engaged, as part
of an industry-wide effort, in trying to ensure that the advantages
of the forest products industry and its effi cient multi-purpose
renewable resource base are recognised by legislators and that we
are not adversely impacted by irrational preferences given to
wasteful use of forest resources as fuel alone.
The European Commission imposed provisional anti-dumping
duties with respect to imports of coated woodfree paper from
China with effect from 18 November 2010. The duties range from
19.7% to 39.1% and will help to re-establish a level playing fi eld in
European markets.
2010 annual report
25
Source: EMGE, September 2010
Source: EMGE, September 2010
North America
The business continued the turnaround achieved in the second half
of 2009 and delivered a good operating performance for the year.
The business benefi ted from rising pulp prices and higher pulp
production in the year, up 9% on 2009.
The business’ integrated approach in identifying and meeting
customer’s needs, optimising product design, driving procurement
and operational effi ciencies continued to contribute to improved
margins for the business. We reduced fi xed costs further during
the year both in absolute, and in per unit terms.
The speciality business (casting release paper for textured surfaces)
had strong demand for its products, particularly from Asia. The
business pioneered a new process, which eliminates six steps in
the production of fl ooring laminates, with a major European
fl ooring producer.
In the latter part of the year, we reduced sales of pulp in preparation
for the Somerset pulp mill outage which started on 01 October
2010. During the outage, the mill’s recovery boiler was extensively
upgraded to further reduce energy costs and the mill’s reliance on
fossil fuels (see case study below).
The availability of alternative fuel tax credits ended on
31 December 2009. During the 2010 fi nancial year, we realised
approximately US$50 million of credits, which were reported as
special items, and received US$74 million of cash in connection
with such credits.
During October 2010, the US International Trade Commission
imposed anti-dumping and countervailing duties on imported
coated sheet paper from Indonesia and China. The duties which
range from 27.1% to 338.7% are expected to re-establish a level
playing fi eld in the US.
Going forward
We expect a further gradual improvement in demand for coated
paper in our major markets. The supply/demand balance is
therefore also expected to improve further in those markets;
however, the balance in some of our export markets is likely to be
impacted by signifi cant new capacity being built in China.
Our businesses continue to explore opportunities to enhance
performance including through innovation, rationalisation or
consolidation and most particularly by working more closely with
customers. We continue to expect signifi cant further consolidation
of the industry.
26
Review of operations
Sappi Southern Africa
Sappi Saiccor Mill produces 800,000tpa of chemical cellulose
2010 annual report
27
Review of operations
Sappi Southern Africa
Sappi was formed in South Africa in 1936 to serve South African consumers with locally produced papers. Sappi
Paper and Paper Packaging continues this tradition by innovating and developing new products to meet local
demand for newsprint, coated and uncoated fi ne papers, offi ce and business papers (stationery, printing and
photocopying), security and speciality papers (passports and election ballot papers), containerboard (eg cardboard
boxes used for exporting fruit) and packaging paper (eg bags for cement, dog food, potatoes and shopping bags).
Bleached paper-pulp is sold on the South African and global paper markets.
Chemical cellulose, a product made from the wood from our plantations, is sold to converters for use in a wide range
of consumer products, such as fashion clothing, cellular phone screens, cellophane wrap for sweets and fl owers,
pharmaceutical and household products and make-up, like lipstick. We are the world’s largest manufacturer of
chemical cellulose and we export almost all of the product that is produced at Sappi Saiccor Mill, KwaZulu Natal.
Sappi Forests supplies 70% of the wood requirements of Sappi Southern Africa from both our own and managed
commercial timber plantations of 555,000 hectares, currently with more than 35 million tons of standing timber. All
wood grown on Sappi owned land is Forest Stewardship Council (FSC©) and ISO 9000 certifi ed. Approximately
150,000 hectares of our plantation land is protected and managed by Sappi Forests to conserve the natural habitat
and biodiversity found there, including indigenous forests and wetlands.
Sappi Southern Africa is a net seller of pulp that effectively hedges pulp purchases by our European business.
Divisions
Plantations
Products produced
Hectares
m3
Employees*
Capacity (’000s)
Sappi
Forests
KwaZulu Natal
Plantations (pulpwood and sawlogs)***
Mpumalanga
Plantations (pulpwood and sawlogs)
Swaziland
Sawmills
Plantations (pulpwood)
Sawn timber (m3)
Total Sappi Forests
Divisions
Mills/Operations
Products produced
231
258
66
555
85
85
1,150
Capacity (’000s)
Paper
Pulp
Employees*
Sappi
Chemical
Cellulose
Saiccor Mill
Chemical cellulose
800
1,220
Adamas Mill
Uncoated woodfree paper (specialities)
Cape Kraft Mill
Waste based linerboard and corrugating medium
Enstra Mill
Bleached chemical pulp for own consumption
Uncoated woodfree and business paper
Ngodwana Mill
Unbleached kraft pulp for own consumption, bleached chemical
pulp for own consumption and market pulp
Sappi Paper
and Paper
Packaging
Mechanical pulp for own consumption
Kraft and white top linerboard
Newsprint
Stanger Mill
Bleached bagasse pulp for own consumption
Coated woodfree paper and tissue paper
Tugela Mill
Unbleached kraft and semi-chemical pulp for own consumption
Kraft linerboard and corrugating medium
Other kraft packaging paper
40
60
200
240
140
110
300
90
105
410
100
60
350
Sappi ReFibre**
Waste paper collection and recycling for own consumption
Total Sappi Paper and Paper Packaging
Total Sappi Southern Africa
1,180
1,180
200
1,225
2,025
4,080
6,450
* Rounded to nearest 10 and excludes corporate head offi ce.
** Sappi ReFibre collects waste paper in the SA market which is used to produce packaging paper.
*** Plantations include title deed and lease area as well as projects.
28
Sappi Southern Africa continued
Access to low cost plantation fi bre is a core element of the group’s
strategy. We have made good progress with rehabilitating the
plantations lost to fi re in 2007 and 2008. We planted 26,000
hectares during the year of which 6,000 hectares related to
rehabilitation, including our plantations in Swaziland.
We acquired 14,500 hectares of developed plantations close to
our Ngodwana Mill during the year and continue to work with
communities and governments in southern Africa to achieve
further afforestation.
Our research into improving our plantation genetics, not only for
overall yield but to achieve specific properties, continues to
progress, assisted by our involvement in the sequencing of the
eucalyptus genome.
Saiccor Mill continued to ramp-up production after its major
expansion and achieved a good level of effi ciency and consistency
in the latter part of the year. The improved consistency resulted in
reduced variable costs as the year progressed, particularly in
respect of energy costs.
The paper and paper packaging paper mills had mixed
performances with signifi cant opportunity for improvement. We
reorganised the combined business to ensure a more effective
interface with our customers, many of whom buy a wide-range
of different products from us. We also increased the focus
on manufacturing, including the appointment of a head of
manufacturing, for the business, which will assist with the sharing
of best practices, implementation of continuous improvement
techniques and improved procurement.
The Usutu Pulp Mill was permanently closed in January 2010. We
are investing in the rehabilitation of the Usutu plantations which
were extensively damaged by fi res in 2007 and 2008. We believe
that the Usutu plantations are among the best tree growing sites
in southern Africa.
During the year, we entered into an agreement to supply renewable
energy to the power utility Eskom, from Saiccor Mill. We are also
in discussions to sell the additional power that we are able to
generate from our Ngodwana Mill. We will continue to explore the
feasibility of further investment to increase our power of self-
suffi ciency and reduce our energy costs.
We launched the “I Choose Paper” campaign during the year to
inform our stakeholders about the advantages of choosing our
products manufactured from renewable, sustainable resources.
The campaign has generated signifi cant interest.
Going forward
Markets for chemical cellulose are currently strong and expected
to remain strong for the year ahead. Although we sell mainly on
contracted terms, spot prices are currently at record highs with no
sign of abatement.
Demand in our southern African markets is expected to continue
its gradual improvement. The exchange rate of the Rand to the
US Dollar will have an impact on the performance of the business
with a direct impact on export revenues and an indirect impact on
the domestic sales levels and prices. A strengthening Rand would
be unfavourable for the performance of the southern African
business.
We expect the benefi t of our reorganisation of the paper and
packaging paper business to improve performance during the year
as a result of improved customer focus and improving effi ciencies.
Paper plays a key role in promoting
literacy throughout the developing world
and many researchers contend that
printed materials are more conducive
to an in-depth reading experience than
electronic media.
2010 annual report
29
Chemical cellulose manufactured at Sappi Saiccor Mill is exported worldwide
30 Chief fi nancial offi cer’s report
Sappi group review
Section 1
Mark Richard Thompson
Chief fi nancial offi cer
On the opposite pages of this report we explain the business and operating performance
of each of the geographic components of the group in more detail – this is important for
a better understanding of the results of the group as a whole.
Our operating performance
For the year ended September 2010, our operating performance improved substantially compared to
fi scal 2009 but did not reach the levels achieved in fi scal 2008, nor our target Return on Capital Employed
(ROCE).
We are of the opinion that operating profi t excluding special items is a good indication of underlying
operating performance as it excludes what we believe are items that are unusual, non-recurring and/or
uncontrollable and are outside our ordinary day-to-day operations – special items are explained in section 2
later on in this report.
Operating profi t excluding special items for the past three years was as follows:
Fiscal year: 2010
US$339 million
2009
2008
US$33 million
US$366 million
To achieve our target of a ROCE of at least 12%, operating profi t excluding special items needs to improve
to approximately US$500 million and we hope to get much closer to that target in fi scal 2011. It is
encouraging to note that in the fi nal quarter of 2010, the group achieved its highest quarterly operating
profi t excluding special items (of US$129 million) for many years which, on an annualised basis, equates
to a ROCE in excess of 12%.
The two main reasons for the improved operating performance in 2010 are:
the better demand for our products in all our major markets compared to the very low levels seen
in 2009 following the global economic crisis, resulting in sales volumes increasing by 18%
compared to 2009; and
the improvement in operating margin (operating profi t excluding special items to sales) from 0,6%
in 2009 to 5,2% in 2010.
continues on page 32
Regional operating review
Sappi Fine Paper Europe
Business summary
Our European business consists of nine mills in six countries with an annual capacity to produce:
Coated Woodfree paper
Uncoated Woodfree paper
Coated Mechanical paper
Speciality paper
Total paper
Pulp
Total capacity
2010 annual report
31
Metric tons
’000
2,600
280
1,230
100
4,210
1,175
5,385
More on our mills, their capacities and products are given on page 23 of this annual report.
In 2010, the business consumed approximately 2.1 million tons of pulp in the production of its paper products – of this,
it produced approximately 0.9 million tons and purchased approximately 1.2 million tons.
In Europe, we have a market share of about 30% in coated woodfree paper, and 14% in coated mechanical paper.
Operating performance
Operating profi t excluding special items
Volume (metric tons ’000)
Sales
Variable manufacturing and delivery costs
Contribution
Fixed costs
Sundry income (costs) and consolidation entries
Operating profi t (loss) excluding special items
2010
3,796
2009
2,956
EUR million
EUR per metric ton
2010
2009
2010
2009
2,664
(1,822)
842
(847)
61
56
2,120
(1,330)
790
(771)
(10)
9
702
(480)
222
(223)
16
15
717
(450)
267
(261)
(3)
3
The improved market conditions resulted in an increase in utilisation of our production capacity from 67% in fi scal 2009
to 89% in fi scal 2010. Sales volumes were 28% higher than in fi scal 2009, which included only nine months of the coated
paper business acquired from M-real in January 2009. Excluding the sales volume of the acquired business, sales volume
for fi scal 2010 increased by 20% compared to fi scal 2009.
Despite the improvement in market conditions, average selling prices realised during fi scal 2010 were lower than those
achieved in fi scal 2009. Average realised prices in Euro terms decreased from EUR717 per ton in fi scal 2009 to EUR702
per ton in fi scal 2010. Selling prices started rising in the last six months of the fi scal 2010 year. Our average selling price
in Euro terms for the last quarter of fi scal 2010 was EUR753 per ton compared to an average selling price of EUR677
per ton achieved in the last quarter of fi scal 2009.
continues on page 33
32
Chief fi nancial offi cer’s report continued
Sappi group review continued
Section 1
Change in Segment reporting
During the year we adopted IFRS 8 Operating Segments which requires that fi nancial
and descriptive information about the components of the business is reported on the
basis that this information is regularly evaluated by the chief operating decision maker
in deciding how to allocate resources and evaluate performance. In addition to adopting
IFRS 8, we have changed our reporting structure to a predominantly geographic basis
as indicated below:
Previously
Sappi Fine Paper Europe
Sappi Fine Paper North America
Sappi Fine Paper South Africa
Sappi Fine Paper
Forest Products
Sappi Group
Now
Sappi Fine Paper Europe
Sappi Fine Paper North America
Sappi Fine Paper
Sappi Southern Africa
Sappi Group
The change is that Sappi Fine Paper South Africa now reports as a part of the re-named Sappi
Southern Africa division and not as part of Sappi Fine Paper.
This change has not had an impact on the group’s overall results or fi nancial position.
Other important features of our results
In addition to the improved operating results, other important features of fi scal 2010 are:
Special items, discussed in section 2 of this report, which overall had a small US$2 million positive
effect on our operating profi t this year but had a large US$106 million negative effect in 2009;
our higher fi nance costs in 2010 following our re-fi nancing towards the end of fi scal 2009 – discussed
in section 2 of this report;
the strong net cash generated in 2010 of US$341 million – discussed in section 3 of this report;
the reduction of net debt by a further US$355 million in 2010 to US$2,221 million, thereby making
good progress towards our target to reduce net debt to below US$2.0 billion by 2012 – discussed in
section 4 of this report; and
our strong liquidity position with cash-on-hand of US$792 million at the year end – discussed in
section 4 of this report.
At the net profi t level we earned a rather modest US$66 million, but this was a signifi cant improvement
on the net loss of US$177 million in 2009.
These and other matters are discussed in more detail later on in this report.
Contents
This report reviews the major elements of our:
Section 2
Section 3
Section 4
and discusses our:
Section 5
Section 6
Income statement
Cash fl ow
Balance sheet
Credit rating, and
Share listing and share price performance
Page 34
Page 48
Page 49
Page 54
Page 55
continues on page 34
2010 annual report
33
Regional operating review continued
Sappi Fine Paper Europe continued
Variable and delivery costs
Variable manufacturing costs:
Wood
Energy
Pulp
Chemicals
Other
Delivery costs
Total
EUR million
EUR per metric ton
2010
2009
2010
2009
179
262
559
469
143
210
136
250
301
369
116
158
47
69
147
124
38
55
46
85
102
125
39
53
1,822
1,330
480
450
We experienced signifi cant input cost pressure during the year. During fi scal 2010, our European business purchased
in the open market approximately 57% of the pulp required for its paper production. Variable manufacturing cost per
ton increased by 7% compared to fi scal 2009, due mainly to a 44% increase in pulp costs per ton. This increase was
offset to some extent by a decrease in purchased energy prices.
Fixed costs
EUR million
Personnel
Maintenance
Depreciation
Services and administration
Total
2010
2009
460
88
168
131
847
418
82
153
118
771
Fixed costs increased by EUR76 million or 10% in fi scal 2010 compared to fi scal 2009. The major reason for this increase
was the inclusion of the acquired business for 12 months in the fi scal 2010 year compared to 9 months in 2009. Excluding
the acquired business, fi xed costs increased by EUR26 million or 4% in fi scal 2010 compared to fi scal 2009, mainly due
to increased personnel and maintenance costs.
Sundry income of EUR61 million for fi scal 2010 included income from carbon emission trading, a positive inventory
revaluation, intra-group insurance transfers in respect of the fi re at Stockstadt Mill, and sales of by-products and services
to third parties.
continues on page 35
34
Chief fi nancial offi cer’s report continued
Sappi group review continued
Section 2
Income statement
Our group fi nancial results can be summarised as follows:
Sales volume (metric tons ’000)
7,894
18
6,707
US$ million
US$ million
%
2010
Change
2009
Sales revenue
Variable manufacturing and delivery costs
Contribution
Fixed costs
Sundry income (loss)*
Operating profi t excluding special items
Special items
Operating profi t (loss)
Finance costs
Profi t (Loss) before tax
Taxation
Net profi t (loss)
Basic earnings (loss) per share (US cents)
6,572
(4,117)
2,455
(2,164)
48
339
2
341
(255)
86
(20)
66
13
22
24
20
10
927
76
5,369
(3,322)
2,047
(1,970)
(44)
33
(106)
(73)
(145)
(218)
41
(177)
(37)
* Sundry income (loss) consists mainly of inventory revaluation, plantation fair value volume adjustments and external debtors
securitisation costs.
Sales volume
In 2010, sales volume increased by 1.2 million tons to 7.9 million tons or 18% compared to 2009. The
regional contri bu tions to sales volumes in 2010 and 2009 are shown below:
Sales volume
Metric tons ’000
Europe
North America
Southern Africa
Sappi group
2010
3,796
1,354
2,744
7,894
%
Change
28
6
11
18
2009
2,956
1,274
2,477
6,707
Demand for our products in all regions improved, leading to the 18% sales volume improvement
compared to the depressed levels of 2009. Capacity utilisations improved in all regions as shown in the
table below. As a group we took about 1.1 million tons of commercial downtime in 2009 compared to
approximately 200,000 tons in 2010, most of this in Europe.
Sales volume to capacity
Percentage
Europe
North America
Sappi Southern Africa*
Sappi group
* Pulp and paper operations only – Forestry not included.
2010
2009
89
93
88
90
67
83
84
74
continues on page 36
2010 annual report
35
Regional operating review continued
Sappi Fine Paper North America
Business summary
Sappi Fine Paper North America owns and operates 3 mills located in the United States which have an annual capacity of:
Coated woodfree paper
Coated speciality paper
Total paper
Pulp
Total capacity
In approximate terms, the pulp balance of the business is as follows:
Own pulp production
Pulp purchases
Pulp sales
Pulp consumption
Metric tons
’000
1,125
35
1,160
945
2,105
Metric tons
’000
932
151
(292)
791
Our market share of the North American coated woodfree paper market is currently approximately 25%.
Operating performance
Operating profi t excluding special items
Volume (metric tons ’000)
Sales
Variable manufacturing and delivery costs
Contribution
Fixed costs
Sundry income (costs) and consolidation entries
Operating profi t (loss) excluding special items
2010
1,354
2009
1,274
US$ million
US$ per metric ton
2010
1,373
(827)
546
(461)
39
124
2009
1,295
(812)
483
(475)
(10)
(2)
2010
1,014
(611)
403
(340)
29
92
2009
1,016
(637)
379
(373)
(8)
(2)
Our North American business delivered an outstanding performance in fi scal 2010 as improved market conditions and
business initiatives combined to result in a return on net operating assets of 12.9% and an operating profi t margin of 9%
for the year.
Demand for coated woodfree products and market pulp improved and prices realised on pulp sales were better than
in 2009.
continues on page 37
36
Chief fi nancial offi cer’s report continued
Sappi group review continued
Section 2
Exchange rates and their impact on the group’s results
The group reports its results in US Dollars and the main exchange rates used in preparing the
fi nancial statements are:
Income statement
average rates
Balance sheet
closing rates
2010
2009
2010
2009
Euro (EUR) = US Dollar (US$)
US Dollar (US$) = Rand (ZAR)
1.3658
7.4917
1.3657
9.0135
1.3491
7.0190
1.4688
7.4112
Two of our three geographic business units (Europe and Southern Africa) have home or functional
currencies other than US Dollars (our reporting currency). The revenue and cost items of the two non-
US Dollar units 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 group revenue and costs in US Dollars can be large, but largely offset one another
at the net level (when netting costs against revenue).
For this reason we isolate the exchange rate impact on revenue and costs by showing the
regional revenue and cost items at 2009 exchange rates – we believe this facilitates a better
understanding of the underlying movements in revenue and costs in the European and Southern
African business.
Compared to fi scal 2009, exchange rates increased Sales by US$263 million but this was largely
offset by the negative impact on variable and delivery costs of US$153 million and on fi xed costs
of US$98 million.
Sales revenue
Sales revenue increased by 22% or US$1.2 billion compared to 2009. This was due to the additional
1.2 million tons sold at the average price per ton of US$799 realised in local currencies in 2010 and
an exchange rate benefi t of US$263 million arising when translating the sales of our European and
Southern African businesses into the weaker US Dollar in 2010.
Sales revenue by region
US$ million
Europe
North America
Southern Africa
Group at 2009 exchange rates
Exchange rate impact
Group as reported
2010
3,638
1,373
1,298
6,309
263
6,572
%
Change
26
6
10
18
22
2009
2,895
1,295
1,179
5,369
–
5,369
As shown in the table below, at constant exchange rates the average selling price per ton for the group’s
products of US$799 was very similar to 2009 (US$801 per ton). Prices per ton in Europe were 2% lower
than in 2009 and, in Southern Africa, 4% higher than in 2009. In North America, price per ton was almost
the same as in 2009.
continues on page 38
2010 annual report
37
Regional operating review continued
Sappi Fine Paper North America continued
Sales volume increased by 6% year-on-year. The operations of the Muskegon Mill ceased six months into fi scal 2009.
Excluding these volumes in 2009, the increase was 11%. Capacity utilisation improved from 83% in 2009 to 93% in 2010.
The average selling prices realised in fi scal 2010 of US$1,014 per ton were marginally lower than the US$1,016 per ton
realised in fi scal 2009. Although average selling prices for paper products were slightly lower than 2009, we saw an
improving trend in pricing towards the end of the year in-line with the improving market. The lower average paper prices
were offset by a signifi cant rise in the average pulp selling price.
Overall sales increased by 6% to US$1,373 million.
Variable and delivery costs
Variable manufacturing costs:
Wood
Energy
Pulp
Chemicals
Other
Delivery costs
Total
US$ million
US$ per metric ton
2010
2009
2010
2009
183
93
89
230
104
128
827
194
115
49
223
108
123
812
135
69
66
170
76
95
152
90
38
175
85
97
611
637
Variable manufacturing costs per ton of US$611 decreased by 4% compared to fi scal 2009 due to a decrease in the price
of wood, energy and chemicals, partially offset by an increase in purchased pulp.
Fixed costs
US$ million
Personnel
Maintenance
Depreciation
Services and administration
Total
2010
2009
247
62
77
75
461
243
60
90
82
475
Fixed costs decreased in 2010 compared to 2009 due to a decrease in depreciation and the benefi ts of ongoing cost
reduction efforts in services and administration, offset by small increases in personnel and maintenance costs.
Sundry income in fi scal 2010 included a positive inventory revaluation and electricity sales.
continues on page 39
38
Chief fi nancial offi cer’s report continued
Sappi group review continued
Section 2
The exchange rate impact of US$34 per ton increased the overall price per ton realised in 2010 by 4% to
US$833 per ton.
Selling price per ton
US$ per ton
Europe
North America
Southern Africa*
Group at 2009 exchange rates
Exchange rate impact
Group as reported
2010
959
1,014
706
799
34
833
%
Change
(2)
–
4
–
4
2009
979
1,016
677
801
–
801
* Pulp and paper operations only – Forestry sales not included.
Variable and delivery costs
Compared to 2009, variable manufacturing and delivery costs increased by 24% or US$794 million
to US$4.1 billion. This was caused by the higher volumes in 2010, a 1% increase in variable costs per
ton in local currency and the US$153 million negative impact of translating the variable costs in Europe
and Southern Africa into US Dollars. More details about our variable and delivery costs by region and
for the group are shown in the tables below:
Variable and delivery costs by region
US$ million
Europe
North America
Southern Africa
Inter-company eliminations
Group at 2009 exchange rates
Exchange rate impact
Group as reported
Variable and delivery costs per ton
US$ per ton
Europe
North America
Southern Africa*
Group at 2009 exchange rates
Exchange rate impact
Group as reported
* Pulp and paper operations only – Forestry costs not included.
2010
2,488
827
753
(104)
3,964
153
4,117
2010
656
611
274
502
20
522
%
Change
37
2
1
19
24
%
Change
7
(4)
(9)
1
5
2009
1,816
812
748
(54)
3,323
–
3,323
2009
615
637
302
495
–
495
continues on page 40
Regional operating review continued
Sappi Southern Africa
Business summary
The annual capacities and products of the seven mills in our Southern African business are:
Coated woodfree paper
Uncoated woodfree paper
Speciality paper
Packaging paper
Newsprint
Tissue paper
Total paper and packaging capacity
Paper pulp
Chemical cellulose pulp
Total capacity
2010 annual report
39
Metric tons
’000
80
200
40
690
140
30
1,180
1,225
800
3,205
In addition, the business owns, leases or otherwise controls 555,000 hectares of land of which approximately 402,000
hectares is plantable with timber. This resource provides about 70% of the fi bre requirements of the business.
The paper and paper packaging products produced by our Southern African business are largely sold regionally, where
we have strong market positions in most of these products.
The business produces 1.2 million tons of paper pulp – some of this is sold and more-or-less an equivalent quantity is
purchased. Thus, on a net basis, we are approximately self suffi cient for our paper pulp requirements in Southern Africa.
The 800,000 tons of chemical cellulose is almost exclusively exported to customers in Asia, Europe and North America.
Operating performance
Operating profi t excluding special items
Volume (metric tons ’000)
Sales
Variable manufacturing and delivery costs
Contribution
Fixed costs
Sundry income (costs) and consolidation entries
Operating profi t (loss) excluding special items
2010
2,744
2009
2,477
ZAR million
ZAR per metric ton
2010
2009
2010
2009
11,695
(6,786)
4,909
(4,324)
419
1,004
10,627
(6,745)
3,882
(4,168)
439
153
4,262
(2,473)
1,789
(1,576)
153
366
4,290
(2,723)
1,567
(1,683)
178
62
As with our other businesses, the Southern African business experienced a recovery in demand for all major products
during fi scal 2010 after the severe decline in fi scal 2009.
continues on page 41
40
Chief fi nancial offi cer’s report continued
Sappi group review continued
Section 2
Variable and delivery costs
US$ million
Variable manufacturing costs:
Wood
Energy
Pulp
Chemicals
Other
Delivery costs
Total
Fixed costs
2010
2009
706
626
929
1,050
259
547
4,117
663
584
543
868
210
454
3,322
Fixed costs increased by US$194 million (10%) to US$2.2 billion in 2010 mainly due to the negative
impact of exchange rates (US$98 million) and the effect of having the additional fi xed costs in Europe
associated with the business acquired from M-real in January 2009 for the full year in fi scal 2010
compared to only nine months in fi scal 2009.
The tables below show the make-up of fi xed costs by region and by type of cost:
Fixed costs by region
US$ million
Europe
North America
Southern Africa
Inter-company eliminations
Group at 2009 exchange rates
Exchange rate impact
Group as reported
Fixed costs by type
US$ million
Personnel
Maintenance
Depreciation
Services and administration
Total
2010
1,157
461
480
(31)
2,066
98
2,164
%
Change
10
(3)
4
5
10
2009
1,053
475
462
(20)
1,970
–
1,970
2010
2009
1,176
1,046
275
411
302
250
396
278
2,164
1,970
continues on page 42
2010 annual report
41
Regional operating review continued
Sappi Southern Africa continued
Overall sales volumes increased by 11% in fi scal 2010 compared to fi scal 2009. Demand for chemical cellulose was
signifi cantly better in fi scal 2010 increasing by 18% compared to fi scal 2009. Volumes in the paper and paper packaging
business declined by 3% due to the closure of the Usutu Mill in January 2010 and, to a lesser extent, to production
problems experienced at our Ngodwana Mill. Excluding the Usutu Mill volumes in 2009, volumes increased by 6% in fi scal
2010 compared to 2009.
During 2010, average chemical cellulose selling prices in US dollar terms increased by 26% compared to fi scal 2009, but
by only 11% in Rand terms due to the strengthening of the Rand to the US Dollar during fi scal 2010. Average selling prices
for paper and paper packaging products increased by 4% compared to fi scal 2009. Overall, average prices including
timber sales, were marginally lower than fi scal 2009 at ZAR4,262 per ton.
For the whole business, sales increased by 10% to ZAR11.7 billion compared to 2009.
Variable and delivery costs
Variable manufacturing costs:
Wood
Energy
Pulp
Chemicals
Other
Delivery costs
Total
ZAR million
ZAR per metric ton
2010
2009
2010
2009
2,088
1,315
570
1,340
465
1,008
6,786
1,897
1,158
747
1,449
455
1,039
6,745
761
479
208
488
170
367
766
468
302
585
183
419
2,473
2,723
During fi scal 2010, input costs per ton decreased by 9% to ZAR2,473 compared to fi scal 2009, mainly due to a decrease
in volumes of bought-in pulp and decreases in the input prices of chemicals and other costs. The decrease was also partly
due to input costs normalising after the interrupted ramp-up of our Saiccor Mill and production curtailments during 2009.
Fixed costs
Personnel
Maintenance
Depreciation
Services and administration
Total
ZAR million
2010
2009
1,982
1,844
699
765
878
697
750
877
4,324
4,168
Fixed costs increased by 4% to ZAR4,324 million. This increase was mainly due to a 7% increase in personnel costs due
to the relatively high infl ation environment in South Africa and the impact of a skills shortage on personnel costs, particularly
in skilled technical functions. Maintenance and services expenses were well controlled and remained at similar levels to 2009.
Sundry income consists mainly of the plantation volume fair value adjustment.
42
Chief fi nancial offi cer’s report continued
Sappi group review continued
Section 2
Operating profi t excluding special items
The contribution by each of our regions to the group operating profi t excluding special items over the past
three years was as follows:
US$ million
Europe
North America
Southern Africa
Corporate and other
Sappi group
2010
2009
2008
76
124
134
5
339
12
(2)
17
6
33
55
95
209
7
366
2010 was a great improvement over 2009 due to the better global economic conditions that prevailed in
2010 and the many improvements we have made to all our businesses. These improvements include:
the closures of three underperforming mills in the past two years – Kangas in Finland, Muskegon in
the United States and Usutu in Swaziland;
the realisation of further synergies from the integration of the M-real coated business we acquired in
January 2009;
our improved market position in Europe following the M-real acquisition which enabled us to put
through three consecutive price increases on coated woodfree products, something that has not
happened in Europe for nearly a decade – although not adequate to compensate fully for the high
cost of bought-in pulp which prevailed for most of the year, these price increases helped us to
maintain a small positive margin in our European business;
the good production performance, particularly in the second half of the year, of our Saiccor Mill in
South Africa following completion of the 200,000 ton chemical cellulose expansion project in 2009;
and
the many projects in all parts of the group to reduce manufacturing costs, improve customer
relationships, simplify product portfolios and streamline logistics.
Economic conditions permitting, we expect these actions to deliver further improvements to our operating
performance in the future and lead to better operating results than the US$366 million operating profi t
excluding special items earned in 2008.
North America did particularly well on all counts to deliver an operating profi t excluding special items of
US$124 million.
Pulp prices, which rose rapidly during fi scal 2010, impacted the split of operating profi t between the
regions – benefi ting the Southern African and North American businesses (which are net sellers of pulp)
and squeezing the margin of the European business (which buys-in approximately half of its pulp
consumption). Also, the strong South African Rand compared to the US Dollar and the Euro negatively
affected the profi ts of the Southern African business by not only reducing Rand revenues from exports but
also domestic prices as a result of increased competition from imports.
continues on page 43
2010 annual report
43
Section 2
The operating margin (operating profi t excluding special items to sales) of each of our businesses is set
out below:
Percentage
Europe
North America
Southern Africa
Sappi group
2010
2009
2008
2.1
9.0
8.6
5.2
0.4
–
1.4
0.6
2.0
5.7
14.1
6.2
To achieve our goal of at least a 12% ROCE we need to improve the group operating margin to around
8% per annum. We expect margins, particularly in Europe and Southern Africa, to improve in 2011.
The bar chart below shows the main components of the “bridge” between our 2009 operating profi t
excluding special items compared to 2010.
continues on page 44
44
Chief fi nancial offi cer’s report continued
Sappi group review continued
Section 2
Special items
Special items are those items which management believe are material by nature or amount to the
operating results and require separate disclosure. Such items generally include profi t and loss on disposal
of property, investments and businesses; asset impairments; restructuring charges; non-recurring
integration costs related to acquisitions; fi nancial impacts of natural disasters; non-cash gains or losses
on the price fair value adjustment of plantations; and unusual government subsidies such as the
alternative fuel mixture credits paid to qualifying alternative fuel producers in the USA.
Special Items
US$ million
Plantation price fair value gain (charge)
Fixed asset impairment reversals (impairments)
Restructuring provisions and closure costs
US alternative fuel mixture credits
Broad-based Black Economic Empowerment transaction costs
Fire and fl ood damage
Other costs
2010
2009
31
20
(46)
51
(23)
(26)
(5)
2
(67)
(79)
(34)
87
-
(11)
(2)
(106)
The net impact of Special items improved our operating profi t in 2010 marginally by US$2 million. In 2009,
the negative impact of US$106 million was substantial. We explain the major components of the 2010
special items below:
the favourable non-cash US$31 million plantation price fair value adjustment was largely due to higher
timber prices partly offset by increases in delivery costs – notes 2.3.6 and 10 to the group annual
fi nancial statements give a full explanation about the accounting for our plantations;
the restructuring provisions and closure costs of US$46 million related to the closure of the Kangas
Mill in Finland and the Usutu Pulp Mill in Swaziland, both of which ceased operations in January 2010;
we earned a further, and fi nal, US$51 million of alternative fuel mixture credits in the United States
of America – please refer to note 2.2.14 of our group annual fi nancial statements for further
information about these tax credits;
we recognised a substantial US$23 million non-cash charge in accordance with IFRS2 in connection
with our Broad-based Black Economic Empowerment transaction which was approved by our
shareholders and completed in 2010 – further information on this transaction is disclosed in notes
2.2.10, 17 and 28 to our group annual fi nancial statements;
our Stockstadt Mill in Germany suffered a major electrical fi re in December 2009 costing an estimated
US$30 million. Since we self-insure up to US$25 million per incident (with an aggregate loss limit
of US$40 million per annum), most of the property damage and business interruption cost of this fi re
will be covered by the group. The exact amount of this cost will be determined once the claim is
fi nalised.
continues on page 45
2010 annual report
45
Operating profi t
After taking into account special items, our operating profi t for 2010 and 2009 was as follows:
Section 2
US$ million
Operating profi t excluding special items
Special Items
Operating profi t
Key operating targets
2010
2009
339
2
341
33
(106)
(73)
Our fi nancial 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 profi t 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 infl ation. Our performance against this target for 2010 was 8% – we would hope to get
considerably closer to the target in 2011.
In order to meet our ROCE target, we need to improve operating profi t excluding special items to around
US$500 million, at our current level of capital employed.
Major sensitivities
Some of the more important factors which impact the group’s operating profi t excluding special items,
based on current anticipated revenue and cost levels, are summarised in the table below:
Sensitivities
Net selling prices
Variable costs
Sales volume
Fixed costs
Brent crude oil price
Pulp prices
Wood prices
ZAR/US
Euro/US$
SFPE
SFPNA
SA
Group
Change
EUR
million
US$
million
ZAR
million
US$
million
1%
1%
1%
1%
US$1
US$10
1%
10 cents
10 cents
27
18
9
7
4
(9)
2
–
–
13
132
7
5
5
–
2
2
–
3
66
54
47
7
42
5
64
–
62
38
23
19
6
(4)
5
8
3
The table above shows that operating profi t excluding special items is most sensitive to changes in the
selling prices of our products.
The calculation of the impact of these sensitivities on operating profi t excluding special items assumes all
other factors remain the same and does not take into account potential management interventions to
mitigate negative impacts or enhance benefi ts. As the table shows, the impact on the individual businesses
of one sensitivity may be different as is the case with changes in international pulp prices which affects the
Southern African and North American businesses (which are net sellers of pulp) and the European business
(which is a net purchaser of pulp) in opposite ways.
continues on page 46
46
Chief fi nancial offi cer’s report continued
Sappi group review continued
Section 2
Finance costs
Comparing our net fi nance costs year-on-year is complex. The breakdown of the major components of
our net fi nance costs in the table below will be helpful in understanding the comparison and the make-up
of our fi nance costs.
US$ million
Net interest
Foreign exchange gains
Fair value change in fi nancial instruments
Net fi nance costs
2010
2009
293
(17)
(21)
255
137
(17)
25
145
Net interest increased signifi cantly from US$137 million in 2009 to US$293 million in 2010. Eliminating
once-off discounts received on early settlement of debt in 2009 and 2010, net interest paid can be
re-stated on a “normalised” basis as follows:
US$ million
Net interest
Discounts on early re-purchase of debt
Normalised net interest
2010
2009
293
5
298
137
41
178
On this normalised basis, net interest has increased by some US$120 million compared to 2009. The
main reasons for this increase are:
in the last month of fi scal 2009, we re-fi nanced US$1.3 billion of maturing low cost debt (costing on
average 4.6% per annum) – which was raised at a time when our credit rating was “investment” grade
and fi nancial markets were more favourable – with new debt at an average rate of approximately 9,7%
per annum – this increased our fi nance costs by some US$65 million;
the US$27 million non-cash amortisation of discounts and costs relating to the 2009 re-fi nancing;
the higher interest rate cost on approximately US$850 million of fi xed rate debt which, for most of
2009, was swapped into lower fl oating rates – these swaps were unwound in 2009 resulting in a cash
infl ow of US$50 million;
in the past two years we have held above average cash balances, serving as a liquidity buffer during
the fi nancial crisis and the uncertain economic outlook prevailing since then – the average balances
held on deposit in 2010 exceeded those in 2009 but, as the average short-term interest rates were
lower than during our 2010 fi nancial year, the interest earned on our cash deposits was lower in 2010
compared to 2009.
The foreign exchange gains of US$17 million in both 2010 and 2009, arose largely from forward points
earned on Rand/US Dollar forward exchange contracts taken out to cover US Dollar denominated
exports from the Southern African business.
The fair value adjustments to fi nancial instruments relate mainly to the unwinding of fi xed to variable
interest rate swaps in 2009. The accounting convention required us to take a charge of US$20 million in
2009 (on the swaps), but this was off-set in 2010 by the amortisation gain on writing down part of the
underlying debt to fair value amounting to US$21 million. Further amortisation gains in 2011 and 2012 will
total approximately US$24 million.
continues on page 47
2010 annual report
47
Taxation
Our tax charge for the year was US$20 million, resulting in an effective tax rate for the group of 23%. The
regional contributions to the charge are set out in the table below:
Section 2
US$ million
Europe
North America
Southern Africa
Sappi group
Profi t/(loss)
before tax
Tax (charge)
relief
Effective
tax rate
(150)
159
77
86
6
(6)
(20)
(20)
(4)%
4%
26%
23%
In Europe, despite the US$150 million loss before tax, we only took tax relief on these losses in an amount
of US$6 million because, in our judgement, in certain countries in Europe we may not generate suffi cient
pre-tax profi ts to recover these losses in the near future. We also have substantial additional unrecognised
tax losses in Austria, Finland, Belgium and The Netherlands which will substantially shield future profi ts
earned in those countries.
The low charge in North America relates mainly to taxes paid in certain of the States in which we operate.
At the Federal level we have substantial unrecognised tax losses which, in 2010, largely shielded the
profi ts of our North American business and are expected to continue to shield profi ts there for some years
to come.
The effective tax rate of 26% in Southern Africa is lower than the Southern African statutory rate of 28%.
On one hand, no tax relief is available on the Broad-based Black Economic Empowerment transaction
(referred to under special items above) and on the closure costs related to the Usutu Pulp Mill (referred
to under special items above). On the other hand, profi ts on exports benefi ted from lower taxes in certain
countries.
Net profi t, earnings per share and dividends
We were pleased to again return to profi t at the net level. After taking into account fi nance costs and
taxation, our net profi t and earnings per share for 2010 and 2009 were as follows:
US$ million
Operating profi t (loss)
Net fi nance costs
Profi t (loss) before tax
Taxation (charge) relief
Net profi t (loss)
Average number of shares in issue (million)
Earnings (loss) per share (US cents)
2010
341
(255)
86
(20)
66
517
13
2009
(73)
(145)
(218)
41
(177)
483
(37)
Our board decided that it would not be appropriate to declare a dividend for fi scal 2010.
continues on page 48
48
Chief fi nancial offi cer’s report continued
Sappi group review continued
Section 3
Cash fl ow analysis
In the table below we present the group’s cash fl ow statement in a summarised format:
US$ million
Operating profi t (loss)
Depreciation
Fellings
Contributions to post-employment benefi ts
Other non-cash items
Cash generated by operations
Movements in working capital
Cash generated by operating activities
Finance costs
Taxation
Capital expenditure*
Dividends paid
Proceeds on disposal of fi xed assets
Net cash generated
* Excluding the M-real acquisition in fi scal 2009.
2010
2009
341
411
71
(73)
(13)
737
(5)
732
(194)
(9)
(211)
–
23
341
(73)
396
69
(62)
102
432
152
584
(81)
(5)
(176)
(37)
4
289
Cash generated by operations of US$737 million was a substantial improvement over the US$432 million
generated in 2009. This improvement was mainly due to the higher operating profi t excluding special
items in 2010.
The small working capital increase of US$5 million was impressive given the large increase in business
activity compared to 2009. All our regions managed their working capital very well – this is further
discussed in section 4 of this report.
In line with our determination to reduce net debt, capital expenditure was again kept at a relatively low
level and aimed mainly at maintaining our production facilities. We spent US$173 million on maintenance,
US$9 million on acquiring plantations and US$29 million on expanding and improving our production
assets.
Net cash generated was a healthy US$341 million which went to reduce net debt – please see section 4
for the movement in our net debt.
continues on page 49
2010 annual report
49
Balance sheets
Our group balance sheets can be summarised as follows:
Section 4
US$ million
Property, plant and equipment
Plantations
Net working capital
Other assets
Net post employment liabilities
Other liabilities
Employment of capital
Equity
Net debt
Capital employed
2010
3,660
687
453
321
5,121
(446)
(558)
4,117
1,896
2,221
4,117
2009
3,934
611
534
332
5,411
(435)
(606)
4,370
1,794
2,576
4,370
We discuss the more important components below.
Property, plant and equipment
We have 19 mills in eight countries capable of producing 4.1 million tons of pulp and 6.6 million tons
of paper products. For more information on our mills, their production capacities and products, please
refer to page 23, for our Fine Paper mills and page 27 for Sappi Southern African mills.
The cost, depreciation and impairments related to our property, plant and equipment are set out in the
table below:
US$ million
Cost
Accumulated depreciation and impairments
Net book value
2010
2009
10,111
6,451
3,660
10,344
6,410
3,934
During 2010, we depreciated our fi xed assets by a further US$411 million, booked additions of
US$206 million and reversed previous impairments of US$20 million. Currency translation difference
was a negative US$86 million.
The capacity replacement value of the property, plant and equipment for insurance purposes has been
assessed at approximately US$25 billion.
For more information on property, plant and equipment – please see note 9 to our fi nancial statements.
Plantations
We own plantations in Southern Africa on approximately 385,000 hectares of plantable and have access
to a further approximately 170,000 hectares of land leased by us or available to us under contract.
We regard our plantations as a vital strategic resource of low cost fi bre to feed our pulp production in
southern Africa and we intend to invest further in this resource in the future. Our plantations currently provide
approximately 70% of the wood requirements of our Southern African Mills. In 2010 we, as a group,
purchased an additional US$706 million of wood to feed our pulp mills, mainly in Europe and North America.
In terms of the relevant accounting standard, we are required to carry these plantations on our balance sheet
at their fair value less the estimated cost of cutting, delivering and selling the timber at the harvesting stage.
In notes 2.3.6 and 10 to the group annual fi nancial statements, we present considerable detail about how
we account for our plantations.
continues on page 50
50
Chief fi nancial offi cer’s report continued
Sappi group review continued
Section 4
Working capital
The component parts of our working capital at fi nancial year end for the past two years are shown in the
table below:
US$ million
Inventories
Receivables
Payables
Net working capital
2010
836
888
2009
792
858
(1,271)
(1,116)
453
534
Optimising the levels of our working capital to minimise the cost of funding this element of our business
is a key focus area.
We carefully manage the ratio of working capital to sales and regularly compare this ratio to those of our
peers in the industry and believe that our working capital management compares favourably in that
regard.
Managing the average level of net working capital is a large element of the management incentive scheme
for all our businesses.
The quarterly average net working capital in 2010 was US$575 million compared to US$634 million in
2009, a decrease of 9% year-on-year. Sales increased by 22% in 2010. The decrease in average net
working capital despite the substantial increase in sales, indicates that working capital was well managed
in 2010.
Post-employment liabilities
The group operates various defi ned benefi t pension, post retirement medical and other types of funds in
the various countries in which we operate. The defi ned benefi t liabilities can be summarised as follows:
US$ million
Liabilities of funded defi ned benefi t plans
Assets of funded defi ned benefi t plans
Net defi cit on funded plans
Liabilities of unfunded plans
Net balance sheet liability
Cash contributions to defi ned benefi t plans
Income statement charge for defi ned benefi t plans
2010
2009
(1,928)
1,808
(1,765)
1,695
(120)
(326)
(446)
77
29
(70)
(365)
(435)
64
31
We carry a net liability of US$446 million in respect of our defi ned benefi t obligations.
Of the US$77 million of cash contributions to defi ned benefi t schemes in 2010, US$26 million (US$25 million
in 2009) was by way of “catch-up” contributions towards the defi cits in our funded plans. We expect to
make similar additional contributions towards these defi cits next year.
continues on page 51
2010 annual report
51
Equity
Year-on-year, equity increased by US$102 million to US$1,896 million as detailed below:
Section 4
US$ million
Equity at September 2009
Profi t for the year
Actuarial losses on pension funds
Exchange rate differences on translation of non-dollar operations
Shares issued in connection with the Broad-based Black Economic Empowerment
transaction
Movement in hedging reserves
Share-based payments
Other
Equity at September 2010
2010
1,794
66
(71)
52
20
14
17
4
1,896
More detail on the movement in equity can be found in the statement of changes in equity in our group
annual fi nancial statements.
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 and
cash equivalents.
Structure of net debt and liquidity
The structure of our net debt as at end September 2010 and 2009 is summarised below:
Structure of net debt
US$ million
Long-term debt
Secured debt
Unsecured debt
Less short-term portion
Net short-term debt
Securitisation funding
Overdrafts
Short-term portion of long-term debt
Less cash
Net debt
2010
2,317
1,208
1,353
(244)
(96)
447
5
244
(792)
2009
2,726
1,520
1,407
(201)
(150)
400
19
201
(770)
2,221
2,576
In 2010, we used cash resources to early repay US$240 million of long-term debt. After these early
repayments and US$75 million of other scheduled debt repayments, our liquidity position remains very
strong with our cash holdings exceeding short-term debt by US$96 million. This is more so because
our securitised borrowings of US$447 million which, although classifi ed as short-term debt, roll forward
monthly and are not expected to be repayable in the short-term. In addition, our committed Revolving
Credit Facility of EUR209 million (US$282 million) remains unutilised.
continues on page 52
52
Chief fi nancial offi cer’s report continued
Sappi group review continued
Section 4
Movement in net debt
The movement in net debt from September 2009 to 2010 is explained in the table below:
US$ million
Net debt at September 2009
Net cash generated in 2010
Fair value adjustment
Currency translation
Net debt at September 2010
Debt profi le and maturity
2010
2,576
(341)
(7)
(7)
2,221
We show the major components and maturities of our net debt as at end September 2010 below. These
are split between debt raised in South Africa and debt raised outside of South Africa.
US$ millions
Amount
Local
int rate
weighted
Fixed/
variable
Short-
term
2011
2012
2013
2014
There-
after
Maturity (Sappi fi scal years)
South Africa
Bank debt
Bonds
Gross debt
less cash
Net SA debt
Non-South African
Securitisation
OeKB Loan(1)
Other bank debt
181
356
10.22%
10.42%
Fixed
Fixed
–
–
537
(129)
408
(129)
(129)
447
432
171
2.81% Variable
447*
8.60%
Fixed
–
4.26% Variable
122*
Revolving credit facility(1)
0
2.03%# Variable
6.75%
12.00%
11.75%
7.50%
Fixed
Fixed
Fixed
Fixed
2012 Bonds (US$)
2014 Bonds (US$)(1)
2014 Bonds (EUR)(1)
2032 Bonds (US$)
IFRS adjustments
Gross debt
less cash
Net non-SA debt
Net group debt
500
300
472
221
(67)
2,476
(663)
1,813
2,221
–
–
–
–
–
(663)
(94)
68
–
–
68
–
62
24
–
–
–
–
–
–
86
14
213
63
142
–
–
227
205
–
124
22
–
500
–
–
–
–
–
124
1
–
–
–
–
–
–
646
873
125
330
29
–
–
29
–
122
2
–
–
300
472
–
–
896
925
8
–
–
8
–
–
–
–
–
–
–
221
–
221
229
(223)
154
* Securitisation debt and US$122 million of the other bank debt is expected to roll over.
# Commitment fees payable on undrawn amounts of the facility of EUR209 million.
(1) These debt components are secured by a security package consisting of claims over certain of our non-South African fi xed
assets, inventories in North America and cross guarantees from, and the pledge of shares by, our major non-South African
subsidiaries. The majority of our non-South African long-term debt is guaranteed by Sappi Limited, the group holding company.
continues on page 53
2010 annual report
53
Covenants
Non-South African covenants
Section 4
Financial covenants apply to approximately US$430 million of our non-South African bank debt, the
EUR209 million Revolving Credit Facility and our securitised borrowings.
These fi nancial covenants are calculated on a last-four-quarter basis and require that at the end of
each quarter:
the ratio of group net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) be
not greater than 5:1 at the end of September 2010, reducing over the term of the facility to 4:1 by
September 2012; and
the ratio of group EBITDA to net interest expense be not less than 2:1 at the end of September 2010,
increasing over the term of the facility to 2.5:1 by June 2012.
The table below shows that as at September 2010 we were in compliance of these covenants:
Non-South African covenants
Net debt to EBITDA
EBITDA to net interest
2010
Covenant
2.7
2.99
<5.0
>2.0
In addition to the fi nancial covenants referred to above, our 2014 Bonds and certain of our bank facilities
contain customary affi rmative and negative covenants restricting, among other things, the granting of
security, incurrence of debt, the provision of loans and guarantees, mergers and disposals and certain
restricted payments, including the payment of dividends. As regards dividend payments, the group is
restricted from paying cash dividends in certain circumstances, for example if the net debt to EBITDA ratio
exceeds 4:1 or if the EBITDA to net interest is less than 2:1. In addition, any cash dividends paid may not
exceed 50% of net profi t excluding special items.
South African covenants
Separate covenants also apply to certain of the debt of our Southern African business.
These covenants require that, with regard to Sappi Southern Africa (Pty) Limited and its subsidiaries:
the ratio of net debt to equity is not at the end of any quarter greater than 65%; and
at the year-end, the ratio of EBITDA to net interest paid for the year is not less than 3:1.
Below we show that for the year ended September 2010, the South African fi nancial covenants were
comfortably met:
South African covenants
Net debt to equity
EBITDA to net interest
2010
Covenant
37%
4.2
<65%
>3.0
continues on page 54
54 Chief fi nancial offi cer’s report continued
Sappi group review continued
Section 5
Credit rating
At the date of this annual report, our credit ratings were as follows:
Fitch South African national rating
Sappi Southern Africa (Pty) Limited
A/F1/Stable (March 2010)
Moody’s international rating
Sappi Corporate Credit Rating
Ba3/NP/Stable (September 2009)
Secured Debt Rating
Unsecured Debt Rating
Ba2 (September 2009)
B2 (September 2009)
Standard & Poor’s international rating
Corporate Credit Rating
Secured Debt Rating
Unsecured Debt Rating
BB-/B/Stable (September 2009)
BB (September 2009)
B+ (September 2009)
The ratings by Moody’s and Standard & Poor’s were updated in September 2009 in the context of the
refi nancing transactions that were fi nalised in August 2009, including the new US$300 million and
EUR350 million bonds, the renewal of the EUR209 Revolving Credit Facility and the extension of the
EUR400 million OeKB syndicated bank facility. These ratings were confi rmed in updated reports as
published in August 2010 by both rating agencies.
Fitch updated the Sappi Southern Africa (Pty) Ltd rating in March 2010 and changed the outlook from
negative to stable in response to more favourable market conditions and performance.
continues on page 55
2010 annual report
55
Share listing and share performance
The group’s primary listing is on the JSE Limited, South Africa’s stock exchange, and has a secondary
Section 6
listing on the New York Stock Exchange. Information regarding our shares, share price, the value of shares
traded, main shareholders and other related information is contained on pages 58 and 59 of the group
annual fi nancial statements.
Our share price performance, adjusted for the new shares issued in the fi rst quarter of fi scal 2009 when
we issued 287 million shares in terms of the rights offer and 11 million shares to M-real in part payment
for the acquisition of its coated paper business, is shown in the graph below:
* Historic share prices revised to refl ect rights offer.
Conclusion
Overall our operating performance in 2010 was much improved but still well short of the levels we believe
the group is capable of performing at.
Our North American business did very well to earn operating profi t excluding special items of US$124 million.
We expect better operating results, particularly from the European and southern African regions in 2011,
and our results in the last quarter of fi scal 2010 give cause for optimism in that regard.
We were pleased with the US$341 million of net cash we generated in 2010 and expect to generate
substantial cash next year and to make good progress towards achieving our goal to reduce net debt
to below US$2.0 billion.
M R Thompson
Chief fi nancial offi cer
03 December 2010
56
Five-year review
for the year ended September 2010
US$ million
Income statement
Sales
Operating profi t excluding special items
Special items – (gains) losses
Operating profi t (loss)
Net fi nance costs
Profi t (loss) before taxation
Taxation charge (benefi t)
Profi t (loss) for the year
Balance sheet
Total assets
Non-current assets
Current assets
Current liabilities
Shareholders’ equity
Net debt
Gross interest-bearing debt
Cash
Capital employed
Cash fl ow
Cash generated from operations
Decrease (increase) in working capital
Finance costs paid
Finance revenue received
Taxation paid
Dividends paid
Cash retained from operating activities
Net cash generated (utilised) excluding Acquisitions
Cash effects of fi nancing activities
Capital expenditure (gross)
EBITDA excluding special items
September
2010
September
2009
September
2008
September
2007
September
2006
6,572
5,369
5,863
5,304
4,941
339
(2)
341
255
86
20
66
7,184
4,653
2,531
2,039
1,896
2,221
3,013
792
4,117
737
(5)
(206)
12
(9)
–
529
341
(257)
211
752
33
106
(73)
145
(218)
(41)
(177)
7,297
4,867
2,430
1,841
1,794
2,576
3,346
770
4,370
432
152
(107)
26
(5)
(37)
461
289
707
175
431
366
52
314
126
188
86
102
6,109
4,408
1,701
1,926
1,605
2,405
2,679
274
4,010
623
1
(139)
13
(70)
(73)
355
(139)
49
505
740
313
(70)
383
134
249
47
202
6,344
4,608
1,736
1,916
1,816
2,257
2,621
364
4,073
585
60
(183)
21
(27)
(68)
388
24
98
458
688
91
(34)
125
130
(5)
(1)
(4)
5,517
3,997
1,520
1,666
1,386
2,113
2,337
224
3,499
396
(17)
(164)
26
(13)
(68)
160
(127)
(21)
303
483
2010 annual report
57
US$ million
Statistics
Number of ordinary shares (millions)
In issue at year-end(1)
Basic weighted average number of shares in issue
September
2010
September
2009
September
2008
September
2007
September
2006
519.5
515.7
229.2
228.5
227.0
during the year(1,3)
516.7
482.6
362.2
360.6
358.0
Per share information (US cents per share)
Basic earnings (loss)(3)
Diluted earnings (loss)(3)
Headline earnings (loss)(3)
Diluted headline earnings (loss)(3)
Ordinary dividend declared(2)
Net asset value
Profi tability ratios (%)
Operating profi t (loss) to sales
Operating profi t excluding special items to sales
EBITDA excluding special items to sales
Operating profi t excluding special items to
capital employed (ROCE)
Profi t (loss) to average ordinary shareholders’
equity (ROE)
Debt ratios (%)
Net debt to total capitalisation
Effi ciency 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
Exchange rates
13
13
10
10
–
365
5.2
5.2
11.4
8.0
3.6
(37)
(37)
(21)
(21)
–
348
(1.4)
0.6
8.0
0.8
(10.4)
28
28
60
59
16
700
5.4
6.2
12.6
9.1
6.0
56
55
52
51
32
795
7.2
5.9
13.0
8.3
12.6
(1)
(1)
(7)
(7)
30
611
2.5
1.8
9.8
2.6
(0.3)
53.9
58.9
60.0
55.4
60.4
0.9
6.9
1.2
54
2.5
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
15,586
16,427
15,156
15,081
15,200
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)
1.3491
1.3658
7.0190
7.4917
1.4688
1.3657
7.4112
9.0135
1.4615
1.5064
8.0751
7.4294
1.4272
1.3336
6.8713
7.1741
1.2672
1.2315
7.7738
6.6039
Defi nitions for various terms and ratios used above are included in the Glossary on pages 189 to 191.
(1) Net of treasury shares (refer to note 17).
(2) The dividends for all the fi nancial years were declared subsequent to year end.
(3) The years ending September 2006 to September 2008 have been restated for the bonus element of the rights issue (refer to note 7).
58
Share statistics
at September 2010
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
5,585
210
322
137
352
81
Number of
shares*
% of shares
in issue
3,557,888
1,545,862
7,691,532
10,121,098
115,572,140
381,022,584
0.7
0.3
1.5
1.9
22.2
73.4
%
83.6
3.1
4.8
2.0
5.3
1.2
6,687
100.0
519,511,104
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 2010 was 6,681 )
*The number of shares excludes 21,935,119 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 benefi cial shareholders. Pursuant to Section 140A of the South African
Companies Act, 1973, as amended, the directors have investigated the benefi cial ownership of shares in Sappi Limited, including those
which are registered in the nominee holdings. These investigations revealed as of September 2010 the following benefi cial holder of more
than 5% of the issued share capital of Sappi Limited:
Public Investment Commissioner (SA)
Shares
61,609,689
%
11.9
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 2010, the following fund managers were responsible for
managing 5% or more of the share capital of Sappi Limited:
Allan Gray Limited
Investec Asset Management
Capital Group Companies Inc.
Old Mutual Investment Group South Africa
Shares
116,798,521
66,968,541
43,837,075
40,244,164
%
22.5
12.9
8.4
7.7
2010 annual report
59
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
– 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)*
September
2010
September
2009
September
2008
September
2007
September
2006
519.5
365
467.00
11.27
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
14,859.9
12,989.4
22,623.4
27,983.7
20,946.0
46.4
92.1
3,565
5.14
3,792
5.14
2,539
3.27
2
–
50
2,639
259.1
98.8
2,855
3.76
5,403
6.41
1,290
1.24
negative
–
negative
1,985
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
negative
1,850
* Based on fi nancial 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 21,935,119 treasury shares held by the group.
Note: Defi nitions for various terms and ratios used above are included in the Glossary on pages 189 to 191.
60
2010 annual report
61
Risk management
This table provides the latest review of the signifi cant exposures Sappi faces as it goes forward. The Sappi group risk profi le is reviewed at
least twice annually to give management risk management information to enable them to make informed risk-based decisions. The risks
are ranked according to management’s assessment of the likelihood of the occurrence and severity. These risks are further discussed
in Sappi’s annual report on Form 20-F fi led with the US Securities Exchange which is available on our website www.sappi.com or in hard
copy on request.
Top risks
Risk
1. We operate in a cyclical
indus try. Global economic
conditions may cause
substantial fl uctu ations
in our results
2. The markets for pulp and
paper products are highly
competitive
Risk description and mitigation
Our pulp and paper products are signifi cantly 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, turmoil in the world economy in 2009 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 and Kangas Mill. We took actions to improve
effi ciencies and reduce costs in all aspects of our business. We continue to maintain a high level of
economic pulp integration on a group-wide basis which reduces the impact of pulp price fl uctuations on
our results. We will continue to match our output to market 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 and our acquisition of M-real’s coated graphic paper business in 2009 enhanced our
position in the woodfree coated paper market. We also continue to drive good customer service,
innovation and effi cient manufacturing and logistics. We are focused on improving the performance and
competitiveness of our European business in particular of coated mechanical paper. We are also taking
steps to improve the performance of our Southern African paper and paper packaging business.
3. We require signifi cant amounts
of fi nance to fund our business
and our ability to generate
cash or borrow depend on
many factors some of which
are beyond our control
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 provides us with adequate
headroom to fund our short-term requirements. We are also focusing on profi t improvement in our
operations by reducing fi xed and variable costs, spending capital prudently and tightly controlled working
capital.
4. 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 signifi cant impact
on our earnings in these
currencies
5. The inability to obtain
energy or raw materials
at favourable prices
could adversely affect
our operations
6. The cost of complying
with environmental, health
and safety laws may be
signifi cant to our business
Sappi is exposed to economic, transaction and translation currency risks. The objective of the group in
managing transactional currency risks is to ensure that foreign exchange exposures are identifi ed as early
as possible and actively managed. In managing transactional currency risks, the group fi rst 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).
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, fi nding alternative lower-cost fuels and raw
materials, further minimising waste, improving manufacturing and logistics effi ciencies and implementing
energy reduction initiatives.
We are subject to a wide range of environmental, health and safety laws and regulations in the various
jurisdictions in which we operate. We invest to maintain compliance with applicable laws and co-operate
across regions to apply best practices in a sustainable manner. The principles of ISO 14000, Forest
Stewardship Council and other recognised programmes are well entrenched across the group. We have
also made signifi cant 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, including GHG emissions requirements, and take action with respect to our
operations accordingly. The health and safety of our own employees and contractors remain a top priority.
62 Risk management continued
Risk philosophy
The Group Risk Management team was mandated by the Sappi
events. In line with previous years, the board decided not to take
separate cover for losses from acts of terrorism, which is consistent
Limited board to establish, coordinate and drive the Risk Management
with current practice in the paper manufacturing industry. Sappi
process throughout Sappi. It has established a risk management
places the insurance for its plantations on a stand-alone basis into
system to identify and manage signifi cant risks.
Complete risk assessments are conducted at least annually in our
divisions (including Sappi Trading) and for the group, and are
international insurance markets. The impact of widespread fi res on
our plantations this year was substantially less than in the previous
three years.
updated every six months. The process uses our strategy as the
Sappi has a global insurance structure and the bulk of its insurance
base against which to assess risk scenarios. The scope of the risk
is placed with its own captive insurance company in Stockholm,
assessment includes risks that may lead to a signifi cant cost,
Sweden; Sappisure Försäkrings AB, which in turn reinsures those
liability or loss, including loss of opportunity, or may affect the
risks outside the company’s self-insurance capabilities in the global
current strategic plan. These risks are identifi ed and analysed, and
reinsurance markets.
risk responses to each individual risk are designed, planned,
implemented and monitored.
Insurance
Sappi follows a practice of insuring its assets against loss arising
from catastrophic events. These events include fi re, fl ood, explosion,
earthquake and machinery breakdown. Specifi c environmental
risks are also insured. External risk engineers conduct both under-
writing surveys as well as risk control surveys of all the Sappi
facilities. The risk control surveys report, rate and rank the identifi ed
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, as
has the 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.
risks and make recommendations to address the probability and/
Insurance cover for credit risks currently applies on a regional basis
or severity of these risks. This process is focussed primarily on the
to a portion of Sappi’s North American, European and Southern
risk exposures associated with insurable risks. Insurance also
African domestic trade receivables subject to a US$5 million group
covers business interruption events which may result from these
aggregate fi rst loss.
2010 annual report
63
Corporate Governance
We are committed to high standards of corporate governance and
continue to seek areas of improvement by measuring ourselves
The board of directors
The basis for good governance at Sappi is laid out in the charter
against international best practice. The group endorses the
for the board of directors, which sets out the division of
Corporate Governance code contained in the South African King III
responsibilities between the board and executive management.
Report issued in 2009, and applies the principles incorporated
The board collectively determine major policies and strategies and
therein or is developing and implementing governance processes
are responsible for managing risk. For further information about
in line with the recommendations. We make use of independent
the board and the board charter, please refer to the company
assessment tools to give us confi rmation of the extent to which we
website, (www.sappi.com). The composition of the board and
apply the principles of King III. The group maintains its primary
the attendance at board meetings and board committee meetings
listing on the JSE Limited as well as a listing on the New York
are set out in the following table:
Stock Exchange. The group complies in all material aspects with
the regulations and codes of these exchanges as they apply to
Sappi. The group delisted from the London Stock Exchange,
effective 2 November 2009.
Name
Status
Board
Audit
Board committees
Nomination
and
Governance
Compen-
sation
Human
resources
and
trans-
formation Sustainability
R J Boëttger
Chief Executive Offi cer
M R Thompson
Chief Financial Offi cer
D C Cronjé
Independent non-executive, chairman
D C Brink(1)
Senior independent non-executive
M Feldberg(2)
Lead independent director
J E Healey
D Konar(4)(6)
Independent non-executive
Independent non-executive
H C Mamsch
Independent non-executive
J D McKenzie
Independent non-executive
K R Osar
B Radebe
Independent non-executive
Independent non-executive
A N R Rudd
Independent non-executive
F A Sonn(1)
Independent non-executive
N P Mageza(3)(5)
Independent non-executive
R Thummer(3)
Non-executive
M V Moosa(3)
Non-executive
5/5
5/5
5/5
1/1
5/5
5/5
B
B
E
5/5 C
3/5
5/5
5/5
5/5
5/5
1/1
4/4
3/3
1/1
B
3/3
6/7
7/7
5/7 C
3/3
B
E
C
2/2 C
2/2
5/5
B
2/2
2/2
5/5 C
2/2
2/2
5/5
2/2
1/1
3/5
5/5
C
2/2
3/3
4/5
2/2
3/3
7/7
7/7
6/7
6/7
3/3
1/1
2/2
1) Retired from the board on 31 December 2009.
2) Professor M Feldberg became the lead independent director from 6 May 2010.
3) During the year, Mr N P Mageza, Dr R Thummer and Mr V Moosa were appointed to the board with effect from 1 January 2010, 1 February 2010
and 1 August 2010 respectively.
4) Member of the human resources and transformation committee until February 2010.
5) Appointed as a member of the human resources and transformation committee, with effect from February 2010.
6) Appointed as a member of the nomination and governance committee, with effect from February 2010.
Indicates board committee membership, C indicates board committee chairman, B indicates attendance by invitation and E indicates attendance ex offi cio.
The fi gures in each column indicate the number of meetings attended out of the maximum possible number of meetings
64 Corporate governance continued
Induction and training of directors
Following appointment to the board, directors receive an induction and training tailored to their individual needs. For further information,
refer to the www.sappi.com website.
Board committees
The board has established committees to assist it with the discharge of its duties. These committees operate within written terms of
reference set by the board. The board committees are as follows:
Governance structure: Sappi board committees
Other
assurance
providers
External
audit
Shareholders
via the AGM
Internal
audit
Audit
committee
Board
of directors
Group risk
management
team
CEO, CFO and
management
committees
Nomination
and
governance
committee
Sustainability
committee
Compensation
committee
Human
resources and
transformation
committee
Audit committee
The audit committee consists of fi ve independent, non-executive
directors and assists the board in discharging its duties relating
to the:
oversight of the performance of the internal audit function; and
oversight of non-fi nancial risks and controls, as well as
information technology (“IT”) governance matters, through a
combined assurance model which is in the process of being
safeguarding and effi cient use of assets;
oversight role for the risk management function;
operation of adequate systems, and control processes;
reviewing of fi nancial information and the preparation of
accurate financial reporting in compliance with applicable
regulations and accounting standards as well as sustainability
information in the integrated report;
reviews compliance with the group’s code of ethics and
developed.
The audit committee can confi rm that it:
is satisfi ed with the independence of the external auditor for
the 2010 fi nancial year;
has considered and approved non-audit services provided by
the external auditors (this is only contemplated for those non-
audit services where signifi cant cost or effi ciency benefi ts are
anticipated from utilising external audit as opposed to other
external regulatory requirements;
service providers);
oversight of the external auditors’ qualifi cations, experience
has satisfi ed its responsibilities in terms of the charter, which is
and performance;
updated periodically;
2010 annual report
65
has met with senior management, which includes the CEO
and the chief fi nancial offi cer (CFO), at least four times during
2010, and with the management disclosure committee;
has considered and satisfi ed itself of the appropriateness
of the expertise and experience of the CFO, who is an
executive director;
has considered and recommended the internal audit mandate
for approval to the board;
has requested an annual review of sustainability information
reported in the integrated report;
has reviewed the disclosure of sustainability issues in the
integrated report, and
has received assurance from management, as well as from
internal and external assurance providers addressing signifi cant
risks facing the company.
all functioned well and that there were no major shortcomings. The
sustainability committee was only established after the 2010 self
assessment evaluation process.
Compensation committee
The compensation committee consists of four independent non-
executive directors. The committee ensures that the compensation
philosophy and practices of the group are aligned to the strategy
and performance goals. It reviews and agrees the various
compensation programmes and in particular the 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.
Human resources and transformation committee
The human resources and transformation committee consists of
The external and internal auditors attended audit committee
four independent non-executive directors. The responsibilities of
meetings and had unrestricted access to the committee and its
the committee are, inter alia, to determine the group’s human
chairman. The external and internal auditors met privately with the
resource policy and strategy, assist with the hiring and setting of
audit committee on a regular basis during 2010.
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 which they
report on a regular basis and they each met four times during 2010.
Dr D Konar has been designated as the audit committee fi nancial
terms and conditions of employment of executives, the approval of
retirement policies and succession planning for management and
the CEO as well as employment equity and transformation in
South Africa.
Sustainability committee and councils
The structure of the sustainability executive management
expert as required by the Sarbanes-Oxley Act of 2002, and
committee, constituted during 2009, changed during 2010
attended the annual general meeting in 2010.
Nomination and governance committee
The nomination and governance committee consists of four
and the committee is now a board committee comprising one
independent non-executive director who chairs the committee, a
non-executive director, as well as the CEO. The sustainability
committee has a charter from the board. Its mandate is essentially
independent non-executive directors which complies with the JSE
to oversee the group’s sustainability strategies and platform.
Limited Listings requirement. The committee considers the
leadership requirements of the company including oversight of
a succession plan for the board. The committee identifi es and
nominates suitable candidates for appointment to the board,
on the basis of required attributes set out in the board charter,
Sustainability councils provide strategic and operational support to
the sustainability committee dealing with day-to-day sustainability
issues, helping to develop and entrench people, planet and
prosperity related initiatives in the business.
for board and shareholders approval. The committee makes
An initial independent review of sustainability information was
recommendations on corporate governance practices and
undertaken by internal audit during 2010. This review process will
disclosures for Sappi and reviews compliance with corporate
be developed further during 2011.
governance requirements. The committee has oversight of the
appraisal process of the board and its committees which consists
of a self assessment process, with the results and recommended
actions for improvement being communicated to the chairman of
each committee and the board. The results of the 2010 self
assessments of the board, audit committee, compensation
committee, human resources and transformation committee, as
well as of the nomination and governance committee revealed that
For more information on sustainability at Sappi, refer to the
www.sappi.com website as well as to the 2010 integrated report,
where a summary can be found on pages 10 to 13.
66 Corporate governance continued
Management committees
Responsibility for the day to day management of the group has been assigned by the board to the CEO. To assist the CEO in discharging
these duties, a number of management committees have been formed:
Governance structure: Sappi management committees
Audit
committee
Group risk
management
team
Technical
committees
IT steering
committee
Board
of directors
CEO, CFO and
executive
committee
Sustainability
committee
Sustainability
councils
Disclosure
committee
Treasury
committee
Executive committee
This committee comprises executive directors and senior
Technical committees
The technical committees continue to focus on global technical
management from Sappi Limited and the CEOs of the three main
alignment, performance and effi ciency measurement as well as
regional business operations of the group. The CEO has assigned
new product development.
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, fi nancial, governance,
sustainability, social and risk processes. The executive committee
meets monthly.
Disclosure committee
This committee comprises some members of the executive
committee and senior management from various disciplines
whose objective is to review and discuss fi nancial information
prepared for public release. Membership of the disclosure committee
was expanded in 2009 to include the regional CFOs. The head of
internal audit is invited to attend meetings.
Treasury committee
The treasury committee meets every second week to assess
risk and advise as to best course of action on treasury related
matters.
Group risk management team
The group risk management team is mandated by the Sappi
Limited board to establish, co-ordinate and drive the risk
management process throughout Sappi. It has established a risk
management system to identify and manage signifi cant 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. The main
focus in 2010, was the review and updating of a “corporate risk
assessment” as well as a King III report gap analysis regarding the
risk management processes at Sappi, which highlighted the need
for some amendments to the group’s risk policy. A full report on
Sappi’s risk management can be found on pages 61 to 62.
IT Steering committee
An IT Steering committee was established during 2010 to promote
IT governance throughout the group. The Steering committee has
a charter that was considered and approved by the audit
committee and the board. An IT governance framework has been
2010 annual report
67
developed and IT reports have been presented to the audit
The head of internal audit reports to the audit committee, meets
committee and the board. A King III report gap analysis was
with board members, has direct access to senior executive
undertaken in 2010. This highlighted the need to revise certain IT
management and is invited to attend various management
policies and procedures.
meetings.
Financial statements
The directors are responsible for overseeing the preparation and
fi nal approval of the group annual fi nancial statements which are
based on International Financial Reporting Standards as issued by
During 2010, internal audit increased its focus on reviewing
signifi cant non-fi nancial risk areas as well as sustainability and legal
compliance activities. This coincided with activities to advise the
business on development of a combined assurance model and
the International Accounting Standards Board. The group’s results
other recommendations made in the King III report on corporate
are reviewed prior to submission to the board as follows:
governance. The forensic activity was streamlined to increase
All four quarters – by the disclosure committee and audit
committee; and
interim and fi nal quarters – by external audit.
Internal controls
The board is responsible for the group’s systems of internal
fi nancial 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 fi nancial statements and
operational management information, that assets are adequately
safeguarded against material loss and that transactions are
properly authorised and recorded. Internal controls also provide
assurance that the group’s resources are utilised effi ciently and
that the activities of the group are in compliance with applicable
laws and regulations.
As part of an ongoing comprehensive evaluation process, control
effectiveness. An external quality assurance review of internal audit
was conducted by the Institute of Internal Auditors (IIA) in 2010
and a “generally complies” rating was received.
Company secretary
All directors have access to the advice and services of the
company secretary and are entitled 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.
Specifi c 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 excellence,
self assessments by management and independent reviews by
integrity and respect in all transactions and with all stakeholders,
internal audit and other assurance providers were undertaken
with whom they interact, as refl ected in the group’s code of ethics
across the group of the effectiveness of various elements of the
that commits the company and employees to sound business
group’s fi nancial, disclosure and other internal controls, procedures
practices and compliance with legislation. The code of ethics is
and systems. Where potential improvements have been identifi ed,
available on the company website.
they are being addressed. The reviews enabled management to
strengthen the group’s controls further. 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.
Legal compliance programme
A legal compliance programme designed to increase awareness
of, and enhance compliance with, applicable legislation is in place.
The internal controls in place, including the fi nancial controls, are
The group compliance offi cer reports quarterly to the group audit
considered to be effective. A Section 404 report in its Form 20-F
committee.
is to be fi led with the United States Securities and Exchange
Commission.
Internal audit
The group’s internal audit department has a current complement
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 with Sappi in order to assess any possible
of 18 persons. It has a specifi c mandate from the audit committee
confl ict of interest. The policy also dictates that directors and
and, independently appraises the adequacy and effectiveness
senior offi cers of the group must disclose any interest in contracts
of the group’s systems, internal controls and accounting records.
as well as other appointments to assess any confl ict of interest in
It reports its fi ndings to local and divisional management, the
fi duciary duties. During the year under review, save as disclosed in
external auditors as well as the respective audit committees.
the group annual fi nancial statements, none of the directors had a
Internal audit also provides a consulting service on risks, controls
signifi cant interest in any material contract or arrangement entered
and governance developments.
into by the company or its subsidiaries.
68 Corporate governance continued
Insider trading
The company has a code of conduct for dealing in company
securities and follows the JSE Listings requirements in this regard.
For further information please refer to the www.sappi.com 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 all stakeholders to anonymously report
environmental, safety, ethics, accounting, auditing, control issues
or other concerns. The follow-up of all reported matters is co-
ordinated by group internal audit and reported to the audit
committee.
Stakeholder communication
The board is responsible for presenting a balanced and under-
standable assessment of the company’s position in reporting
to stakeholders. A stakeholder engagement policy was developed
in 2010. The reporting addresses material matters of signifi cant
interest and is based on principles of openness and substance
over form.
2010 annual report
69
Compensation report
This report sets out the group’s compensation philosophy and
The committee reviewed and recommended the fees for non-
practices in general and provides detail compensation information
executives directors for approval by shareholders effective October
for the executive directors, Mr R J Boëttger and Mr M R Thompson,
2010.
and non-executive directors for the year ending September 2010.
Against the back drop of 2009 which was a very challenging
fi nancial year for the group and the industry and considering the
group’s fi nancial performance in 2010, the committee reviewed
and approved the compensation programmes and awards to
employees.
The compensation committee is responsible for:
ensuring that the compensation philosophy and practices of
the group are aligned to the strategy and performance goals;
reviewing the compensation of executive directors and other
senior key management;
satisfying shareholders that the senior executive compensation
The committee gave due consideration to ensuring an appropriate
is set by a committee of independent directors; and
balance is maintained between the need for compensation that is
competitive and would attract and retain key talent, while ensuring
reviewing and approving proposals (submitted by the group
executive committee) on the fees and benefits of non-
that compensation practices are aligned to good corporate
executive directors.
governance, risk taking and shareholder interest.
Governance
The compensation committee for 2010 consisted of:
Prof M Feldberg (chairman of the committee)
Mr H C Mamsch
Mr J D Mckenzie
Sir A N R Rudd
Mr D C Brink (retired on 31 December 2009)
Mr D C Brink retired from the board of directors on 31 December
2009. Mr Brink had also been the chairman of the compensation
committee as a separate committee from the human resources
committee since 2005.
He was succeeded by Professor M Feldberg, who was appointed
chairman of the compensation committee in January 2010.
At the invitation of the committee, Dr D C Cronjé (group chairman),
Mr R J Boëttger (group chief executive offi cer) and Ms L A Swartz
(group head human resources) attended meetings but recused
themselves when items 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
fi nancial year-end except for Mr D C Brink. No current committee
member has any personal fi nancial interest or confl icts of interest
arising from cross-directorships, or day–to–day involvement in
running the business.
During the course of the year, the committee met four times and
conducted two further meetings by telephone conference.
The committee reviewed and approved:
the management incentive plan rules for 2010;
the annual incentive plan awards for 2009;
the share grants made for 2010; and
the salary increases effective 01 January 2010.
In exceptional circumstances, in order to appropriately compensate
for shifting business goals or major unplanned events, the committee
has the right to exercise discretion in authorising adjustments on
both fi nancial and individual performance targets, which it deems
appropriate when evaluating performance against the targets at
fi nancial year end.
During the year, the compensation committee undertook a self-
evaluation of its effectiveness and concluded that the committee
was acting effectively.
Advice
During the course of the year, management and the committee
sought advice from the following external advisers:
The HayGroup presented their fi ndings on the benchmark analysis
of Sappi’s compensation practices for executive directors and
other senior key managers to the compensation committee. The
report included a review of South African, European and North
American compensation practices.
Kepler and Associates provided adhoc advice to management on
remuneration practices and trends to assist with background
information and related support in formulating recommendations.
Verifi cation of Sappi’s performance and that of the peer group for
the Performance Share Incentive Plan was conducted by Kepler
and Associates for total shareholder return and, by KPMG for cash
fl ow return on net assets.
In addition, the group companies participate in national and/or
industry surveys to benchmark compensation practices.
Compensation philosophy
Sappi’s compensation programs are designed to achieve the
company’s goals of attracting, motivating and retaining employees
who can drive the achievement of fi nancial and strategic objectives
that are intended to build long-term shareholder value.
The philosophy statement underpins all Sappi group company
compensation policies across all geographies and functions.
70 Compensation report continued
The design and components of our compensation programs gives
Consideration is also given to how the results were achieved and
due consideration to the nature of the paper and pulp industry
whether the decisions and actions taken were consistent with
which is characterised by its mature profi le, cyclicality and slow
our values.
growth.
The annual management incentive scheme aims to reward the
The primary components of pay include base salary and benefi ts
delivery of short-term fi nancial and individual performance goals.
such as medical and retirement, annual incentive awards and long-
term incentives.
Long-term incentive plans aim to reward long-term sustained
performance and create alignment with the delivery of value to the
Compensation levels are set to refl ect:
shareholder.
competitive market practices;
internal equity;
company performance; and
individual performance.
Incentives are capped in order that inappropriate business risk-
taking is neither encouraged nor rewarded.
Market conditions – all components of pay are set competitively
with due consideration to market pay practices of companies
Sappi’s benchmarking philosophy is to pay at the median of the
of similar size and complexity in regional markets.
market for all components of pay except for short-term incentives
which are targeted at the 75th percentile. Total compensation is
Risks – the compensation committee considers the management
of risk to be important to the process of designing and
between the 50th and 75th percentile of the market.
implementing sustainable compensation structures. Therefore,
Guiding principles
We strive to reward employees in the group fairly and equitably in
relation to job levels; experience and the employment market.
the balance in terms of the pay mix components encourages
prudent risk taking. Executive compensation is balanced in
terms of the pay mix components to ensure that policies
encourage behaviour consistent with the group’s risk reward
Job size – all jobs are sized using a consistent methodology to
strategy.
defi ne pay structures and reward levels.
Performance – relevant components of compensation are
linked to the performance of individuals and that of his/her
specifi c business unit or function and/or company.
2010 annual report
71
Compensation structure
The compensation of executive directors and other key senior management comprises fi xed and variable components. The following table
summarises the major components of our compensation programmes.
Component
Purpose
Characteristics
Base salary
Attract and retain qualifi ed talent
Fixed compensation
Reinforce the guiding principle of
Reviewed annually
being competitive
Target median of the market
Recognise individual work experience
Individual increases are granted based on performance (merit),
and level of responsibility
and infl uenced by internal and external equity and budget
Recognise individual performance
constraints
and maintain internal parity among
Used as a base for calculating other components of
those performing like jobs
compensation
Retirement
benefi ts
To provide income for an individual
Defi ned benefi t and defi ned contribution plans
after they have stopped working
Majority of defi ned benefi t plans closed to new hires
Employees in defi ned benefi t legacy plans continue to accrue
benefi ts in such plans for both past and future service
Contributory and non-contributory plans
Company contributions vary based on local market practice
Death and
To provide assurance to employees’
Based on local market practice
disability benefi ts
family in the event of disability and/or
Disability benefi t – is a percentage of base salary for a defi ned
death
period
Death benefi t – is a multiple of base salary
Medical benefi ts
To provide medical insurance to
Non-pensionable
employees and their families in the
Market related
event of ill-health
Appropriate in light of position
Other benefi ts
Short-term incentive
Dependent on conditions, seniority/ grade and regional policy
eg car benefi ts, education assistance, meal allowances, service
awards etc.
Annual incentive
Focus participants on key annual
Variable compensation provided to reward performance over
metrics
the short-term
Motivate the attainment of short-term
Short-term incentive targets are determined annually
goals for the applicable period
Specifi c performance goals supporting both the company’s
Provide a competitive target
overall goals for the year and the contributions of individuals in
compensation opportunity
his/her own area of responsibility are established
Is linked to the next higher business unit level
Paid out annually, provided the threshold is achieved
On-target cash award for executive directors is 85% of salary
and ranges from 30% to 70% for other key senior managers
based on seniority and location.
Includes the management incentive scheme (MIS) and other
performance or bonus schemes – for employees who do not
participate in the MIS
72 Compensation report continued
Component
Purpose
Characteristics
Long-term incentive
Share options
Motivate the attainment of
Variable compensation provided to reward performance over
long-term goals
the long-term
Reinforce the guiding principle of
Vests 25% each year over four years
alignment to shareholder interests
Expires eight years from date of grant
Provide an opportunity for eligible
No dividend earned
employees to acquire an interest
Number of shares granted is benchmarked at levels of seniority
in the equity of the company
Awarded annually
Performance plan
Reinforce the guiding principle
Conditional grants awarded annually to executive directors
shares
for long-term performance and
and other key senior managers of the company
shareholder interests
Cliff vesting after four years if performance hurdles are met
Align executive interests with the
Performance is measured relative to a peer group of 14 other
long-term operational growth
industry related companies
of the company
The number of shares allocated is benchmarked externally
Encourage long-term commitment
and is performance based
to the company
Is a wealth creation mechanism for
executive directors and other key
senior managers if the company
outperforms the peer group
Broad-based Black Economic Empowerment
Management
Provide black managers with the
Established to meet the requirements of the Forestry Sector
share ownership
opportunity to acquire equity
Charter
plan
in the company
Eligible employees receive an allocation based on seniority
Attract, motivate and retain black
of “A” ordinary shares
managers
Shares vest 40% after three years and thereafter 10% each
year
Shares can only be taken-up after September 2019
Managers receive the net value in shares or cash at the end
of the lock-in period
Employee share
Provide employees who do not
Established to meet the requirements of the Forestry Sector
ownership plan
currently participate in either the
Charter
share option scheme or performance
Eligible employees receive an allocation based on seniority
share plan to acquire equity in the
of “A” ordinary shares and ordinary shares
company
Shares vest 40% after three years and thereafter 10%
Provide historically disadvantaged
each year
employees an opportunity to
The shares can only be taken-up after September 2019
participate in equity based
Employees receive the net value in shares or cash at the end
compensation
of the lock-in period
2010 annual report
73
Balance between fi xed and variable pay:
Short-term incentives
The balance between fi xed and variable pay components will
Executive directors and other senior managers participate in an
change each year based on performance. Each executive director’s
annual management incentive scheme. The scheme aims to
total compensation consists of salary and benefits, annual
reward the delivery of short-term fi nancial targets which comprises
incentives, and long-term incentives.
of company/business unit and/or function performance as well as
Assuming an on-target performance we would generally expect
the compensation mix for executive directors to be in the region of:
40% base pay plus benefi ts (fi xed)
30% short-term (variable)
30% long-term (variable)
Base salary
the performance of individuals. Specifi c to the management
incentive scheme, fi nancial and operational performance criteria
account for 80% of the bonus award and individual performance
accounts for 20% of the bonus award. During fi nancial year 2010,
the business performance criteria included operating profi t,
working capital and capital expenditure.
Examples of other variable pay programs within the group include,
Base salaries are benchmarked against the median of the relevant
but are not limited to:
market for each role and takes account of level, experience,
Production bonuses
performance and market pricing.
Gain sharing programmes
The committee also pays attention to internal equity.
Performance bonuses for staff who do not participate in the
Salary increases for executive directors and key senior managers
is consistent with the overall increase in salaries granted to other
levels of employees in the company based upon the geography in
which they live and work.
Retirement benefi ts
Across the group and based on location, it is the company’s policy
to provide retirement benefi ts through either a defi ned contribution
fund or a defi ned benefi t fund.
management incentive scheme
Sales incentive plans
For the fi nancial period covered by this annual report, no bonus
awards were paid to executive directors or any participants of the
management incentive scheme as the performance threshold had
not been met.
A bonus incentive award based on the groups fi nancial performance
of 116% of target will be included in the calculation for payment to
executives and other key senior managers in December 2010
In certain European countries, retirement benefi ts are provided by
(which payment falls within the 2011 fi nancial year), based on the
the state through social security systems. The design of both the
performance achieved for the year ending September 2010.
defi ned benefi t and defi ned contribution schemes in Europe takes
into account these social security benefi ts when determining the
Long-term incentives
contribution tables and fi nal pensions earned.
Contributions to the plans differ by geography and are either
contributing or non-contributing plans. Where defi ned benefi t
plans exist in the company, they are mainly legacy plans closed to
new hires. Employees who participate in these defi ned benefi t
plans continue to accrue past and future benefi ts in such plans.
Mr Boëttger is a member of the Sappi Provident fund (defi ned
contribution plan) and Mr Thompson is a member of the Sappi
Pension Fund (defi ned benefi t plan).
The company operates two long-term-incentive plans: the Sappi
Share Incentive Scheme and the Sappi Performance Share Plan.
Under these plans executive directors and other eligible employees
receive an annual grant.
Performance plan shares are conditionally granted to executive
directors and other key senior managers (approximately
40 employees). Vesting of the conditional grants take place after
four years based on the relative performance of the company
compared to 14 other industry related companies. The performance
criteria for the four year performance period ending September
Both Mr Boëttger and Mr Thompson are members of Sappi
2010 include Total Shareholder Return (TSR) and Cash fl ow
retirement funds.
Other benefi ts
Return on Net assets (CFRONA).
The peer group consisted of the following companies:
These include benefi ts such as medical insurance, death and
Abitibi Bowater; Holmen AB; Mondi Plc; Fibria Celulose SA;
disability insurance, vehicle benefi ts, leave and recognition of
International Paper; M-real OYJ; UPM-Kymmene OYJ; Stora Enso
service, and are applied where applicable in respective regions and
OYJ; Domtar; MeadWestvaco; Nippon Paper Group; Weyerhauser;
employee categories.
Norkse Skogindustria; Oji Paper.
74 Compensation report continued
For the four year performance period ending September 2009 and
M R Thompson
a vesting date of December 2009, Sappi’s performance relative to
Mr Thompson’s, total compensation for the year of US$466,915 is
the peer group measured on TSR was ranked in tenth place which
9.7% lower than that for 2009 of US$517,090.
resulted in none of the conditional share awards vesting.
Mr Thompson received a salary increase of 7% on the South
Other participants receive an annual grant of share options which
African portion of his salary which accounts for 70% and no salary
vests 25% each year over 4 years and expires after 8 years.
Executive compensation 2010:
R J Boëttger
Mr Boëttger’s total compensation for the year of US$923,997 is
13.6% lower than that for 2009 of US$1,070,283.
increase on the offshore portion of his salary which accounts for
30% of his total annual salary. In US$ terms, Mr Thompson’s salary
increased by 29.7% from US$261,921 to US$339,708. This year-
on–year differential is a result of Mr Thompson receiving only
eleven months pay instead of twelve months in 2009. He
voluntarily forfeited one month’s salary in support of employees
who experienced hardships as a result of a diffi cult 2009 fi nancial
Mr Boëttger received a salary increase of 7% on the South African
year. Exchange rate currency fl uctuations year-on-year also
portion of his salary which accounts for 70% and no salary
impacted his 2010 compensation.
increase on the offshore portion of his salary which accounts for
30% of his total annual salary. In US$ terms, Mr Boëttger’s salary
increased by 28.84% from US$551,185 to US$710,148 per
annum. This year-on-year differential is a result of Mr Boëttger
receiving only eleven months pay instead of twelve months in
Mr Thompson did not receive a bonus in 2009 as the group did
not meet the performance threshold. Such a bonus would have
been paid out in the 2010 fi nancial year. Based on the rules of the
management incentive scheme which rewards performance
targets based on operating profi t, working capital and capital
2009. He voluntarily forfeited one month’s salary in support of
expenditure, a bonus of US$102,582 was paid for the 2008
employees who experienced hardships as a result of a diffi cult
fi nancial year and is included in the 2009 total compensation
2009 fi nancial year. Exchange rate currency fl uctuations year-on-
number.
year also impacted his 2010 compensation.
Mr Thompson did not sell any shares during the 2010 fi nancial
Mr Boëttger did not receive a bonus in 2009 as the group did not
year.
meet the performance threshold. Such a bonus would have been
paid out in the 2010 fi nancial year. Based on the rules of the
management incentive scheme which rewards performance
targets based on operating profi t, working capital and capital
Through the Sappi Performance Share Incentive Plan, Mr Thompson
was awarded 120,000 conditional shares in December 2009. The
share price at the date of issue was R33.85.
expenditure, a bonus of US$347,548 was paid for the 2008
Top three executive’s salaries
fi nancial year and is included in the 2009 total compensation
KING III recommends that the salaries of the top three executives,
number.
Mr Boëttger did not sell any shares during the 2010 fi nancial year.
Through the Sappi Performance Share Incentive Plan, Mr Boëttger
was awarded 195,000 conditional shares in December 2009.
The share price at the date of issue was R33.85.
excluding executive directors should be disclosed. As the executive
management team is made up of a group of international
employees and to retain the confi dentiality of salaries across the
different geographies, the board decided not to disclose this
information for each of the individuals but has instead disclosed
the total salaries of the three employees concerned.
In the 2010 fi nancial year, the amount of the combined salaries
(comprising base pay and benefi ts) of the top three executive
directors was US$1,793,560 (2009: US$1,723,787).
2010 annual report
75
Directors’ participation in the Sappi Limited Share Incentive Trust (Scheme)
and The Sappi Limited Performance Incentive Trust (Plan)
Executive directors
Outstanding at beginning of year
Number of shares held
Issue 26
Issue 27
Issue 28a
Issue 29
Performance Shares 30*
Performance shares 30a*
Performance shares 31a*
Performance shares 32
Performance shares 34
Offered and accepted during the year
Performance shares 35
Paid for during the year
Number of shares
Returned, lapsed and forfeited during the year
Number of shares
Outstanding at year end
Number of shares held
Issue 27
Issue 28a
Issue 29
Performance shares 31a*
Performance shares 32*
Performance shares 34
Performance shares 35
Expiry dates
Issue 27
Issue 28a
Issue 29
Performance shares 31a*
Performance shares 32*
Performance shares34
Performance shares 35
R J Boëttger
M R Thompson
Total 2010
Total 2009
Allocated
price
No of
shares
Allocated
price
No of
shares
No of
shares
No of
shares
484,000
484,000
968,000
339,000
R77.97
R62.34
R47.08
R46.51
R11.06
R11.06
R11.06
33,000
33,000
39,600
39,600
52,800
110,000
88,000
88,000
R11.06
R11.06
220,000
110,000
154,000
195,000
120,000
315,000
648,800
–
–
–
(16,500)
(195,800)
(195,800)
(3,300)
679,000
408,200
1,087,200
968,000
R62.34
R47.08
R46.51
R11.06
33,000
39,600
39,600
88,000
88,000
120,000
R11.06
R11.06
220,000
110,000
154,000
195,000
13 February 2011
30 December 2011
13 December 2012
02 July 2011
12 December 2011
22 December 2012
09 December 2013
Changes in executive directors’ share options, allocations shares and performance shares after year-end
* Performance shares are issued when all conditions per note 28 are met. The position of participants in regard to the rights offer is also explained in note 28.
76 Compensation report continued
Dealings in the Scheme and the Plan for the year ended September 2010:
None
Dealings in the Scheme and the Plan for the year ended September 2009:
Director
Executive directors
M R Thompson
Date paid for
No of shares
paid for
Allocation
price
Market value
at date
of payment
Deferred Sale
17 December 2008
Deferred Rights Sale
17 December 2008
Performance Plan
22 December 2008
Performance Plan
3,000
3,600
4,500
R49.00
R20.27
R0.00
R33.00
R33.00
R36.70
Rights
22 December 2008
5,400
R20.27
R36.70
Total
16,500
Employment and separation agreements
Employment agreements typically stipulate notice periods required
Non-executive directors’ fees refl ect their services as directors and
by the employee and employer in the event of termination of
services on various sub-committees on which they serve, and the
employment except for our North American operations where
quantum of committee fees depends on whether the director is an
employment is “at will”. Based on seniority these notice periods
ordinary member or a chairman of the committee. Non-executive
vary from one to eighteen months.
Separation agreements, when appropriate, are negotiated with an
affected employee with prior approval having been obtained in
directors do not earn attendance fees; however, additional fees are
paid for attendance at board meetings in excess of the fi ve
scheduled meetings per annum.
terms of our governance structures.
Non-executive directors do not participate in any incentive
Employment contracts do not make any commitment to payment
schemes or plans of any kind.
in the event of a termination for cause or in the event of change-
In determining the fees for non-executive directors, due consideration
in-control. In cases in which there is a signifi cantly increased
is given to the fee practice of companies of similar size and
likelihood of a transaction involving a business unit, limited
complexity in the countries in which the directors are based.
change-in-control protections may be agreed and implemented if
it is deemed necessary for retention purposes.
Non-executive director fees
Directors are normally remunerated in the currency of the country
The extreme volatility of currencies, in particular the Rand/
US Dollar exchange rate in the past few years, caused distortion
of the relative fees in US Dollars paid to individual directors.
Non-executive directors’ fees are proposed by the executive
in which they live or work from. The remuneration is converted into
committee, agreed by the compensation committee, recommended
US Dollars (the group’s reporting currency) at the average
by the board and approved at the annual general meeting by the
exchange rate prevailing during the reporting years. Directors’ fees
shareholders.
are established in local currencies to refl ect market conditions in
those countries.
2010 annual report
77
The schedule below details the earnings of individual non-executive directors during 2010 and during 2009.
Although the shareholders approved an increase of 7% for the South African based non-executive directors with effect from 1 October 2009,
the difference in US Dollar terms between 2010 and 2009 is a result of the exchange rate currency fl uctuations.
2010
Director
US$
D C Brink(5)
M Feldberg
J E Healey
D Konar
H C Mamsch
B Radebe
A N R Rudd
F A Sonn(5)
K R Osar
J D McKenzie
D C Cronje(1)
N P Mageza(2)
R Thummer(3)
M V Moosa(4)
2009
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 D McKenzie
D C Cronje(1)
(1) Appointed in January 2008
(2) Appointed in January 2010
(3) Appointed in February 2010
(4) Appointed in August 2010
(5) Retired in December 2009
Board fees
Committee
fees
Travel
allowance
12,711
66,600
55,100
33,918
56,818
33,918
56,818
8,479
55,100
33,918
235,662
25,438
37,879
5,653
12,250
49,183
75,000
62,056
81,949
10,999
48,077
2,750
27,500
27,860
–
18,572
11,206
–
2,800
14,000
14,000
5,600
2,800
5,600
5,600
2,800
11,200
5,600
2,800
2,800
2,800
–
Total
27,761
129,783
144,100
101,574
141,567
50,517
110,495
14,029
93,800
67,378
238,462
46,810
51,885
5,653
718,012
427,402
78,400
1,223,814
Board fees
Committee
fees
Travel
allowance
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
Total
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
Annual financial
statements
Annual fi nancial statements
for the year ended September 2010
Auditor’s report
Directors’ approval
Secretary’s certifi cate
Audit committee report
Directors’ report
Group income statements
Group statements of comprehensive income
Group balance sheets
Group cash fl ow statements
Group statements of changes in equity
Group income statements in Rands
(convenience translation)
Group statements of comprehensive income
in Rands (convenience translation)
Group balance sheets in Rands (convenience translation)
Group cash fl ow statements in Rands
(convenience translation)
Notes to the group annual fi nancial statements
1. Business
2. Accounting policies
2.1 Basis of preparation
2.2 Summary of accounting policies
2.3 Critical accounting policies and estimates
Page
80
81
81
82
84
88
88
89
90
91
92
92
93
94
95
95
95
95
95
98
2010 annual report
79
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. Inventories
16. Trade and other receivables
17. Ordinary share capital and share premium
18. Other comprehensive income (loss)
19. Non-distributable reserves
20. Interest-bearing borrowings
21. Other non-current liabilities
22. Provisions
23. Notes to the cash fl ow statements
24. Encumbered assets
25. Commitments
26. Contingent liabilities
Page
113
114
116
117
119
119
120
121
121
124
126
126
127
132
133
134
136
137
138
27. Post-employment benefi ts – pension and other benefi ts 138
28. Share-based payments
29. Financial instruments
30. Related party transactions
31. Events after balance sheet date
32. Environmental matters
33. Acquisition
Company auditor’s report
Condensed Sappi Limited company income statements
2.4 Adoption of accounting standards in the current year
102
Condensed Sappi Limited company statements
2.5 Accounting standards, interpretations and amendments
of comprehensive income
to existing standards that are not yet effective
3. Segment information
4.1 Operating profi t
4.2 Employment costs
4.3 Other operating expenses (income)
5. Net fi nance costs
6. Taxation charge (benefi t)
7.
Earnings (loss) per share and headline earnings
102
103
108
109
109
110
110
Condensed Sappi Limited company balance sheets
Condensed Sappi Limited company statements
of changes in equity
Condensed Sappi Limited company cash fl ow statements
186
Notes to the condensed Sappi Limited company fi nancial
statements
(loss) per share
112
Investments
147
155
177
178
178
180
183
184
184
185
186
187
188
80
Auditor’s report
Independent auditor’s report to the members
of Sappi Limited
We have audited the group annual fi nancial statements of Sappi
relevant to the entity’s preparation and fair presentation of the
fi nancial statements in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of
Limited, which comprise the group balance sheets as at September
expressing an opinion on the effectiveness of the entity’s internal
2010, and the group income statements, group statements of
control. An audit also includes evaluating the appropriateness of
comprehensive income, group statements of changes in equity
accounting policies used and the reasonableness of accounting
and group cash fl ow statements for the year then ended, and a
estimates made by management, as well as evaluating the overall
summary of signifi cant accounting policies and other explanatory
presentation of the fi nancial statements.
notes, and the directors’ report, as set out on pages 84 to 91;
pages 95 to 181 and 74 to 77.
Directors’ responsibility for the fi nancial statements
The company’s directors are responsible for the preparation and
fair presentation of these fi nancial statements in accordance with
International Financial Reporting Standards 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.
We believe that the audit evidence we have obtained is suffi cient
and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the fi nancial statements present fairly, in all material
respects, the consolidated fi nancial position of Sappi Limited as at
September 2010, and its consolidated fi nancial performance and
consolidated cash fl ows for the year then ended in accordance
with International Financial Reporting Standards and in the manner
required by the Companies Act of South Africa.
Auditor’s responsibility
Our responsibility is to express an opinion on these financial
Deloitte & Touche
statements based on our audit. We conducted our audit in
Per M J Comber
accordance with International Standards on Auditing. Those
Partner
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 mis-
statement.
03 December 2010
Deloitte & Touche – Registered Auditors
Buildings 1 and 2, Deloitte Place
An audit involves performing procedures to obtain audit evidence
The Woodlands, Woodlands Drive, Woodmead Sandton
about the amounts and disclosures in the fi nancial statements.
Johannesburg, South Africa
The procedures selected depend on the auditor’s judgement,
including the assessment of the risks of material misstatement of
the fi nancial statements, whether due to fraud or error. In making
National Executive: G G Gelink Chief Executive A E Swiegers Chief Operating Offi cer
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 M J Comber Deputy Chairman of the Board.
those risk assessments, the auditor considers internal control
A full list of partners and directors is available on request.
2010 annual report
81
Directors’ approval
The directors are responsible for the maintenance of adequate
The directors are of the opinion, based on the information and
accounting records and the content, integrity and fair presentation
explanations given by the company’s offi cers and the internal
of the annual fi nancial statements of the group and Sappi Limited
auditors, that the system of internal control provides reasonable
company, and the related fi nancial information included in this
report.
assurance that the fi nancial records may be relied on for the
preparation of the fi nancial statements. However, any system of
internal fi nancial control can provide only reasonable, and not
These have been prepared in accordance with International
absolute assurance against material misstatement or loss.
Financial Reporting Standards as issued by the International
Accounting Standards Board, the JSE Limited Listings
Requirements and in the manner required by the South African
The directors have reviewed the group’s budget and cash fl ow
forecasts. This review, together with the group’s fi nancial position,
existing borrowing facilities and cash on hand, has satisfi ed the
Companies Act. In preparing the fi nancial statements, the group
directors that the group will continue as a going concern for the
applied appropriate accounting policies supported by reasonable
foreseeable future. Therefore the group continues to adopt the
judgements and estimates. The auditors are responsible for
going concern basis in preparing its fi nancial statements.
auditing the annual fi nancial statements in the course of executing
their statutory duties.
The directors acknowledge that they are ultimately responsible for
the system of internal fi nancial 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 U.S.
Sarbanes-Oxley Act (a requirement for companies listed on the
New York Stock Exchange), are set out in the Corporate
The report and annual fi nancial statements of the group and the
company appear on pages 84 to 188 and were approved by the
board of directors on 03 December 2010 and signed on its behalf by:
R J Boëttger
M R Thompson
Chief executive offi cer
Chief fi nancial offi cer
Governance section of this report.
Sappi Limited
Secretary’s certifi cate
In terms of section 268G(d) of the Companies Act, 61 of 1973 (as amended) 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 fi nancial year ended September 2010, 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 Southern Africa (Pty) Limited
Secretaries
per D J O’Connor
Group secretary
03 December 2010
82
Audit committee report
for the year ended September 2010
The legal responsibilities of the Sappi Limited group audit committee
(the committee) are set out in the South African Companies Act,
External audit
The group’s external auditors are Deloitte & Touche. Fees paid
61 of 1973 (as amended). These responsibilities, together with the
to the auditors are disclosed in note 4 to the annual fi nancial
requirements of compliance with appropriate governance and
statements.
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
Key functions and responsibilities
of the committee
The key functions and responsibilities of the committee as outlined
in the charter are to:
chairman of the board, are eligible to serve on the committee. The
■ assist the board of directors in its evaluation of the adequacy
nomination and governance committee recommends to the board
and effi ciency of the internal control systems, accounting
any appointments to or removals from the board, which in turn is
practices, information systems and auditing processes applied
responsible for the composition of the committee. The committee
within the group in the day-to-day management of its business;
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.
■ 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
The committee comprised the following members during the year
statements and reports prepared with reference to the affairs of
and to the date of this report, except where noted otherwise:
the group;
Dr D Konar (Chairman)
(appointed in January 2004,
auditors who, in the opinion of the committee, are independent
■ nominate for appointment as auditors the company registered
Mr J E Healey
Mrs K R Osar
Mr P N Mageza
Mr H C Mamsch
Mr D C Brink
chairman from January 2007)
(appointed in August 2004)
(appointed in November 2007)
(appointed in February 2010)
(retiring 31 December 2010)
(retired 31 December 2009)
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
Biographical details of the current members of the committee are
the auditors may provide to the group;
set out on pages 18 to 20.
■ approve any contract with the auditors for the provision of non-
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 chairman of the board is entitled to attend meetings ex
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 fi nancial statements, or any other related matter
offi cio. The external auditors attend all committee meetings and
thereto; and
separate meetings are held to afford them the opportunity of
■ perform such further functions as may be prescribed.
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 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
The group head internal audit has a direct reporting line to the
effectiveness and adherence to the ERMF. The emphasis on risk
committee chairman and also meets regularly with the chief
governance is based on the group’s ERMF. The ERMF places
executive officer and the chief financial officer. Further details
weight on accountability, responsibility, independence, reporting,
on the internal audit function are contained in the corporate
communications and transparency, both internally and with all our
governance report.
key external stakeholders.
2010 annual report
83
Specifi c 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; and
■ monitoring the identifi cation and correction of weaknesses and
breakdowns of systems and internal controls.
Financial control, accounting and reporting
■ monitoring the adequacy and reliability of management information
and the effi ciency of management information systems;
■ 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 confi rming the
appropriateness of accounting policies used;
■ evaluating on an ongoing basis the appropriateness, adequacy
and effi ciency of accounting policies and procedures, compliance
with generally accepted accounting practice and overall accounting
standards as well as any changes thereto;
■ discussing and resolving any signifi cant 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; and
■ reviewing and monitoring all key performance indicators to
ensure that decision making capabilities and the accuracy of the
related reporting and fi nancial results they aid are maintained at
industry levels.
■ considering whether the extent of reliance placed on internal
audit by the external auditors is appropriate and whether there
are any signifi cant 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 identifi ed; and
■ performing such other functions as are prescribed in the
regulations relating to the South African Companies Act.
Having considered, analysed, reviewed and debated information
provided by management, internal audit and external audit, the
committee confi rmed 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 effi ciently; and
■ the skills, independence, audit plan, reporting and overall
performance of the external auditors are acceptable and that it
recommends their re-appointment in 2011.
Appropriateness of the expertise and experience
of the chief fi nancial offi cer
In terms of the JSE Listings Requirements, the audit committee
at its meeting held on 04 November 2010, satisfi ed itself as to the
appropriateness of the expertise and experience of the chief
fi nancial offi cer.
Internal audit
■ direct reporting by the group head internal audit to the chairman
Annual fi nancial statements
The committee has:
of the committee;
■ monitoring the effectiveness of the internal audit function in terms
of its scope, plans, coverage, independence, skills, staffi ng,
overall performance and position within the organisation;
■ monitoring and challenging, where appropriate, action taken by
management with regard to adverse internal audit fi ndings; and
■ 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
■ reviewed and discussed the audited annual fi nancial statements
included in the annual report with the external auditors, the chief
executive offi cer and the chief fi nancial offi cer;
■ reviewed signifi cant 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 fi nancial statements, which will be
open for discussion at the forthcoming annual general meeting.
Dr D Konar
Audit committee chairman
auditors and monitoring confl icts of interest; and
03 December 2010
84
Directors’ report
for the year ended September 2010
Your directors submit their report for the year ended September
2010.
Business of Sappi Limited (group or the
company) and its operating companies
mentioned below (the group)
The group manufactures and sells a wide range of pulp, paper,
chemical cellulose and wood products for use in almost every
sphere of economic activity. The group is comprised of Sappi Fine
Paper North America, Sappi Fine Paper Europe and Sappi
Southern Africa which are its reportable segments.
Sappi Fine Paper which comprises Sappi Fine Paper Europe and
Share capital
As at September 2010 the authorised and issued share capital of
Sappi were as follows:
Authorised:
725,000,000 ordinary shares of
ZAR1 each ZAR725 million
19,961,476 “A” ordinary shares of
ZAR1 each ZAR20 million
Issued:
541,446,223 ordinary shares of
ZAR1 each ZAR541 million
19,961,476 “A” ordinary shares of
ZAR1 each ZAR20 million
Share premium
US$1,564 million
Sappi Fine Paper North America, has manufacturing and marketing
During the year, the following share issues occurred:
facilities in North America, Europe and Asia and produces mainly
high quality branded coated fi ne paper. It also manufactures
uncoated graphic and business paper, coated and uncoated
speciality paper, and casting release paper used in the manufacture
of artifi cial leather and textured polyurethane applications. Sappi
■ 19,961,476 “A” ordinary shares were created and issued as part
of Sappi’s 2010 Broad-based Black Economic Empowerment
transaction. These are eliminated at a consolidated group level
as they are treated as treasury shares.
■ 4,328,359 ordinary shares were issued as part of the unwinding
Southern Africa (Sappi Paper and Paper Packaging, Sappi Forests
of the 2006 Black Economic Empowerment transaction.
and Sappi Chemical Cellulose) based in southern Africa, produces
commodity paper products, pulp, chemical cellulose, uncoated
fi ne paper 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. The fi nancial results and
position associated with Sappi Trading are allocated to our reportable
segments.
Reporting period
The group’s fi nancial 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 fi nancial reporting is based on
International Financial Reporting Standards (IFRS) issued by the
International Accounting Standards Board (IASB), Interpretations
issued by the International Financial Reporting Interpretations
Committee (IFRIC) of the IASB, the AC 500 standards issued by
■ Included in the 541,446,233 ordinary shares are 41,896,595
treasury shares. See note 17 of the annual fi nancial statements
for further information relating to the share capital of Sappi
Limited.
Purchase of shares by a subsidiary
Through a wholly-owned subsidiary, the Sappi group has in previous
fi scal years acquired approximately 21.4 million Sappi Limited
ordinary shares (treasury shares) on the open market of the
JSE Limited. No shares were acquired during fi scals 2010 and
2009, other than the take up of the rights issue in December 2008.
Some of these 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.
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.
Signifi cant announcements and events during the
year under review and subsequent to year end
During the 2010 fi nancial year, the following signifi cant announce -
ments/events took place:
the Accounting Practices Board, and the requirements of the
■ We completed a share-based Broad-based Black Economic
South African Companies Act of 1973.
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.
Empowerment transaction in June 2010 following shareholder
approval in April 2010. In one leg of the transaction Lereko
Investments, our strategic empowerment partner, exchanged its
interest in Sappi’s plantation land for Sappi Limited shares. The
major part of the transaction, which is fully described on our
For the convenience of users, the income statements, balance
website, is primarily for the benefi t of our employees in southern
sheets and cash fl ow statements of the group have been
Africa. See also notes 17 and 28 of our annual financial
translated into South African Rands on pages 92 to 94.
statements for further details relating to this transaction.
2010 annual report
85
■ The total potential value of the transaction amounts to
ZAR814 million, with a total potential shareholding of 4.5%
of the issued share capital of Sappi Limited. This share-based
Broad-based Black Economic Empowerment transaction
translates into the empowerment of approximately 30% of
Sappi’s South African business, and increased its overall
scorecard empowerment performance, from an independent
empowerment rating agency, of BB last year to AA this year.
■ On 20 April 2010, Sappi announced that it had extended its
plantation holdings in South Africa with the purchase of the
Sjonajona plantation (14,500 ha in extent) from Mondi.
■ On 15 July 2010, Sappi announced the consolidation of its
Southern African paper and paper packaging businesses in
order to strengthen its ability to meet customer requirements
and develop new business opportunities.
Financing
During the year, in which there was no new signifi cant debt acquired,
the group repaid the following borrowings:
The Sappi Limited Share Incentive Trust
(the Scheme) and The Sappi Limited
Performance Share Incentive Trust (the Plan)
Sappi has two share incentive schemes in place, namely the
Scheme and the Plan for the purpose of enabling Sappi Limited to
allot shares and grant options in respect of ordinary shares to
present employees, including executive directors, employees of
its subsidiaries and employees seconded to joint ventures. The
maximum number of shares which may be acquired by participants
under both the Scheme and the Plan is 42,700,870 shares. Of the
42,700,870 shares, 23,371,122 shares have been offered and are
outstanding at the end of fi scal 2010 leaving the remainder of
19,329,748 shares that can still be allocated to participants. The
group has 21,935,119 treasury shares at year end, some of which
have been and will continue to be utilised to meet the requirements
of the Scheme and the Plan from time to time.
During the year, 999,200 credit sale and combined option/deferred
sale allocations under the Sappi Limited Share Incentive Scheme
■ In March 2010, the North American Municipal Bonds of
were cancelled in terms of the rules of the Scheme. The allocations
US$106 million were repaid at par value;
■ An amount of US$29 million of our 7.5% Guaranteed Notes due
2032 was repurchased in the open market early in the third
fi scal quarter for US$24 million; and
■ In June 2010, Sappi made an early repayment of the fi rst
instalment on a syndicated loan with Österreichische Kontrollbank
of EUR80 million (US$99 million) due in December 2010.
The group is in a strong liquidity position with large cash resources
of US$792 million as at September 2010 with cash exceeding
the amount of short term interest-bearing debt of US$696 million,
access to an undrawn committed revolving credit facility of
EUR209 million, and a much improved long term debt maturity
profi le with the average time to maturity of 4.1 years. Substantially all
non-South African long-term debt is supported by a Sappi Limited
guarantee. Net cash generated for the year was US$341 million.
Covenants on certain international term debt are similar and are
detailed in the chief fi nancial offi cer’s report.
Borrowing and fi nancing
The group’s net debt at September 2010 amounted to US$2.2 billion
(September 2009: US$2.6 billion). The company’s Articles of
Association allow net borrowings of up to US$5.6 billion. Details
of the non-current borrowings are set out in note 20 of the group
annual fi nancial statements.
Dividends
In accordance with the group’s stated primary target of reducing
debt to below US$2.0 billion, the board has decided not to declare
a dividend for the fi nancial year ended September 2010. Refer to
the chief fi nancial offi cer’s report for details on the restrictions limiting
the payment of cash dividends.
were made in March 2002 (in respect of 470,000 shares at a price
of ZAR147.20 per share) and in December 2008 (in respect of
529,200 shares, arising from the 2008 rights offer at a price of
ZAR20.27). The allocations would have expired on 28 March 2010
and the average price payable by participants for the allocations at
that time (ZAR77.97 per share) would have been well above the
market price. The board considered that it would not have been
in the best interests of the company to enforce payment by the
participants concerned. The purpose of the Share Scheme is to
offer participants an incentive and to have insisted that participants
pay for the allocations concerned, would have imposed a hardship
on the participants and would have served as a disincentive.
Note 28 of the group annual fi nancial statements provides further
details regarding the Scheme and the Plan.
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 on-going and aims to lower the risk
of incurring losses from uncontrolled incidents.
Fixed assets
During the year, both the Kangas and Usutu mills were closed
following their announced potential closures in October 2009.
86 Directors’ report continued
There have been no major changes to the nature and use of the
Professor M Feldberg was appointed Lead Independent director in
group’s fixed assets. Note 9 of the group annual financial
May 2010.
statements provides further details regarding the fi xed assets of
Sappi Limited.
Litigation
We become involved from time to time in various claims and
lawsuits incidental to the ordinary course of our business. We
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
of the group annual fi nancial statements).
Directors and secretaries
The composition of the board of directors is provided on pages 18
At the year end there were 14 directors, two of whom were
executive directors. Ten of the 12 non-executive directors were
independent. The independence of those directors who are
designated as independent, was reviewed and confi rmed during
the year by the nomination and governance committee.
It was announced earlier in the year that Mr H C Mamsch will be
retiring as a director on 31 December 2010.
In terms of the company’s Articles of Association, Dr D C Cronjé,
Professor M Feldberg, Mrs K R Osar and Mrs B Radebe will retire
by rotation from the board at the forthcoming annual general
meeting and all being eligible, have offered themselves for
to 20. During the year, Mr D C Brink and Dr F A Sonn retired as
re-election. Having assessed the individual performances of the
directors. Messrs N P Mageza and M V Moosa and Dr R Thummer
directors concerned, the board recommends each of them for
were appointed to the board during the year. In terms of the
re-appointment.
company’s Articles of Association, the appointments of Mr Mageza
and Dr Thummer were confi rmed at the annual general meeting
on 01 March 2010, and they were re-appointed as directors on
that date. It will be necessary to confi rm the appointment of
Mr Moosa at the forthcoming annual general meeting. He will, in
Personal details of Mr M V Moosa, Dr D C Cronjé, Professor
M Feldberg, Mrs K R Osar and Mrs B Radebe are set out in
the Notice of Annual General Meeting on pages 192 to 196 of
this report.
terms of the Articles of Association, retire from the board at that
The remuneration and fees of the directors of Sappi Limited are set
meeting, and being eligible, has offered himself for re-election.
out in the Compensation report on pages 69 to 77.
The benefi cial 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 set out below:
2010
2009
Direct interests
Indirect
interests
Direct interests
Director
Benefi cial
Non-executive directors
D C Brink
R Thummer
M V Moosa(1)
Executive directors
R J Boëttger
M R Thompson
–
7,542
–
85,000
20,517
Vested
obligations
to purchase
or repay loans
Benefi cial
Benefi cial
–
–
–
–
72,600
–
–
626,998
–
7,542
–
–
–
85,000
20,517
Vested
obligations
to purchase
or repay loans
–
–
–
–
89,100
Indirect
interests
Benefi cial
22,000
–
–
–
–
Total
113,059
72,600
626,998
113,059
89,100
22,000
(1) M V Moosa holds 31.8% share of Lereko Investment (Pty) Limited which holds a total of 1,971,693 Sappi Limited shares as part of the BBBEE transaction described in
note 28 and note 30 of the group annual fi nancial statements.
2010 annual report
87
There have not been any changes in the direct or indirect benefi cial
interest of the directors and their associates between September
2010 and the date of this report.
Other than Mr M V Moosa’s interest in the BEE transaction
described above and in notes 28 and 30 of the group annual
fi nancial statements, the directors have certifi ed that they did not
have any material interest in any signifi cant transaction with
either the company or any of its subsidiaries.
Mr M V Moosa was appointed a director of the company after the
conclusion of the latest BEE transaction. Other than his interest in
the BEE transaction there are no other directors’ interests in
contracts.
A register of interests of directors and other executives in the
shares of the company is available to shareholders and the public
on request.
Subsequent to year end, Sappi Southern Africa (Pty) Limited
was appointed secretaries to Sappi Limited in place of Sappi
Management Services (Pty) Limited. Details of the secretaries
and their business and postal addresses are set out on
page 198.
Special resolutions
The following is a list of the special resolutions passed by the
company and its South African incorporated subsidiaries during
the year:
■ Sappi Limited – increase in authorised share capital by the
creation of “A” ordinary shares, amendment to the Articles of
Association to set out rights and conditions attaching to the “A”
ordinary shares, authority for specifi c repurchase of “A” ordinary
shares and authority for fi nancial assistance in connection with
“A” ordinary shares.
■ Sappi Management Services (Pty) Limited – transfer of all assets
and liabilities of the company to Sappi Manufacturing (Pty)
Limited, now Sappi Southern Africa (Pty) Limited.
■ Sappi Manufacturing (Pty) Limited – regarding entitlement to
voluntarily redeem Class “A”, Class “B”, Class “C” and Class “D”
preference shares and change of name to Sappi Southern Africa
(Pty) Limited.
■ Sappi Waste Paper (Pty) Limited – change of name to Sappi
Refi bre (Pty) Limited and change of main business and main
object of the company.
Subsidiary companies
Details of the company’s signifi cant subsidiaries are set out in
Annexure A on page 188.
88
Group income statements
for the year ended September 2010
US$ million
Sales
Cost of sales
Gross profi t
Selling, general and administrative expenses
Other operating expenses
Share of profi t from associates and joint ventures
Operating profi t (loss)
Net fi nance costs
Finance costs
Finance revenue
Finance cost capitalised
Net foreign exchange gains
Net fair value (gain) loss on fi nancial instruments
Profi t (loss) before taxation
Taxation charge (benefi t)
Profi t (loss) for the year
Basic weighted average number of ordinary shares in issue (millions)
Basic earnings (loss) per share (US cents)
Diluted earnings (loss) per share (US cents)
Group statements of comprehensive income
for the year ended September 2010
US$ million
Profi t (loss) for the year
Note
2010
2009
2008
4
4
4
13
4
5
6
7
7
6,572
5,786
5,369
5,029
5,863
5,016
786
448
10
(13)
341
255
309
(16)
–
(17)
(21)
86
20
66
340
385
39
(11)
(73)
145
198
(61)
–
(17)
25
(218)
(41)
(177)
847
385
165
(17)
314
126
181
(38)
(16)
(8)
7
188
86
102
516.7
482.6
362.2
13
13
(37)
(37)
28
28
Other comprehensive income (loss), net of tax
18
Exchange differences on translation of foreign operations
Actuarial (losses) gains on pension funds
Movement on available-for-sale fi nancial assets
Movement in hedging reserves
Deferred tax on other comprehensive income (loss)
Total comprehensive income (loss) for the year
Note
2010
2009
(177)
(197)
14
(229)
–
(14)
32
(374)
2008
102
(256)
(262)
7
–
–
(1)
(154)
66
8
52
(71)
2
14
11
74
Group balance sheets
at September 2010
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
Financial instruments
Current assets
Inventories
Trade and other receivables
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
Financial instruments
Other non-current liabilities
Current liabilities
Interest-bearing borrowings
Overdraft
Financial instruments
Trade and other payables
Taxation payable
Provisions
Total equity and liabilities
2010 annual report
89
Note
2010
2009
9
10
11
12
13
14
29
15
16
29
17
19
20
11
29
21
20
29
22
4,653
3,660
687
53
27
125
82
19
4,867
3,934
611
56
32
123
101
10
2,531
2,430
836
888
15
792
792
858
10
770
7,184
7,297
1,896
1,638
161
(385)
1
481
3,249
2,317
386
–
546
2,039
691
5
3
1,271
36
33
1,794
1,541
143
(354)
(14)
478
3,662
2,726
355
24
557
1,841
601
19
14
1,116
56
35
7,184
7,297
90
Group cash fl ow statements
for the year ended September 2010
US$ million
Note
2010
2009
2008
23.1
23.2
23.3
23.4
23.5
23.6
33
Cash retained from operating activities
Cash generated from operations
– (Increase) 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 fi nancing activities
Proceeds from interest-bearing borrowings*
Repayment of interest-bearing borrowings*
Rights issue proceeds
Share issue costs
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 fl ows relating to ongoing short-term fi nancing activities.
529
737
(5)
732
(206)
12
(9)
529
–
(188)
(150)
(173)
21
2
(38)
(38)
–
(256)
204
(444)
–
(3)
–
(13)
85
770
(63)
792
461
432
152
584
(107)
26
(5)
498
(37)
(762)
(143)
(147)
2
2
(619)
(29)
(590)
707
355
623
1
624
(139)
13
(70)
428
(73)
(494)
(239)
(250)
7
4
(255)
(255)
–
49
3,469
(3,222)
2,077
(2,032)
575
(31)
(78)
(6)
406
274
90
770
–
–
–
4
(90)
364
–
274
2010 annual report
91
Group statements of changes in equity
for the year ended September 2010
Number
of
ordinary
shares
Ordinary
share
capital
Share
premium
Ordinary
share
capital
and
share
premium
Non-
distributable
reserves
Foreign
currency
translation
reserve
Hedging
reserve
Retained
earnings
Total
equity
US$ million
Balance – September 2007
228.5
34
791
825
Transfer from retained earnings
Share-based payments
Transfers to Sappi Limited Share
Incentive Trust
Total comprehensive loss
Dividends – US$0.32 per share*
–
–
0.7
–
–
Balance – September 2008
229.2
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 loss
Dividends – US$0.16 per share*
–
–
0.3
275.0
–
11.2
–
–
Balance – September 2009
515.7
Transfer from retained earnings
Share-based payments
Transfers from Sappi Limited
Share Incentive Trust
Broad-based Black Economic
Empowerment (BBBEE)
transaction
Costs directly attributable
to the BBBEE transaction
Total comprehensive income
–
–
(0.5)
4.3
–
–
–
–
–
(6)
–
28
–
–
–
28
–
1
13
–
70
–
–
–
1
–
3
–
–
6
(118)
–
679
–
–
2
–
–
6
(124)
–
707
–
–
2
547
575
(31)
44
230
–
(31)
45
243
–
1,471
1,541
–
–
(6)
19
(3)
83
–
–
(6)
20
(3)
86
Balance – September 2010
519.5
74
1,564
1,638
Note reference:
17
* Dividends relate to the previous fi nancial year’s earnings but were declared subsequent to year end.
114
8
10
–
(8)
–
124
6
9
–
–
–
–
4
–
143
2
17
–
–
–
(1)
161
19
9
–
–
–
(130)
–
(121)
–
–
–
–
–
–
(233)
–
(354)
–
–
–
–
–
(31)
(385)
–
–
–
–
–
–
–
–
–
–
–
–
–
(14)
–
(14)
–
–
–
–
–
15
1
868
(8)
–
–
108
(73)
895
(6)
–
–
–
–
–
(374)
(37)
478
(2)
–
–
–
–
5
1,816
–
10
6
(154)
(73)
1,605
–
9
2
575
(31)
45
(374)
(37)
1,794
–
17
(6)
20
(3)
74
481
1,896
92
Group income statements in Rands convenience translation
for the year ended September 2010
ZAR million
Sales
Cost of sales
Gross profi t
Selling, general and administrative expenses
Other operating expenses
Share of profi t from associates and joint ventures
Operating profi t (loss)
Net fi nance costs
Finance costs
Finance revenue
Finance cost capitalised
Net foreign exchange gains
Net fair value (gain) loss on fi nancial instruments
Profi t (loss) before taxation
Taxation charge (benefi t)
Profi t (loss) for the year
Basic weighted average number of ordinary shares in issue (millions)
Basic earnings (loss) per share (SA cents)
Diluted earnings (loss) per share (SA cents)
Group statements of comprehensive income
in Rands convenience translation
for the year ended September 2010
ZAR million
Profi t (loss) for the year
Other comprehensive income (loss), net of tax
Exchange differences on translation of foreign operations
Actuarial (losses) gains on pension funds
Movement on available-for-sale fi nancial assets
Movement in hedging reserves
Deferred tax on other comprehensive income (loss)
Total comprehensive income (loss) for the year
Unaudited
2010
2009
2008
49,235
43,347
48,393
45,329
43,559
37,266
5,888
3,356
74
(97)
2,555
1,911
2,315
(120)
–
(127)
(157)
644
150
494
516.7
97
97
3,064
3,470
351
(99)
(658)
1,307
1,785
(550)
–
(153)
225
(1,965)
(370)
(1,595)
482.6
(333)
(333)
6,293
2,860
1,226
(126)
2,333
937
1,345
(282)
(119)
(59)
52
1,396
638
758
362.2
208
208
Unaudited
2010
2009
2008
494
60
390
(532)
15
105
82
554
(1,595)
(1,776)
126
(2,064)
–
(126)
288
758
(1,902)
(1,947)
52
–
–
(7)
(3,371)
(1,144)
Note:
The above fi nancial 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 fl ow 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 defi ned in IAS 21. It should be noted that the translated ZAR fi gures from US Dollars do not
necessarily represent that these US Dollar amounts could be converted into ZAR at the time when the transaction occurred.
Group balance sheets in Rands convenience translation
at September 2010
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
Financial instruments
Current assets
Inventories
Trade and other receivables
Financial instruments
Cash and cash equivalents
Total assets
Equity and liabilities
Shareholders’ equity
Non-current liabilities
Interest-bearing borrowings
Deferred tax liabilities
Financial instruments
Other non-current liabilities
Current liabilities
Interest-bearing borrowings
Overdraft
Financial instruments
Trade and other payables
Taxation payable
Provisions
Total equity and liabilities
2010 annual report
93
Unaudited
2010
2009
32,659
25,690
4,822
372
190
877
575
133
36,070
29,156
4,528
415
237
912
748
74
17,765
18,010
5,868
6,233
105
5,559
5,870
6,359
74
5,707
50,424
54,080
13,308
22,804
16,263
2,709
–
3,832
14,312
4,850
35
21
8,921
253
232
13,296
27,140
20,203
2,631
178
4,128
13,644
4,454
141
104
8,271
415
259
50,424
54,080
Note:
The above fi nancial 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 fl ow 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 defi ned in IAS 21. It should be noted that the translated ZAR fi gures from US Dollars do not
necessarily represent that these US Dollar amounts could be converted into ZAR at the time when the transaction occurred.
94
Group cash fl ow statements in Rands convenience translation
for the year ended September 2010
ZAR million
Cash retained from operating activities
Cash generated from operations
– (Increase) 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 fi nancing activities
Proceeds from interest-bearing borrowings*
Repayment of interest-bearing borrowings*
Rights issue proceeds
Share issue costs
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
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
2010
3,964
5,521
(37)
5,484
(1,543)
90
(67)
3,964
–
(1,409)
(1,124)
(1,296)
157
15
(285)
(285)
–
(1,917)
1,528
(3,326)
–
(22)
–
(97)
638
5,707
(786)
5,559
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
* Includes gross cash fl ows relating to ongoing short-term fi nancing activities.
Note:
The above fi nancial 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 fl ow 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 defi ned in IAS 21. It should be noted that the translated ZAR fi gures from US Dollars do not
necessarily represent that these US Dollar amounts could be converted into ZAR at the time when the transaction occurred.
2010 annual report
95
Notes to the group annual fi nancial statements
for the year ended September 2010
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
fi ne paper and chemical cellulose. The group has manufacturing
facilities in nine countries, on four continents, and customers in
over 100 countries across the globe.
industry, and are rounded to the nearest million except as otherwise
indicated.
The fi nancial statements are prepared on the historical-cost basis,
except as set out in the accounting policies below. Certain items,
including derivatives are stated at their fair value while plantations
and non-current assets held for sale are stated at fair value less
cost to sell.
(i) Fiscal year
The group’s fi nancial year end is on the Sunday closest to the last
The group is comprised of Sappi Fine Paper North America, Sappi
day of September.
Fine Paper Europe and Sappi Southern Africa reportable segments.
Sappi Fine Paper which comprises Sappi Fine Paper Europe and
Accordingly, the last three fi nancial years were as follows:
Sappi Fine Paper North America, has manufacturing and marketing
■ 28 September 2009 to 26 September 2010 (52 weeks)
facilities in North America, Europe and Asia and produces mainly
■ 29 September 2008 to 27 September 2009 (52 weeks)
high quality branded coated fine paper. It also manufactures
■ 01 October 2007 to 28 September 2008 (52 weeks)
uncoated graphic and business paper, coated and uncoated
speciality paper, and casting release paper used in the manufacture
of artifi cial leather and textured polyurethane applications. Sappi
Southern Africa (Sappi Paper and Paper Packaging, Sappi Forests
and Sappi Chemical Cellulose) based in southern Africa, produces
The group has disclosed two years’ comparative information for
the income statement, statement of comprehensive income and
the cash fl ow statement to be consistent with its disclosure in the
annual report prepared on form 20-F.
commodity paper products, pulp, chemical cellulose, uncoated
(ii) Underlying concepts
fine paper and forest and timber products for southern Africa
The fi nancial statements are prepared on the going concern basis.
and export markets. The group operates a trading network called
Sappi Trading for the international marketing and distribution of
Assets and liabilities and income and expenses are not offset in the
income statement or balance sheet unless specifi cally permitted
chemical cellulose and market pulp throughout the world and
by IFRS.
of the group’s other products in areas outside its core operating
regions of North America, Europe and southern Africa. The fi nancial
results and position associated with Sappi Trading are allocated to
our reportable segments.
2. Accounting policies
The following principal accounting policies have been consistently
applied in dealing with items that are considered material in relation
to the Sappi Limited group fi nancial statements.
2.1 Basis of preparation
Changes in accounting estimates are recognised prospectively in
profi t 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.
2.2 Summary of 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
The group’s consolidated fi nancial statements have been prepared
ruling at the date of such transactions.
in accordance with:
■ International Financial Reporting Standards (IFRS) issued by the
International Accounting Standards Board (IASB);
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.
■ Interpretations issued by the International Financial Reporting
Exchange gains and losses on the translation and settlement of
Interpretations Committee (IFRIC) of the IASB;
foreign currency monetary assets and liabilities during the period
■ the AC 500 Standards issued by the Accounting Practices
are recognised in the profi t or loss in the period in which they arise.
Board in South Africa; and
■ the requirements of the South African Companies Act of 1973.
(ii) Consolidation of foreign operations
The assets and liabilities, including goodwill of entities that have
The fi nancial statements are presented in United States Dollars
non-dollar functional currencies are translated at the closing rate,
(US$), as it is the major trading currency of the pulp and paper
while the income and expenses are translated using the average
96 Notes to the group annual fi nancial statements continued
exchange rate. The differences that arise on translation are reported
(ii) Initial measurement
directly in other comprehensive income. These translation differences
All fi nancial instruments are initially recognised at fair value plus
are recycled through profi t or loss for the period on disposal of the
transaction costs that are incremental to the group and directly
foreign operation.
The group used the following exchange rates for fi nancial reporting
purposes:
Rate at
ZAR to one US$
GBP to one US$
EUR to one US$
Sep 10
Sep 09
Sep 08
7.0190
0.6321
0.7412
7.4112
0.6268
0.6809
8.0751
0.5421
0.6843
Average annual rate
Sep 10
Sep 09
Sep 08
ZAR to one US$
GBP to one US$
EUR to one US$
7.4917
0.6406
0.7322
9.0135
0.6419
0.7322
7.4294
0.5049
0.6638
2.2.2 Group accounting
(i) Subsidiary undertakings and special-purpose entities
The group fi nancial statements include the assets, liabilities and
results of the company and subsidiary undertakings (including
attributable to the acquisition or issue of the fi nancial asset or
fi nancial liability except for those classifi ed as ‘fair value through
profi t and loss’ where the transaction costs are recognised
immediately in profi t and loss.
(iii) Subsequent measurement
■ Financial assets and fi nancial liabilities at fair value through
profi t or loss
Financial instruments at fair value through profi t or loss consist of
items classifi ed as held for trading. The group has not designated
any fi nancial instruments as at fair value through profi t or loss.
■ Non-trading fi nancial liabilities
All fi nancial liabilities, other than those at fair value through profi t
or loss, are classifi ed as non-trading fi nancial liabilities and are
measured at amortised cost.
■ Loans and receivables
Loans and receivables are carried at amortised cost, with interest
revenue recognised in profi t and loss for the period using the
effective interest method.
special-purpose entities) controlled by the group. The results of
■ Available-for-sale fi nancial assets
subsidiary undertakings acquired or disposed of in the year are
included in the consolidated income statements from the date of
acquisition or up to the date of disposal or cessation of control.
Available-for-sale fi nancial 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
Intra-group balances and transactions, and profi ts and losses
basis, are recognised in profi t or loss.
arising from intra-group transactions, are eliminated in the
preparation of the group fi nancial 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
(iv) Embedded derivatives
Certain derivatives embedded in fi nancial 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 profi t or loss.
ventures are incorporated in the group’s fi nancial statements using
(v) Derecognition
the equity method of accounting. The share of the associate’s
The group derecognises a fi nancial asset when the rights to
or joint venture’s retained income, which is the profi t after tax,
receive cash fl ows from the asset have expired or have been
is determined from their latest fi nancial statements. The carrying
transferred and the group has transferred substantially all risks and
amount of such investments is reduced to recognise any impairment
rewards of ownership.
in the value of individual investments.
2.2.3 Financial instruments
(i) Initial recognition
A fi nancial liability is derecognised when and only when the liability
is extinguished, ie, when the obligation specifi ed in the contract is
discharged, cancelled or has expired.
Financial instruments are recognised on the balance sheet when
(vi) Impairment of fi nancial assets
the group becomes a party to the contractual provisions of a
■ Loans and receivables
fi nancial instrument. All purchases of fi nancial assets that require
An impairment loss is recognised in profi t or loss when there is
delivery within the time frame established by regulation or market
evidence that the group will not be able to collect all amounts due
convention (‘regular way’ purchases) are recognised at trade date.
according to the original terms of the receivables.
2010 annual report
97
■ Available-for-sale fi nancial assets
the minimum lease payments. Lease payments are allocated
When there is objective evidence that an available-for-sale fi nancial
between capital repayments and fi nance charges using the
asset is impaired, the cumulative unrealised gains and losses
effective interest rate method.
previously recognised in equity are removed from equity and
recognised in profi t or loss even though the fi nancial asset has not
been derecognised.
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
Impairment losses are only reversed in a subsequent period if the
depreciated on a straight-line basis over the shorter of the lease
fair value increases due to an objective event occurring since the
period and the expected useful life of the asset.
loss was recognised.
(vii) Interest income and expense
Interest income and expense are recognised in profi t or loss using
the effective interest rate method.
2.2.4 Government grants
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.
2.2.5 Intangible assets
(i) Research activities
Expenditures on research activities and internally generated
goodwill are recognised in profi t or loss as an expense as incurred.
(ii) Development activities
Lease payments made under operating leases are charged to
profi t 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 benefi t.
(ii) Recognition of lease of land
The land and buildings elements of a lease are considered
separately for the purpose of lease classifi cation.
Where the building is a fi nance lease and the lease payments
cannot be allocated reliably between these two elements, the entire
lease is classifi ed as a fi nance lease.
2.2.8 Non-current assets held for sale
and discontinued operations
Non-current assets (or disposal groups) are classifi ed as held for
sale when their carrying value will be recovered principally through
Intangible assets are stated at cost less accumulated amortisation
sale within 12 months rather than use. Non-current assets held for
and impairment losses. Amortisation of engineering projects,
sale are measured at the lower of carrying amount and fair value
computer software and development costs is charged to profi t or
less cost to sell and are not depreciated.
loss on a straight-line basis over the estimated useful lives of these
assets, not exceeding fi ve 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.
2.2.6 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.
Cost is determined on the following basis:
■ First in fi rst out (FIFO): fi nished goods
2.2.9 Segment reporting
Sappi reports and discloses segment information on the basis of
information that is reviewed by the chief operating decision maker
to make decisions when allocating resources and to assess
performance of the group’s operating segments. The operating
segments of Sappi are; Sappi Fine Paper which is made up of
operations in Europe and North America, and Sappi Southern Africa.
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.
■ Weighted average: raw materials, work in progress and
consumable stores
2.2.10 Share-based payments
(i) Equity-settled share-based payment transactions
■ The specifi c identifi cation basis is used to arrive at the cost of
The services or goods received in an equity-settled share-based
items that are not interchangeable.
payment transaction with counterparties are measured at the fair
2.2.7 Leases
(i) The group as lessee
value of the equity instruments at grant date.
If the equity instruments granted vest immediately and the benefi ciary
Finance leases are capitalised at the inception of the lease at the
is not required to complete a specifi ed period of service before
lower of the fair value of the leased asset or the present value of
becoming unconditionally entitled to those instruments, the benefi t
98 Notes to the group annual fi nancial statements continued
received is recognised in profi t or loss for the period in full on grant
Shipping and handling costs, such as freight to our customers’
date with a corresponding increase in equity.
Where the equity instruments do not vest until the benefi ciary has
completed a specifi ed period of service, it is assumed that the
benefi t received by the group as consideration for those equity
instruments, will be received in the future during the vesting period.
These benefi ts are accounted for in profi t or loss as they are
destination are included in cost of sales. These costs, when
included in the sales price charged for our products are recognised
in net sales.
2.2.13 Emission trading
The group recognises grants when allocated by governments for
emission rights as an intangible asset at a nominal amount with an
received during the vesting period, with a corresponding increase
equal liability at the time of the grant.
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 modifi ed binomial option
pricing valuation models. The valuation technique is consistent
with generally acceptable valuation methodologies for pricing
The group does not recognise a liability for emissions to the extent
that it has suffi cient 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 sells allowances to parties outside the group at
amounts greater than carrying value, a gain is recognised in profi t
fi nancial instruments and incorporates all factors and assumptions
or loss for the period.
that knowledgeable, willing market participants would consider in
setting the price of the equity instruments.
(iii) Broad-based Black Economic Empowerment
transaction
2.2.14 Alternative fuel mixture credits
Up until 31 December 2009, the U.S. Internal Revenue Code
allowed 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
The group accounts for the transaction in accordance with IFRS 2
business.
and the fair value of the services rendered by employees in profi t
or loss as they are rendered during the service period.
2.2.11 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.
The group qualifi ed for the alternative fuel mixtures tax credit
through its North American operations because it used 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
Borrowing costs capitalised are calculated at the group’s average
the group has complied with the requirements of the Internal
funding cost, except to the extent that funds are borrowed
Revenue Code and has submitted a claim for the credits due. This
specifi cally for the purpose of obtaining a qualifying asset. Where
is recorded in profi t and loss under other operating income.
this occurs, actual borrowing costs incurred less any investment
income on the temporary investment of those borrowings are
capitalised.
2.2.12 Revenue
Revenue is recognised when the signifi cant 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
The company considers the tax credits earned in fi scal 2010
and fi scal 2009 as fully taxable and have treated them as such in
the calculation of its tax provision in the consolidated fi nancial
statements.
2.3 Critical accounting policies and estimates
Management of the group makes estimates and assumptions
concerning the future in applying its accounting policies. The
estimates may not equal the related actual results.
regional sales, transfer occurs at the point of offl oading the
The group believes that the following accounting policies are critical
shipment into the customer warehouse, whereas for the majority
due to the degree of management judgement and estimation
of export sales transfer occurs when the goods have been loaded
required and/or the potential material impact they may have on the
into the relevant carrier, unless the contract of sale specifi es
group’s fi nancial position and performance.
different terms.
Revenue is measured at the fair value of the amount received or
receivable which is arrived at after deducting trade and settlement
2.3.1 Impairment of assets other than goodwill and
fi nancial instruments
The group assesses all assets (other than goodwill and intangible
discounts, rebates, and customer returns.
assets not yet available for use) at each balance sheet date
2010 annual report
99
for indications of an impairment or the reversal of a previously
the estimated cost of dismantling and removing the assets, where
recognised impairment.
Intangible assets not yet available for use are tested at least
annually for impairment.
In assessing assets for impairment, the group estimates the asset’s
useful life, discounted future cash fl ows, including appropriate
bases for 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 pre-tax
specifically required in terms of legislative requirements or a
constructive obligation exists, professional fees and, for qualifying
assets, borrowing costs capitalised in accordance with the group’s
accounting policy.
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.
discount rate (impairment discount factor) is another sensitive input
Depreciation which commences when the assets are ready for
to the calculation.
Where an impairment exists, the losses are recognised in profi t
or loss for the period. For an asset whose cash fl ows 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 through
profi t or loss 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.
Refer to note 9 for the assumptions and inputs used in assessing
assets for impairment or impairment reversals.
2.3.2 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. The acquiree’s identifi able
their intended use, 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 refl ects the pattern
in which the asset’s future economic benefi ts are expected to be
consumed by the entity.
Management judgement and assumptions are necessary in
estimating the methods of depreciation, useful lives and residual
values. 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:
Buildings
Plant
Vehicles
straight-line 40 years
straight-line 5 to 20 years
straight-line 5 to 10 years
Furniture and equipment
straight-line 3 to 6 years
2.3.4 Taxation
Taxation on the profi t or loss for the year comprises current and
assets, liabilities and contingent liabilities that meet the conditions for
deferred taxation. Taxation is recognised in profi t or loss except to
recognition are recognised at their fair value at the acquisition date.
the extent that it relates to items recognised directly in other
Goodwill arising at acquisition is subsequently held at cost less any
accumulated impairment losses. Goodwill is not amortised but is
comprehensive income, in which case, it is also recognised in
other comprehensive income.
tested for impairment annually or more frequently where there is an
(i) Current taxation
indication of impairment based on an allocation to one or more
Current taxation is the expected taxation payable on the taxable
CGUs in which the synergies from the business combinations are
income, which is based on the results for the period after taking
expected.
Goodwill is tested for impairment using a cash flow valuation
model based on an allocation of the goodwill to one or more
into account necessary adjustments, using taxation rates enacted
or substantively enacted at the balance sheet date, and any
adjustment to taxation payable in respect of previous years.
CGUs. The group takes into account its ability to carousel
The group estimates its income taxes in each of the jurisdictions in
products across different operating units in allocating goodwill
which it operates. This process involves estimating its current tax
to CGUs.
2.3.3 Property, plant and equipment
Items of property, plant and equipment are stated at cost less
liability together with assessing temporary differences resulting
from differing treatment of items for tax and accounting purposes.
Secondary Tax on Companies (STC) is a South African income tax,
accumulated depreciation and impairment losses. Cost includes
that arises from the distribution of dividends and is recognised in
100 Notes to the group annual fi nancial statements continued
profi t or loss at the same time as the liability to pay the related
Hedge accounting is discontinued on a prospective basis when
dividend.
(ii) Deferred taxation
Deferred taxation is provided using the balance sheet liability
method, based on temporary differences. The amount of deferred
the hedge no longer meets the hedge accounting criteria (including
when it becomes ineffective), when the hedging instrument is sold,
terminated or exercised and for cash fl ow hedges, the designation
is revoked and the forecast transaction is no longer expected to
taxation provided is based on the expected manner of realisation
occur. Where a forecasted transaction is no longer expected to
or settlement of the carrying amount of assets and liabilities using
occur, the cumulative gain or loss deferred in equity is transferred
taxation rates enacted or substantively enacted at the balance
to profi t or loss.
sheet date. Such assets and liabilities are not recognised if the
temporary difference arises from the initial recognition of goodwill
or from the initial recognition (other than in a business combination)
of other assets and liabilities in a transaction that affects neither the
taxable profi t nor the accounting profi t. Deferred taxation is charged
The fi nancial 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
fl ows of the related underlying exposures. Hedge ineffectiveness is
to profi t or loss for the period, except to the extent that it relates to
recognised immediately in profi t or loss.
a transaction that is recognised directly in other comprehensive
income, or a business combination that is an acquisition.
Refer to note 29 for details of the fair value hedging relationships
as well as the impact of the hedge on the pre-tax profi t or loss for
Before recognising a deferred tax asset the group assesses the
the period.
likelihood that the deferred tax assets will be recovered from future
taxable income and, to the extent recovery is not probable, a
deferred tax asset is not recognised. In recognising deferred tax
assets, the group considers profi t forecasts, including the effect of
exchange rate fl uctuations on sales and external market conditions.
2.3.5 Derivatives and hedge accounting
■ Fair value hedges
2.3.6 Plantations
Plantations are stated at fair value less estimated cost to sell at the
harvesting stage. In arriving at plantation fair values, the key
assumptions are estimated prices less cost of delivery, discount
rates, and volume and growth estimations. All changes in fair value
are recognised in the period in which they arise.
If a fair value hedge meets the conditions for hedge accounting,
The impact of changes in estimate prices, discount rates and,
any gain or loss on the hedged item attributable to the hedged
volume and growth assumptions may have on the calculated fair
risk is included in the carrying amount of the hedged item and
value and other key fi nancial information on plantations are
recognised in profi t or loss. The changes in the fair value of the
disclosed in note 10.
hedging instrument and the hedged item is recognised in profi t
or loss.
■ Cash fl ow hedges
In relation to cash fl ow hedges that meet the conditions for hedge
accounting, the portion of the gain or loss on the hedging instrument
■ Estimated prices less cost of delivery
In periods prior to the third quarter of fi scal 2010 the group used
unadjusted current market prices to estimate the fair value of
timber.
that is determined to be an effective hedge is recognised directly
In the third quarter of fi scal 2010, the group revised this methodology
in other comprehensive income and the ineffective portion is
for all immature timber and mature timber that is to be felled in more
recognised in profi t or loss.
The gains or losses, which are recognised directly in shareholders’
equity, are transferred to profi t or loss in the same period in which
the hedged transaction affects profi t or loss.
If the forecasted transaction results in the recognition on a non-
fi nancial asset or non-fi nancial liability, the associated cumulative
than 12 months from the reporting period to consider a 12 quarter
rolling historical average price. This is considered a reasonable
period of time taking into consideration the length of the growth
cycle of the plantations. The new methodology also takes into
consideration expected future price trends and recent market
transactions involving comparable plantations.
gain or loss is transferred from equity to the underlying asset or
The group considers the new methodology to be preferable.
liability on the transaction date.
■ Hedge of a net investment in a foreign operation
The effective portion of the gain or loss on the hedging instrument
Current market prices for timber are highly volatile for timber that
is expected to be felled in more than 12 months from the reporting
period. Therefore, the group considers the use of a rolling historical
is recognised in other comprehensive income and is only reclassifi ed
average price coupled with consideration of expected future price
to profi t or loss on the disposal or partial disposal of the foreign
trends and recent market transactions involving comparable
operation.
plantations to be a preferable methodology.
2010 annual report
101
Mature timber that is expected to be felled within 12 months from
costs for managing the plantations are recognised as silviculture
the reporting period continues to be valued using unadjusted
costs in cost of sales (see note 4.1).
current market prices. Such timber is expected to be used in the
short term and consequently, current market prices are considered
an appropriate refl ection of fair value.
2.3.7 Pension plans and other
post-retirement benefi ts
Defi ned-benefi t and defi ned-contribution plans have been established
The fair value is derived by using the prices as explained above
for eligible employees of the group, with the assets held in
reduced by the estimated cost of delivery. Cost of delivery includes
separate trustee-administered funds.
all costs associated with getting the harvested plantations to the
market, being harvesting, loading, transport and allocated fi xed
overheads.
■ Discount rate
The discount rate used is the applicable pre-tax weighted average
cost of capital of the business unit.
■ Volume and growth estimations and cost assumptions
The group focuses on good husbandry techniques which include
The present value of the defi ned benefi t obligations and related
current service costs are calculated annually by independent
actuaries using the projected unit method.
These actuarial models use an attribution approach that generally
spread 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.
ensuring that the rotation of plantations is met with adequate
Estimates and assumptions used in the actuarial models include
planting activities for future harvesting. The age threshold used for
the discount rate, return on assets, salary increases, healthcare
quantifying immature timber is dependent on the rotation period
cost trends, longevity and service lives of employees.
of the specifi c timber genus which varies from between eight to
eighteen years. In the southern African region, softwood less than
eight years and hardwood less than five years is classified as
immature timber.
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 comprehensive
income. Any increase in the present value of plan liabilities expected
Trees are generally felled at the optimum age when ready for
to arise due to current service costs is charged to operating profi t.
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).
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 fi re,
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.
The group has projected growth estimation over a period of eight
to 18 years per rotation. In deriving this estimate, the group
Gains or losses on the curtailment or settlement of a defi ned
benefi t plan are recognised in profi t or loss when the group is
demonstrably committed to the curtailment or settlement. Past
service costs are recognised immediately to the extent that the
benefi ts are already vested, and otherwise are amortised on a
straight-line basis over the vesting period of those benefi ts.
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 benefi t 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.
established a long-term sample plot network which is representative
Refer to note 27 for the key estimates, assumptions and other
of the species and sites on which trees are grown and the
information on post-employment benefi ts applicable as at the end
measured data from these permanent sample plots were used as
of September 2010.
input into the group’s growth estimation. Periodic adjustments are
made to existing models for new genetic material.
2.3.8 Provisions
Provisions are recognised when the group has a legal or constructive
The group directly manages plantations established on land that
obligation arising from past events that will probably be settled.
is either owned or leased from third parties. Indirectly managed
Where the effect of discounting (time value) is material, provisions
plantations represent plantations established on land held by
are discounted and the discount rate used is a pre-taxation rate
independent commercial farmers where Sappi provides technical
that refl ects current market assessments of the time value of
advice on the growing and tendering of trees. The associated
money and, where appropriate, the risks specifi c to the liability.
102 Notes to the group annual fi nancial statements continued
The establishment and review of the provisions requires signifi cant
two comparative periods for the affected notes. Due to the fact
judgement by management as to whether or not there is a probable
that no changes were made to the fi scal 2008 and 2009 balance
obligation and as to whether or not a reliable estimate can be
sheets, only one comparative period has been disclosed for the
made of the amount of the obligation.
balance sheet.
Environmental accruals are recorded based on current interpretation
of environmental laws and regulations.
2.4 Adoption of accounting standards
in the current year
The following standards, interpretations and signifi cant amendments
or revisions to standards have been adopted by the group in the
current year:
2.5 Accounting standards, interpretations and
amendments to existing standards that are not
yet effective
The group has not yet adopted certain new standards, amendments
and interpretations to existing standards, which have been published
but are only effective for our accounting periods beginning on or
after October 2010 or later periods. These new standards, and
their effective dates for the group’s annual accounting periods
IFRS 8 Operating Segments
are listed below:
IFRS 8 requires an entity to report fi nancial and descriptive
information about its reportable segments. Reportable segments
are components of an entity for which separate fi nancial information
is available that is evaluated regularly by the chief operating
■ IFRS 9 Financial Instruments
IFRS 9 introduces new requirements for classifying and measuring
fi nancial assets. The group is currently evaluating the impact
that the adoption of this IFRS will have on its consolidated
decision maker in deciding how to allocate resources and assessing
fi nancial statements.
performance.
Amendment, revisions or issues of the following standards or
The adoption of IFRS 8 “Operating Segments” did not have an
interpretations which will only become mandatory for the group’s
impact on the group’s reported results or fi nancial position.
consolidated fi nancial statements on the dates indicated are not
Amendment to IFRS 7 Financial Instruments:
Disclosures
expected to have a material impact on the group’s results or
fi nancial position:
IFRS 7 was amended to require enhanced disclosures about fair
■ IFRS 2 Share-based Payment
value measurements. The group has in note 29, disclosed the level
Amendments relating to group cash-settled share-based
in the fair value hierarchy into which the fair value measurements
payment transactions (September 2011)
are categorised for fi nancial instruments that are measured at fair
■ IFRS 7 Financial Instruments: Disclosures.
value in the statement of fi nancial position.
Transfers of fi nancial assets (September 2012)
The adoption of this amendment did not have an impact on the
■ IAS 24 Related Party Disclosures
group’s reported results or fi nancial position.
Revised defi nition of related parties (September 2012)
Other amendments to IFRS
■ IAS 32 Financial Instruments: Presentation
The group adopted IFRIC 15, IFRIC 17, IFRIC 18, revision to
Amendments relating to classifi cation of rights issues
IFRS 3, amendments to IAS 27, IAS 28, IAS 31, IFRS 2, IAS 39,
(September 2011)
■ IFRIC 19 Extinguishing Financial Liabilities
with Equity Instruments (September 2011)
■ Various improvements to IFRSs
IFRIC 9 and various improvements to IFRSs in fi scal 2010.
The adoption of these new or revised standards, interpretations,
amendments and improvements to standards did not have a
material impact on the group’s reported results or fi nancial position.
Presentation of comparative information on adoption of
IFRS on a retrospective basis
With the adoption of IFRS 8 and the group’s change in its internal
organisation structure, the group made retrospective adjustments
to segment reporting per note 3 to the fi nancial statements. The
group also had other adjustments to notes 20, 24 and 25 to the
fi nancial statements. These adjustments only impacted the notes
to the fi nancial statements and therefore the group has disclosed
2010 annual report
103
3.
Segment information
Sappi adopted IFRS 8 “Operating Segments” in fi scal 2010. The adoption of this standard did not have an impact on the group’s
reported results, fi nancial position or cash fl ows.
IFRS 8 requires an entity to report fi nancial and descriptive information about its reportable segments. The group’s reportable
segments are North America, Europe and Sappi Southern Africa. Reportable segments are components of an entity for which
separate fi nancial information is available that is evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and assess performance. Prior year segment disclosure has been revised as refl ected below.
Sappi reports and discloses segment information on the basis of information that is reviewed by the chief operating decision maker
to make decisions when allocating resources and to assess performance of the group’s reportable segments. Information reported
to the chief operating decision maker for the purpose of resource allocation and assessment of segment performance is focused
on a geographical region. The group accounts for intra-group 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.
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. The fi nancial results and position associated with Sappi Trading are allocated to our
reportable segments.
Revised segmental reporting disclosure
Prior to the adoption of IFRS 8, the Sappi Fine Paper segment included the group’s fi ne paper operations in Southern Africa. Sappi
has since changed the structure of its internal organisation in a manner that has caused the composition of its reportable segments
to change such that Sappi Fine Paper South Africa is now reported as part of the Sappi Southern African segment in accordance
with the geographical management of our business. The table below shows the effect of this change for the fi nancial years ended
September 2009 and 2008 respectively:
Sappi Southern Africa*
US$ million
2009
2008
2009
2008
2009
2008
As previously reported
Adjustment
Revised segmental reporting
Income statement
External sales(1)
Inter-segment sales
Total sales
Segment operating (loss) profi t
Other non-cash items (including fair
861
532
1,393
(52)
1,099
657
1,756
273
318
32
350
(3)
380
41
421
6
1,179
564
1,743
(55)
1,479
698
2,177
279
value adjustment on plantations)
2
(150)
2
3
4
(147)
Balance sheet
Capital expenditures
Total assets
Segment assets(2)
Property, plant and equipment
60
2,002
1,686
1,078
290
2,049
1,721
1,008
11
260
205
118
9
168
110
111
71
2,262
1,891
1,196
299
2,217
1,831
1,119
* Sappi Forest Products has been renamed to Sappi Southern Africa.
104 Notes to the group annual fi nancial statements continued
3.
Segment information (continued)
The information below is presented in the way that it is reviewed by the chief operating decision maker as required
by IFRS 8 “Operating Segments”:
Sappi Fine Paper
North America
Europe
US$ million
2010
2009
2008
2010
2009
2008
Income statement
External sales(1)
Inter-segment sales
Total sales
Operating profi t excluding special items
Special items – (gains) losses(2)
Segment operating profi t (loss)
EBITDA excluding special items(2)
Share of profi t of equity investments
Depreciation and amortisation
Asset (impairment reversals)
impairments
Other non-cash items (including fair
value adjustment on plantations)
Balance sheet
Capital expenditures
Segment assets(2)
Total assets
Property, plant and equipment
1,373
252
1,295
179
1,664
244
3,638
476
2,895
267
2,720
392
1,625
1,474
1,908
4,114
3,162
3,112
124
(56)
180
201
–
77
(2)
8
(2)
(55)
53
98
–
100
–
48
95
3
92
201
1
106
4
17
76
4
72
310
1
234
(10)
8
12
79
(67)
226
3
214
74
86
55
119
(64)
235
1
180
78
131
42
935
1,100
777
31
981
1,160
810
125
1,087
1,290
879
100
2,109
2,917
1,663
82
2,340
3,080
1,928
82
1,758
2,266
1,363
Reconciliation of operating profi t (loss) excluding special items to segment operating profi t (loss):
Sappi Fine Paper
North America
Europe
US$ million
2010
2009
2008
2010
2009
2008
Operating profi t (loss) excluding
special items
Special items – (gains) losses(2)
Segment operating profi t (loss)
124
(56)
180
(2)
(55)
53
95
3
92
76
4
72
12
79
(67)
55
119
(64)
2010 annual report
105
Sappi Southern Africa
Unallocated and eliminations(3)
Group
2010
2009
2008
2010
2009
2008
2010
2009
2008
1,561
714
1,179
564
1,479
698
–
–
–
6,572
5,369
5,863
(1,442)
(1,010)
(1,334)
–
–
–
2,275
1,743
2,177
(1,442)
(1,010)
(1,334)
6,572
5,369
5,863
134
22
112
236
4
102
2
(39)
18
72
(54)
101
4
83
5
4
64
1,887
2,376
1,220
71
1,891
2,262
1,196
209
(70)
279
296
5
87
37
(147)
299
1,831
2,217
1,119
5
28
(23)
5
8
–
–
8
–
65
791
–
5
10
(5)
6
4
1
–
7
–
7
8
10
1
–
(38)
(58)
339
(2)
341
752
13
413
(10)
(15)
33
106
(73)
431
11
398
366
52
314
740
17
374
79
119
100
(57)
–
38
795
–
1
39
336
–
206
4,996
7,184
3,660
184
5,250
7,297
3,934
507
4,715
6,109
3,361
Sappi Southern Africa
Unallocated and eliminations(3)
Group
2010
2009
2008
2010
2009
2008
2010
2009
2008
134
22
112
18
72
(54)
209
(70)
279
5
28
(23)
5
10
(5)
7
–
7
339
(2)
341
33
106
(73)
366
52
314
106 Notes to the group annual fi nancial statements continued
3.
Segment information (continued)
Reconciliation of EBITDA excluding special items and operating profi t (loss) excluding special items to profi t (loss) before taxation:
US$ million
2010
2009
2008
2010
2009
2008
Sappi Fine Paper
North America
Europe
201
77
124
(56)
180
98
100
(2)
(55)
53
201
106
95
3
92
310
234
76
4
72
226
214
12
79
(67)
235
180
55
119
(64)
EBITDA excluding special items(2)
Depreciation and amortisation
Operating profi t (loss) excluding
special items
Special items – (gains) losses
Segment operating profi t (loss)
Net fi nance costs
Profi t (loss) before taxation
Reconciliation of segment assets to total assets:
Sappi Fine Paper
North America
Europe
US$ million
2010
2009
2008
2010
2009
2008
Segment assets(2)(3)
Deferred taxation asset
Cash and cash equivalents
Derivative fi nancial instruments
Trade and other payables
Provisions
Taxation payable
Total assets
935
981
1,087
2,109
2,340
1,758
–
7
–
155
1
2
–
14
–
151
14
–
–
5
–
198
–
–
53
8
–
722
15
10
56
16
–
633
19
16
39
1
–
411
42
15
1,100
1,160
1,290
2,917
3,080
2,266
(1) Sales where the product is manufactured.
(2) Refer to pages 189 to 191, Glossary for the defi nition of the terms.
(3) Includes the group’s treasury operations, the self-insurance captive and the investment in the Jiangxi Chenming joint venture.
2010 annual report
107
Sappi Southern Africa
Unallocated and eliminations(3)
Group
2010
2009
2008
2010
2009
2008
2010
2009
2008
236
102
134
22
112
101
83
18
72
(54)
296
87
209
(70)
279
5
–
5
28
(23)
6
1
5
10
(5)
8
1
7
–
7
752
413
339
(2)
341
255
86
431
398
33
106
(73)
145
(218)
740
374
366
52
314
126
188
Sappi Southern Africa
Unallocated and eliminations(3)
Group
2010
2009
2008
2010
2009
2008
2010
2009
2008
1,887
1,891
1,831
–
129
1
339
14
6
–
86
–
275
2
8
–
78
–
297
–
11
65
–
648
2
55
3
18
38
–
654
14
57
–
32
39
2
190
24
53
–
28
4,996
5,250
4,715
53
792
3
56
770
14
1,271
1,116
33
36
35
56
41
274
24
959
42
54
2,376
2,262
2,217
791
795
336
7,184
7,297
6,109
108 Notes to the group annual fi nancial statements continued
US$ million
4.1 Operating profi t
Operating profi t has been arrived at
after charging (crediting):
Raw materials, energy and other direct
input costs
Wood (includes felling adjustment(1))
Energy
Chemicals
Pulp
Other variable costs
Fair value adjustment on plantations(1)
Growth
Price
Employment costs
Depreciation
Delivery charges
Maintenance
Other overheads
Marketing and selling expenses
Administrative and general expenses
2010
2009
2008
Selling,
general
and
admini-
strative
expenses
Selling,
general
and
admini-
strative
expenses
Cost of
sales
Selling,
general
and
admini-
strative
expenses
Cost of
sales
Cost of
sales
3,570
706
626
1,050
929
259
(67)
(31)
968
388
547
275
136
–
–
5,786
–
–
–
–
–
–
–
–
208
23
–
–
–
112
105
448
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
US$ million
2010
2009
2008
Fair value adjustment on plantations(1)
Changes in volumes
Fellings
Growth
Plantation price fair value adjustment
71
(67)
4
(31)
(27)
69
(73)
(4)
67
63
80
(70)
10
(120)
(110)
2010 annual report
109
US$ million
2010
2009
2008
4.1
Operating profi t (continued)
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 refi nancing 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 benefi ts
– non-executive directors – fees
4.2
Employment costs
Wages and salaries
Defi ned-contribution plan expense (refer to note 27)
Pension costs (refer to note 27)
Post-employment benefi ts other than pension expense (refer to note 27)
Share-based payment expense
Other
4.3 Other operating expenses (income)
Included in other operating expenses are the following:
Asset (impairment reversals) impairments
Profi t on sale and write-off of property, plant and equipment
Restructuring provisions raised (released) and closure costs
Alternative fuel mixture credits
Broad-based Black Economic Empowerment transaction charge
(refer to note 28)
– Unwinding of the 2006 Black Economic Empowerment transaction
– IFRS 2 costs on management and employee share option plans
67
14
48
31
12
19
8
7
1
–
–
25
3
14
1
1
1,054
42
15
14
13
38
1,176
(10)
(5)
46
(51)
23
19
4
50
16
15
27
11
16
8
6
1
1
(2)
31
2
16
2
1
936
33
21
10
9
37
50
16
32
33
15
18
10
6
1
3
(1)
34
–
22
2
1
921
23
9
14
10
40
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.
110 Notes to the group annual fi nancial statements continued
US$ million
2010
2009
2008
5.
Net fi nance costs
Gross interest and other fi nance costs on liabilities carried at amortised cost
– Interest on bank overdrafts
– Interest on redeemable bonds and other loans
– Interest cost on fi nance lease obligations
Finance revenue received on assets carried at amortised cost
– Interest on bank accounts
– Discount on early redemption of redeemable bonds and other loans
– Interest revenue on other loans and investments
Interest capitalised to property, plant and equipment
Net foreign exchange gains
Net fair value (gain) loss on fi nancial instruments
– Realised loss on termination of interest rate swaps
– (Gain) loss on non-hedged swaps and loans
– Amortisation of (gain) cost of de-designated hedges
– Hedge ineffectiveness
• gain on hedging instrument (derivative)
• loss on hedged item
309
1
303
5
(16)
(6)
(5)
(5)
–
(17)
(21)
–
–
(21)
–
–
198
6
190
2
(61)
(16)
(41)
(4)
–
(17)
25
18
(2)
–
(41)
50
181
4
174
3
(38)
(22)
–
(16)
(16)
(8)
7
–
2
5
(30)
30
255
145
126
US$ million
2010
2009
2008
6.
Taxation charge (benefi t)
Current taxation:
– Current year
– Prior year over provision
– Other company taxes*
Deferred taxation: (refer to note 11)
– Current year
– Prior year under provision
– Attributable to tax rate changes
* Includes Secondary Tax on Companies (STC)(1)
10
(20)
4
26
–
–
20
–
6
(7)
4
(44)
3
(3)
(41)
4
23
(19)
2
89
–
(9)
86
7
(1) The imposition of Secondary Tax on Companies (STC) effectively means that a dual corporate taxation system exists in South Africa comprising of normal
income taxation and STC. Liability for STC is determined independently from normal income taxation and is paid by South African companies at the fl at rate
of 10% in respect of the amount of dividends declared less all dividends which accrued to them (but subject to certain exclusions) during its 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.
In addition to income taxation charges (benefi ts) to profi t and loss, deferred tax relief of US$11 million (2009: US$32 million relief;
2008: US$1 million charge) has been recognised directly in other comprehensive income (refer to note 11).
2010 annual report
111
US$ million
2010
2009
2008
6.
Taxation charge (benefi t) (continued)
Reconciliation of the tax rate
Profi t (loss) before taxation
Profi t-making regions
Loss-making regions
Taxation at the average statutory tax rate
Profi t-making regions at 30% (2009: 28%; 2008: 30%)
Loss-making regions at 26% (2009: 28%; 2008: 26%)
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 charge (benefi t)
Effective tax rate for the year
86
307
(221)
35
92
(57)
(10)
–
65
(54)
–
(20)
4
20
(218)
133
(351)
(60)
38
(98)
(32)
(3)
72
(22)
4
(4)
4
(41)
23%
19%
188
560
(372)
72
167
(95)
(51)
(9)
103
(19)
7
(19)
2
86
46%
Our effective tax rate refl ects the benefi ts from reduced tax rates in South Africa (2010: nil; 2009: nil; 2008: US$9 million) and
Germany (2010: nil; 2009: US$3 million; 2008: nil). The corporate tax rate in South Africa was reduced from 29% to 28% in 2008.
The corporate tax rate (including trade tax) in Germany was reduced from 30% to 28.6% in 2009.
112 Notes to the group annual fi nancial statements continued
7.
Earnings (loss) per share and headline earnings (loss) per share
Basic earnings (loss) per share (EPS)
EPS is based on the group’s profi t (loss) for the year divided by the weighted average number of shares in issue during the year
under review.
2010
2009(1)
2008
Profi t
US$
million
Shares
millions
Earnings
per share
US
cents
Loss
US$
million
Shares
millions
Loss
per share
US
cents
Profi t
US$
million
Shares
millions
Earnings
per share
US
cents
Basic EPS calculation
66
516.7
13
(177)
482.6
(37)
102
362.2
28
Share options and performance
shares under Sappi
Limited Share Trust
Share options granted under the
Broad-based Black Economic
–
3.9
–
–
–
–
–
3.6
–
Empowerment transaction
–
0.2
–
–
–
–
–
–
Diluted EPS calculation
66
520.8
13
(177)
482.6
(37)
102
365.8
–
28
(1) In the 2009 fi nancial year, Sappi conducted a renounceable rights offer of 286,886,270 new ordinary shares of ZAR1.00 each to qualifying Sappi shareholders.
In accordance with IAS 33, the fi scal 2008 basic, headline and diluted earnings per share have been restated to take into account the bonus element of the
rights offer. As such, the 2008 weighted average number of shares has been adjusted by a factor of 1.58 (the adjustment factor). The adjustment factor was
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).
The diluted EPS calculations are based on Sappi Limited’s daily average share price of ZAR31.86 (2009: ZAR30.12; 2008: ZAR94.08)
and exclude the effect of certain share options granted under the Sappi Share Incentive Scheme as well as share options granted
under the Broad-based Black Economic Empowerment transaction as they would be anti-dilutive.
There are 10.6 million (September 2009: 15.6 million; September 2008: 2.3 million) share options that could potentially dilute
EPS in the future that are not included in the diluted weighted average number of shares calculation as they are anti-dilutive.
2010 annual report
113
7.
Earnings (loss) per share and headline earnings (loss) per share (continued)
Headline earnings per share(1)
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 listings required measure.
Reconciliation between attributable earnings (loss) to ordinary shareholders and headline earnings (loss):
2010
2009
2008
Gross
Tax
Net
Gross
Tax
Net
Gross
Tax
Net
Attributable earnings (loss)
to ordinary shareholders
86
20
66
(218)
(41)
(177)
188
86
102
Profi t on sale and write-off of
property, plant and equipment
(4)
–
(4)
(1)
–
(1)
(5)
–
(5)
(Impairment reversals)
impairment of plant and
equipment
(10)
–
(10)
79
–
79
119
–
119
Headline earnings (loss)
72
20
52
(140)
(41)
(99)
302
86
216
Basic weighted average number
of ordinary shares in issue
(millions)
Headline earnings (loss) per
share (US cents)
Diluted weighted average
number of shares (millions)
Diluted headline earnings (loss)
per share (US cents)
516.7
10
520.8
10
482.6
(21)
482.6
(21)
362.2
60
365.8
59
(1) Headline earnings – as defi ned in circular 3/2009 issued by the South African Institute of Chartered Accountants, separates from earnings all separately
identifi able remeasurements. It is not necessarily a measure of sustainable earnings.
US$ million
2010
2009
2008
8.
Dividends
Dividend paid: (2009: 16 US cents per share; 2008: 32 US cents
per share), net of dividends attributable to treasury shares
–
(37)
(73)
The board decided not to declare a dividend in respect of the 2010 fi nancial year.
114 Notes to the group annual fi nancial statements continued
US$ million
2010
2009
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
1,628
875
753
7,742
4,992
2,750
741
584
157
1,686
887
799
7,863
4,914
2,949
795
609
186
10,111
6,451
10,344
6,410
3,660
3,934
* Plant and equipment includes vehicles and furniture, the book value of which does not warrant disclosure as 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 2008
Additions
Acquisition
Disposals
Transfers
Depreciation
Impairments
Translation differences
Net book value at September 2009
Additions
Acquisition
Disposals
Transfers
Depreciation
Impairment reversals
Translation differences
Land and
buildings
Plant and
equipment
Capitalised
leased
assets
Total
612
33
169
(3)
–
(37)
–
25
799
23
8
(13)
–
(41)
–
(23)
2,608
141
3,361
150
508
–
11
(339)
(79)
90
2,949
183
5
(3)
5
(350)
20
(59)
1
73
(1)
(11)
(20)
–
3
184
750
(4)
–
(396)
(79)
118
186
3,934
–
–
–
(5)
(20)
–
(4)
206
13
(16)
–
(411)
20
(86)
Net book value at September 2010
753
2,750
157
3,660
Details of land and buildings are available at the registered offi ces of the respective companies who own the assets (refer note 24
for details of encumbrances).
2010 annual report
115
9.
Property, plant and equipment (continued)
Asset impairments
September 2010
Asset impairments and impairment reversals mainly comprise of:
European mechanical coated cash-generating unit: Kangas Mill
The coated mechanical cash-generating unit was previously impaired in September 2009 for US$74 million. On 12 January 2010,
Sappi ceased operations at Kangas Mill which formed part of the mechanical coated cash-generating unit. Following the closure
of the mill, the recoverable amount of the remaining assets in the coated mechanical CGU were reassessed resulting in an
impairment reversal of US$18 million.
Usutu Mill – Closure and transfers from assets held for sale
At the end of January 2010, Usutu Mill ceased operations. The property, plant and equipment related to the mill had been
substantially impaired in previous years and was impaired by a further US$2 million in the current fi scal year.
The Usutu pulp mill was permanently closed at the end of January 2010. The future of the site and plantations was discussed with
potential investors and the government of Swaziland. The disposal group consisting mainly of plantations had been classifi ed
as held for sale since December 2009. The Sappi board subsequently took a decision to continue with its forestry operations
in Swaziland, and is investigating the establishment of various timber processing operations at the Usutu Mill site. As a result,
the assets are no longer classifi ed as held for sale.
Adamas Mill
There were indicators of potential impairment to the Adamas Mill cash-generating unit. The group assessed this CGU for
impairment and concluded that no impairment existed at September 2010. The recoverable amount was determined on the basis
of value in use. The headroom in this calculation was calculated to be US$2 million using a pre-tax real discount rate of 9.48%.
The calculation of the recoverable amount is sensitive to general market conditions, particularly the foreign currency exchange rate.
The carrying amount of the CGU at the end of fi scal 2010 was US$23 million.
September 2009
Usutu Mill
Usutu Mill is an unbleached pulp mill and forms part of the Sappi Forest Products reporting segment. In 2008, forest fi res caused
by severe weather conditions resulted in the loss of approximately 28% of the mill’s fi bre supply and 40% of its plantations, resulting
in insuffi cient fi bre 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 fi ne 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 Sappi Fine Paper segment. Due to the downturn in the market, the
net present value of the future cash fl ows of the cash-generating unit was lower than its carrying amount. As a result, a non-cash
impairment charge of US$74 million has been recognised. The recoverable amount of the various assets within the cash-generating
unit has been determined on the basis of value in use. The value in use was established using a pre-tax real discount rate of 7.22%.
116 Notes to the group annual fi nancial statements continued
US$ million
2010
2009
10.
Plantations
Fair value of plantations at beginning of year
Gains arising from growth
Fire, hazardous weather and other damages
Additions
Gain (loss) arising from fair value price changes*
Harvesting – agriculture produce (fellings)
Translation difference
Fair value of plantations at end of year
611
67
–
9
31
(71)
40
687
631
73
(2)
1
(67)
(69)
44
611
* In the third quarter of fi scal 2010, the group changed the accounting estimate used to derive the estimated price of timber that is used to calculate the fair value
of its plantations. The change is explained in more detail in section 2.3 – Critical accounting policies and estimates on valuing plantations. The impact of the
change as at the third quarter of fi scal 2010 was an increase in the fair value of plantations of US$28 million.
Sappi manages the establishment, maintenance and harvesting of its plantations on a compartmentalised basis. These plantations
are comprised of pulpwood and sawlogs and are managed in such a way so as to ensure that the optimum fi bre balance
is supplied to its paper and pulping operations in southern Africa.
As Sappi manages its plantations on a rotational basis, the respective increases by means of growth are negated by depletions
over the rotation period for the group’s own production or sales. Estimated volume changes on a rotational basis amount to
approximately fi ve million tons per annum.
We own plantations on land that we own, as well as on land that we lease. We disclose both of these as directly managed
plantations. With regard to indirectly managed plantations, Sappi has several different types of agreements with many independent
farmers. The agreements depend on the type and specifi c needs of the farmer and the areas planted. These agreements range in
time from one to more than 20 years. In certain circumstances we provide loans to farmers, which are disclosed as accounts
receivable in the group balance sheet (these loans are considered immaterial to the group). If Sappi provides seedlings, silviculture
and/or technical assistance, the costs are expensed when incurred by the group.
The group is exposed to fi nancial risks arising from climatic changes, disease and other natural risks such as fi re, fl ooding and
storms and human-induced losses arising from strikes, civil commotion and malicious damage. These risks are covered by an
appropriate level of insurance as determined by management. The plantations have an integrated management system that is
certifi ed to ISO 9001, ISO 14001, OHSAS 18001 and FSC standards.
Changes in estimate prices, the discount rate, costs to sell and, volume and growth assumptions applied in the valuation of
immature timber may impact the calculated fair value as tabled below:
US$ million
Market price changes
1% increase in market prices
1% decrease in market prices
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
2010
2009
2008
2
(2)
(5)
5
9
(9)
(1)
1
2
(2)
12
(12)
(3)
3
6
(6)
(9)
9
1
(1)
17
(17)
(4)
4
6
(6)
(10)
10
1
(1)
2010 annual report
117
US$ million
Assets
Liabilities
Assets
Liabilities
2010
2009
11.
Deferred tax
Other liabilities, accruals and prepayments
Inventory
USA alternative minimum taxation credit carry forward
Tax loss carry forward
Property, plant and equipment
Plantations
Other non-current assets
Other non-current liabilities
(100)
5
14
313
(113)
(26)
27
(67)
53
8
(3)
–
63
(302)
(160)
–
8
(386)
(111)
5
11
360
(141)
(20)
26
(74)
56
8
(4)
–
69
(292)
(145)
–
9
(355)
Negative asset and liability positions
These balances refl ect 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 suffi cient future
taxable profi ts against which these losses can be recovered. In the estimation of future taxable profi ts, 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 profi ts will be available against which deductible temporary differences can be utilised.
US$ million
2010
2009
Unrecognised deferred tax assets relate to the following:
Other non-current liabilities
Tax losses
Attributable to the following tax jurisdictions:
Belgium
The Netherlands
Finland
United Kingdom
United States of America
Swaziland
South Africa
Austria
Expiry between two and fi ve years
Expiry after fi ve years
Indefi nite life
74
630
704
63
8
47
64
198
32
3
289
704
2
205
497
704
66
634
700
49
10
39
65
222
28
2
285
700
–
152
548
700
118 Notes to the group annual fi nancial statements continued
US$ million
2010
2009
11.
Deferred tax (continued)
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
Reconciliation of deferred tax
Deferred tax balances at beginning of year
Deferred tax assets
Deferred tax liabilities
Deferred taxation (charge) benefi t for the year (refer note 6)
Other liabilities, accruals and prepayments
Inventory
Utilisation of Secondary Tax on Companies (STC) credits
USA alternative minimum taxation credit
Tax loss carry forward
Property, plant and equipment
Plantations
Other non-current liabilities
Amounts recorded directly in other comprehensive income
Rate adjustments
Translation differences
Deferred tax balances at end of year
Deferred tax assets
Deferred tax liabilities
Secondary Tax on Companies (STC)
700
86
(54)
–
3
(31)
704
56
(355)
(299)
(26)
5
–
–
2
(14)
15
(9)
(25)
11
–
(19)
(333)
53
(386)
591
129
(22)
1
2
(1)
700
41
(399)
(358)
41
(6)
5
(2)
–
30
(10)
18
6
32
3
(17)
(299)
56
(355)
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
484
44
465
42
2010 annual report
119
12. Goodwill and intangible assets
2010
Licence
US$ million
Goodwill
fees Patents Brands
Total Goodwill
2009
Licence
fees
Patents
Brands
Total
Net carrying amount
at beginning of year
Acquisition
Amortisation
Translation difference
Net carrying amount
Cost (gross
carrying amount)
Accumulated
amortisation
and impairment
Net carrying amount
US$ million
4
–
–
–
4
3
–
–
–
3
–
–
–
–
–
25
–
(2)
(3)
20
32
–
(2)
(3)
27
4
–
–
–
4
3
–
–
–
3
–
–
–
–
–
–
25
(2)
2
25
7
25
(2)
2
32
4
3
20
24
51
4
3
21
27
55
–
4
–
3
(20)
(4)
(24)
–
20
27
–
4
–
3
(21)
(2)
(23)
–
25
32
13.
Joint ventures and associates*
Cost of equity investments
Share of post-acquisition profi t, net of distributions received
Foreign currency translation effect
Summarised fi nancial 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
US$ million
Sales
Profi t for the period
Group’s share of equity investments’ profi t for the period
2010
2009
96
8
21
125
640
298
342
125
99
24
–
123
638
312
326
123
2010
2009
2008
691
35
13
756
28
11
902
46
17
120 Notes to the group annual fi nancial statements continued
13.
Joint ventures and associates* (continued)
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 fi nancial statements of Jiangxi Chenming are to 31 December of each year which was the reporting date when
the company was established. The last audited fi nancials were to 31 December 2009.
Umkomaas Lignin (Pty) Limited
A 50% 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
fi nancial statements of Umkomaas Lignin (Pty) Limited are to 31 December of each year which is the year end of Borregaard. The
last audited fi nancials were to 31 December 2009.
Sapin SA
A 50% 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 fi nancial statements of Sapin SA are to 31 December of each year which is the year end of Sapin SA. The last
audited fi nancials were to 31 December 2009.
Papierholz Austria GmbH
A 43% joint venture agreement for the buying and selling of wood and wood chips to Sappi and other paper and pulp manufacturers.
The fi nancial statements of Papierholz Austria GmbH are to 31 December of each year which is the year end of Papierholz Austria
GmbH. The last audited fi nancials were to 31 December 2009.
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 fi nancial statements because we have taken the position that it is controlled by an unrelated investor
which has suffi cient equity capital at risk. Sappi’s investment in the SPE is US$6 million as of September 2010 (2009: US$6 million).
The fi nancial statements of Timber IV are to 30 September of each year. The results are unaudited.
Energie Biberist AG
A 10% investment in associate Energie Biberist AG (EBAG) in which Sappi exercises signifi cant infl uence by virtue of the fact that
Sappi has the power to appoint one of the fi ve directors. EBAG is an energy company supplying Sappi Biberist with 100% of
electricity requirements. The fi nancial statements of EBAG are to 31 December each year which is the year end of EBAG. The last
audited fi nancials of EBAG were 31 December 2009.
VOF Warmtekracht
During the year, Sappi purchased the remaining 50% of VOF Warmtekracht from Essent. VOF Warmtekracht was previously a 50%
owned joint venture in The Netherlands between Sappi and Essent for co-generation of electricity and steam. Sappi no longer
accounts for VOF Warmtekracht as a joint venture, but now consolidates this entity as part of the Sappi group fi nancial statements.
Where the year ends of joint ventures and associates are different to Sappi’s, the unaudited management accounts of the joint ventures and associates are used
for the periods to Sappi’s year end.
US$ million
14. Other non-current assets
Loans to the Sappi Limited Share Incentive Trust participants
Financial assets*
Post-employment benefi ts – pension asset (refer note 27)
Other loans
* Details of investments are available at the registered offi ces of the respective companies.
2010
2009
1
32
37
12
82
6
33
52
10
101
15.
US$ million
Inventories
Raw materials
Work in progress
Finished goods
Consumable stores and spares
2010 annual report
121
2010
2009
185
86
376
189
836
155
83
347
207
792
The charge to the group income statement relating to the write down of inventories to net realisable value amounted to US$17 million
(2009: US$10 million and 2008: US$11 million).
The cost of inventories recognised as an expense and included in cost of sales amounted to US$5,197 million (September 2009:
US$4,467 million and September 2008: US$4,552 million).
Refer to note 24 for inventory pledged as security.
16.
Trade and other receivables
Trade accounts receivable, gross
Allowance for credit losses
Trade accounts receivable, net
Prepayments and other receivables
754
(14)
740
148
888
682
(15)
667
191
858
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$888 million (2009: US$858 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 (%)
15%
16%
16.1 Reconciliation of the allowance for credit losses
Balance at beginning of year
Raised during the year
Released during the year
Foreign exchange currency translation effect
Balance at end of year
15
9
(9)
(1)
14
5
16
(6)
–
15
An allowance has been made for estimated irrecoverable amounts from the sale of goods of US$14 million (2009: US$15 million).
This allowance has been determined by reference to specifi c customer delinquencies.
122 Notes to the group annual fi nancial statements continued
Trade and other receivables (continued)
16.
16.2 Analysis of amounts past due
September 2010
The following provides an analysis of the amounts that are past the due contractual maturity dates:
US$ million
Not impaired
Impaired
Total
Less than 7 days overdue
Between 7 and 30 days overdue
Between 30 and 60 days overdue
More than 60 days overdue
18
18
3
15
54
–
–
1
13
14
18
18
4
28
68
September 2009
The following provides an analysis of the amounts that are past the due contractual maturity dates:
US$ million
Not impaired
Impaired
Total
Less than 7 days overdue
Between 7 and 30 days overdue
Between 30 and 60 days overdue
More than 60 days overdue
9
29
9
19
66
–
–
–
15
15
9
29
9
34
81
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 in line with the group limits of authority framework.
The group has a provision of US$14 million (2009: US$15 million) against trade receivables that are past due.
The group holds collateral of US$17 million (2009: US$17 million) against these trade receivables that are past due.
The group has granted facilities to customers to buy on credit for the following amounts:
US$ million
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
2010
2009
331
276
557
225
965
332
275
495
212
951
2,354
2,265
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$486 million (2009: US$460 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$447 million
(2009: US$400 million). The group is restricted from selling and repledging the trade receivables that have been pledged as
collateral for the liability.
2010 annual report
123
16. Trade and other receivables (continued)
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 the end of each fi nancial month on a non-recourse basis.
“Scheck-Wechsel”
The Scheck-Wechsel is a fi nancial guarantee supplied by Sappi to the bank of certain customers (trade receivables) who wish
to obtain a loan to fi nance early payment of specifi ed trade receivables (thereby benefi ting from an early settlement discount).
By signing the Scheck-Wechsel, Sappi provides a fi nancial guarantee to the bank of the customer.
This fi nancial 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 fi nancial 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$29 million (2009: US$25 million) has been disclosed in this respect.
Trade receivables securitisation
To improve our cash fl ows in a cost-effective manner, Sappi Trading, Sappi Fine Paper Europe and Sappi Fine Paper North America
sell all eligible trade receivables on a non-recourse basis to special-purpose entities (SPEs) that are owned and controlled by third
party fi nancial 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 Southern Africa securitisation facility
Sappi sells the majority of its ZAR receivables to Rand Merchant Bank Limited, which issues commercial paper to fi nance the
purchase of the receivables. Sappi does not guarantee the recoverability of any amounts, but shares proportionately with Rand
Merchant Bank Limited the credit risk of each underlying receivable, after all recoveries, including insurance recoveries, with Sappi
bearing 15% of such risk (and Rand Merchant 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 Inter-bank Agreed Rate) plus a spread. This structure is currently treated as an off balance sheet arrangement.
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 specifi ed 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.
The total amount of trade receivables sold at the end of September 2010 amounted to US$215 million (September 2009:
US$171 million). Details of the securitisation programme at the end of fi scal 2010 and 2009 are disclosed in the tables below:
Bank
2010
Currency
Value
Facility
Discount charges
Rand Merchant Bank Limited
ZAR
ZAR1,510 million
Unlimited*
Linked to 3 month JIBAR
2009
Rand Merchant Bank Limited
ZAR
ZAR1,268 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.
124 Notes to the group annual fi nancial statements continued
16. Trade and other receivables (continued)
16.5 Off balance sheet structures (continued)
Details of the on balance sheet securitisation facilities are described in note 20.
16.6
Analysis of customers
A signifi cant portion of the group’s sales and accounts receivable are from major groups of customers. None of the group’s major
customers represented more than 10% of our sales during the years ended September 2010 and September 2009. Where
appropriate, credit insurance has been taken out over the group’s trade receivables.
None of the group’s other receivable fi nancial instruments represent a high concentration of credit risk because the group has
dealings with a variety of major banks and customers world-wide.
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$5 million
2010
2009
Number of
customers US$ million Percentage
Number of
customers
US$ million
Percentage
7
13
2,176
2,196
131
81
528
740
18%
11%
71%
100%
6
9
2,519
2,534
82
55
530
667
12%
8%
80%
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$5 million.
Refer note 29 for further details on credit risk.
17. Ordinary share capital and share premium
Authorised share capital:
Ordinary shares of ZAR1 each
“A” ordinary shares of ZAR1 each*
Issued share capital:
Ordinary shares of ZAR1 each
“A” ordinary shares of ZAR1 each*
Treasury shares**
Share premium
2010
2009
Number of
shares
US$ million
Number of
shares
US$ million
725,000,000
19,961,476
541,446,223
19,961,476
(41,896,595)
725,000,000
–
537,117,864
–
(21,384,559)
77
3
(6)
1,564
519,511,104
1,638
515,733,305
73
–
(3)
1,471
1,541
* The “A” ordinary shares are unlisted but will rank pari passu with the ordinary shares in all respects except for dividend entitlements where the “A” ordinary shares
will be entitled to fi fty percent of the dividends payable on the ordinary shares. The “A” ordinary shares will have the same voting rights as ordinary shares but will
not be listed on the JSE Limited. Sappi will have the option to repurchase a number of “A” ordinary shares in August 2019. The number of any “A” ordinary shares
that Sappi elects to buy back on the repurchase date will depend on the price performance of the ordinary shares over the period of the transaction with the
remaining “A” ordinary shares being distributed to the benefi ciaries and converted into ordinary shares. The “A” ordinary shares’ rights, terms, conditions of
conversion and privileges are contained in Article 38 of Sappi’s Articles, details of which are available for inspection at the company’s registered offi ces.
** Includes 21,935,119 (September 2009: 21,384,559) ordinary shares as well as 19,961,476 (2009: nil) “A” ordinary shares that are held by group entities,
including The Sappi Limited Share Incentive Trust (the Scheme) and the trusts set up to house the Broad-based Black Economic Empowerment transaction.
These may be utilised to meet the requirements of the trusts.
The authorised share capital was increased during the year with 19,961,476 “A” ordinary shares with a par value of ZAR1.00 per
share as part of Sappi’s 2010 Broad-based Black Economic Empowerment transaction (refer to note 28 for further details). The
issued ordinary share capital increased during the year from ZAR537,117,864 to ZAR541,446,223 with the issue of 4,328,359
ordinary shares as part of the unwinding of the 2006 Broad-based Black Economic Empowerment transaction and 19,961,476
“A” ordinary shares as part of Sappi’s 2010 Broad-based Black Economic Empowerment transaction. Costs related to the Broad-
based Black Economic Empowerment transaction of US$3 million were charged to share premium in the current year.
2010 annual report
125
Number of shares
2010
2009
17. Ordinary share capital and share premium (continued)
The movement in the number of treasury shares is set out in the table below:
Ordinary treasury shares:
Ordinary 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 28)
– Share plan options (per note 28)
– Allocation shares (per note 28)
– Restricted shares (per note 28)
– Scheme shares forfeited, released and other
Ordinary treasury shares at end of year
“A” ordinary treasury shares:
“A” ordinary shares issued to the Broad-based Black Economic Empowerment trusts
21,384,559
–
550,560
9,906,661
11,860,873
(382,975)
–
–
–
–
550,560
(206,140)
(165,491)
(214,660)
(22,000)
225,316
21,935,119
21,384,559
19,961,476
–
41,896,595
21,384,559
Included in the issued and unissued ordinary share capital of 725,000,000, is 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 7 March 2005.
Since March 1994, 2,970,582 (September 2009: 2,970,582) shares have been allocated to the Scheme participants and paid for,
and 14,799,182 (September 2009: 11,910,172) shares have been allocated to the Scheme participants and not yet paid for.
In terms of the Plan, 9,312,840 (September 2009: 9,736,450) shares have been allocated and remain unpaid for, and 176,491
(September 2009: 165,491) shares have been allocated and paid for by the Plan participants.
Capital risk management
The capital structure of the group consists of:
■ issued share capital and premium and accumulated profi ts disclosed above and in the statement of changes in equity
respectively;
■ debt, which includes interest-bearing borrowings and obligations due under fi nance 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 fi scal 2010 and 2009, we were in compliance with the fi nancial covenants relating to the loans payable.
The group’s strategy with regard to capital risk management remains unchanged from 2009.
126 Notes to the group annual fi nancial statements continued
US$ million
2010
2009
2008
18. Other comprehensive income (loss)
Exchange differences on translation
Gross amount
Tax
Actuarial (losses) gains on pensions and post-employment benefi ts
Gross amount (refer note 27)
Tax
Fair value adjustment on available-for-sale fi nancial instruments
Gross amount
Tax
Hedging reserves
Gross amount
Tax
Other comprehensive income (loss) recorded directly in equity
Profi t (loss) for the year
Total comprehensive income (loss) for the year
52
52
–
(60)
(71)
11
2
2
–
14
14
–
8
66
74
14
14
–
(197)
(229)
32
–
–
–
(14)
(14)
–
(197)
(177)
(374)
(262)
(262)
–
6
7
(1)
–
–
–
–
–
–
(256)
102
(154)
US$ million
2010
2009
19.
Non-distributable reserves
Legal reserves in subsidiaries
Share-based payment reserve
Other
Capital reduction(1)
Capitalisation of distributable reserves(2)
Available-for-sale fi nancial assets
78
69
14
1
11
2
82
48
13
1
12
–
161
143
2010
Share-
based
payment
reserve
Legal
reserves(2)
Other
Total
Legal
reserves(2)
2009
Share-
based
payment
reserve
Opening balance
Transfer from retained earnings
Share-based payment expense
Movement on available-for-sale
fi nancial assets
Translation difference
82
2
–
–
(6)
78
48
–
17
–
4
69
13
–
–
2
(1)
14
143
2
17
2
(3)
161
75
6
–
–
1
82
35
–
9
–
4
48
Other
Total
14
–
–
–
(1)
13
124
6
9
–
4
143
(1) Reduction in capital arising from the transfer of share premium under a special resolution dated 14 April 1975.
(2) Represents equity of the company that is not available for distribution as a result of appropriations of equity by subsidiaries and legal requirements respectively.
2010 annual report
127
US$ million
2010
2009
2008
20.
Interest-bearing borrowings
Secured borrowings
– Mortgage and pledge over trade receivables and certain assets
(refer note 24 for details of encumbered assets)
– Capitalised lease liabilities (refer note 24 for details of encumbered assets)
Total secured borrowings*
Unsecured borrowings*
Total borrowings (refer note 29)
Less: Current portion included in current liabilities
1,605
50
1,655
1,353
3,008
691
2,317
1,849
71
1,920
1,407
3,327
601
2,726
468
29
497
2,156
2,653
821
1,832
* Our September 2009 disclosure has been amended to correctly refl ect the split between secured and unsecured interest-bearing borrowings and to refl ect the
classifi cation set out in the detailed list of borrowings in note 20 to the 2009 group annual fi nancial statements.
2009
Secured borrowings**
Unsecured borrowings
Total
As previously
reported
Adjustment
Adjusted
1,350
1,977
3,327
570
(570)
–
1,920
1,407
3,327
** Mortgage and pledge over trade receivables and certain assets of US$1,849 million was previously disclosed as US$1,321 million, and capitalised lease
liabilities of US$71 million was previously disclosed as US$29 million.
The repayment profi le of the interest-bearing borrowings is as follows:
Payable in the year ended September:
2010*
2011*
2012
2013
2014
2015 (September 2009: thereafter)
Thereafter
2010
2009
691
892
352
842
7
224
601
261
890
338
895
342
–
3,008
3,327
* Included in the US$691 million refl ected as payable in 2010 is US$447 million debt relating to securitisation funding (2009: US$400 million included in US$601 million)
which has the character of a short-term revolving facility but is expected to run until 31 December 2011 under the existing contractual arrangements, and the
intention is to renew this arrangement well ahead of maturity.
128 Notes to the group annual fi nancial statements continued
20.
Interest-bearing borrowings (continued)
Capitalised lease liabilities
Finance leases are primarily for plant and equipment. Lease terms generally range from fi ve to ten years with options to make
early settlements or renew at varying terms. At the time of entering into capital lease agreements, the commitments are recorded
at their present value using applicable interest rates. As of September 2010, the aggregate amounts of minimum lease payments
and the related imputed interest under capitalised lease contracts payable in each of the next fi ve fi nancial years and thereafter
are as follows:
2010
2009
Minimum
lease
payments
Interest
Present
value of
minimum
lease
payments
Minimum
lease
payments
Interest
Present
value of
minimum
lease
payments
Payable in the year ended September:
2010
2011
2012
2013
2014
2015 (September 2009: thereafter)
Total future minimum lease payments
–
16
17
15
6
7
61
–
(5)
(3)
(2)
(1)
–
(11)
–
11
14
13
5
7
50
23
17
18
15
6
7
86
(4)
(3)
(2)
(2)
(1)
(1)
(13)
19
14
16
13
5
6
73
2010 annual report
129
20.
Interest-bearing borrowings (continued)
Set out below are details of the more signifi cant non-current interest-bearing borrowings in the group at September 2010.
Currency
Interest
rate
Principal
amount
outstanding
Balance sheet
value
Security/Cession
Expiry
Financial
covenants
Redeemable bonds
Public bond
EUR
Fixed
EUR350 million
EUR319 million(2,6)
Public bond
US$
Fixed(7)
US$300 million(7)
US$274 million(2,6)
August 2014
No fi nancial
covenants
August 2014
No fi nancial
covenants
Property, plant and
equipment, inter-
company receivables
and shares in
subsidiaries
Property, plant and
equipment, inter-
company receivables
and shares in
subsidiaries
Public bond
US$
Fixed
US$500 million
US$513 million(2,3,6) Unsecured
June 2012
Public bond
US$
Fixed
US$221 million
US$222 million(2,3,6) Unsecured
June 2032
Public bond
ZAR
Fixed
ZAR1,000 million
ZAR1,000 million
Unsecured
June 2013
Public bond
ZAR
Fixed
ZAR1,000 million
ZAR1,000 million
Unsecured
October 2011
Public bond
ZAR
Fixed
ZAR498 million
ZAR498 million(6)
Unsecured
June 2012
No fi nancial
covenants
No fi nancial
covenants
No fi nancial
covenants
No fi nancial
covenants
No fi nancial
covenants
Private
placement bond
Private
placement bond
Private
placement bond
Private
placement bond
Secured loans
State Street
Bank
State Street
Bank
ZAR
Fixed
ZAR134 million
ZAR134 million
Unsecured
November 2012 No fi nancial
ZAR
Fixed
ZAR133 million
ZAR133 million
Unsecured
January 2013
ZAR
Fixed
ZAR33 million
ZAR33 million
Unsecured
March 2013
covenants
No fi nancial
covenants
No fi nancial
covenants
ZAR
Fixed
ZAR61 million
ZAR61 million(6)
Unsecured
December 2013 No fi nancial
covenants
EUR
Variable
EUR231 million
EUR231 million
Trade receivables
Revolving facility EBITDA to net
US$
Variable
US$61 million
US$61 million
Trade receivables
interest and net
debt to EBITDA(5)
Revolving facility EBITDA to net
interest and net
debt to EBITDA(5)
130 Notes to the group annual fi nancial statements continued
20.
Interest-bearing borrowings (continued)
Currency
Interest
rate
Principal
amount
outstanding
Balance sheet
value
Security/Cession
Expiry
Financial
covenants
Secured loans (continued)
State Street
Bank
Österreichische
Kontrollbank
Österreichische
Kontrollbank
US$
Variable
US$75 million
US$75 million
Trade receivables
Revolving facility EBITDA to net
interest and net
debt to EBITDA(5)
EBITDA to net
interest and net
debt to EBITDA(5)
EUR
Fixed
EUR320 million
EUR310 million(2,6) Property, plant and
April 2014
EUR
Variable
EUR25 million
EUR25 million(1)(2)
equipment, inter-
company receivables
and shares in
subsidiaries
Property, plant and
equipment, inter-
company receivables
and shares in
subsidiaries
June 2013
EBITDA to net
interest and net
debt to EBITDA(5)
Capitalised leases
Fortum
EUR
Variable
EUR22 million
EUR22 million
Plant and
equipment
November 2012 No fi nancial
covenants
Rand Merchant
Bank
ZAR
Fixed
ZAR148 million
ZAR148 million(1)
Buildings
September 2015 No fi nancial
covenants
Unsecured bank term loans
Österreichische
Kontrollbank
EUR
Variable
EUR58 million
EUR58 million(1)
Unsecured
December 2010 No fi nancial
Nedbank
ZAR
Fixed
ZAR350 million
ZAR350 million(1)
Unsecured
January 2011
Nedbank
ZAR
Fixed
ZAR397 million
ZAR397 million
Unsecured
March 2014
Peritum Trading ZAR
Fixed
ZAR13 million
ZAR13 million(1)
Unsecured
June 2014
covenants
No fi nancial
covenants
Gearing ratio/
interest & dividend
cover(4)
No fi nancial
covenants
Royal Bank of
Scotland
EUR
Fixed
EUR12 million
EUR12 million
Unsecured
December 2010 No fi nancial
covenants
20.
Interest-bearing borrowings (continued)
The analysis of the currency per debt is:
US$(8)
EURO
ZAR
2010 annual report
131
Local currency
million
US$ million
1,151
979
3,766
1,151
1,321
536
3,008
(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 specifi ed 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 fi nancial covenant relates to the fi nancial position of Sappi Southern Africa (Pty) Limited, 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) USD fi xed rates have been swapped into EUR fi xed rates. These swaps are subject to hedge accounting in order to reduce as far as possible the foreign
exchange exposure.
(8) This amount includes debt of US$300 million that is swapped into Euro.
A detailed reconciliation of total interest-bearing borrowings has been performed in note 29.
Other restrictions
As is the norm for bank loan debt, a portion of Sappi Limited’s fi nancial indebtedness is subject to cross default provisions.
Breaches in bank covenants in certain subsidiaries, if not corrected in time, might result in a default in group debt, and in this case,
a portion of Sappi Limited consolidated liabilities might eventually become payable on demand.
During fi scal 2010 and 2009, we were in compliance with the fi nancial covenants relating to all loans payable. Regular monitoring
of compliance with applicable covenants occurs. If there is a possible breach of a fi nancial covenant in the future, negotiations
would commence with the applicable institutions before such breach occurs.
Borrowing facilities secured by trade receivables
The group undertakes several trade receivable securitisation programmes due to the cost effectiveness of such structures. These
structures, with the exception of the South African scheme, are accounted as on balance sheet, with a corresponding liability
(external loan) being recognised and corresponding interest is recognised as fi nance cost.
The trade receivables are legally transferred, however, most of the market risk (foreign exchange risk and interest rate risk) and the
credit risk is retained by Sappi. As a consequence, based on the risks and rewards evaluation, these securitised receivables do
not qualify for de-recognition under IAS 39.
Further detail of the value of trade receivables pledged as security for these loans is included in note 16.
Sappi Fine Paper North America
Sappi sells the majority of its US$ 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$18 million that relates to the uninsured portion of those obligors
with concentrations above 3% (Sappi, as servicer of the receivables, is responsible for the collection of all amounts that are due
from the customer). The rate of discounting charged on the receivables is LIBOR (London Inter-bank Offered Rate) plus a margin
for receivables to customers located in Organisation for Economic Co-operation and Development (OECD) countries.
132 Notes to the group annual fi nancial statements continued
20.
Interest-bearing borrowings (continued)
Sappi Fine Paper Europe and Sappi Trading
Under a combined securitisation arrangement for Sappi Fine Paper Europe and Sappi Trading, Sappi sells receivables to Galleon
Capital LLC on a non-recourse basis. Credit enhancement is calculated by deducting a deferred purchase price of 14%. Sappi is
responsible for the collection of all amounts that are due from the customer. The rate of discounting that is charged on the
receivables is LIBOR (London Inter-bank Offered Rate) plus a margin for receivables to customers located in OECD countries plus
a further margin for receivables to customers located in non-OECD countries.
Unutilised facilities
The group monitors its availability of funds on a weekly basis. The group treasury committee determines the amount of unutilised
facilities to determine the headroom which it currently operates in. The net cash balances included in current assets and current
liabilities are included in the determination of the headroom available.
Unutilised committed facilities
US$ million
Currency
Interest rate
Syndicated loan*
EUR
Variable (EURIBOR)
2010
282
2009
307
* Syndicated loan with a consortium of banks with JP Morgan Europe Limited as facility agent with a remaining revolving facility available of EUR209 million, which
is subject to fi nancial covenants relating to the Sappi Limited Group and is secured by the same assets as the public 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$7 million (2009: US$0.8 million) in respect of the syndicated loan facility.
Unutilised uncommitted facilities
US$ million
Currency
Interest rate
2010
2009
Held by:
Southern Africa
Group Treasury – Europe
ZAR
EUR
Variable (JIBAR)
Variable (EURIBOR)
Total unutilised facilities (committed and uncommited) excluding cash
Fair value
The fair value of all interest-bearing borrowings is disclosed in note 29 on fi nancial instruments.
417
–
417
699
445
54
499
806
US$ million
2010
2009
21. Other non-current liabilities
Post-employment benefi ts – pension liability (refer note 27)
Post-employment benefi ts other than pension liability (refer note 27)
Long-term employee benefi ts
Workmen’s compensation
Long service awards
Land restoration provision
Deferred income
Other
298
178
5
9
26
19
3
8
308
172
9
8
27
19
3
11
546
557
2010 annual report
133
US$ million
22.
Provisions
Restructuring provisions
Other provisions
Balance at September*
* These are all included in current liabilities
Restructuring provisions
Balance at September 2008
Increase in provisions
Utilised
Released during the year
Other movements
Translation effect
Balance at September 2009
Increase in provisions
Utilised
Released during the year
Other movements
Translation effect
Balance at September 2010
2010
2009
29
4
33
Severance,
retrenchment
& related
costs
Lease
cancellation &
penalty costs
Other
restructuring
27
17
(24)
(1)
(1)
–
18
10
(19)
–
–
–
9
4
–
(1)
–
(1)
1
3
–
–
–
–
(1)
2
10
21
(10)
(4)
(5)
(1)
11
31
(23)
(2)
1
–
18
32
3
35
Total
41
38
(35)
(5)
(7)
–
32
41
(42)
(2)
1
(1)
29
September 2010 Restructuring Plans
Sappi Fine Paper Europe
Kangas Mill. On 12 January 2010, Sappi Fine Paper Europe ceased operations at its Kangas Mill. A total of 150 employees were
affected by the closure of the mill. A total restructuring provision of US$14 million was raised during the year of which US$8 million
was utilised by September 2010.
Sappi Southern Africa
Usutu Mill. In the fi nal quarter of our 2009 fi scal year, Sappi had begun consultation with stakeholders with the intention of
permanently ceasing production at Usutu mill. Adverse market conditions and the cumulative severe impact of fi re damage over
past years had made the mill unviable. In January 2010, Sappi Southern Africa ceased production at the mill. 491 employees
were affected by the closure by fi scal year end. A provision relating to severance, retrenchment and other related closure costs
of US$24 million was raised during the year; US$14 million of which remained at fi scal year end.
134 Notes to the group annual fi nancial statements continued
22.
Provisions (continued)
September 2009 Restructuring Plans
Sappi Fine Paper Europe
Kangas Mill. During the fi scal 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 2009 resulting in nine employees being made redundant. After the term of notice and remodelling, employment
contracts ended in April 2010. A provision of approximately US$1 million relating to retrenchment costs was 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.
A provision of approximately US$2 million was raised.
Sappi Fine Paper North America Muskegon Mill. During the fi nancial 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 fi ne paper. A provision of approximately US$21 million relating to restructuring charges
was raised.
Sappi Southern Africa
Regional restructuring. During the fi nancial 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 effi ciency improvement initiatives. The restructuring affected approximately 227 employees. A total provision of approximately
US$2 million was raised.
US$ million
2010
2009
2008
Notes to the cash fl ow statements
23.
23.1 Cash generated from operations
Profi t (loss) for the year
Adjustment for:
– Depreciation
– Fellings
– Amortisation
– Taxation charge (benefi t)
– Net fi nance costs
– Asset (impairment reversals) impairments
– Fair value adjustment gains and growth on plantations
– Post-employment benefi ts funding
– Broad-based Black Ecomonic Empowerment transaction charge
– Other non-cash items
23.2
(Increase) decrease in working capital
(Increase) decrease in inventories
(Increase) decrease in receivables
Increase (decrease) in payables
66
411
71
2
20
255
(20)
(98)
(73)
23
80
737
(72)
(74)
141
(5)
(177)
396
69
2
(41)
145
79
(6)
(62)
–
27
432
116
175
(139)
152
102
374
80
–
86
126
119
(190)
(88)
–
14
623
(38)
(19)
58
1
2010 annual report
135
US$ million
2010
2009
2008
23.
23.3
Notes to the cash fl ow statements (continued)
Finance costs paid
Gross interest and other fi nance costs
Net foreign exchange gains
Net fair value gains (losses) on fi nancial instruments
Non-cash movements included in items above
23.4
Taxation paid
Amounts unpaid at beginning of year
Translation effects
Taxation benefi t (charge) to profi t or loss
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
Profi t on disposal
23.7 Cash and cash equivalents
Cash and deposits on call
Money market instruments
(309)
17
21
65
(206)
(54)
4
6
35
(9)
(173)
–
(173)
16
5
21
791
1
792
(198)
17
(25)
99
(107)
(54)
(2)
(3)
54
(5)
(146)
(1)
(147)
–
2
2
727
43
770
(181)
8
(7)
41
(139)
(125)
7
(6)
54
(70)
(250)
–
(250)
2
5
7
221
53
274
136 Notes to the group annual fi nancial statements continued
US$ million
2010
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
309
1,295
186
486
2,276
322
1,542
164
460
2,488
17
176
–
415
608
* This has been increased by US$157 million (2008: US$172 million) to refl ect certain assets that were also encumbered. Plant and equipment was previously
disclosed as US$1,385 million in 2009 (2008: US$4 million).
Plant and equipment
2009
2008
As previously
reported
Adjustment
Adjusted
1,385
4
157
172
1,542
176
Suspensive sale agreements are instalment sale agreements which the group has entered into in respect of certain property, plant
and equipment where the assets purchased are encumbered as security for the outstanding liability until such time that the liability
is discharged.
The encumbered assets relate mainly to the security provided under the following facilities:
■ Public High Yield Bonds of US$300 million and EUR350 million respectively, both due 2014;
■ Österreichische Kontrollbank loans of EUR400 million (current outstanding balance of EUR320 million) and EUR25 million
respectively; and
■ The Committed Revolving Credit Facility of EUR209 million.
The security consists substantially of (i) the land, plant and equipment located at Sappi’s production facilities in Gratkorn, Austria;
Kirkniemi, Finland; Maastricht, The Netherlands; Nijmegen, The Netherlands; Skowhegan/Somerset, Maine, USA, and Cloquet,
Minnesota, USA and (ii) certain inventory owned by SD Warren Company and Sappi Cloquet LLC. The security also includes certain
shares in subsidiaries and certain inter-company receivables which are not refl ected in the total above.
2010 annual report
137
US$ million
2010
2009
2008
25.
Commitments
Capital commitments
Contracted but not provided
Approved but not contracted
Future forecasted cash fl ows of capital commitments:
2009
2010
2011 (September 2008: thereafter)
2012 (September 2009: thereafter)
Thereafter
62
109
171
104
32
35
171
62
126
188
102
48
38
–
188
76
130
206
154
35
17
–
–
206
The capital expenditure is expected to be fi nanced by funds generated by the business, existing cash resources and borrowing
facilities available to the group.
Further information on capital commitments relating to environmental matters can be found in note 32.
US$ million
2010
2009
2008
Lease commitments
Future minimum obligations under operating leases – undiscounted:
Payable in the year ended September:
2009
2010
2011
2012
2013
2014 (September 2008: thereafter)
2015 (September 2009: thereafter*)
Thereafter
40
23
16
9
5
37
130
31
14
7
4
2
38
–
96
28
14
9
4
2
35
–
–
92
* The lease commitments for 2009 was previously disclosed as US$60 million. This has been increased by US$36 million to include a land lease commitment that
should have been refl ected.
As previously
reported
Adjustment
Adjusted
Future minimum obligations under operating leases – September 2009: thereafter
2
36
38
138 Notes to the group annual fi nancial statements continued
US$ million
26.
Contingent liabilities
Guarantees and suretyships
Other contingent liabilities
2010
2009
48
8
44
8
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 in respect of certain group companies.
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 fi nal 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 fi nancial position, results of operations or cash fl ows.
27.
Post-employment benefi ts – pensions and other benefi ts
Summary of results
US$ million
2011
2010
2009
2010
2009
2010
2009
All
plans
Defi ned
contribution plans
Defi ned benefi t
pension plans
Other defi ned
benefi t plans
Post-retirement plan cost recognised
in income statements
Employer contributions paid over
the fi scal year
Expected employer contributions to
be paid over next fi scal year
– Defi ned contribution plans
– Defi ned benefi t pension plans
– Other defi ned benefi t plans
Pension/benefi t plan liability is
presented on the balance sheets
as follows:
Pension/benefi t liability (refer note 21)
Pension asset (refer note 14)
Accrued contributions*/obligations
(included in other payables)
Net balance sheet liability
42
54
12
42
40
33
33
15
66
21
54
14
11
10
10
298
(37)
–
261
308
(52)
–
256
178
–
7
185
172
–
7
179
4
4
2
2
* Amounts to defi ned contribution plans due in respect of the current reporting period that had not yet been paid over to the plans.
2010 annual report
139
27.
Post-employment benefi ts – pensions and other benefi ts (continued)
US$ million
Development in the balance sheets for the pension/benefi t plans
is shown in the table below and graphically following:
Net pension/benefi t liability at start of year
Net pension liability acquired during the year
Net pension/benefi t cost for the year
Employer contributions
Net actuarial (loss) gain for the year to other comprehensive income (OCI)
Foreign currency gain (loss) exchange effect
Net pension/benefi t liability at end of year
Defi ned benefi t
pension plans
Other defi ned
benefi t plans
2010
2009
2010
2009
(256)
–
(15)
66
(73)
17
(261)
(27)
(52)
(21)
54
(207)
(3)
(256)
(179)
(148)
–
(14)
11
2
(5)
–
(10)
10
(22)
(9)
(185)
(179)
Accumulated liabilities exceeded assets in all defi ned benefi t plans except for two plans in southern Africa and one plan in Europe.
Synopsis for the year for defi ned pension/benefi t plans
Reductions in corporate bond yields and rising long term implied infl ation in some regions caused liabilities in our defi ned benefi t
plans to increase. Assets in our funded plans grew in all regions, but growth was less than the increase in liabilities, leading to
increased defi cits at the end of 2010.
140 Notes to the group annual fi nancial statements continued
27. Post-employment benefi ts – pensions and other benefi ts (continued)
Detailed results
Defi ned contribution plans
The group operates defi ned contribution plans of various sizes for all qualifying employees in most regions throughout the group.
The assets of the plans 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 plans in certain locations open to eligible employees.
The total cost charged to the income statement of US$42 million (September 2009: US$33 million, September 2008: US$23 million)
represents contributions payable to these plans by the group based on rates specifi ed in the rules of these plans. As at September
2010, US$4 million (September 2009: US$2 million, September 2008: US$2 million) was due in respect of the current reporting
period that had not yet been paid over to the plans. Part of the increase in total cost charged relates to a rearrangement in a plan
in southern African whereby effective from May 2009, members no longer pay contributions and the company meets all contributions.
The effect of this change is an increase in company contributions of US$8 million (September 2009: US$2 million).
Defi ned benefi t pension plans
The group operates 14 principal (gross liabilities each exceeding US$20 million) defi ned benefi t pension and/or lump sum plans
plus a number of smaller plans. These include plans closed to new entrants and plans closed to future accrual for existing
members. Plans open to new entrants or future accrual cover all qualifying employees. All plans have been established in
accordance with applicable legal requirements, customs and existing circumstances in each country. Plans remain open to new
members except for the following: plans in southern Africa, Austria, some in Germany and one in North America. Plans in the
United Kingdom are closed to future accrual.
Benefi ts are generally based upon compensation and years of service, with varying defi nitions of compensation such as average
salary near retirement or career average revalued earnings. Exceptions to these are certain plans in Germany and Austria that
provide fi xed benefi ts and certain plans in North America that provide benefi ts based on years of service and a ‘$ multiplier’. The
$ multiplier is a nominal US Dollar amount that historically has increased from time to time. In Switzerland, the company has a
defi ned contribution plan providing guaranteed minimum investment returns to members’ funds and pays pensions out of fund
proceeds and reserves (if required). The plan has a liability under IAS 19 which is disclosed with other defi ned benefi t pension 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.
As of September 2010, the total number of active members in our defi ned benefi t pension plans is approximately 8,400.
Actuarial valuations of the European and North American funds are performed annually. An actuarial review is performed annually
for the South African and United Kingdom funds, with an actuarial valuation being performed on a tri-annual basis.
Group companies have no other signifi cant post-employment defi ned benefi t obligations, except for the following:
■ Post-retirement healthcare benefi ts provided to persons in North America and in South Africa totalling US$185 million.
■ Jubilee (long service award plans) in continental Europe of US$26 million, an early retirement benefit plan in Belgium of
US$5 million (refer to note 21).
■ ‘ATZ’ (early retirement) benefi t obligations in Germany totalling US$7 million.
■ Workmans’ compensation benefi t obligations in North America totalling US$13 million.
All pension obligations were measured at the end of the fi nancial year.
Post-employment benefi ts other than pensions (‘other defi ned benefi t’ plans)
The group sponsors two defi ned benefi t post-employment plans that provide certain healthcare and life insurance benefi ts to
eligible retired employees of the North American and South African operations. Employees are generally eligible for benefi ts upon
retirement and completion of a specifi ed number of years of service.
Actuarial valuations of all the plans are performed annually.
All post-employment obligations were measured at the end of the fi nancial year.
2010 annual report
141
27.
Post-employment benefi ts – pensions and other benefi ts (continued)
US$ million
2010
2009
Defi ned
benefi t
pension
plans
Other
defi ned
benefi t
plans
Defi ned
benefi t
pension
plans
Other
defi ned
benefi t
plans
Change in present value of defi ned benefi t obligations
Defi ned benefi t obligations at beginning of years
1,945
175
1,414
143
Current service costs
Past service costs (credits)
Interest costs
Plan participants’ contributions
Actuarial losses (gains) experience
Actuarial losses assumptions
Acquisition
Gains on curtailments and settlements
Benefi ts paid
Translation differences
27
1
107
7
21
122
–
–
(128)
(33)
4
–
11
–
(9)
7
–
–
(11)
5
21
(4)
103
4
9
245
225
(1)
(106)
35
2
–
10
–
3
19
–
(1)
(10)
9
Defi ned benefi t obligations at end of years
2,069(1)
182(2)
1,945(1)
175(2)
Present value of wholly unfunded obligations
Present value of wholly and partly funded obligations
144
1,925
182
–
190
1,755
175
–
142 Notes to the group annual fi nancial statements continued
27.
Post-employment benefi ts – pensions and other benefi ts (continued)
US$ million
Change in fair value of plan assets
Fair value of plan assets at beginning of years
Expected returns on plan assets**
Actuarial gains on plan assets
Acquisition
Employer contributions
Plan participants’ contributions
Benefi ts paid
Losses on curtailments and settlements
Translation differences
2010
2009
Defi ned
benefi t
pension
plans
Other
defi ned
benefi t
plans
Defi ned
benefi t
pension
plans
Other
defi ned
benefi t
plans
1,695
114
70
–
66
7
(128)
–
(16)
–
–
–
–
11
–
(11)
–
–
–
1,387
104
47
173
54
5
(106)
(1)
32
1,695(1)
–
–
–
–
10
–
(10)
–
–
–
Fair value of plan assets at end of years
1,808(1)
** Net of administration costs.
Defi cits
Unrecognised past service credits
(261)
–
(182)
(3)
(250)
(6)
(175)
(4)
Recognised pension plan liabilities
(261)(2)
(185)(3)
(256)(2)
(179)(3)
2010 annual report
143
27.
Post-employment benefi ts – pensions and other benefi ts (continued)
2010
2009
2008
Defi ned
benefi t
pension
plans
Other
defi ned
benefi t
plans
Defi ned
benefi t
pension
plans
Other
defi ned
benefi t
plans
Defi ned
benefi t
pension
plans
Other
defi ned
benefi t
plans
27
1
107
(114)
(6)
–
4
–
11
–
(1)
–
21
–
103
(104)
1
–
2
–
10
–
(1)
(1)
26
1
97
(115)
1
(1)
4
–
11
–
(1)
–
15(1)
14(2)
21(1)
10(2)
9(1)
14(2)
184
10.9%(3)
–
–
151
9.9%(3)
–
–
(73)(4)
2(4)
(207)(4)
(22)(4)
(407)
(52)
(334)
(54)
US$ million
Periodic pension/benefi t costs
recognised in income statements
Current service costs
Past service costs
Interest costs
Expected returns on plan assets**
Amortisation of past service
(credits) costs
Gains on curtailments and settlements
Net periodic pension/benefi t costs
charged to cost of sales and selling,
general and administrative expenses
** Net of administration costs.
Actual returns on plan assets
Actual returns on plan assets (%)
Amounts recognised in the statements
of other comprehensive income
Actuarial (losses) gains
Cumulative actuarial gains and
losses recognised in the statements
of other comprehensive income
Actuarial (losses) gains
Assumptions
Financial assumptions are derived by reference to market fi nancial data and established methods recommended by actuaries.
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 fi nancial and other professionals in developing appropriate return benchmarks.
144 Notes to the group annual fi nancial statements continued
27.
Post-employment benefi ts – pensions and other benefi ts (continued)
Weighted average actuarial assumptions
at balance sheet date
Discount rates (pensions) (%)
Compensation increases (%)*
Expected long-term returns on assets (%)
Discount rates (other benefi ts) (%)
Initial healthcare costs trend rates (%)
... which gradually reduce to an
ultimate rate of (%)
...over a period of (years)
Southern
Africa
2010
Europe
North
America
Southern
Africa
2009
Europe
North
America
8.25
6.20
9.15
8.25
6.50
6.50
–
4.05
2.40
4.20
–
–
–
–
4.90
3.50
8.00
4.40
7.00
5.00
7
9.00
6.70
9.90
9.00
7.25
7.25
–
4.90
2.60
5.30
–
–
–
–
5.50
3.50
8.00
5.20
8.00
5.00
5
Southern
Africa
2010
Europe
North
America
Southern
Africa
2009
Europe
North
America
Weighted average actuarial assumptions
used to determine pension benefi t cost
Discount rates (pensions) (%)
Compensation increases (%)*
Expected long-term returns on assets (%)
Discount rates (other benefi ts) (%)
Initial healthcare costs trend rates (%)
... which gradually reduce to an
ultimate rate of (%)
...over a period of (years)
9.00
6.70
9.90
9.00
7.25
7.25
–
4.90
2.60
5.30
–
–
–
–
5.50
3.50
8.00
5.20
8.00
5.00
5
9.00
6.45
9.40
9.00
7.00
7.00
–
6.90
3.10
6.75
–
–
–
–
7.60
3.50
8.25
7.60
9.00
5.00
4
* Weighted average of plans that use a compensation assumption.
Demographic assumptions (the expected change in membership), are derived by reference to historic and likely future changes
in membership and using established methods recommended by actuaries. Changing life expectancy of members (particularly
in retirement) can have a signifi cant effect on defi ned benefi t obligations. The group makes provision in its defi ned benefi t
obligations for realistic life expectancy by reference to established mortality tables. Further, where recommended by actuaries,
extended provisions are included in the obligations to account for expected improvements in life expectancy that are likely to be
experienced by future retirees.
Illustrating life expectancy
The table below shows sample life expectancy for a male aged 60 at fi scal year end, and life expectancy for a male aged 60 in
20 years’ time, taken from mortality tables used in determining regional plan obligations.
Southern
Africa Belgium* Netherlands Germany
Austria Switzerland
United
Kingdom
North
America
2010
Life expectancy of male
aged 60 at fi scal 2010
Life expectancy of male
18.6
21.5
24.7
23.3
24.3
21.8
25.0
22.1
aged 60 at fi scal 2030
19.5
21.5
26.6
26.2
27.2
21.8
27.0
22.1
* The plan provides a lump sum only on retirement. Life expectancy in retirement is not relevant, but has been included here for illustrative purposes.
2010 annual report
145
27. Post-employment benefi ts – pensions and other benefi ts (continued)
Illustrating sensitivity
The discount and salary increase rates can have a signifi cant effect on the amounts reported. The table below illustrates the effect
of changing key assumptions:
2010
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 heath-
care cost
trend rate
1%
decrease
in health-
care cost
trend rate
US$ million
(Decrease) increase in defi ned benefi t
pension obligation
(234)
284
Increase in aggregate of current service
cost and interest cost
(Decrease) increase in defi ned other
benefi t obligation
Increase (decrease) in aggregate of
current service cost and interest cost
–
(19)
–
4
21
1
52
–
(30)
–
17
2
(14)
(1)
Investment management and strategy
Plan fi duciaries set investment policies and strategies for the local trusts. Long-term strategic investment objectives include
preserving the funded status of the trust and balancing risk and return while keeping in mind the regulatory environment in each
region. The plan fi duciaries 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:
2010
Southern
Africa
Europe
(incl UK)
North
America
Southern
Africa
2009
Europe
(incl UK)
North
America
%
26
47
5
22
%
27
27
23
5
18
%
%
21
60
5
14
%
20
45
19
5
11
38
44
–
18
%
38
6
38
–
18
%
21
57
–
22
%
25
40
17
–
18
%
25
60
6
9
%
20
25
42
5
8
%
38
49
–
13
%
41
6
40
–
13
Weighted average target asset
allocation by region
Equity securities
Debt securities*
Real estate
Other**
Weighted average actual asset
allocation by region
Equity securities
Government debt securities
Debt securities
Real estate
Other**
* Target asset allocations do not routinely split between corporate and government bonds.
** Investments that can transcend several asset classes, equity overlay on bond strategy, cash and near cash, funds heavily infl uenced by currency.
146 Notes to the group annual fi nancial statements continued
27.
Post-employment benefi ts – pensions and other benefi ts (continued)
Expected benefi t payments from pension and other benefi t plans are as follows:
US$ million
Payable in the year ending September:
2011
2012
2013
2014
2015
Years 2016 – 2020
Defi ned
benefi t
pension plans
Other
defi ned
benefi t plans
100
99
103
105
108
605
12
13
12
12
12
63
The four tables below show summary data for the current annual period and the previous four annual periods:
Aggregate total of present value of the defi ned benefi t obligations, fair value of assets and derived balance sheet
liabilities in the defi ned benefi t pension plans
US$ million
Defi ned benefi t obligations
Fair value of assets
Defi cits
Unrecognised past service (credits) costs
Pension asset surplus restrictions
Balance sheet liabilities
2010
2,069
1,808
(261)
–
–
(261)
2009
1,945
1,695
(250)
(6)
–
(256)
2008
1,414
1,387
(27)
–
–
(27)
2007
1,607
1,545
(62)
1
–
(61)
2006
1,513
1,285
(228)
2
(41)
(267)
Aggregate total of present value of the defi ned benefi t obligations and derived balance sheet liabilities in the other
benefi t plans
Defi ned benefi t obligations – defi cits
Unrecognised past service credits
Balance sheet liabilities
(182)
(3)
(185)
(175)
(4)
(179)
(143)
(5)
(148)
Actuarial gains and losses arising in the defi ned benefi t pension plan liabilities and plan assets
Plan liabilities gains (losses)
Plan assets (losses) gains
Net (losses) gains
(143)
70
(73)
(254)
47
(207)
173
(189)
(16)
Actuarial gains and losses arising in the other benefi t plan liabilities and plan assets
(173)
(6)
(179)
60
41
101
(164)
(6)
(170)
73
27
100
Plan liabilities gains (losses)
2
(22)
23
–
(1)
Reconciliation of gains and losses recognised in other comprehensive income
Net (losses) gains from pensions
Net gains (losses) from other defi ned benefi ts
Net (losses) gains in group statement of
comprehensive income
(73)
2
(71)
(207)
(22)
(229)
(16)
23
7
101
–
101
100
(1)
99
2010 annual report
147
28. Share-based payments
The Sappi Limited Share Incentive Trust and The Sappi Limited Performance Share Incentive Trust
Shareholders, at prior annual general meetings, fi xed the aggregate number of shares which may be acquired by all participants
under the Sappi Limited Share Incentive Trust (Scheme) and The Sappi Limited Performance Share Incentive Trust (Plan) at
19,000,000 shares (equivalent to 7.95% of the shares then in issue). Subsequent to the December 2008 rights offering, this
number of shares increased to 42,700,870 shares (still equivalent to 7.95% of the shares in issue).
The Sappi Limited Share Incentive Trust (Scheme)
Certain managerial employees are eligible to participate in the Scheme. Under the rules of the Scheme, participants (a) may be
offered options to acquire ordinary shares (Share options), (b) may be offered the opportunity to acquire ordinary shares (Scheme
shares), or (c) may be granted options to enter into agreements with the company to acquire ordinary shares (Allocation shares).
In recent years, only Share options have been offered to participants.
Under the rules of the Scheme:
■ Share options entitle the participant to purchase one ordinary share per share option.
■ Scheme shares entitle the participant to enter into a loan with the Scheme to acquire Sappi Limited shares at a specifi c issue
price. The Scheme shares are registered in the participant’s name and pledged to the Scheme as security for the loan. Upon
payment of the loan, the Scheme shares become unsecured Sappi Limited shares owned by the participant.
■ Allocation shares entitle the participant to accept an option to acquire one Allocation share per option. These options must be
exercised by the participant within 12 months, failing which the option will automatically lapse. The Allocation shares entitle the
participant to pay for one ordinary share per Allocation share.
The amount payable by a participant 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 Share options,
Scheme shares, or Allocation shares, as the case may be.
The Share options, Scheme shares and Allocation shares vest in blocks of 25% per annum on the anniversary date of the offer
and expire eight years after the offer date. Only once the shares vest may Share options be exercised by the participants, Scheme
shares released from the Scheme to participants and Allocation shares delivered to participants. For allocations prior to November
2004, the Share options, Scheme shares and Allocation shares vested in blocks of 20% per annum on the anniversary date of the
offer and expired 10 years after the offer date.
The Scheme rules provide that appropriate adjustments are to be made to the rights of participants in the event that the company,
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 (Plan)
Under the rules of the Plan, participants who are offi cers and other employees of the company, may be awarded conditional
contracts to acquire ordinary shares for no cash consideration. The conditional contracts are subject to performance criteria being
met or exceeded after the fourth anniversary date, for ordinary shares to be allotted or transferred to the participants of the Plan.
Should the performance criteria not be met, then the number of shares allotted are adjusted downwards from 100% to 75%, or
50%, or none depending on the degree of not meeting the criteria. The performance criteria, which entails a benchmarking of the
company’s performance against an appropriate peer group of companies, is set by the board at the offer date, for each conditional
share award.
The Plan rules provide that appropriate adjustments are to be made to the rights of participants in the event that the company,
inter alia, undertakes: a rights offer, or is a party to a scheme of arrangement affecting the structuring of its issued share capital or
reduces its share capital.
148 Notes to the group annual fi nancial statements continued
28. Share-based payments (continued)
The Sappi Limited Performance Share Incentive Trust (Plan) (continued)
The Plan rules also provide that 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 persons who have control of the company as at an allocation date, take any decision, pass any resolution or take any
action the effect of which is to delist the company from the JSE Limited and the company becomes aware of such decision,
resolution, or action;
then 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 they 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 in fi scal 2009 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.
Number of shares
Allocations
2010
2009
2009
Total
Rights offer
Annual
2009
Total
During the year, the following offers were made to employees:
Share options
Allocation shares
Conditional share awards
Scheme shares
Restricted shares
2,889,010
2,192,410
–
–
2,565,300
1,815,000
–
–
–
–
Share options and conditional share awards declined
(65,900)
(62,080)
3,847,680
1,345,500
4,725,240
1,577,834
12,000
(63,840)
6,040,090
1,345,500
6,540,240
1,577,834
12,000
(125,920)
5,388,410
3,945,330
11,444,414
15,389,744
2010 annual report
149
28.
Share-based payments (continued)
Scheme shares, Share options, Restricted shares, Performance shares and Allocation shares activities were as follows during
the fi nancial years ended September 2010 and 2009:
Scheme
shares***
Restricted
shares**
Share
options(1)
Performance
shares(2)**
Weighted
average
exercise
price
(ZAR)*
Allocation
shares(1)
Weighted
average
exercise
price
(ZAR)*
Total
shares
Outstanding at
September 2008
1,351,862
10,000
3,232,700
3,951,100
46.00
1,105,450
98.20
9,651,112
– Offered
and accepted
1,577,834
12,000
5,951,970
6,540,240
19.96
1,307,700
20.27 15,389,744
– Paid for/released
(75,060)
(22,000)
(206,140)
(165,491)
20.95
(214,660)
30.68
(683,351)
– Returned, lapsed
and forfeited
5,736
Outstanding at
September 2009
2,860,372
– Offered
and accepted
– Paid for/released
– Returned, lapsed
and forfeited
Outstanding at
–
–
–
–
–
–
–
–
(734,150)
(360,289)
41.69
(352,540)
54.12
(1,441,243)
8,244,380
9,965,560
29.33
1,845,950
65.24 22,916,262
2,889,010
2,565,300
–
(11,000)
17.93
11.06
–
–
–
–
5,454,310
(11,000)
(974,630)
(3,207,020)
14.48
(806,800)
77.61
(4,988,450)
September 2010
2,860,372
– 10,158,760
9,312,840
27.91
1,039,150
56.15 23,371,122
Exercisable at
September 2008
491,300
Exercisable at
September 2009
752,600
Exercisable at
September 2010
202,040
–
–
–
1,906,330
5,000
96.97
1,032,300
110.22
3,434,930
4,835,090
5,184,568
–
–
55.60
1,845,950
65.24
7,433,640
49.33 1,039,150
56.15
6,425,758
* The options are valued 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 2,658,332 (2009: 2,107,772), includes 1,026,794 rights offer Scheme shares
taken up at ZAR20.27 per share, included in offered and accepted in the 2009 year.
(1) Issued in terms of the Scheme
(2) Issued in terms of the Plan
150 Notes to the group annual fi nancial statements continued
28.
Share-based payments (continued)
The fair value of Scheme shares held at September 2010 was US$13.5 million (September 2009: US$8.1 million).
The following table sets out the number of share options outstanding at the end of September, excluding the Scheme shares:
2010
2009
Vesting
conditions
Vesting date
Expiry date
Exercise
price (ZAR)
Share options:
28 March 2002 (ii)
13 February 2003 (ii)
30 December 2003 (ii)
–
1,274,980
267,190
1,128,700
1,383,000
267,190
14 January 2004 (ii)
1,208,280
1,311,680
Time
Time
Time
Time
Time
Time
Time
Time
Time
Time
(i)
(i)
(i)
(i)
(i)
(i)
(i)
(i)
(i)
(i)
28 March 2010
13 February 2011
30 December 2011
14 January 2012
25 March 2012
13 December 2012
12 December 2015
19 March 2016
22 December 2016
09 December 2017
2,200
2,115,560
1,233,680
555,060
2,093,260
–
25 March 2004 (ii)
13 December 2004 (ii)
12 December 2007 (ii)
19 March 2008 (ii)
22 December 2008
09 December 2009
Performance shares:
13 December 2005 (ii)
08 August 2006 (ii)
15 January 2007 (ii)
29 January 2007 (ii)
31 May 2007 (ii)
02 July 2007 (ii)
10 September 2007 (ii)
12 December 2007 (ii)
19 March 2008 (ii)
23 December 2008
09 December 2009
2,200
1,993,900
1,168,560
531,740
1,990,850
2,760,210
–
–
–
110,000
2,960,540
220,000
55,000
1,155,000
451,000
1,815,000
2,546,300
3,030,060 Performance
13 December 2009
110,000 Performance
08 August 2010
11,000 Performance
31 December 2009
110,000 Performance
29 January 2011
3,008,500 Performance
31 May 2011
220,000 Performance
02 July 2011
55,000 Performance
10 September 2011
1,155,000 Performance
12 December 2011
451,000 Performance
12 March 2012
1,815,000 Performance
22 December 2012
–
Performance
09 December 2013
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
77.97
62.34
47.08
47.08
50.42
46.51
52.57
55.97
35.50
33.85
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
20,510,750
20,055,890
(i) These vest over four or fi ve years depending on the date of allocation.
(ii) During the 2009 year there was a rights issue of 6 shares for every 5 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.
2010 annual report
151
28.
Share-based payments (continued)
The following assumptions have been utilised to determine the fair value of the shares granted in the fi nancial 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
Life of options
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 35
Issue 35
Issue 35
09 Dec 09
Normal Option
ZAR32.85
ZAR33.85
4 years
09 Dec 09
Performance
US$4.34
–
4 years
09 Dec 09
Performance
US$4.34
–
4 years
Cash Flow Return
Proportionately
Market related –
on Net Assets
over time
8 years
N/A
N/A
2,889,010
44.1%
7.3%
2.5%
95%
Modifi ed binomial
ZAR13.51
relative to peers
relative to peers
N/A
Yes
41.0%
1,282,650
54.9%
2.1% (US yield)
1.7%
95%
Monte-carlo
ZAR22.25
N/A
No
100%
1,282,650
N/A
N/A
1.7%
95%
Market price
ZAR24.64
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
fi gures, 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 exercised or declined
Shares removed on resignation, retirement of directors or forfeited
At end of year
2010
2009
Number of
options/
shares
Number of
options/
shares
968,000
–
315,000
–
(195,800)
339,000
406,800
242,000
(16,500)
(3,300)
1,087,200
968,000
152 Notes to the group annual fi nancial statements continued
28.
Share-based payments (continued)
The following table sets forth certain information with respect to the 1,087,200 Share options and Performance shares granted by
Sappi to executive directors:
Issue date
13 February 2003
30 December 2003
13 December 2004
02 July 2007*
12 December 2007*
22 December 2008*
09 December 2009*
Number of
options/shares**
33,000
39,600
39,600
220,000
198,000
242,000
315,000
1,087,200
Expiry date
13 February 2011
30 December 2011
13 December 2012
02 July 2011
12 December 2011
13 December 2012
09 December 2013
Exercise price
(ZAR)**
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.
Broad-based Black Economic Empowerment transaction (BBBEE Transaction)
In June 2010, Sappi completed a Broad-based Black Economic Empowerment (“BBBEE”) transaction (the “BBBEE Transaction”).
The South African government has through the years promulgated various pieces of legislation to increase the participation of
Historically Disadvantaged South Africans (“HDSAs”) in the South African economy and, through BEE legislation, formalised the
country’s approach in this regard.
In April 2006, Sappi announced a BEE transaction (the “Plantation BEE Transaction”) with Lereko Property Company (Proprietary)
Limited (“LPC”), a BEE company set up to house a consortium consisting of Lereko Investments (Proprietary) Limited (“Lereko
Invesments”), AMB Capital Limited (“AMB Capital”) and Malibongwe Women Development Trust (“Malibongwe”) (collectively, the
“Strategic Partners”), pursuant to which LPC acquired a 25% undivided share in Sappi’s South African plantation land, excluding
the value of the plantations, owned by Sappi and/or Sappi Manufacturing, coupled with the right to develop the land not utilised
for forestry operations. Sappi Manufacturing retained the right of use over all the land under the underlying arrangements. As part
of the Plantation BEE Transaction, 30% of LPC was set aside for the benefi t of certain categories of Sappi’s South African
employees who did not participate in any Company share incentive scheme. The balance of the shareholding in LPC was to be
held by Lereko Investments (46.19%), Malibongwe (10.14%) and AMB Capital (13.67%).
However, the Plantation BEE Transaction did not meet Sappi’s undertakings under the Forestry Charter gazetted in June 2009
(which sets the objectives and principles for BEE in the forestry industry and includes the BEE scorecard and targets to be applied,
as well as certain undertakings by government and South African forestry companies to assist the forestry industry to achieve its
BEE targets). Accordingly, Sappi decided to unwind the Plantation BEE Transaction, which resided at a South African subsidiary
level and to implement the BBBEE Transaction, a new sustainable transaction of equivalent value at a holding company level using
its listed securities.
2010 annual report
153
28. Share-based payments (continued)
Broad-based Black Economic Empowerment transaction (BBBEE Transaction) (continued)
Sappi views BBBEE as a key requirement for sustainable growth and social development in South Africa. The BBBEE Transaction
enabled Sappi to meet its BEE targets in respect of BEE equity ownership. The BBBEE Transaction comprised two distinct parts.
The fi rst part entailed the issue of ordinary shares to the Strategic Partners and the Sappi employees who were to be participants
in the Plantation BEE Transaction, as part of the unwinding of the rights from that transaction. The second part consisted of the
creation and issuance of a new class of unlisted equity shares referred to as “A” ordinary shares. The “A” ordinary shares were
issued at their par value of ZAR1 to a trust for the benefi t of certain Sappi employees including HDSAs (the “ESOP Trust”), a trust
for the benefi t of certain Sappi managers that are HDSAs (the “MSOP Trust”) and a trust for the benefi t of communities surrounding
the major mills and/or plantations operated by Sappi in South Africa (the “Sappi Foundation Trust”, and together with the ESOP
Trust and the MSOP Trust, the “BBBEE Trusts”). The issuance of the “A” ordinary shares was fi nanced through notional non-interest
bearing loans extended by Sappi to the BBBEE Trusts. The BBBEE Transaction resulted in the BBBEE Trusts and the Strategic
Partners holding, collectively, ordinary and “A” ordinary shares equivalent to 4.5% of the share capital of Sappi Limited, which
corresponds to an effective 30% interest in Sappi’s South African business under the Forestry Charter and BEE legislation in general.
The transaction has resulted in potentially 4.5% of the issued share capital of Sappi being held as follows:
■ Sappi’s South African Employees (62.5%);
■ South African Black Managers (15%);
■ Strategic partners (12.5%); and
■ Communities surrounding the South African mill operations and plantations (10%).
The total value of the transaction, based on the 30 day volume weighted average share price (VWAP) of Sappi as at Friday,
5 February 2010 of ZAR33.50, amounted to ZAR814 million and required the issue of 24.3 million shares, made up of 4.3 million
ordinary shares and 20.0 million of a new class of equity shares, “A” ordinary shares.
Ordinary shares
The strategic partners agreed to transfer the value created through their shareholding in LPC in the Plantation BEE Transaction into
fully paid up ordinary shares. The value created through the entitlement of 30% of LPC which was set aside for the benefi t of certain
categories of Sappi’s South African Employees was converted into fully paid up ordinary shares and are held in the ESOP Trust.
After the completion of the above transactions, Sappi became the sole shareholder of LPC and regained 100% ownership of
Sappi’s South African plantation land.
The fair value attributable to the strategic partners and certain categories of South African employees on the unwinding of the
Plantation BEE Transaction was determined by reference to the fair value of LPC’s 25% undivided share in Sappi South Africa’s
plantation land. The value attributable to the strategic partners for their shareholding in LPC was ZAR102 million and the portion
attributable to certain categories of South African employees, which is held through the ESOP Trust, for their 30% entitlement of
LPC was ZAR43 million.
These values resulted in the issue of the following number of ordinary shares to the Strategic Partners and the ESOP Trust based
on Sappi’s 30 day VWAP as at Friday, 5 February 2010 (being ZAR33.50):
Entity
Strategic partners:
Lereko Investments
Malibongwe
AMB
Employees (through the ESOP Trust)
Total
Ordinary share
allocation
Value of shares
issued
ZAR million
Value of shares*
issued
US$ million
1,971,693
432,842
643,221
3,047,756
1,280,597
4,328,353
66
15
21
102
43
145
9
2
3
14
5
19
* The group has recognised the issue of ordinary shares as payment to the Strategic Partners and certain categories of South African employees on the unwinding
of the Plantation BEE Transaction as a share-based payment expense.
154 Notes to the group annual fi nancial statements continued
28.
Share-based payments (continued)
“A” Ordinary shares
The transaction resulted in the formation of the ESOP Trust, the Management Share Option Plan Trust (MSOP Trust or MSOP),
whose benefi ciaries are the black managers, and the Sappi Foundation Trust, whose benefi ciaries include the growers and
communities in the geographic areas where Sappi’s Southern African business has operations. The “A” ordinary shares were
allocated as follows:
Entity
ESOP
MSOP
Sappi Foundation
Total
Number of “A”
Ordinary Shares
Value of shares
issued
ZAR million
Value of shares*
issued
US$ million
13,889,195
3,642,969
2,429,312
19,961,476
465
122
82
669
66
17
12
95
* The group recognised a share-based payment expense of US$4 million that related to the “A” Ordinary shares that were awarded to the Sappi Foundation,
MSOP and ESOP trusts.
The following assumptions were utilised to determine the fair value of the “A” Ordinary shares granted:
Base price for hurdle rate price
Share price hurdle rate
Hurdle rate price
Dividend yield (unadjusted)
Volatility
Dividend payout
Straight-line dividend payout rate
Employee turnover (annual)
Management turnover (annual)
Model used to value
32.50
9.1%
75.34
3.0%
40.0%
Straight-line vesting
50.0%
7.8%
11.3%
Black Scholes Model
The ESOP and MSOP trusts have been set up with rules that detail the way in which the shares are allocated and how they are
forfeited.
The vesting schedule for the MSOP and ESOP is illustrated below:
Completed months of service after effective date
0 – 35
36 – 48
49 – 60
61 – 72
73 – 84
85 – 96
97 – 108
109 – Termination Date
Refer to note 17 for further details regarding the “A” ordinary shares.
Incremental
vesting of
entitlements
(%)
Cumulative
vesting of
entitlements
(%)
–
40
10
10
10
10
10
10
–
40
50
60
70
80
90
100
2010 annual report
155
29. Financial instruments
The group’s fi nancial 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 fi nancial 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 fi nancial 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 (insofar as it relates to deposits of cash, cash equivalents and fi nancial investments).
Credit risk (insofar as it relates to trade receivables) is primarily managed regionally but is co-ordinated on a group basis, whilst
commodity price risk is managed regionally.
The group’s Limits of Authority framework delegates responsibility and approval authority to various offi cers, 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 fi nancial instruments and risks referred to in this note.
a) Market risk
Interest rate risk
Interest rate risk is the risk that the value of a borrowing or an investment will change due to a change in the absolute level of
interest rates, the spread between two rates, the shape of the yield curve or any other interest rate relationship.
The group is exposed to interest rate risk as it borrows funds at both fi xed and fl oating interest rates. The group monitors market
conditions and may utilise approved interest rate derivatives to alter the existing balance between fi xed 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 following table provides information about Sappi’s current and non-current borrowings that are sensitive to changes in interest
rates. The table presents cash fl ows by expected maturity dates and the estimated fair value of borrowings. The average fi xed
effective interest rates presented 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 fi nancial years ended September 2010 and
thereafter are based on the yield curves for each respective currency as published by Reuters on 26 September 2010. The
information is presented in US$, which is the group’s reporting currency.
156 Notes to the group annual fi nancial statements continued
29.
Financial instruments (continued)
Expected maturity date
(US$ equivalent in millions)
2011
2012
2013
2014
2015
2016+
US Dollar
Fixed rate debt
Average interest rate (%)
Variable rate debt(1)
Average interest rate (%)
Euro
Fixed rate debt
Average interest rate (%)
Variable rate debt(2)
Average interest rate (%)
Rand
Fixed rate debt
Average interest rate (%)
Variable rate debt(3)
Average interest rate (%)
Total
Fixed rate debt
Average interest rate (%)
Variable rate debt
Average interest rate (%)
Fixed and variable
Current portion
Long term portion
–
–
136
2.31
80
7.79
411
2.61
64
9.19
–
–
144
8.41
547
2.53
691
513
6.58
–
–
126
8.52
22
4.00
231
11.11
–
–
870
8.06
22
4.00
892
Total
carrying
value
2010
Fair
value
2009
Carrying
value
2009
Fair
value
1,015
1,133
1,214
1,281
–
–
–
–
–
222
7.47
–
–
3
8.50
136
2.31
136
868
1,066
2.17
2.04
10.80
–
–
–
–
–
–
453
2.74
536
10.36
–
–
453
556
–
8.12
128
2.08
1,048
11.09
400
2.89
536
10.30
1
10.55
128
1,290
399
524
1
225
7.40
–
–
2,419
2,755
2,798
3,095
9.74
589
2.64
589
9.65
529
2.72
528
225
3,008
3,344
3,327
3,623
691
2,317
732
2,612
601
2,726
602
3,021
–
–
–
–
126
8.53
20
4.00
205
9.76
–
–
331
9.29
20
–
280
12.85
–
–
533
12.37
–
–
29
–
–
7
–
–
7
11.00
11.67
–
–
842
–
–
7
12.48
11.17
–
–
351
842
Total interest-bearing borrowings (refer note 20)
3,008
3,344
3,327
3,623
(1) The US Dollar fl oating interest rates are based on the London Inter-bank Offered Rate (LIBOR).
(2) The Euro fl oating interest rates are based on the European Inter-bank Offered Rate (EURIBOR).
(3) The Rand fl oating interest rates are predominately based on the Johannesburg Inter-bank Agreed rate (JIBAR).
The fair value of non-current borrowings is estimated by Sappi based on the rates from market quotations for non-
current borrowings with fi xed 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.
The range of interest rates in respect of all non-current borrowings comprising both fi xed and fl oating rate obligations,
is between 4% and 12.48% (depending on currency).
At September 2010, 80% of Sappi’s borrowings were at fi xed rates of interest, and 20% were at fl oating rates. Fixed
rates of interest are based on contract rates.
A detailed analysis of the group’s borrowings is presented in note 20.
2010 annual report
157
29. 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 fi nancial instruments are measured at fair value at each reporting date with
changes in fair value recorded in profi t or loss for the period or in other comprehensive income, depending on certain hedge
designations carried out by the group in a documented hedging strategy.
In August 2009, Sappi entered into a new fi xed for fi xed interest and currency swap, which has been designated as a cash fl ow
hedge of future cash fl ows linked to fi xed rate debt denominated in foreign currency. The swap corresponds to the underlying
US$300 million Senior Secured Notes due 2014. The swap converts all future US$ cash fl ows to EUR.
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 profi t 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 2010 the effectiveness tests for the above mentioned hedges showed a 100% hedge effectiveness. The swaps
showed a total positive fair value of US$19 million, the positive fair value of the currency leg of the swap of US$16 million was
booked to profi t or loss to offset the corresponding foreign currency unrealised gain of the revaluation of the underlying hedged
item, whereas the remaining positive fair value of the interest leg of the swap of US$3 million was deferred in equity.
The interest rate and currency swap contract converting US$ cash fl ows into GBP and fi xed US$ interest rates into fi xed GBP
interest rates matured on 31 December 2009. This derivative was not designated as a hedge in a documented hedge strategy.
See details of the swap instruments in the table below:
US$ million
Interest rate
Maturity date
2010
2009
Nominal
value
Fair value*
favourable
Nominal
value
Fair value*
favourable
(unfavourable)
IRCS
IRCS
US Dollar 6.30% into GBP 6.66%
December 2009
US Dollar 12.00% into EUR 12.19% August 2014
–
300
117
300
–
19
19
10
(24)
(14)
* This refers to the carrying value.
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 specifi c
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.
158 Notes to the group annual fi nancial statements continued
29. Financial instruments (continued)
Summary sensitivity: analyses external interest rate derivatives
The following is a sensitivity analysis of the impact on profi t or loss in US$ million of a change in fair value of interest rate derivative
instruments due to changes in the interest rate basis points (bps). The sensitivity analysis of fl oating rate debt, is carried out
separately (see below).
IRCS converting fi xed US$ rates into EUR fi xed rates:
Scenario name
Base value Scenario value
Change
% Change
– 50bps EURIBOR-6M
+ 50 bps EURIBOR-6M
Total
(403.6)
(403.6)
(410.3)
(397.0)
(1.7)
1.6
(6.7)
6.6
(0.1)
Scenario name
Base value Scenario value
Change
% Change
– 50 bps USD-LIBOR-3M
+ 50 bps USD-LIBOR-3M
Total
422.3
422.3
429.4
415.4
1.7
(1.6)
7.1
(6.9)
0.2
The derivative converts fi xed US$ interest payments of 12% into fi xed 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 the end of fi scal 2010, the net fair value of the derivative amounted to a positive amount of US$18.7 million (Gross “Base
Values” in the table above: negative US$403.6 million for the EUR leg and US$422.3 million for the US$ leg) of which a positive
amount of US$15.4 million was due to the exchange rate movement between inception and the reporting date. This amount is
compensated by the opposite movement of the underlying US$ external debt and therefore has no impact on profi t or loss. The
portion of the fair value due to interest rate movements amounts to a positive value of US$3.3 million and has been recorded in
other comprehensive income. This value will reduce to zero at maturity.
For the period outstanding, the table above shows the impact that a shift of 50 bps on the LIBOR/EURIBOR curve would have on
the fair value. A decrease in the US$ 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$13.6 million for a shift of 50 bps.
The largest shift experienced over the last twelve-month period was a negative net shift of 0.84%, due to a decrease in US$ rates
of 0.81% and a decrease in the EUR rates of 1.65%. Applied to the fair value as at the end of fi scal 2010, this would have resulted
in a negative change in fair value of US$11.1 million.
Scenario name
Base value Scenario value
Change
% Change
– 81 bps USD-LIBOR-3M
– 165 bps EURIBOR-6M
Total
422.3
(403.6)
433.8
(426.2)
11.5
(22.6)
(11.1)
2.7
(5.6)
The above analysis measures the impact on profi t or loss that a change in fair value of the interest rate derivatives would have if
the specifi ed scenarios were to occur.
2010 annual report
159
29. Financial instruments (continued)
Sensitivity analysis: interest rate risk – in case of a credit rating downgrade of Sappi
The following table shows the sensitivity of securitisation debt to changes in the group’s own credit rating. The securitisation
agreement stipulates that if the company were downgraded below our current grading, an additional margin would be agreed
between the bank and the company. In this respect we assumed a hypothetical increase of 1.5%.
Please note that the change in value of the securitisation debt is included in the sensitivity analysis of fl oating rate debt in the table
below:
Securitisation in Europe and Hong Kong
US$ million
Europe
Hong Kong
Sub-total
Impact calculated on total portfolio amounts to
Impact on
income statement
of a one notch
downgrade below
BB-credit rating
5
1
6
Notional
311
75
386
1.55%
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 suffi cient other credit enhancements to mitigate the co-mingling risk.
The table below shows the sensitivity of certain fi xed rate debt to changes in the group’s own credit rating. The agreements of
these specifi c 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
US$ million
Commitment fee on unused revolving credit facility
Interest on utilised bank syndicated loan
Interest on utilised bank loan
Sub-total
Impact calculated on total portfolio amounts to
Sensitivity analysis: interest rate risk of fl oating rate debt
Notional
282
432
34
748
0.53%
US$ million
Total debt
Ratio fi xed/fl oating to total debt
Total
Fixed rate
Floating rate
3,008
2,419
80%
589
20%
Impact on
income statement
of downgrade below
BB “secured”
credit rating
1
3
–
4
Impact on
income statement
of 50 bps interest
3
The fl oating rate debt represents 20% of total debt. If interest rates were to increase (decrease) by 50 bps the fi nance cost on
fl oating rate debt would increase (decrease) by US$3 million.
160 Notes to the group annual fi nancial statements continued
29. Financial instruments (continued)
Currency risk
Sappi is exposed to economic, transaction and translation currency risks. The objective of the group in managing currency risk is
to ensure that foreign exchange exposures are identifi ed as early as possible and actively managed.
■ Economic exposure consists of planned net foreign currency trade in goods and services not yet manifested in the form of
actual invoices and orders;
■ Transaction exposure arises due to transactions entered into, which result in a fl ow of cash in foreign currency, such as
payments under foreign currency long and short-term loan liabilities, purchases and sales of goods and services, capital
expenditure and dividends. Where possible, commercial transactions are only entered into in currencies that are readily
convertible by means of formal external forward exchange contracts; and
■ Translation exposure arises when translating the group’s assets, liabilities, income and expenditure into the group’s presentation
currency. Borrowings are taken out in a range of currencies which are based on the group’s preferred ratios of gearing and
interest cover based on a judgement of the best fi nancial structure for the group. On consolidation this gives rise to translation
exposure which is not hedged.
In managing currency risk, the group fi rst makes use of internal hedging techniques with external hedging being applied thereafter.
External hedging techniques consist primarily of foreign currency forward exchange contracts and currency options. Foreign
currency capital expenditure on projects must be covered as soon as practical (subject to regulatory approval).
Currency risk analysis
In the preparation of the currency risk analysis the derivative instrument has been allocated to the currency which the underlying
instrument has been hedging.
2010
US$ million
Financial assets
Other non-current assets
Non-current derivative
fi nancial assets**
Trade and other receivables
Current derivative fi nancial assets**
Cash and cash equivalents
Total
Total in
scope*
105
19
889
15
792
38
19
777
15
792
422
296
15
337
1,641
1,072
Financial liabilities
Non-current interest-bearing
borrowings
Current interest-bearing borrowings
Overdraft
Current derivative fi nancial liabilities**
2,317
691
5
3
2,317
691
5
3
Trade and other payables
1,270
991
1,015
136
4
(2)
221
USD
EUR
ZAR
GBP
Other
2
13
22
(403)
366
–
320
296
830
490
1
(1)
436
–
24
–
128
174
472
65
–
6
286
829
–
–
56
–
1
57
–
–
–
–
18
18
39
1
–
35
–
6
42
–
–
–
–
30
30
12
Foreign exchange gap
(2,366)
(302)
(1,460)
(655)
4,007
1,374
1,756
2010 annual report
161
USD
EUR
ZAR
GBP
Other
29.
Financial instruments (continued)
Currency risk analysis (continued)
2009
US$ million
Financial assets
Other non-current assets
Non-current derivative
fi nancial assets**
Trade and other receivables
Current derivative fi nancial assets**
Cash and cash equivalents
Financial liabilities
Non-current interest-bearing
borrowings
Non-current derivative
fi nancial liabilities**
Current interest-bearing borrowings
Overdraft
Current derivative fi nancial liabilities**
Trade and other payables
Total
Total in
scope*
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
452
380
5
–
182
402
4,244
1,099
2,307
1
34
–
–
216
755
–
130
45
–
–
175
–
–
–
3
11
19
33
1
–
51
–
4
56
–
–
–
8
1
41
50
6
Foreign exchange gap
(2,677)
(631)
(1,574)
(620)
142
* This refers to items that are within the scope of IAS 39.
** The amount disclosed with respect to derivative instruments, refl ects the currency which the derivative instrument is covering.
The above table does not indicate the group’s foreign exchange exposure, it only shows the fi nancial instruments assets and
liabilities classifi ed per underlying currency.
The group’s foreign currency forward exchange contracts at September 2010 are detailed below:
US$ million
Foreign currency
Bought:
Sold:
2010
2009
Contract
amount
(Notional
amount)
Fair value
(unfavourable)
favourable
Contract
amount
(Notional
amount)
Fair value
(unfavourable)
favourable
US Dollar
Euro
ZAR
US Dollar
Euro
ZAR
7
43
–
(232)
(98)
(5)
(285)
–
–
–
15
(2)
–
13
473
213
–
(132)
(16)
(1)
537
(13)
(1)
–
9
–
–
(5)
162 Notes to the group annual fi nancial statements continued
29.
Financial instruments (continued)
The fair value of foreign currency contracts has been computed by the group based upon the market data valid at the end
of fi scal 2010.
All forward currency exchange contracts are valued at fair value with the resultant profi t or loss included in the net fi nance costs
for the period.
Forward exchange contracts are used to hedge the group from potential unfavourable exchange rate movements that may occur
on recognised fi nancial assets and liabilities or planned future commitments.
The foreign currency forward exchange contracts have different maturities, with the most extended maturity date being January 2011.
As at the year end there was an open exposure of US$14.4 million which has since been hedged.
Sensitivity analysis – (loss) gain
Base currency (US$ million)
EUR
GBP
CHF
SEK
JPY
ZAR
Other currencies
Total
Exposure
+10 %
–10 %
(15.8)
5.8
11.6
0.8
0.2
(2.5)
(14.5)
(14.4)
(1.4)
0.5
1.1
0.1
–
(0.3)
(1.3)
(1.3)
1.8
(0.6)
(1.3)
(0.1)
–
0.3
1.5
1.6
Based on the exposure as at the end of fi scal 2010, 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$1.3 million (increase of 10%) or a gain of
US$1.6 million (decrease of 10%).
During 2010, we have contracted non-deliverable average rate foreign exchange transactions for a total notional value of
US$65 million which were used as an overlay hedge of export sales. Since these contracts have all matured before the end of fi scal
2010, these constitute non-representative positions. The total impact on profi t or loss amounts to a gain of US$2.4 million.
Commodity price risk
Commodity price risk arises mainly from price volatility and threats to security of raw material supply and other inputs to the
production process.
A combination of contract and spot deals are used to manage price volatility and contain costs. Contracts are limited to the group’s
own use requirements. The group aims to improve its understanding of the direction, magnitude and duration of future commodity
price changes and to develop commodity specifi c expertise.
During 2010, we have contracted two pulp swaps in Europe for a limited volume of pulp (6,000 tons for each swap). Sappi Fine
Paper Europe (“SFPE”) buys pulp from external suppliers at a variable price consisting of a reference price linked to the Pix Pulp
index which is adjusted with a premium depending on the pulp market conditions. As SFPE expected pulp prices to increase, it
was decided to fi x the pulp price for one year by entering into a pulp swap whereby the variable price was swapped for an annual
fi xed price.
2010 annual report
163
29.
Financial instruments (continued)
The group’s pulp swap contracts at the end of fi scal 2010 are detailed below:
US$ million
Base currency
Bleached Hardwood Kraft Pulp (BHKP)
bought
Northern Bleached Softwood Kraft (NBSK)
bought
US Dollar
Euro
2010
2009
Contract
amount
(notional
amount)
Fair value
favourable
(unfavourable)
Contract
amount
(notional
amount)
Fair value
(unfavourable)
favourable
1
2
3
0.2
(0.1)
0.1
–
–
–
–
–
–
b) Credit risk
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in a fi nancial loss to the group.
The group faces credit risk in relation to trade receivables, cash deposits and fi nancial 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 specifi c 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 fi nancial statements.
On average 60% of our trade receivables are credit insured.
164 Notes to the group annual fi nancial statements continued
29. Financial instruments (continued)
Hedge accounting
1. Fair value hedges
Until June 2009, the group had fair value hedges which qualifi ed for hedge accounting. As the hedging instrument was sold
in 2009 hedge accounting was ceased.
The result of the sale of the hedging instrument was booked to the income statement in 2009.
The fi nal life-to-date fair value adjustment of the underlying bonds on the date of the sale of the swaps is amortised over the life of
the initial hedge designation period and amounted to US$46 million. In the course of 2010, US$136 million of the underlying bonds
have been early redeemed and the corresponding amortisation has been booked immediately into the income statement.
In consequence the impact on the profi t and loss account will be as follows:
Fiscal period
4th quarter 2009
2010
2011
2012
Total
US$ million
1
21
12
12
46
As at September 2010, the group does not have any outstanding fair value hedges.
The following is an analysis of the impact on pre-tax profi t and loss for the period based on the consolidated accounts translated
at average rates:
Favourable (unfavourable)
Fair value hedges
Net profi t or loss 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
2010
2009
at average
rate
US$ million
at average
rate
US$ million
–
–
–
–
21
–
–
–
21
(18)
52
(59)
(11)
–
(9)
41
(50)
(27)
2010 annual report
165
29. Financial instruments (continued)
2. Cash fl ow hedges
In August 2009, Sappi entered into a fi xed for fi xed interest and currency swap, which has been designated as a cash fl ow hedge
of future cash fl ows linked to fi xed rate debt denominated in foreign currency. The swap corresponds to the underlying
US$300 million Senior Secured Notes due 2014. The swap converts all future US$ cash fl ows into EUR.
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 profi t or loss in the same line as the hedged item at the moment the hedged item
affects profi t 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 fi nancial technology company based in New York, to assess the fair value of the IRCS and to
measure the effectiveness of the cash fl ow 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.
3. Net investment hedges
In February 2010, Sappi designated a hedge of a net investment for an indeterminate period of Sappi Papier Holding (“SPH”)
in SD Warren Holdings Corporation (“SFPNA”) including all its subsidiaries and incorporating all net assets. The hedged risk
is the currency risk associated with the spot re-translation of the net assets of the foreign operation into the functional currency
of the consolidating parent entities at the level of which the hedge is designated, ie, SPH for USD-EUR spot exchange risk and
Sappi Ltd for USD-ZAR spot exchange risk. The hedging instrument is a non-derivative foreign currency external debt. At inception
of the hedge both, the net investment in the foreign operation (as hedged item) and the foreign currency denominated debt
(as hedging instrument), have been recorded at the spot rate in effect on the hedge designation date.
Exchange differences linked to the subsequent revaluation of the foreign currency debt in the books of the entity holding the debt
are deferred in other comprehensive income to the extent effective until the foreign operation is disposed of or liquidated. They are
recognised in the income statement on disposal or liquidation as part of the gain or loss on disposal.
166 Notes to the group annual fi nancial statements continued
29. Financial instruments (continued)
3. Net investment hedges (continued)
Ineffectiveness can only occur if the net investment carrying value of the foreign operation would fall below the designated amount
of the hedging instruments. The net investment value of the foreign operation is validated each quarter. Ineffective gains and losses
are booked directly to the income statement. As at the end of fi scal 2010, the hedge was 100% effective.
2010
2009
Foreign
Exchange
result
deferred
in other
comprehensive
income
2
–
2
Foreign
Exchange
result
deferred
in other
comprehensive
income
–
–
–
Hedged
notional
–
–
–
Hedged
notional
227
30
257
310
US$ million – favourable
Bond 2012
Bond 2032
Net investment value of Sappi Fine Paper North America
c) Liquidity risk
Liquidity risk is the risk that the group will be unable to meet its current and future fi nancial 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 fl ows;
■ 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 profi le 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 fi nancial covenants applicable to its borrowing facilities.
2010 annual report
167
Undiscounted cash fl ows
0 – 6
months
6 – 12
months
1 – 2
years
2 – 5
years
>5
years
Total
13
–
18
(18)
1
1
18
(17)
–
–
–
–
–
2
1
1
36
(35)
1
–
–
–
–
3
6
17
372
(355)
–
–
–
–
–
17
–
–
–
–
–
–
–
–
38
19
444
(425)
777
17
267
(250)
792
23
17
1,643
29.
Financial instruments (continued)
Liquidity risk management
2010
Total
fi nancial
assets
and
liabilities
Fair
value of
fi nancial
instru-
ments
38
19
38
19
US$ million
Financial assets
Other non-current assets
Non-current derivative
fi nancial assets
Receive leg
Pay leg
Trade and other receivables
777
777
776
Current derivative
fi nancial assets
Receive leg
Pay leg
15
15
Cash and cash equivalents
792
792
17
267
(250)
792
1,598
Financial liabilities
Interest-bearing borrowings
2,317
2,612
71
71
1,084
1,571
507
3,304
Non-current derivative
fi nancial liabilities
–
–
Pay leg
Receive leg
–
3
(3)
Interest-bearing borrowings
691
732
571
Overdraft
Current derivative
fi nancial liabilities
Pay leg
Receive leg
5
3
5
3
Trade and other payables
991
991
5
2
130
(128)
951
–
3
(3)
211
–
1
5
(4)
1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
6
(6)
782
5
3
135
(132)
952
1,600
284
1,084
1,571
507
5,046
Liquidity gap
(2)
(282)
(1,081)
(1,548)
(490)
(3,403)
168 Notes to the group annual fi nancial statements continued
29.
Financial instruments (continued)
Liquidity risk management
2009
Total
fi nancial
assets
and
liabilities
Fair
value of
fi nancial
instru-
ments
43
10
43
10
US$ million
Financial assets
Other non-current assets
Non-current derivative
fi nancial assets
Receive leg
Pay leg
Trade and other receivables
734
734
Current derivative
fi nancial assets
Receive leg
Pay leg
10
10
Cash and cash equivalents
770
770
Financial liabilities
Interest-bearing borrowings
2,726
3,021
Non-current derivative
fi nancial liabilities
24
24
Pay leg
Receive leg
Interest-bearing borrowings
Overdraft
Current derivative
fi nancial liabilities
Pay leg
Receive leg
601
19
14
602
19
14
Trade and other payables
860
860
Undiscounted cash fl ows
0 – 6
months
6 – 12
months
1 – 2
years
2 – 5
years
>5
years
Total
44
10
130
(120)
734
11
262
(251)
770
15
–
–
–
–
–
–
–
–
1
–
–
–
–
–
–
–
–
1
8
–
–
–
–
–
–
–
–
8
7
–
–
–
–
–
–
–
–
7
15
1,569
100
494
2,716
123
3,530
1
19
(18)
106
–
–
–
–
–
2
38
(36)
–
–
–
–
–
–
17
425
(408)
–
–
–
–
–
–
1
1
–
–
–
–
–
–
–
22
502
(480)
655
19
14
620
(606)
818
13
10
130
(120)
734
11
262
(251)
770
1,538
97
1
19
(18)
549
19
14
620
(606)
818
Liquidity gap
40
(206)
(488)
(2,726)
(109)
(3,489)
1,498
207
496
2,733
124
5,058
2010 annual report
169
29. Financial instruments (continued)
Derivative fi nancial instruments with maturity profi le
The following tables indicate the different types of derivative fi nancial instruments for 2010 and 2009, included within the various
categories on the face of the balance sheet.
Classes of derivative
fi nancial instruments
September 2010
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
fl ow
hedge
Total
Maturity analysis*
Undiscounted cash fl ows
<6M >6M <1Y
>1Y <2Y
>2Y <5Y
>5Y
19
422
(403)
15
265
(250)
–
6
(6)
3
135
(132)
–
–
–
–
–
–
–
–
–
–
–
–
19
422
(403)
–
–
–
–
–
–
–
–
–
–
18
(18)
17
267
(250)
–
3
(3)
2
130
(128)
1
18
(17)
–
–
–
–
3
(3)
1
5
(4)
1
36
(35)
17
372
(355)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
* The reported maturity analysis is calculated on an undiscounted basis.
170 Notes to the group annual fi nancial statements continued
29.
Financial instruments (continued)
Classes of derivative
fi nancial instruments
Total
Fair
value
hedge
Cash
fl ow
hedge
Maturity analysis*
Undiscounted cash fl ows
<6M >6M <1Y
>1Y <2Y
>2Y <5Y
>5Y
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
10
130
(120)
10
260
(250)
24
453
(429)
14
619
(605)
10
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
–
–
–
–
* The reported maturity analysis is calculated on an undiscounted basis.
2010 annual report
171
29. Financial instruments (continued)
Fair values
All fi nancial instruments are carried at fair value or amounts that approximate fair value except for the non-current interest-bearing
borrowings at fi xed 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 fi xed 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
fl ows at market data valid at closing date. The same data is used to value the related hedging instrument.
The best evidence of the fair value of a fi nancial asset or fi nancial 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 fi nancial assets and fi nancial liabilities.
If quoted market prices are unavailable, the fair value of fi nancial assets and fi nancial liabilities is calculated using pricing models
or discounted cash fl ow techniques. Where discounted cash fl ow techniques are used, estimated future cash fl ows 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, are measured at cost.
Fair values of foreign exchange and interest rate derivatives are calculated by using recognised treasury tools which use discounted
cash fl ow techniques based on effective market data valid at closing date.
The fair value of loan commitments are based on the commitment fees effectively paid.
172
29.
Financial instruments (continued)
Classes of fi nancial
instruments
Total
balance
September 2010
NON-CURRENT ASSETS
Categories according to IAS 39
Out of
scope
IAS 39*
Held for
trading
Loans
and
receiv-
ables
Held to
maturity
Available-
for-sale
Total in
scope
Fair
value
Other non-current assets
105
67
–
15
–
23
38
38
Loans to associates
(minority interests)
AFS – Club debentures
AFS – Investment funds
Other assets
Derivative fi nancial
instruments
CURRENT ASSETS
–
–
–
67
–
–
–
–
4
–
2
9
–
–
–
–
–
2
19
2
4
2
21
11
4
2
21
11
19
–
19
–
–
–
19
19
Trade and other receivables
888
111
Trade receivables
Other accounts receivable
– current
Derivative fi nancial
instruments
15
Cash (and cash equivalents)
792
Overnight deposits
and current accounts
(including petty cash)
Time deposits (<3 months)
Money market funds
–
111
–
–
–
–
–
* This refers to items that are outside the scope of IAS 39.
–
–
–
773
740
33
15
–
–
792
–
–
–
115
676
1
–
–
–
–
–
–
–
–
4
–
4
–
–
–
–
–
777
777
740
740
37
37
15
15
792
792
115
676
1
115
676
1
2010 annual report
173
29.
Financial instruments (continued)
Categories
according to
IAS 39
Total
balance
Out of
scope
IAS 39*
Held for
trading
Other
fi nancial
liabilities
Total in
scope
Fair
value
2,317
691
5
3
1,271
–
–
–
–
–
–
–
–
–
–
–
–
–
280
278
–
2
–
–
–
–
–
–
–
–
–
–
–
–
3
–
–
–
–
2,317
2,317
2,612
103
1,796
39
379
103
1,796
39
379
107
2,052
34
419
691
691
732
96
62
13
148
372
5
–
991
249
1
741
96
62
13
148
372
5
3
991
249
1
741
96
62
13
182
379
5
3
991
249
1
741
Classes of fi nancial instruments
September 2010
NON-CURRENT LIABILITIES
Interest-bearing borrowings
Bank loans payable (>1 year) – including
syndicated loans
Bonds
Financial leasing liabilities
Secured loans
CURRENT LIABILITIES
Interest-bearing borrowings
Bank loans payable (<1 year) – including
syndicated loans
Current portion of other non-current loans payable
Financial leasing liabilities
Secured loans (<1 year)
Securitisation debt
Overdraft
Bank overdrafts (<3 months)
Derivative fi nancial instruments
Trade and other payables
Accruals
Accounts payable to associates
Other accounts payable – current
* This refers to items that are outside the scope of IAS 39.
174
29.
Financial instruments (continued)
Classes of fi nancial
instruments
Total
balance
September 2009
NON-CURRENT ASSETS
Other non-current assets
101
Categories according to IAS 39
Out of
scope
IAS 39*
Held for
trading
Loans
and
receiv-
ables
Held to
maturity
Available-
for-sale
Total in
scope
Fair
value
Loans to associates
(minority interests)
AFS – Club debentures
AFS – Investment funds
Other assets
Derivative fi nancial
instruments
CURRENT ASSETS
58
–
–
–
58
–
–
–
–
–
20
4
–
–
16
10
–
10
–
Trade and other receivables
858
Trade receivables
Other accounts receivable
– current
Derivative fi nancial
instruments
Cash (and cash equivalents)
Overnight deposits and current
accounts (including petty cash)
Time deposits (<3 months)
Money market funds
10
770
124
–
124
–
–
–
–
–
* This refers to items that are outside the scope of IAS 39.
–
–
–
10
–
–
–
–
734
667
67
–
770
99
628
43
–
–
–
–
–
–
–
–
–
–
–
–
–
–
23
43
43
–
2
19
2
4
2
19
18
4
2
19
18
–
–
–
–
–
–
–
–
–
10
10
734
667
734
667
67
67
10
770
99
628
43
10
770
99
628
43
2010 annual report
175
Categories
according to
IAS 39
Total
balance
Out of
scope
IAS 39*
Held for
trading
Other
fi nancial
liabilities
Total in
scope
Fair
value
2,726
24
601
19
14
1,116
–
–
–
–
–
–
–
–
–
–
–
–
–
–
256
255
–
1
–
–
–
–
2,726
2,726
3,021
720
1,952
54
720
1,952
804
2,161
54
24
56
24
24
–
–
–
–
–
–
–
–
–
14
–
–
–
–
601
601
602
149
32
19
67
333
1
19
–
860
262
1
597
149
32
19
67
333
1
19
14
860
262
1
597
150
32
19
67
333
1
19
14
860
262
1
597
29.
Financial instruments (continued)
Classes of fi nancial instruments
September 2009
NON-CURRENT LIABILITIES
Interest-bearing borrowings
Bank loans payable (>1 year) – including
syndicated loans
Bonds
Financial leasing liabilities
Derivative fi nancial instruments
CURRENT LIABILITIES
Interest-bearing borrowings
Bank loans payable (<1 year) – including
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 fi nancial instruments
Trade and other payables
Accruals
Accounts payable to associates
Other accounts payable – current
* This refers to items that are outside the scope of IAS 39.
176
29.
Financial instruments (continued)
Hierarchy of fair value measurements for fi nancial instruments measured at fair value on the balance sheet:
US$ million
NON-CURRENT ASSETS
Other non-current assets
AFS – Club debentures
AFS – Investment funds
Derivative fi nancial
instruments
CURRENT ASSETS
Derivative fi nancial
instruments
NON-CURRENT
LIABILITIES
Derivative fi nancial
instruments
CURRENT LIABILITIES
Derivative fi nancial
instruments
2010
Fair value hierarchy
Level 1
Level 2
Level 3
Total
fair
value
Total
fair
value
2009
Fair value hierarchy
Level 1
Level 2
Level 3
2
19
2
19
–
–
–
–
2
19
2
19
–
–
19
–
19
–
10
–
10
15
55
–
21
15
34
–
–
10
41
–
21
10
20
–
–
–
–
–
–
–
–
–
24
–
24
–
3
3
–
–
3
3
–
–
14
38
–
–
14
38
–
–
2010 annual report
177
30. Related party transactions
Transactions between Sappi Limited company and its subsidiaries, which are related parties of the company, have been eliminated
on consolidation and are not disclosed in this note. Details of transactions between the group and other related parties are
disclosed below:
Sale of goods
Purchases of goods
Amounts
owed by
related parties
Amounts
owed to
related parties
US$ million
2010
2009
2008
2010
2009
2008
2010
2009
2010
2009
Joint ventures:
– Jiangxi Chenming Paper
Company Limited
– Sapin S.A.
– VOF Warmtekracht
– Umkomaas Lignin
(Pty) Limited
– Papierholz Austria GmbH
– Energie Biberist AG
1.1
0.5
10.8
2.0
0.4
4.0
0.3
38.1
44.2
5.6
0.9
1.1
–
–
–
–
–
–
0.6
22.1
7.1
0.3
90.5
38.6
1.5
21.3
25.0
2.6
30.9
32.8
–
0.1
–
–
–
–
–
–
1.8
0.9
68.5
92.7
–
–
–
–
–
–
0.9
0.6
–
–
8.1
3.8
3.7
0.9
–
–
6.1
–
18.0
41.4
49.6
159.2
116.3
159.0
1.9
0.9
13.4
10.7
A description concerning the joint venture, Timber IV, is discussed in note 13.
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.
Shareholders
The company’s shares are widely held by shareholders across the world. The principal shareholders of the company are disclosed
in this annual report on pages 58 and 59.
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. Meyer Feldberg, a non-executive director of the company, disclosed his role as senior advisor of Morgan
Stanley & Co. Limited, a fi nancial advisor to Sappi, and Morgan Stanley South Africa (Pty) Limited, a transaction sponsor to
Sappi Limited.
178
30. Related party transactions (continued)
Broad-based Black Economic Empowerment (BBBEE) Transaction
Refer to notes 17 and 28 for details of our BBBEE transaction.
Key management personnel
Compensation for key management was as follows:
Total excluding directors
Total including directors
US$ million
2010
2009
2008
2010
2009
2008
Short-term benefi ts
Post-employment benefi ts
Other long-term benefi ts
Share-based payments
2.8
0.5
–
–
3.3
2.9
0.7
–
–
3.6
2.9
0.4
–
–
3.3
3.9
0.8
–
–
4.7
4.3
0.9
–
–
5.2
4.3
0.7
–
–
5.0
The number of key management personnel included above for 2010 was nine (2009: nine; 2008: ten).
31.
Events after balance sheet date
No signifi cant changes have occurred in our fi nancial position since September 26, 2010.
32. 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 fi nes and penalties. Environmental compliance is an increasingly important
consideration in our businesses, and we expect to continue to incur signifi cant capital expenditures and operational and
maintenance costs for environmental compliance, including costs related to reductions in air emissions such as carbon dioxide
(CO2) 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.
North America
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
Commissioner of the Department of Inland Fisheries and Wildlife, State of Maine (the “Commissioner”), issued a decision requiring
Sappi Fine Paper North America to install a fi sh passage at the Cumberland Mills dam associated with the Westbrook Mill, the
most downriver dam on the Presumpscot River. On 12 May 2010, the Commissioner accepted a conceptual design for the fi sh
passage jointly proposed by the state, several non-governmental organisations and Sappi Fine Paper North America, and fi nal
detailed design drawings were submitted to the Commissioner on 24 September 2010. A fi nal order approving the design was
issued to Sappi Fine Paper North America on 05 October 2010. Pursuant to the order, construction of the fi sh passage must be
completed by 01 May 2013. Costs associated with construction and relating engineering of this fi sh passage are estimated to be
approximately US$4 million to US$5 million. Fish passage at the next dam upstream, the Saccarappa dam, must be operational
two years after the Cumberland Mills dam fi shway is completed, or during the spring of 2015. Installation of the Cumberland Mills
dam fi shway may also trigger, over a period of approximately ten years, the obligation to install fi shways for at least some of Sappi
Fine Paper North America’s other four upstream dams as well, to allow natural fi sh migration and thus promote the restoration of
native species to the river. The total cost of all fi shways associated with Sappi’s dams along the Presumpscot River is estimated
to be in the range of approximately US$18 million to US$28 million, which includes costs expected to be incurred in the next
several years for the fi sh passage on the Cumberland Mills and Saccarappa dams as well as estimated costs for upstream fi shways
which may be incurred in the future. Because construction of additional fi shways depends on several future contingencies,
including the results of data gathering on fi sh populations in the river, we do not know the precise timing for incurring related future
costs, assuming such obligations are triggered.
2010 annual report
179
32. Environmental matters (continued)
We closely monitor state, regional and Federal GHG initiatives and other regulatory developments in anticipation of any potential
effects on our operations. Although the United States has not ratifi ed the Kyoto Protocol, and has not yet adopted a Federal
programme for regulating GHG emissions, Congress is considering comprehensive Federal legislation regarding climate change,
and various regional initiatives regarding emissions associated with climate change are in effect or proposed. In addition, the U.S.
Environmental Protection Agency has fi nalised or proposed several rules relating to emissions reporting and emissions reductions,
including a proposed rule known as the “Boiler MACT” which would establish new standards for emissions of hazardous air
pollutants from commercial and industrial boilers. Signifi cant capital expenditures could be required for emissions control
equipment at our mills in order to comply with the Boiler MACT and/or other proposed rules regulating GHGs. The nature, scope
and timing of any proposed legislation, including climate change legislation, is highly uncertain and, currently, we do not know what
precise effect, if any, such legislation will have on our fi nancial condition and operations.
Europe
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 (IPPC) regulates air emissions, water discharges and defi nes permit
requirements and best available techniques (BAT) for pollution control. The revised BAT reference documents (BREFs) are
expected to be fi nalised in 2011.
■ The national European laws regulate the waste disposal framework and place restrictions on land fi lling materials in order to
reduce contaminated leachate and methane emissions. Prevention, reuse and recycling (material or thermal) are the preferred
waste management methods. In Austria, Germany, Switzerland and The Netherlands only inert ash or slag from thermal
recycling and incineration processes may be placed in landfi lls.
■ 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, however,
apply to a number of raw materials that we source. We will also register some intermediate substances in our pulp production
processes. We expect this registration to be fi nalised by November 2010.
■ 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 ratifi ed the Kyoto Protocol and we have developed a GHG strategy
to comply with applicable GHG restrictions and to manage emission reductions cost effectively.
South Africa
In southern Africa, the environmental regulatory legal framework is still evolving, as is the enforcement process. We work with
government authorities in striving to fi nd a balance between economic development and, social and environmental considerations.
The Minister of Water and Environmental Affairs considered it necessary to strengthen enforcement of legislation by the
Environmental Management Inspectors (EMIs) in her department. The EMIs prioritised various sectors of industry and inspected
those sectors in the course of the past four years. In 2008, 2009 and 2010, the EMIs focused attention on the pulp and paper
sector, signalling more stringent enforcement for Sappi mills.
In August 2008, the EMIs conducted a comprehensive inspection at our Ngodwana Mill. No major fi ndings were raised. The EMIs
inspected our Enstra mill during October 2009 and carried out a subsequent follow up visit in August 2010. Following that visit
there has been correspondence with the Department of Environmental Affairs regarding some aspects of Enstra’s compliance with
standards for atmospheric emissions; that communication is ongoing. The EMIs inspected our Tugela mill in October 2010. No oral
fi ndings were raised during the visit; a written report is expected within the next two months.
The primary South African environmental laws affecting our operations are:
■ The National Water Act. This law addresses the water shortages in South Africa and relates to both our manufacturing and our
forestry operations. Abstraction of water, discharge of effl uent and management of forests are all regulated under a licensing
system in which fi rst allocations go to, among other things, human consumption, before allocations are made to agriculture,
industry and forestry. All water use is subject to a charge.
180
32. Environmental matters (continued)
■ The National Environmental Management Act. This law provides for the integration of environmental considerations into all
stages of any development process. The Act includes a number of signifi cant principles, such as private prosecution of
companies in the interest of the protection of the environment and the establishment of aggressive waste reduction goals.
■ The National Environmental Management Act: Air Quality Act was promulgated in the beginning of 2005 and has now replaced
the 1965 Atmospheric Pollution Prevention Act. The new Act will impose more stringent compliance standards on our
operations over a period of fi ve to ten years.
■ The National Environmental Management Act: Waste Act was enacted on 01 July 2009. The Waste Act regulates the use,
re-use, recycling and disposal of waste and regulates waste management by way of a licensing system.
■ The Kyoto Protocol. South Africa has also ratifi ed the Kyoto Protocol. We are investigating Clean Development Mechanism
projects, as defi ned in the Kyoto Protocol, at South African mills.
The requirements under these statutes, predominantly with respect to air emissions from our mills, will result in additional capital
and operating expenditures, some of which may be signifi cant. Our mills are in the process to receive air registration certifi cates
from the authorities which will clarify the impact this will have on our business. Legislation is, however, making provision to phase
in new standards; the impact on our mills is therefore expected to be distributed over the next fi ve to ten years. We are in frequent
contact with regulatory authorities during the phasing in of these requirements, in an attempt to manage the transition period.
33. Acquisition
On 31 December 2008, Sappi acquired M-real’s coated graphic paper business for an enterprise value of EUR750 million
(approximately US$1.1 billion). The fi nal purchase consideration was reduced by assumed debt and other adjustments (including
working capital) amounting to EUR102 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 fi nanced through a combination of equity, assumed debt, the cash proceeds from a rights offering and
a vendor loan note.
During fi scal 2009, the acquired business contributed sales of US$890 million, net operating profi t of US$33 million and net profi t
of US$38 million to the group results for the period from acquisition to fi scal year end. Included in the net profi t of the acquired
business for the fi scal 2009 year, is the US$41 million discount received on the settlement of the vendor loan notes.
Details of net assets acquired and goodwill are as follows:
Purchase consideration:
Cash consideration
Shares issued*
Vendor loan note
Adjustments to working capital
Gain on forward exchange contract covering purchase consideration
Direct costs relating to the acquisition
Total purchase consideration
Fair value of net identifi able assets acquired (see below)
Goodwill
EURO million
US$ million
401
32
220
(4)
(24)
23
648
648
–
565
45
307
(6)
(32)
32
911
911
–
* 11 159 702 Sappi shares were issued to M-real as partial payment of the acquisition price. The fair value of US$45 million (EUR32 million) was determined using
Sappi’s published market price at the date of exchange.
2010 annual report
181
33.
Acquisition (continued)
The assets and liabilities arising from the acquisition are as follows:
EURO million
EURO million
US$ million
US$ million
Acquiree’s
carrying
amount
Acquiree’s
carrying
amount
Fair value
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
634
2
–
118
200
15
5
(85)
(37)
(46)
(4)
(60)
(11)
531
2
18
115
192
18
5
(85)
(37)
(42)
(4)
(65)
–
892
3
–
166
281
21
7
(120)
(52)
(65)
(6)
(84)
(15)
Net identifi able assets acquired
731
648
1,028
Outfl ow of cash to acquire business, net of cash acquired:
747
3
25
162
270
25
7
(120)
(52)
(59)
(6)
(91)
–
911
Cash consideration
Direct costs relating to acquisition
Cash and cash equivalents in subsidiary acquired
Net cash outfl ow on acquisition
EURO million
US$ million
401
23
(5)
419
565
32
(7)
590
182
Condensed
company financial
statements
2010 annual report
183
Company auditor’s report
for the year ended September 2010
Independent auditor’s report to the members of Sappi limited
The condensed annual fi nancial statements of Sappi Limited set out on pages 184 to 188 have been derived from the annual fi nancial
statements of the company for the year ended September 2010. We have audited the annual fi nancial statements in accordance with
International Standards on Auditing. In our report dated 03 December 2010, we expressed an unqualifi ed opinion on the annual fi nancial
statements from which the condensed fi nancial statements were derived.
Opinion
In our opinion, the accompanying condensed fi nancial statements are consistent, in all material respects, with the annual fi nancial
statements from which they were derived.
For a better understanding of the scope of our audit and the company’s fi nancial position, the results of its operations and cash fl ows for
the period, the condensed fi nancial statements should be read in conjunction with our audit report and the annual fi nancial statements from
which they were derived.
Deloitte & Touche
Per M J Comber
Partner
03 December 2010
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 Offi cer 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 M J Comber Deputy Chairman of the Board.
A full list of partners and directors is available on request.
184
Condensed Sappi Limited company income statements
for the year ended September 2010
ZAR million
Operating loss
Income from subsidiaries
Net fi nance income
Loss before taxation
Taxation – Current
– Deferred
Loss for the year
Note
2010
2009
1
2
3
(34)
22
7
(5)
(3)
(2)
–
(38)
–
21
(17)
25
19
(61)
Condensed Sappi Limited company statements
of comprehensive income
for the year ended September 2010
ZAR million
Loss for the year
Other comprehensive income, net of tax
Total comprehensive income (loss) for the year
2010
2009
–
–
–
(61)
–
(61)
2010 annual report
185
Condensed Sappi Limited company balance sheets
at September 2010
ZAR million
Assets
Non-current assets
Property, plant and equipment
Investments in subsidiaries
Inter-company receivables
Loan to Executive Share Purchase Trust
Deferred tax asset
Current assets
Trade and other receivables
Inter-company receivables
Taxation receivable
Total assets
Equity and liabilities
Shareholders’ equity
Ordinary share capital
Share premium
Non-distributable reserves
Retained earnings
Non-current liabilities
Inter-company payables
Current liabilities
Trade and other payables
Inter-company payables
Taxation payable
Total equity and liabilities
2010
2009
20,697
20,424
1
18,177
2,453
2
18,142
2,199
64
2
46
2
36
8
81
–
42
8
34
–
20,743
20,466
20,578
20,334
561
12,183
432
7,402
66
99
51
48
–
537
12,062
333
7,402
31
101
44
42
15
20,743
20,466
(Annexure A)
(Annexure A)
(Annexure A)
(Annexure A)
(Annexure A)
186
Condensed Sappi Limited company statements of changes in equity
for the year ended September 2010
ZAR million
Number
of
ordinary
shares
Ordinary
share
capital
Share
premium
Ordinary
share
capital
and share
premium
Non-
distri-
butable
reserves
Distri-
butable
reserves
Total
equity
Balance – September 2008
239.1
239
6,427
6,666
Share-based payment
Total comprehensive loss for the year
Dividends*
Rights issue proceeds
Costs directly attributable to the rights issue
Issue to M-real
–
–
–
286.8
–
11.2
–
–
–
–
–
–
–
–
–
287
5,528
5,815
–
11
(302)
409
(302)
420
247
86
–
–
–
–
–
7,837
14,750
–
(61)
(374)
–
–
–
86
(61)
(374)
5,815
(302)
420
Balance – September 2009
537.1
537
12,062
12,599
333
7,402
20,334
Share-based payment
Total comprehensive income (loss) for the year
–
–
–
–
–
–
–
–
Share issue – BBBEE transaction
24.3
24
122
146
99
–
–
–
–
–
99
–
146
Balance – September 2010
561.4
561
12,184
12,745
432
7,402
20,579
* Dividends relate to the previous fi nancial year’s earnings but were declared subsequent to year end.
Condensed Sappi Limited company cash fl ow statements
for the year ended September 2010
ZAR million
Loss before interest and taxation
Adjustments:
Dividends received pre-acquisition
Subsidiary transactions
Other
Cash generated from (utilised in) operations
Movement in working capital
Net fi nance income
Taxation paid
Dividends paid
Cash utilised in operating activities
Decrease 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
2010
2009
(34)
–
(28)
25
(37)
13
7
(20)
–
(37)
16
–
21
–
–
–
–
(38)
82
306
13
363
(82)
21
(23)
(374)
(95)
–
(5,493)
5,513
75
–
–
–
2010 annual report
187
Notes to the condensed Sappi Limited company fi nancial statements
for the year ended September 2010
ZAR million
1.
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 fi de 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
Loss: Pre-acquisition portion
Net fi nance income
Interest paid
Interest received
Net foreign exchange gains (losses)
Commitments
Operating leases and rentals
Payable within one year
Payable within two to fi ve years
Contingent liabilities
Guarantees and suretyships
2.
3.
4.
5.
6.
2010
2009
1
5
13
9
4
–
21
119
227
–
22
–
22
–
4
3
7
1
–
1
2
10
12
8
4
–
19
96
211
–
82
(82)
–
–
35
(14)
21
1
1
2
13,747
20,581
Basis of preparation
The annual fi nancial statements from which these condensed fi nancial statements have been derived have been prepared in
accordance with the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board.
188
Investments
at September 2010
Set out below are the more signifi cant subsidiaries and joint ventures or those that have a loan with Sappi Limited:
Annexure A
Investments in subsidiaries
and joint venture
Southern Africa
Sappi Southern Africa (Pty) Ltd(1)
Sappi Share Facilitation Company
(Pty ) Ltd
Usutu Pulp Company Ltd
Lereko Property
Company (Pty) 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 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(3)
Employee share participation Trusts
Various other companies
O
O
O
P
O
O
O
O
O
O
H
O
O
D
H
F
O
O
O
O
O
O
O
O
F
O
Share
capital
Effective holding
Book value
of investment
Loan to
subsidiary
Loan from
subsidiary
2010
%
2009
%
2010
ZAR
million
2009
ZAR
million
2010
ZAR
million
2009
ZAR
million
2010
ZAR
million
2009
ZAR
million
ZAR12,026,250
100
100
1,885
1,851
1,644
1,410
ZAR1,000
SZL10,000,000
100
100
100
100
ZAR7,000
100
100
USD1,000
– (2)
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
–
–
–
1
–
100
–
100
–
–
100
1
100 16,288 16,288
–
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
–
–
3
–
–
–
–
2
–
–
789
–
789
–
–
–
–
–
–
–
–
–
–
–
–
–
35
–
–
–
–
–
–
–
–
–
–
–
–
–
20
1
–
–
–
–
–
–
–
–
–
–
–
–
34
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(14)
–
(7)
–
–
–
–
–
–
(15)
–
–
–
–
–
–
–
–
–
–
(8)
(7)
–
–
–
–
–
–
–
(22)
–
–
–
–
–
–
–
–
–
–
(1)
(9)
–
–
–
–
–
–
(66)
(4)
–
–
(31)
(3)
Write down of investment in subsidiaries
Holding companies
Operating companies
Finance companies
H
O
F
18,177 18,142
2,489
2,233
(114)
(73)
–
–
–
–
–
–
18,177 18,142
2,489
2,233
(144)
(73)
Management companies
Joint venture
M
JV
Dormant
Property Holding
D
P
(1) Sappi Manufacturing (Pty) Limited’s name changed to Sappi Southern Africa (Pty) Limited on 12 October 2010.
(2) No issued share capital, only additional paid in capital of US$488 million.
(3) Declared a dividend out of pre-acquisition reserves.
2010 annual report
189
Glossary
General defi nitions
bleached pulp – pulp that has been bleached by means of
chemical additives to make it suitable for fi ne paper production
chemical cellulose – highly purifi ed chemical pulp intended
primarily for conversion into chemical derivatives of cellulose and
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
used mainly in the manufacture of viscose staple fi bre, solvent spin
from kraft pulp
fi bre and fi lament
kraft pulp – chemical wood pulp produced by digesting wood by
chemical pulp – a generic term for pulp made from wood fi bre
means of the sulphate pulping process
that has been produced in a chemical process
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 fi ller 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 fi bre 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
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
number of lost time injuries x 200 000
Frequency
Rate (LTIFR)
=
man hours
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 refi ning of wood or wood chips
from which corrugated boxes are produced
NBSK – Northern Bleached Softwood Kraft pulp. One of the
COSO – the Committee of Sponsoring Organisations of the
Treadway Commission
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
fi bre – fi bre is generally referred to as pulp in the paper industry.
industry for comparative purposes
Wood is treated chemically or mechanically to separate the fi bres
during the pulping process
fine paper – paper usually produced from chemical pulp for
printing and writing purposes and consisting of coated and
uncoated paper
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 fi rstly, by
conducting a variety of analyses and secondly, by setting standards
FSC – in terms of the Forest Stewardship Council (FSC) scheme,
packaging paper – paper used for packaging purposes
there are two types of certifi cation. 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 manufacturers like Sappi, Chain-of-
Custody certifi cation involves independent verifi cation of the supply
chain, which identifi es and tracks the timber through all stages of
the production process from the tree farm to the end product
PEFC – the world’s largest forest certifi cation system, the PEFC
is focused on promoting sustainable forest management. Using
multi-stakeholder processes, the organisation develops forest
management certifi cation standards and schemes which have
been signed by 37 nations in Europe and other intergovernmental
processes for sustainable forestry management around the world
pulpwood – wood suitable for producing pulp – usually not of
Greenhouse gases (GHGs) – the GHGs included in the Kyoto
suffi cient standard for saw-milling
Protocol are carbon dioxide, methane, nitrous oxide, hydrofl uoro-
carbons, perfl uorocarbons and sulphur hexafl uoride
ISO – developed by the International Standardisation Organisation
(ISO), ISO 9000 is a series of standards focused on quality
release paper – embossed paper used to impart design in
polyurethane or polyvinyl chloride plastic fi lms for the production of
synthetic leather and other textured surfaces. The term also applies
to backing paper for self adhesive labels
190 Glossary continued
sackkraft – kraft paper used to produce multiwall paper sacks
fair value – the value for which an asset could be exchanged or a
silviculture costs – growing and tending costs of trees in forestry
liability settled in a market related transaction
operations
speciality paper – a generic term for a group of papers intended
fi nancial results – comprise the fi nancial position (assets, liabilities
and equity), results of operations (revenue and expenses) and cash
for commercial and industrial use such as fl exible packaging,
fl ows of an entity and of the group
metallised base paper, coated bag paper, etc
functional currency – the currency of the primary economic
thermo-mechanical pulp – pulp produced by processing wood
environment in which the entity operates
fi bres using heat and mechanical grinding or refi ning wood or
wood chips
foreign operation – an entity whose activities are based or
conducted in a country or currency other than that of the reporting
tons – term used in this report to denote a metric ton of 1,000 kg
entity
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 fi nancial defi nitions
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 geographical
acquisition – the acquisition of M-real’s coated graphic paper
business on 31 December 2008
area of operation; and
acquisition date – the date on which control in respect of
■ is distinguished separately for fi nancial and operating purposes
subsidiaries, joint control in joint ventures and signifi cant infl uence
presentation currency – the currency in which fi nancial results of
in associates commences
an entity are presented
associate – an entity, other than a subsidiary or joint venture,
qualifying asset – an asset that necessarily takes a substantial
over which the group has signifi cant infl uence over fi nancial and
period (normally in excess of six months) to get ready for its
operating policies
intended use
basic earnings per share – net profi t for the year divided by the
weighted average number of shares in issue during the year
recoverable amount – the amount that refl ects the greater of the
net selling price and the value in use that can be attributed to an
commissioning date – the date that an item of property, plant and
asset as a result of its ongoing use by the entity. In determining the
equipment, whether acquired or constructed, is brought into use
value in use, expected future cash fl ows are discounted to their
control – the ability, directly or indirectly, to govern the fi nancial
and operating policies of an entity so as to obtain economic benefi t
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
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 signifi cant infl uence over the other party in making fi nancial
and operating decisions or is a member of the key management
diluted earnings per share – is calculated by assuming conversion
of Sappi Limited
or exercise of all potentially dilutive shares, share options and
share awards unless these are anti-dilutive
discount rate – this is the pre-tax interest rate that refl ects the
current market assessment of the time value of money for the
purposes of determining discounted cash fl ows. In determining the
cash fl ows the risks specifi c to the asset or liability are taken into
segment assets – total assets (excluding deferred taxation and
cash) less current liabilities (excluding interest-bearing borrowings
and overdraft)
share-based payment – a transaction in which Sappi Limited
issues shares or share options to group employees as compensation
account in determining those cash fl ows and are not included in
for services rendered
determining the discount rate
signifi cant infl uence – the ability, directly or indirectly, to participate
disposal date – the date on which control in respect of subsidiaries,
in, but not exercise control over, the fi nancial and operating policy
joint control in joint ventures and signifi cant infl uence in associates
decisions of an entity so as to obtain economic benefi t from its
ceases
activities
2010 annual report
191
Non-GAAP fi nancial defi nitions
net assets – total assets less total liabilities
The group believes that it is useful to report certain non-GAAP
measures for the following reasons:
■ these measures are used by the group for internal performance
analysis;
■ the presentation by the group’s reported business segments of
these measures facilitates comparability with other companies
in our industry, although the group’s measures may not be
comparable with similarly titled profi t measurements reported by
other companies; and
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
■ it is useful in connection with discussion with the investment
and cash and cash equivalents) less current liabilities (excluding
analyst community and debt rating agencies
interest-bearing borrowings and overdraft)
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
BBBEE charge – Represents the IFRS 2 non-cash charge
associated with the Broad-based Black Economic Empowerment
(BBBEE) transaction implemented as envisaged in the BEE
legislation in South Africa
capital employed – shareholders’ equity plus net debt
cash interest cover – cash generated by operations divided by
fi nance costs less fi nance 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 fi nancial year end closing
prices on the JSE Limited converted to US cents using the closing
fi nancial year end exchange rate
earnings yield – headline earnings per share divided by the fi nancial
year end closing prices on the JSE Limited converted to US cents
using the closing fi nancial year end exchange rate
EBITDA excluding special items – earnings before interest (net
fi nance costs), taxation, depreciation, amortisation and special items
fellings – the amount charged against the income statement
representing the standing value of the plantations harvested
headline earnings – as defi ned in circular 3/2009 issued by the
South African Institute of Chartered Accountants, separates from
earnings all separately identifi able re-measurements. It is not
necessarily a measure of sustainable earnings. It is a Listings
Requirement of the JSE Limited to disclose headline earnings
per share
inventory turnover (times) – cost of sales divided by inventory on
hand at balance sheet date
ordinary dividend cover – profi t 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 fi nancial year end closing prices on the
JSE Limited converted to US cents using the closing fi nancial year
end exchange rate divided by headline earnings per share
ROCE – return on average capital employed. Operating profi t
excluding special items divided by average capital employed
ROE – return on average equity. Profi t for the period divided by
average shareholders’ equity
RONOA – return on average net operating assets. Operating profi t
excluding special items divided by average net operating assets
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 profi t or loss on disposal of property, investments and
businesses, asset impairments, restructuring charges, non-
recurring integration costs related to acquisitions, fi nancial 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
fi nancial year end closing prices on the JSE Limited converted to
US cents using the closing fi nancial 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
192
Notice to shareholders
Notice of annual general meeting
THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR
Ordinary resolution number 2.4
“Resolved that Mrs Bridgette Radebe is re-elected as a
IMMEDIATE ATTENTION
director of Sappi Limited.”
If you are in any doubt as to what action you should take, please
4. Ordinary resolution number 3: Re-appointment of auditors
consult your stockbroker, banker, attorney, accountant or other
professional advisor immediately.
Sappi Limited
(Registration No 1936/008963/06)
(“Sappi”)
The seventy-fourth annual general meeting of Sappi will be held in
the Auditorium, Ground Floor, 48 Ameshoff Street, Braamfontein,
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 designated
registered auditor being Mr R Campbell) as the auditors of
Sappi Limited for the year ending September 2011”.
Johannesburg on Wednesday, 09 February 2011, at 14:30. The
5.
Ordinary resolutions number 4.1 to 4.3: The Sappi Limited
following business will be transacted and resolutions proposed
Performance Share Plan and the Sappi Limited Share Incentive
with or without modifi cation.
Scheme.
1.
Annual fi nancial statements: Receive and consider the annual
Ordinary resolution number 4.1
fi nancial statements for the year ended September 2010.
“Resolved as an ordinary resolution that all the ordinary shares
2.
Ordinary resolution number 1: Confi rmation of appointment
of directors appointed subsequent to the last annual general
meeting and subsequent to the fi nancial year end, and re-
election of those directors.
“Resolved that the appointment of Mr Mohammed Valli Moosa with
effect from 01 August 2010 is confi rmed and as, in terms of the
articles of association of Sappi Limited, he retires from offi ce at the
conclusion of the annual general meeting at which this resolution is
required for the purpose of carrying out the terms of The Sappi
Limited Performance Share Incentive Plan (the Plan), other
than those which have specifi cally been appropriated for the
Plan in terms of ordinary resolutions duly passed at previous
general meetings of Sappi Limited, be and are hereby specifi cally
placed under the control of the directors who be and are
hereby authorised to allot and issue those shares in terms
of the Plan.”
considered, he is re-elected as a director of Sappi Limited.”
Ordinary resolution number 4.2
For Mr Moosa’s personal details, refer to note 1 under Notes on
page 195.
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. 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.
For personal details on those directors, refer to note 2 under
Notes on pages 195 to 196.
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 Daniël Christiaan Cronjé is re-elected as a
director of Sappi Limited.”
Ordinary resolution number 2.2
“Resolved that Professor Meyer Feldberg is re-elected as a
director of Sappi Limited.”
Ordinary resolution number 2.3
“Resolved as an ordinary resolution that all the ordinary shares
required for the purpose of carrying out the terms of The Sappi
Limited Share Incentive Scheme (the Scheme), other than
those which have specifi cally been appropriated for the Scheme
in terms of ordinary resolutions duly passed at previous general
meetings of Sappi Limited, be and are hereby specifi cally
placed under the control of the directors who be and are
hereby authorised to allot and issue those shares in terms
of the Scheme.”
Ordinary resolution number 4.3
“Resolved as an ordinary resolution that any subsidiary of
Sappi Limited (Subsidiary) be and is hereby authorised in
terms of the Listings Requirements of the JSE Limited to sell
at the price at which a participant is allowed to acquire the
Company’s shares and to transfer to The Sappi Limited Share
Incentive Scheme and/or The Sappi Limited Performance
Share Incentive Plan (collectively “the Schemes”) those number
of Sappi Limited’s shares acquired by that Subsidiary from
time to time but not exceeding the maximum number of Sappi
Limited’s shares available to the Schemes as may be required
“Resolved that Mrs Karen Rohn Osar is re-elected as a
by the Schemes when a participant to whom Sappi Limited’s
director of Sappi Limited.”
shares will be allocated has been identifi ed.”
2010 annual report
193
The passing of resolutions 4.1 and 4.2 will enable the directors
to continue to meet the share requirements of the Sappi
Limited Share Incentive Scheme and the Sappi Limited
Performance Share Incentive Plan (collectively the Schemes),
both of which Schemes are already in place and subject to the
2. Audit committees
Group committee
Listings Requirements of the JSE Limited. The passing of
Chairperson
from
to
resolution 4.3 will provide directors with the fl exibility to utilise
shares repurchased from time to time by a wholly-owned
subsidiary of Sappi Limited and held in treasury by the
subsidiary company, for the purposes of satisfying the share
requirements of the Schemes, at times when the directors
consider that to be more effi cient than issuing new shares in
If South African resident
ZAR254,100
ZAR284,500
If European resident
GBP36,400
GBP38,200
If USA resident
US$55,100
US$58,500
Other members
the capital of Sappi.
If South African resident
ZAR126,300
ZAR142,250
At present there is a combined maximum number of 42,700,870
shares for allocation to the Schemes (7.95% of the ordinary
issued share capital) of which 12,325,960 shares have already
If European resident
GBP18,300
GBP19,200
If USA resident
US$27,500
US$28,500
been issued to, or transferred to the Schemes, leaving a
Regional audit committees
balance of up to 30,374,910 shares which could still need to
be issued or transferred to the Schemes.
Chairperson
6. Ordinary resolution number 5: Remuneration policy
If South African resident
“Resolved as an ordinary resolution, (non-binding) that the
company’s remuneration policy as contained
in the
Compensation report on pages 69 to 77 of the annual report,
be approved.”
If European resident
If USA resident
ZAR32,100
per meeting
GBP4,700
per meeting
US$6,900
per meeting
ZAR35,900
per meeting
GBP4,900
per meeting
US$7,160
per meeting
This non-binding resolution is being proposed in accordance
3. Human resources and transformation committee,
with the recommendations of King III.
7. Ordinary resolution number 6: Non-executive directors’ fees
“Resolved that, with effect from 01 October 2010 and until
otherwise determined by Sappi Limited (Sappi) in general
meeting, the remuneration per annum, unless stated otherwise,
of the non-executive directors for their services shall be
compensation committee, nomination and governance
committee, sustainability committee and any additional
committees
Chairperson
If South African resident
ZAR158,400
ZAR171,000
If European resident
GBP21,900
GBP22,700
increased as follows:
If USA resident
US$32,600
US$33,400
from
to
Other members
1. Sappi board fees
If South African resident
ZAR82,400
ZAR89,000
Chairperson
ZAR1,765,500*
ZAR2,000,000*
If European resident
GBP15,400
GBP15,900
* Inclusive of all committee fees.
Lead independent director
If South African resident
ZAR380,900
ZAR410,000
If European resident
GBP54,600
GBP56,500
If USA resident
US$82,700
US$84,750
Other directors
If USA resident
US$19,900
US$20,400
4.
Additional meeting fees for board meetings in excess
of fi ve meetings per annum (whether attended in person
or by teleconference/videoconference)
If South African resident
If European resident
ZAR25,400
per meeting
GBP3,600
per meeting
US$5,500
per meeting
ZAR27,450
per meeting
GBP3,720
per meeting
US$5,640
per meeting
If South African resident
ZAR254,100
ZAR274,400
If European resident
GBP36,400
GBP37,650
If USA resident
If USA resident
US$55,100
US$56,450
5. Travel compensation (increase of 3.6%)
For more than
10 fl ight hours return
US$2,800
per meeting
US$2,900
per meeting
194
Notice to shareholders continued
Sappi indicated in the notice to shareholders dated
Proxies
06 December 2004 that it planned to review directors’ fees
A shareholder is entitled to appoint one or more proxies to
annually in future. Ordinary resolution number 6 increases the
attend, speak and on a poll to vote in his stead. A proxy need
remuneration currently paid to non-executive directors and
not be a shareholder. For the convenience of shareholders, a
board committee members by between approximately 2.5%
form of proxy is enclosed.
and 13.3% per annum depending generally on the domicile of
the directors and the currency in which they are paid, with
effect from 01 October 2010. The fees were last increased
with effect from 01 October 2009 and have been reviewed 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
The attached form of proxy is only to be completed by
a shareholder who holds Sappi shares in certifi cated form or
has dematerialised his shares (i.e. has replaced the paper
share certifi cates 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 specifi cally instructed his Central
Securities Depositary Participant (CSDP) or broker to hold his
shares in his own name on Sappi’s sub-register).
and corporate governance requirements. More and more
A shareholder who has dematerialised his shares and who is
responsibility is being placed on company chairmen and
not registered as an “own name” dematerialised shareholder
company audit committees and in recognition of this, it is
and who wishes to:
considered appropriate to increase their fees by a higher
percentage than the other fees. 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.
8. Ordinary resolution number 7: 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
– attend the annual general meeting must instruct his CSDP or
broker to provide him with a letter of representation to 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.
resolutions passed at the annual general meeting held on
When authorised to do so, CSDPs or brokers recorded in
09 February 2011 or any adjournment thereof.”
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 09 February 2011
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.
2010 annual report
195
QUESTIONS
Skills, expertise and experience
The board encourages shareholders to attend and to ask questions
Mr Moosa is currently the Deputy Chairman of Lereko
at the annual general meeting. In order to facilitate the answering of
Investments (Pty) Limited, Sappi’s Strategic Black Economic
questions at the meeting, shareholders who wish to ask questions
Empowerment partner. He has held numerous leadership
in advance are encouraged to submit their questions in writing to the
positions across business, government, politics and civil society
Group Secretary by 17:00 on Monday, 07 February 2011 at:
in South Africa. To name but a few, he was South African
7th Floor
48 Ameshoff Street
Braamfontein
Johannesburg, 2001
or
PO Box 31560
Braamfontiein
2017
or
by e-Mail to Denis.O’Connor@sappi.com
Sappi Southern Africa (Pty) Limited
Secretaries: per D J O’Connor
48 Ameshoff Street
Braamfontein, Johannesburg 2001
15 December 2010
Notes
1. Confi rmation of appointment of director appointed
since the last annual general meeting and subsequent
to the year end, and the re-election of that director:
Mohammed Valli Moosa
Age: 53
Qualifi cations: BSc (Mathematics)
Nationality: South African
Appointed: August 2010
Non-executive
Minister of Environmental Affairs and Tourism, the President
of the IUCN (International Union for the Conservation of
Nature); Chairman of the UN Commission for Sustainable
Development, and he was a long serving National Executive
Committee member of the African National Congress (ANC).
2. Directors retiring by rotation who are seeking re-election:
Dr Daniël Christiaan Cronjé
Chairman
Age: 64
Qualifi cations: BCom (Hons), MCom, DCom
Nationality: South African
Appointed: January 2008
Independent
Sappi board committee memberships
– Human resources and transformation committee (chairman)
– Nomination and governance committee (chairman)
(Attends audit committee meetings and compensation
committee meetings ex offi cio)
Other board and organisation memberships
Die Dagbreek Trust (chairman)
Eqstra Holdings Limited (chairman)
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
Other board and organisation memberships
years. Prior to that Dr Cronjé was lecturer in Money and
Auditor General’s Advisory Committee (South Africa)
Banking at Potchefstroom University.
Anglo Platinum Limited (deputy chairperson and lead
independent director)
Imperial Holdings Limited
Lereko Investment (Pty) Limited and various other associate
companies of Lereko Investment (Pty) Limited
Real Africa Holdings Limited (chairman)
Sanlam Limited
Sun International Limited (chairman)
196
Notice to shareholders continued
Professor Meyer Feldberg
Age: 68
Qualifi cations: BA, MBA, PhD
Nationality: American
Appointed: March 2002
Lead independent director
Karen Rohn Osar
Age: 61
Qualifi cations: MBA, Finance
Nationality: American
Appointed: May 2007
Independent
Sappi board committee memberships
– Compensation committee (chairman)
– Nomination and governance committee
Other board and organisation memberships
include
British American Business Council (advisory board member)
Sappi board committee memberships
– Audit committee
Other board and organisation memberships
Innophos Holdings, Inc. (also chairperson of audit committee)
Reader’s Digest Association
Webster Financial Corporation
Columbia University Business School
Macy’s, Inc
Morgan Stanley (senior adviser)
New York City Ballet
New York City Global Partners (president)
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
signifi cant contribution to American life.
Skills, expertise and experience
Ms Osar was executive vice president and chief fi nancial
offi cer of specialty chemicals company Chemtura Corporation
until her retirement in March 2007. Prior to that, she held
various senior management and board positions in her career.
She was vice president and treasurer for Tenneco, Inc and also
served as chief fi nancial offi cer of Westvaco Corporation and
as senior vice president and chief fi nancial offi cer 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.
Bridgette Radebe
Age: 50
Qualifi cations: BA (Pol Sc and Socio)
Nationality: South African
Appointed: May 2004
Independent
Sappi board committee memberships
– Human resources and transformation committee
Other board and organisation memberships
Mmakau Mining (Pty) Limited (executive chairperson)
South African Mining Development Association (president)
Mineral and Mining Development Board (former vice chairman)
New Africa Mining Fund (founder and board trustee)
Skills, expertise and experience
Ms Radebe was the fi rst 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.
Shareholders’ diary
Annual general meeting
First quarter results released
Second quarter and half-year results released
Third quarter results released
Financial year end
Preliminary fourth quarter and year results including dividend announcement released
Annual report posted to shareholders
2010 annual report
197
09 February 2011
February 2011
May 2011
August 2011
September 2011
November 2011
December 2011
198
Administration
Sappi Limited
Registration number 1936/008963/06
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
JSE code: SAP
ISIN code: ZAE 000006284
NYSE code: SPP
Group secretary
Denis O’Connor
Secretaries
Sappi Southern Africa (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
2010 annual report
199
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 certifi cated form; or
– hold dematerialised shares (i.e. where the paper share certifi cates 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) (i.e. shareholders who have specifi cally 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-fourth annual general meeting of the members to be held at 14:30 on Wednesday, 09 February 2011 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 14:30 South African time on Monday, 07 February 2011, 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 modifi cation) at the annual general meeting of Sappi to be held at 14:30 on Wednesday, 09 February 2011 or any
adjournment thereof, as follows:
Number of shares
For
Against
Abstain
Ordinary resolution number 1 – confi rmation of appointment and re-election of directors appointed since the
last annual general meeting* – Mr Mohammed Valli Moosa
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 Daniël Christiaan Cronjé as a director of Sappi
Ordinary resolution number 2.2 – Re-election of Professor Meyer Feldberg as a director of Sappi
Ordinary resolution number 2.3 – Re-election of Mrs Karen Rohn Osar as a director of Sappi
Ordinary resolution number 2.4 – Re-election of Mrs Bridgette Radebe as a director of Sappi
Ordinary resolution number 3
ending September 2011
– Re-appointment of Deloitte & Touche as auditors of Sappi for the year
Ordinary resolution number 4.1 – The placing of all ordinary shares required for the purpose of carrying out the
terms of the Sappi Limited Performance Share Incentive Plan (“the Plan”) under the control of the directors to
allot and issue in terms of the Plan
Ordinary resolution number 4.2 – The placing of all ordinary shares required for the purpose of carrying out the
terms of the Sappi Limited Share Incentive Scheme (“the Scheme”) under the control of the directors to allot
and issue in terms of the Scheme
Ordinary resolution number 4.3 – The authority for any subsidiary of Sappi to sell and to transfer to the Sappi
Limited Share Incentive Scheme and the Sappi Limited Performance Share Incentive Plan (collectively “the
Schemes”) such shares as may be required for the purposes of the Schemes
Ordinary resolution number 5 – Non-binding approval of remuneration policy
Ordinary resolution number 6 – Increase in non-executive directors’ fees
Ordinary resolution number 7 – 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 fi t.
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 192.
200
Notes to proxy
The form of proxy must only be used by certifi cated 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 offi ces 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.
3
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.
4
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 fi rst 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.
5
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.
6
Forms of proxy must be lodged with, or posted to, the offi ces of Sappi’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 14:30 on Monday, 07 February 2011.
7
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 fi t in respect of that resolution.
8
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 satisfi ed as to the manner in which a member wishes to vote.
Our reporting strategy
Forward-looking statements
The King Report on Governance for South Africa 2009 (King III),
information that is material, relevant, accessible, understandable
which is recognised internationally as a leading governance
and comparable” and to demonstrate that “…strategy, risk,
standard, was adopted by the JSE and became effective on
performance and sustainability are inseparable” in the way Sappi
01 March 2010. As we are headquartered in South Africa with our
manages its business.
primary listing on the JSE Limited we subscribe to King III. In line
with the integrated reporting requirement contained in King III, we
have increased the level of integration in this year’s report. Primarily
we are responding to the guideline to “…transparently disclose
We use 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 2010 and longer term prospects,
stakeholders are directed to the following sources of company information:
Quarterly results announcements and analyst presentations.
Annual reports and accounts, prepared in accordance with International Financial Reporting Standards (IFRS) issued by the
International Accounting Standards Board (IASB).
Form 20-F, prepared in accordance with US Securities and Exchange Commission (SEC) regulations.
Sustainable development report, aimed at giving the reader a broad overview of our sustainability performance.
Our online report (http://sappi.investoreports.com/sappi_sdr_2010) follows the same structure as the printed report, but
incorporates additional detail and includes a comprehensive Global Reporting Initiative (GRI) index which has links to relevant
sections in the annual report, the Form 20-F and previous sustainability reports.
Group website – www.sappi.com
Certain statements in this report that are neither reported fi nancial 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 highly cyclical nature of the pulp and paper industry (and the factors that contribute to such cyclicality, such as levels of demand,
production capacity, production, input costs including raw material, energy and employee costs, and pricing);
the impact on our business of the global economic downturn;
unanticipated production disruptions (including as a result of planned or unexpected power outages);
changes in environmental, tax and other laws and regulations;
adverse changes in the markets for 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;
adverse changes in the political situation and economy in the countries in which we operate or the effect of governmental efforts to
address present or future economic or social problems;
the impact of investments, acquisitions and dispositions (including related fi nancing), any delays, unexpected costs or other problems
experienced in connection with dispositions or with integrating acquisitions and achieving expected savings and synergies; and
Note: Please refer to the glossary of terms used in this report on pages 189 to 191.
currency fl uctuations.
Sappi Limited is listed on the following stock exchanges and is subject to their listing requirements:
JSE Limited, South Africa (primary listing)
New York Stock Exchange, USA (secondary listing)
We undertake no obligation to publicly update or revise any of these forward-looking statements, whether to refl ect new information or
future events or circumstances or otherwise.
This report is printed on
Magno Satin: cover – 250g/m2,
pages 1 to 64 – 150g/m2 and
Triple Green Silk:
pages 65 to 200 – 115g/m2
Sappi is a leading producer of coated fi ne paper used in the printing of high end printed communications.
Cover picture: Wood chips are a renewablle resource from certifi ed forests used at Sappi Saiccor Mill
www.sappi.com
This report has been compiled and produced by Sappi Corporate Affairs® 2010
Sappi House • 48 Ameshoff Street • 2001 Braamfontein • Johannesburg • South Africa
www.sappi.com
Inspired by life
“Look deep into nature, and then you will
understand everything better” – Albert Einstein
This inspiration and the insights we gain
informs our technical excellence, our
innovations, our relationships and the use
of our resources. It is the spark that ignites
the passion in our people and makes the
end solutions relevant and successful.
annual report
2010
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