Edgar Filing: SAPPI LTD

Page 1

FORM 6-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16

under the Securities Exchange Act of 1934

For the month of August 2006

Commission file number: 1-14872

SAPPI LIMITED

(Translation of registrant’s name into English)

48 Ameshoff Street

Braamfontein

Johannesburg 2001

REPUBLIC OF SOUTH AFRICA

(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or
Form 40-F.

Form 20-F

-------

Form 40-F

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted

by Regulation S-T Rule 101(b) (1):

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted

by Regulation S-T Rule 101(b) (7):

Indicate by check mark whether by furnishing the information contained in this Form, the

registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under
the Securities Exchange Act of 1934.

Yes

-------

If “Yes” is marked, indicated below the file number assigned to the registrant in

connection with Rule 12g3-2(b): 82-

FORWARD-LOOKING STATEMENTS

In order to utilize the "Safe Harbor" provisions of the United States Private Securities Litigation Reform
Act of 1995 (the "Reform Act"), Sappi Limited (the "Company") is providing the following cautionary
statement. Except for historical information contained herein, statements contained in this Report on Form
6-K may constitute "forward-looking statements" within the meaning of the Reform Act. The words
"believe", "anticipate", "expect", "intend", "estimate ", "plan", "assume", "positioned", "will", "may",
"should", "risk" and other similar expressions which are predictions of or indicate future events and future
trends which do not relate to historical matters identify forward-looking statements. In addition, this Report
on Form 6-K may include forward-looking statements relating to the Company's potential exposure to
various types of market risks, such as interest rate risk, foreign exchange rate risk and commodity price
risk. Reliance should not be placed on forward-looking statements because they involve known and
unknown risks, uncertainties and other factors which are in some cases beyond the control of the Company,
together with its subsidiaries (the "Group"), and may cause the actual results, performance or achievements
of the Group to differ materially from anticipated future results, performance or achievements expressed or
implied by such forward-looking statements (and from past results, performance or achievements). Certain
factors that may cause such differences include but are not limited to: the highly cyclical nature of the pulp
and paper industry; pulp and paper production, production capacity, input costs including raw material,
energy and employee costs, and pricing levels in North America, Europe, Asia and southern Africa; any
major disruption in production at the Group's key facilities; changes in environmental, tax and other laws
and regulations; adverse changes in the markets for the Group's products; any delays, unexpected costs or
other problems experienced with any business acquired or to be acquired; consequences of the Group's
leverage; adverse changes in the South African political situation and economy or the effect of
governmental efforts to address present or future economic or social problems; and the impact of future
investments, acquisitions and dispositions (including the financing of investments and acquisitions) and any
delays, unexpected costs or other problems experienced in connection with dispositions. These and other
risks, uncertainties and factors are discussed in the Company's Annual Report on Form 20-F and other
filings with and submissions to the Securities and Exchange Commission, including this Report on Form 6-
K. Shareholders and prospective investors are cautioned not to place undue reliance on these forward-
looking statements. These forward-looking statements are made as of the date of the submission of this
Report on Form 6-K and are not intended to give any assurance as to future results. The Company
undertakes no obligation to publicly update or revise any of these forward-looking statements, whether to
reflect new information or future events or circumstances or otherwise.

sappi

quarter

results and

nine months

ended

June

2006

1st

2nd

3rd

4th

Sappi is the world’s leading
producer of coated fine paper

for the nine months ended June 2006

** Estimate as at 30 June 2006

† Rest of World

Sales by product group *

Sales: where the product
is sold *

Sales: where the product
is manufactured *

Geographic ownership **

■

Coated fine paper

■

Uncoated fine paper

■

Coated specialities

■

Packaging and

newsprint

■

Pulp

■

Other

63%

13%

■

North America

■

Europe

■

Southern Africa

■

Asia and other

31%

40%

15%

14%

■

North America

■

Europe

■

Southern Africa

29%

45%

26%

■

South Africa

■

North America

■

Europe and ROW †

55%

35%

10%

●

Headline loss 20 US cents per share; net loss 23 US cents per share

●

Unfavourable plantation fair value adjustment – 7 US cents per share

●

Input cost pressure

●

Strong demand continues

●

Prices increase in USA; flat in Europe

●

Weaker rand benefits SA businesses

●

Saiccor expansion approved

summary

Quarter

Nine months

ended

June

March

June

2006

2005**

2006

2005**

Sales (US$ million)

1,214

1,256

1,144

3,645

3,630

Operating (loss) profit (US$ million)

(34)

(188)

(121)

Operating (loss) profit to sales (%)

(2.8)

4.7

(16.4)

2.0

(3.3)

EBITDA (US$ million) *

176

(71)

421

246

EBITDA to sales (%) *

6.8

14.0

(6.2)

11.6

6.8

Operating (loss) profit to average net assets (%) *

(3.4)

5.9

(17.6)

2.4

(3.7)

Headline EPS (US cents) *

(20)

(5)

(14)

EPS (US cents)

(23)

(78)

(19)

(69)

Return on average equity (ROE) (%) *

(14.6)

2.4

(40.3)

(4.0)

(11.6)

Net debt (US$ million) *

2,222

2,172

2,114

2,222

2,114

Net debt to total capitalisation (%) *

47.4

44.3

44.0

47.4

44.0

* Refer to page 19, Supplemental Information for the definition of the term.

** Comparative amounts have been restated to take into account the effect of the adoption of International Financial Reporting

Standards (Refer to note 2).

financial highlights

Demand for our fine paper continued to grow strongly in the quarter with sales volume increasing 8%

compared to a year earlier, representing some recovery of market shares. Apparent consumption in the USA

grew 13% and in Europe grew 2% compared to the same period last year. Demand in Europe was slower

than the prior quarter, which is typical at this time of year and prices remained flat compared to the prior

quarter and to the year earlier. In North America prices are improving but our average price realisation reflects

a lower increase as a result of the inclusion of a higher proportion of pulp and publication paper in our mix.

We reported at the end of the previous quarter that in order to restore margins to an acceptable level we

would change a number of business practices. These include pricing policy, distribution and terms of doing

business. There is already evidence of some improvement and we expect continued improvement in the

coming quarters.

The Forest Products business had strong demand for its products but sales were constrained by poor

production and major maintenance events. The relatively weaker rand is expected to result in less

competition from imports for our South African businesses and export earnings should rise accordingly.

Net sales for the group of US$1.2 billion were up 6.1% compared to a year earlier mainly as a result of an

increase in the average price realised in South Africa and the regional mix.

Although the rate of increase of raw material and energy costs slowed, the unfavourable impact of wood,

chemical and energy prices compared to the prior quarter was US$3 million and US$34 million compared

to a year earlier. Rising pulp prices had a further US$6 million impact on costs compared to a year earlier;

however, as we sell slightly more pulp than we purchase, our sales benefit.

Our South African businesses benefited from the weaker rand towards the end of the quarter but for the first

time since the introduction of plantation fair value accounting (IAS41), the non-cash plantation fair value

adjustment (net after fellings) was unfavourable. This represented a US$22 million charge compared to gains

of US$60 million last quarter and US$8 million a year earlier. This reflects the mark-to-market of increases in the

energy cost to bring wood to market over our entire plantation investment. Major boiler repairs at Ngodwana

resulted in significant additional purchased fuel and electricity costs, and a severe hailstorm at Stanger caused

damage to the roof and inventory. The combined negative effect of these events was US$9 million.

In addition, the direct cost of major planned maintenance shuts was approximately US$20 million in the

quarter compared to US$4 million last quarter and US$19 million a year earlier.

Our operating loss for the quarter after these impacts was US$34 million compared to a loss of

US$188 million last year, which included the US$180 million charge for the impairment of Muskegon Mill.

SG&A costs this quarter were significantly higher than comparative periods due to the timing of various grant

receipts and fee payments. Year to date SG&A costs are largely in line with previous years.

Net finance costs were US$35 million compared to US$31 million last quarter; US$2 million of the difference

was a result of lower net foreign exchange gains. In the comparable quarter last year finance costs were

reduced by an adjustment for the fair value of financial instruments of US$19 million.

The headline loss per share for the quarter was 20 US cents and the net loss per share was 23 US cents. The

primary reason for the difference was further asset impairment at previously impaired sites and asset write-offs.

comment

sappi limited – third quarter page 2

cash flow and debt

Cash generated by operations was US$85 million for the quarter before US$18 million of foreign currency

related non-cash adjustments, compared to US$93 million a year ago. Working capital reduced

US$16 million as a result of increased payables in the quarter. We aim to reduce working capital

substantially in the final quarter.

During the quarter, net interest payments were US$48 million compared to US$23 million in the previous

quarter. The payments included a semi-annual interest payment on the US$750 million bonds.

Capital expenditure continued to be tightly controlled and was US$74 million, about 77% of depreciation, for

the quarter compared to US$83 million a year earlier. We utilised US$59 million cash this quarter and expect

to at least reverse this in the final quarter.

Net debt was US$2.2 billion at quarter end, up US$50 million on the previous quarter. Net debt to total

capitalisation increased to 47% from 44% at March. During the quarter we issued ZAR1 billion

(approximately US$140 million) of 7 year notes in the South African markets to repay short term debt.

The issue was oversubscribed.

operating review for the quarter

Sappi Fine Paper

Quarter

Quarter Quarter

ended

June 2006

June 2005

March 2006

US$ million

change

US$ million

Sales

968

905

7.0

1,018

Operating loss *

(18)

(210)

–

(6)

Operating loss to sales (%)

(1.9)

(23.2)

–

(0.6)

EBITDA *

(125)

–

EBITDA to sales (%)

6.4

(13.8)

–

7.4

RONOA pa (%)

(2.3)

(24.3)

–

(0.8)

* Includes pre tax charge of US$180 million in respect of Muskegon Mill asset impairment in June 2005.

Sales increased 7% for the quarter compared to a year earlier. While we are seeing improved pricing in the
USA, particularly for web products, prices in Europe have remained flat. Our efforts in both markets to
improve margin management continue.

Cost pressures, particularly wood, energy and chemicals continue to squeeze our margins. The rate of
increase in the quarter slowed compared to the recent trend.

sappi limited – third quarter page 3

Europe

Quarter

ended

June 2006

June 2005

change

March 2006

US$ million

(US$)

(Euro)

US$ million

Sales

536

498

7.6

8.6

569

Operating profit (loss)

Operating profit (loss) to sales (%)

(12)

–

0.2

(2.4)

–

1.1

EBITDA

27.0

28.1

EBITDA to sales (%)

8.8

7.4

–

9.3

RONOA pa (%)

0.2

(2.6)

–

1.4

Our sales volume grew 7% in the quarter compared to a year ago resulting in a recovery of market share

lost during our strong stand on prices last year. Price realisation in the quarter was flat and continued input

cost pressure squeezed our margins resulting in small operating profit of US$1 million.

We took commercial downtime during the quarter. The mills operated well with efficient management of

fixed costs and raw material usage.

North America

Quarter

ended

June 2006

June 2005

)

March 2006

US$ million

change

US$ million

Sales

354

338

4.7

367

Operating loss

(14)

(199)

–

(10)

Operating loss to sales (%)

(4.0)

(58.9)

–

(2.7)

EBITDA

(166)

–

EBITDA to sales (%)

4.5

(49.1)

–

5.2

RONOA pa (%)

(4.9)

(56.9)

–

(3.4)

* Includes pre tax charge of US$180 million in respect of Muskegon Mill asset impairment in June 2005.

The quarter ended strongly with improved mill output, improved prices and improving margin management.

The quarter's result, however, was an operating loss of US$14 million.

Mill performances improved during the quarter but Muskegon efficiency levels are still well short of our

targets. The streamlining of our product range and improved mill scheduling have helped restore our

service levels and we expect further improvements in the months ahead.

The direct cost of major maintenance shuts in the quarter was US$6 million.

We continue to work towards achieving new labour agreements at our US mills. Offers are on the table at

our two mills in Maine, and we are still in discussions at our Muskegon and Cloquet mills. We are hopeful

that the offers will be voted on by our employees in the near future.

sappi limited – third quarter page 4

operating review for the quarter (continued)

Fine Paper South Africa

Quarter

ended

June 2006

June 2005

change

March 2006

US$ million

(US$)

(Rand)

US$ million

Sales

13.0

14.7

Operating (loss) profit

(5)

–

(2)

Operating (loss) profit to sales (%)

(6.4)

1.4

–

(2.4)

EBITDA

(1)

–

EBITDA to sales (%)

(1.3)

5.8

–

3.7

RONOA pa (%)

(11.9)

2.0

–

(4.6)

Sales volumes and prices improved during the quarter but cost pressure including higher pulp costs and the

storm damage at Stanger mill resulted in an operating loss in the quarter.

Forest Products

Quarter

ended

June 2006

June 2005

change

March 2006

US$ million

(US$)

(Rand)

US$ million

Sales

246

239

2.9

4.4

238

Operating (loss) profit

(16)

–

Operating (loss) profit to sales (%)

(6.5)

9.6

–

29.0

EBITDA

(63.6)

(63.1)

105

EBITDA to sales (%)

8.1

23.0

–

44.1

RONOA pa (%)

(4.7)

6.8

–

19.2

Demand for our products was strong in the quarter; however our sales of kraft products were unfavourably

impacted by poor operating efficiency at Ngodwana and Tugela mills. Saiccor's production was lower than

planned as a result of the tie-in of debottlenecking capital work. Efficiency levels have improved and Saiccor’s

output is now ahead of plan. Demand for Saiccor's chemical cellulose is strong and the mill is expected to

run at operating rates anticipated by the capital work.

Usutu mill returned to profitability during the quarter as a result of a concerted profit improvement programme

and was bolstered by strong pricing and currency.

Average softwood pulp prices (NBSK) were up about US$40 compared to the prior quarter and hardwood

pulp prices increased by US$25 per ton. This will have a flow through effect in the quarter ahead and should

be bolstered by the currency moves.

Operating profit was reduced by the plantation fair value adjustment of US$22 million and major maintenance

and exceptional repair costs of US$18 million, resulting in an operating loss of US$16 million.

sappi limited – third quarter page 5

The rand rate was weaker during the quarter at R6.47 to the US dollar compared to R6.18 in the March

quarter and R6.37 a year earlier. The rate is currently approximately R7.00. The weaker rate will improve

export revenues and help reduce import competition in the domestic markets.

Work will begin on the project to expand chemical cellulose production at our Saiccor mill in the fourth quarter

and is expected to be completed in the third quarter 2008.

The project will expand capacity by 300,000 tons, 75,000 tons of which will replace existing higher cost

capacity. It will also substantially improve the environmental impact of the mill. The estimated cost of the

combined project is US$460 million

outlook

Our short term goal is to return to reasonable profitability next year and we have identified the steps we

believe can deliver this. We are confident that our North American and Southern African businesses will

return to operating profitability next quarter. For Europe we are making progress with cost reduction but are

unlikely to see much of the effect of price improvements we need before the end of the third calendar quarter.

We may also incur some one-off costs to effect cost improvements in the next six months in Europe.

The improvement of the group's cash flow remains a priority. The freeze implemented in April on capital projects

except those needed for maintenance of the business and short payback items will continue, providing us with

the flexibility to undertake step change projects from time to time such as the Saiccor expansion. We plan to

manage the Saiccor expansion and some lesser projects without increasing group debt.

The change in our marketing and control policies is beginning to work. We aim to achieve a meaningful

average price increase in Europe towards the end of the summer.

We expect the group to return to profitability in the next quarter, excluding fair value adjustments, and

thereafter to move towards attaining our longer term objectives.

On behalf of the Board

E van As

W Pfarl

Director

3 August 2006

sappi limited

(Registration number 1936/008963/06)

Issuer Code: SAVVI

JSE Code: SAP

ISIN Code: ZAE 000006284

sappi limited – third quarter page 6

operating review for the quarter (continued)

sappi limited – third quarter page 7

Certain statements in this release that are neither reported financial results nor other historical
information, are forward-looking statements, including but not limited to statements that are
predictions of or indicate future earnings, savings, synergies, events, trends, plans or objectives.
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), adverse changes in the markets for the group's products, consequences of
substantial leverage, changing regulatory requirements, unanticipated production disruptions,
economic and political conditions in international markets, the impact of investments,
acquisitions and dispositions (including related financing), any delays, unexpected costs or other
problems experienced with integrating acquisitions and achieving expected savings and
synergies and currency fluctuations. The company undertakes no obligation to publicly update
or revise any of these forward-looking statements, whether to reflect new information or future
events or circumstances or otherwise.

forward-looking statements

sappi limited – third quarter page 8

financial results

for the quarter and nine months ended June 2006

sappi limited – third quarter page 9

group income statement

sappi limited – third quarter page 10

Restated

Reviewed

Quarter

Nine months

ended

June 2006

June 2005

June 2006

June 2005

US$ million

change

US$ million

change

Sales

1,214

1,144

6.1

3,645

3,630

0.4

Cost of sales

1,143

1,070

3,283

3,263

Gross profit

74 (4.1)

362

367 (1.4)

Selling, general and

administrative expenses

267

259

(26)

(7)

108

Other expenses

181

229

Operating (loss) profit

(34)

(188)

81.9

(121)

Net finance costs

Net paid

100

Capitalised

–

(1)

Net foreign exchange

gains

(1)

(3)

(5)

(6)

Change in fair value of

financial instruments

(19)

(1)

(34)

Loss before tax

(69)

(197)

65.0

(19)

(175)

89.1

Taxation – current

– deferred

(17)

(23)

(43)

Net loss

(53)

(177)

70.1

(44)

(155)

71.6

Loss per share

(US cents)

(23)

(78)

(19)

(69)

Weighted average

number of shares

in issue (millions)

226.3

225.7

226.1

225.8

Diluted loss per share

(US cents)

(23)

(78)

(19)

(69)

Weighted average

number of shares

on fully diluted

basis (millions)

228.4

226.6

227.9

226.8

Note: Refer to notes to the group results (page 17) for Headline earnings and calculation thereof.

group balance sheet

sappi limited – third quarter page 11

Restated

Reviewed

June 2006

Sept 2005

US$ million

ASSETS

Non-current assets

4,118

4,244

Property, plant and equipment

3,215

3,333

Plantations

575

604

Deferred taxation

Other non-current assets

257

237

Current assets

1,476

1,645

Inventories

755

711

Trade and other receivables

552

567

Cash and cash equivalents

169

367

Total assets

5,594

5,889

EQUITY AND LIABILITIES

Shareholders’ equity

Ordinary shareholders’ interest

1,354

1,589

Non-current liabilities

2,578

2,547

Interest-bearing borrowings

1,637

1,600

Deferred taxation

356

367

Other non-current liabilities

585

580

Current liabilities

1,662

1,753

Interest-bearing borrowings

746

616

Bank overdraft

159

Other current liabilities

792

858

Taxation payable

116

120

Total equity and liabilities

5,594

5,889

Number of shares in issue at balance sheet date (millions)

226.5

225.9

group cash flow statement

sappi limited – third quarter page 12

group statement of recognised income and
expense

Restated

Reviewed

Quarter

Nine months

ended

June 2006

June 2005

June 2006

June 2005

US$ million

Operating (loss) profit

(34)

(188)

(121)

Depreciation, fellings and other amortisation

116

117

347

367

Other non-cash items (including impairment

charges)

(15)

164

(115)

161

Cash generated by operations

306

407

Movement in working capital

(97)

(110)

Net finance costs

(48)

(33)

(116)

(100)

Taxation paid

–

(1)

(12)

(40)

Dividends paid

–

(68)

Cash retained from operating activities

156

Cash effects of investing activities

(94)

(64)

(246)

(270)

(59)

(233)

(181)

Cash effects of financing activities

(150)

(129)

Net movement in cash and cash equivalents

(28)

(58)

(199)

(310)

Restated

Reviewed

Quarter

Nine months

ended

June 2006

June 2005

June 2006

June 2005

US$ million

Pension fund asset not recognised

(2)

–

(6)

–

Actuarial losses on pension and other post

employment benefit liabilities

(5)

–

(5)

–

Deferred taxation on above items

–

Valuation allowance against deferred tax asset

on actuarial losses

–

(62)

Exchange differences on translation of

foreign operations

(142)

(102)

(122)

(38)

Net expense recorded directly in equity

(149)

(102)

(132)

(100)

Net loss for the period

(53)

(177)

(44)

(155)

Total recognised expense for the period

(202)

(279)

(176)

(255)

notes to the group results

Basis of preparation

The condensed quarterly financial statements have been prepared in accordance with International
Financial Reporting Standards (IFRS). Sappi is reporting under IFRS for the first time for the year ending
September 2006. The date of first transition to IFRS is October 2004 and comparative results have
been restated accordingly. The condensed consolidated interim financial statements do not include all of
the information required for full annual financial statements.

These quarterly results have been prepared in accordance with IAS 34 (Interim financial reporting).
The accounting policies used in the preparation of the quarterly results are compliant with IFRS and
consistent with those used in the annual financial statements for September 2005, except as disclosed
below.

The preliminary results for the quarter have been reviewed in terms of International Standards on Review
Engagements by the group’s auditors, Deloitte & Touche. Their unqualified review report includes an
emphasis of matter that amendments to the interpretive guidance issued between the date of this
announcement and the finalisation of the financial statements for the year ending September 2006, may
result in changes to the restatements published. This report is available for inspection at the company’s
registered offices.

Effect of the first time adoption of IFRS

As discussed in Note 1, the group has adopted International Financial Reporting Standards (IFRS) in
preparing its consolidated financial statements for the year ending September, 2006. For purposes of
these interim financial statements, the group has developed accounting policies based on IFRS issued
to date that will be effective at our reporting date of September, 2006. IFRS 1, First-time Adoption of
International Financial Reporting Standards, requires that an entity develop accounting policies based on
the standards and related interpretations effective at the reporting date of its first IFRS financial
statements. IFRS 1 also requires that those policies be applied as of the date of transition to IFRS and
throughout all periods presented in the first IFRS financial statements. The accounting policies used in
these financial statements are subject to change up to the reporting date of our first IFRS financial
statements. Management does not believe the final accounting policies will change materially from those
utilised in the preparation of the accompanying interim financial statements.

The following exemptions in accordance with IFRS 1 were considered:

•

Business Combinations – IFRS 3

The group has elected not to retrospectively apply the requirements of IFRS 3 for Business
Combinations that occurred prior to October 2004.

•

Share based payments – IFRS 2

The group has applied the share based payment exemption therefore IFRS 2 is only applicable to
equity instruments granted after 7 November 2002 that were not vested by 1 January 2005.
Liabilities arising from cash-settled share-based payments settled after 1 January 2005 are subject
to IFRS 2. For instruments vesting on or after 1 January 2005, Sappi has recognised a charge in
the income statement and set up a separate category in shareholders’ equity for all share options
and awards, based on the fair value of the awards as calculated at the grant date.

•

The effects of changes in foreign exchange rates – IAS 21

Sappi has elected to apply the exemption in IFRS 1 which allows the cumulative translation
differences of all foreign operations to be reset to zero by transfer to distributable reserve at the date
of transition to IFRS which is October 2004.

sappi limited – third quarter page 13

Adjustments on adoption of IFRS

The adoption of IFRS led to changes in the Group’s financial position, financial performance and cash
flows. The significant differences between previously reported SA GAAP financial statements and IFRS
are as follows:

•

Employee benefits – IAS 19

Previously unrecognised actuarial employee benefit losses were recognised at October 2004,
resulting in an increase in pension and other post employment benefits liabilities and a
corresponding reduction in equity and deferred tax liability. These adjustments also led to a
reduction in employee benefit expense in profit for the period. Sappi has elected to adopt the policy
of recognising actuarial gains and losses in the period in which they occur. The gains and losses
are recognised outside of profit for the period in the statement of recognised income and expense
(SORIE). Items processed through SORIE are tax effected through SORIE. Part of the first-time
adoption of this method of accounting included a historic analysis of all pension fund movements to
determine the portion of our deferred tax balances that relate to SORIE.

•

Share based payments – IFRS 2

Sappi has recognised a charge in the income statement and established a separate category in
shareholders' equity for all share options and awards, based on the fair value of the awards as
calculated at the grant date. The cost of the share options and grants are reflected in the income
statement over the vesting period. This IFRS change had no impact on the comparative total
shareholders' equity as a Share Based Payment Reserve is created with the equal and opposite
amount included in retained earnings.

•

Financial instruments – IAS 39

A significant portion of our securitised receivables are now reflected on our balance sheet,
increasing trade and other receivables by US$268 million and short term debt by US$346 million
and decreasing other payables by US$78 million at September 2005. The related expense is no
longer reflected in S,G&A but is included under finance costs. This caused an increase in finance
costs and decrease in S,G&A of US$15 million for the year ended September 2005 (June 2005:
US$12 million).

Cash flow hedges on inter-company loans, accounted for in equity, no longer qualify for hedge
accounting under IAS 39. As a result these instruments are now recognised at fair value through
profit and loss.

•

The effects of changes in foreign exchange rates – IAS 21

Sappi has elected to apply the exemption in IFRS 1 which allows the cumulative translation
differences of all foreign operations to be reduced to zero at the date of transition to IFRS which is
October 2004. The Foreign Currency Translation Reserve (Non Distributable Reserve) was
transferred to retained earnings. This IFRS change has no impact on total shareholders’ equity.

There are no other accounting policy changes relevant to the first time adoption of IFRS.

•

Circular 9/2006 Transactions giving rise to adjustments to sales/purchases

The South African Institute of Chartered Accountants recently issued a circular on the treatment of
settlement discount in accordance with IFRS.

This circular clarifies the following IFRS interpretations:

•

Settlement/cash discounts allowed should be estimated at the time of sale and presented as a
reduction in sales.

•

Settlement/cash discounts received should be deducted from the cost of inventories, or cost of
sales.

Management has evaluated the impact of the above interpretations on the group’s results and the
impact was found to be minimal. The results have been adjusted accordingly for this circular.

sappi limited – third quarter page 14

notes to the group results (continued)

sappi limited – third quarter page 15

Reconciliation of previous SA GAAP to IFRS for shareholders’ equity

Reviewed

Year

Nine months

IFRS

ended

transition

Sept 2005

June 2005

Oct 2004

US$ million

Total equity presented under SA GAAP

1,881

1,867

2,157

Impact on retained earnings:

Recognition of previously unrecognised
actuarial losses – IAS 19

(340)

(284)

(300)

Deferred taxation impact of IAS 19 change

Share based payments – IFRS 2

(20)

(17)

(9)

Release of cash flow hedge reserve – IAS 39

(2)

Foreign Currency Translation Reserve reset to zero
at October 2004

244

244 244

Share based payment reserve – IFRS 2

17 9

Hedging Reserves – IAS 39

(13)

(10)

Foreign Currency Translation Reserve

(240)

(243)

(244)

Total equity and reserves presented under IFRS

1,589

1,619

1,950

Reconciliation of previous SA GAAP to IFRS for net (loss) profit

Reviewed

Year

Nine months

ended

Sept 2005

June 2005

US$ million

Net loss under SA GAAP

(213)

(180)

Reduction in expense due to recognition of actuarial
gains and losses – IAS 19

Deferred taxation impact of IAS 19

Share based payment expense – IFRS 2

(10)

(8)

Gains from cash flow hedges that do not qualify for
hedge accounting – IAS 39

Deferred taxation impact of IAS 39

(7)

(5)

Net loss under IFRS

(184)

(155)

IFRS cash flow statement impact

The reduction in employee benefit expense resulted in an increase in operating profit and a
corresponding decrease in non-cash items. Share based payment costs led to a decrease in operating
profit and an increase in non-cash items. The recognition of securitised debtors caused the relating
costs to be reflected under finance costs instead of included in operating profit. In addition related
movements are reflected in working capital and borrowings.

notes to the group results (continued)

sappi limited – third quarter page 16

IFRS impact on net debt

In accordance with IAS 39 a significant portion of our securitised receivables are now reflected
on our balance sheet, increasing trade and other receivables by US$268 million and short term
debt by US$346 million and decreasing other payables by US$78 million at September 2005.
This resulted in an increase in net debt of US$346 million from US$1,662 million to US$2,008 million
at September 2005.

IFRS impact on contingent liabilities

In accordance with IAS 39 securitised receivables are now reflected on our balance sheet. The
contingent liabilities disclosed at September 2005 included certain guarantees related to the
securitisation programme. The amount disclosed for September 2005 has been amended accordingly
to exclude these guarantees as the liablity is now disclosed on balance sheet.

Reconciliation of movement in shareholders’ equity

Restated

Reviewed

Nine months

ended

June 2006

June 2005

US$ million

Balance – beginning of year as reported

1,881

2,157

IFRS adoption (refer note 2)

(292)

(207)

Recognition of previously unrecognised actuarial losses – IAS 19

(340)

(300)

Deferred taxation impact of IAS 19 change

Translation differences

–

Balance – beginning of year restated

1,589

1,950

Total recognised expense for the period

(176)

(255)

Dividends paid

(68)

Share buybacks net of transfers to participants of the share

purchase trust

(15)

Share based payment reserve

Balance – end of period

1,354

1,619

sappi limited – third quarter page 17

Restated

Reviewed

Quarter

Nine months

ended

June 2006

June 2005

June 2006

June 2005

US$ million

Operating profit
Included in operating profit are

the following non-cash items:

Depreciation and amortisation

Depreciation of property,

plant and equipment

101

291

317

Other amortisation

–

101

292

318

Impairment of property, plant and

equipment

177

219

Impairment of other assets

–

281

300

540

Fair value adjustment gains on

plantations (included in cost of sales)

Changes in volume

Fellings

Growth

(21)

(16)

(56)

(49)

(1)

–

(1)

–

Changes in fair value

(8)

(44)

(25)

(8)

(45)

(25)

The above fair value adjustments have
been offset by silviculture costs

Headline earnings per share
Headline earnings per share (US cents) *

(20)

(5)

(14)

Weighted average number of shares
in issue (millions)

226.3

225.7

226.1

225.8

Diluted headline earnings per
share (US cents) *

(20)

(5)

(14)

Weighted average number of shares
on fully diluted basis (millions)

228.4

226.6

227.9

226.8

Calculation of Headline earnings *
Net loss

(53)

(177)

(44)

(155)

Profit (loss) on disposal of business
and property, plant and equipment

–

(2)

Write-off of assets

–

Impairment of property, plant and
equipment

165

207

Headline earnings

(45)

(11)

(31)

* Headline earnings disclosure is required by the JSE Limited.

sappi limited – third quarter page 18

notes to the group results (continued)

Restated

Reviewed

Quarter

Nine months

ended

June 2006

June 2005

June 2006

June 2005

US$ million

Capital expenditure

Property, plant and
equipment

213

221

Reviewed

June 2006

Sept 2005

US$ million

Capital commitments

Contracted but not provided

116

115

Approved but not contracted

135

198

251

313

Contingent liabilities

Guarantees and suretyships

56 *

Other contingent liabilities

* In accordance with IAS 39 securitised receivables are now reflected on our balance sheet. The contingent liabilities

disclosed at September 2005 included certain guarantees related to the securitisation programme. The amount

disclosed for September 2005 has been amended accordingly to exclude these guarantees as the liablity is now

disclosed on balance sheet.

supplemental information

sappi limited – third quarter page 19

definitions

Average – averages are calculated as the sum of the opening and closing balances for the relevant period

divided by two

* EBITDA – earnings before interest (net finance costs), tax, depreciation and amortisation

* EBITDA to sales – EBITDA divided by sales

Fellings – the amount charged against the income statement representing the standing value of the

plantations harvested

Headline earnings – as defined in Circular 7/2002 issued by the South African Institute of Chartered

Accountants, separates from earnings all items of a capital nature. It is not necessarily a measure of

sustainable earnings. It is a listing requirement of the JSE Limited to disclose headline earnings per share

NBSK – Northern Bleached Softwood Kraft pulp. One of the main varieties of market pulp, mainly produced

from spruce trees in Scandinavia, Canada and north eastern USA. The NBSK is a benchmark widely used

in pulp and paper industry for comparative purposes

* Net assets – total assets less current liabilities

* Net asset value – shareholders’ equity plus net deferred tax

* Net asset value per share – net asset value divided by the number of shares in issue at

balance sheet date

* Net debt – current and non-current interest-bearing borrowings, and bank overdrafts (net of cash,

cash equivalents and short-term deposits)

* Net debt to total capitalisation – Net debt divided by shareholders’ equity plus minority interest,

non-current liabilities, current interest-bearing borrowings and overdraft

* ROE – return on average equity. Net profit divided by average shareholders’ equity

* RONA – operating profit divided by average net assets

* RONOA – operating profit divided by average net operating assets. Net operating assets are total assets

(excluding deferred taxation and cash) less current liabilities (excluding interest-bearing borrowings

and bank overdraft)

* SG&A – selling, general and administrative expenses

* Silviculture costs – growing and tending costs of trees in forestry operations

* The above financial measures, other than headline earnings per share, are presented to assist our

shareholders and the investment community in interpreting our financial results. These financial measures

are regularly used and compared between companies in our industry.

supplemental information

sappi limited – third quarter page 20

additional information

Restated

Reviewed

Quarter

Nine months

ended

June 2006

June 2005

June 2006

June 2005

US$ million

Net loss to EBITDA

(1)

reconciliation

Net loss

(53)

(177)

(44)

(155)

Net finance costs

Taxation – current

– deferred

(17)

(23)

(43)

Depreciation

101

291

317

Amortisation (including fellings)

EBITDA

(1)

(71)

421

246

Restated

Reviewed

June 2006

Sept 2005

US$ million

Net debt (US$ million)

(2)

2,222

2,008

Net debt to total capitalisation (%)

(2)

47.4

40.9

Net asset value per share (US$)

(2)

7.24

8.35

(1)

In connection with the U.S. Securities Exchange Commission (“SEC”) rules relating to “Conditions for Use
of Non-GAAP Financial Measures”, we have reconciled EBITDA to net profit rather than operating profit.
As a result our definition retains other income/expenses as part of EBITDA.

We use EBITDA as an internal measure of performance and believe it is a useful and commonly used
measure of financial performance in addition to operating profit and other profitability measures under
IFRS. EBITDA is not a measure of performance under IFRS. EBITDA should not be construed as an
alternative to operating profit as an indicator of the company’s operations in accordance with IFRS.
EBITDA is also presented to assist our shareholders and the investment community in interpreting our
financial results. This financial measure is regularly used as a means of comparison of companies in our
industry by removing certain differences between companies such as depreciation methods, financing
structures and taxation regimes. Different companies and analysts may calculate EBITDA differently, so
making comparisons among companies on this basis should be done very carefully.

(2)

Refer to page 19, Supplemental Information for the definition of the term.

supplemental information

sappi limited – third quarter page 21

regional information

Quarter

Nine months

ended

June 2006

June 2005

June 2006

June 2005

Metric tons

(000’s)

change

(000’s)

change

Sales

Fine Paper –

North America

349

324

7.7

1,058

1,005

5.3

Europe

576

538

7.1

1,824

1,754

4.0

Southern Africa

16.2

237

215

10.2

Total

1,004

930

8.0

3,119

2,974

4.9

Forest Products – Pulp and paper

operations

368

374

(1.6)

1,070

1,154

(7.3)

Forestry

operations

394

455

(13.4)

1,142

1,205

(5.2)

Total

1,766

1,759

0.4

5,331

5,333

(0.0)

Restated

Reviewed

Quarter

Nine months

ended

June 2006

June 2005

June 2006

June 2005

US$ million

change

US$ million

change

Sales

Fine Paper –

North America

354

338

4.7

1,066

1,034

3.1

Europe

536

498

7.6

1,625

1,643

(1.1)

Southern Africa

13.0

238

224

6.3

Total

968

905

7.0

2,929

2,901

1.0

Forest Products – Pulp and paper

operations

224

217

3.2

651

669

(2.7)

Forestry

operations

–

8.3

Total

1,214

1,144

6.1

3,645

3,630

0.4

sappi limited – third quarter page 22

supplemental information

Restated

Reviewed

Quarter

Nine months

ended

June 2006

June 2005

June 2006

June 2005

US$ million

change

US$ million

change

Operating profit

Fine Paper –

North America

(14)

(199)

93.0

(23)

(211)

89.1

Europe

(12)

–

(50.0)

Southern Africa

(5)

–

(7)

–

Total

(18)

(210)

91.4

(

(165)

94.5

Forest Products

(16)

–

87.5

Corporate

–

(1)

–

(7)

(4)

(75.0)

Total *

(34)

(188)

81.9

(121)

–

Earnings before interest, tax,

depreciation and amortisation

charges

Fine Paper –

North America

(166)

–

(106)

–

Europe

27.0

161

190

(15.3)

Southern Africa

(1)

–

(68.8)

Total

(125)

–

232

100

132.0

Forest Products

(63.6)

195

150

30.0

Corporate

–

(1)

–

(6)

(4)

(50.0)

Total *

(71)

–

421

246

71.1

Net operating assets

Fine Paper –

North America

1,134

1,294

(12.4)

1,134

1,294

(12.4)

Europe

1,900

1,761

7.9

1,900

1,761

7.9

Southern Africa

158

172

(8.1)

158

172

(8.1)

Total

3,192

3,227

(1.1)

3,192

3,227

(1.1)

Forest Products

1,246

1,263

(1.3)

1,246

1,263

(1.3)

Corporate and other

(83.0)

Total

4,447

4,543

(2.1)

4,447

4,543

(2.1)

* Operating profit and EBITDA for the nine months ended June 2005 reduced by US$222 million in respect of asset impairments and

asset impairment reversals.

supplemental information

sappi limited – third quarter page 23

summary rand convenience translation

Restated

Quarter

Nine months

ended

June

2006

2005

change

2006

2005

change

Sales (ZAR million)

7,849

7,292

7.6

23,339

22,409

4.2

Operating (loss) profit (ZAR million)

(220)

(1,198) 81.6

474

(747)

–

Net loss (ZAR million)

(343)

(1,128)

69.6

(282)

(957)

70.5

EBITDA * (ZAR million)

530

(453)

–

2,696

1,519

77.5

Operating (loss) profit to sales (%)

(2.8)

(16.4)

2.0

(3.3)

EBITDA * to sales (%)

6.8

(6.2)

11.6

6.8

Operating (loss) profit to average

net assets (%)

(3.3)

(17.4)

2.3

(3.5)

EPS (SA cents)

(149)

(497)

70.0

(122)

(426)

71.4

Headline EPS (SA cents) *

(129)

(32)

(303.1)

(90)

154

–

Net debt (ZAR million) *

15,932

14,172

12.4

Net debt to total capitalisation (%) *

47.4

44.0

Cash generated by operations

(ZAR million)

433

593

(27.0)

1,959

2,512

(22.0)

Cash retained from operating

activities (ZAR million)

226

994 (77.3)

549

(84.9)

Net movement in cash and cash

equivalents (ZAR million)

(181)

(370)

51.1

(1,274)

(1,914)

33.4

* Refer to page 19, Supplemental Information for the definition of the term.

exchange rates

June

March

Dec

Sept

June

2006

2005

Exchange rates:

Period end rate: US $1 = ZAR

7.1700

6.1655

6.3275

6.3656

6.7041

Average rate for the Quarter: US $1 = ZAR

6.4658

6.1858

6.4795

6.5289

6.3738

Average rate for the YTD: US $1 = ZAR

6.4031

6.3334

6.4795

6.2418

6.1732

Period end rate: EUR 1 = US$

1.2789

1.2119

1.1843

1.2030

1.2097

Average rate for the Quarter: EUR 1 = US$

1.2570

1.1983

1.1915

1.2139

1.2678

Average rate for the YTD: EUR 1 = US$

1.2191

1.1964

1.1915

1.2659

1.2811

The financial results of entities with reporting currencies other than the US Dollar are translated into

US Dollars as follows:

– Assets and liabilities at rates of exchange ruling at period end; and

– Income, expenditure and cash flow items at average exchange rates.

sappi limited – third quarter page 24

note:(1 ADR = 1 sappi share)

sappi ordinary shares

ADR price (NYSE TICKER: SPP)

1 Apr

2003

1 Jul
2003

1 Oct

2003

1 Jan

2004

1 Apr

2004

1 Jul
2004

1 Oct

2004

1 Jan

2005

1 Apr

2005

1 Jul
2005

1 Oct

2005

1 Jan

2006

1 Jul
2006

1 Apr

2006

2 Aug
2006

1 Apr

2003

1 Jul
2003

1 Oct

2003

1 Jan

2004

1 Apr

2004

1 Jul
2004

1 Oct

2004

1 Jan

2005

1 Apr

2005

1 Jul
2005

1 Oct

2005

1 Jan

2006

120

100

1 Jul
2006

1 Apr

2006

2 Aug
2006

this report is available on the Sappi website

www.sappi.com

Other interested parties can obtain printed copies of this report from:

South Africa:

United States

United Kingdom:

Computershare Investor

ADR Depository:

Capita Registrars

Services 2004 Limited

The Bank of New York

The Registry

70 Marshall Street

Investor Relations

34 Beckenham Road

Johannesburg 2001

PO Box 11258

Beckenham, Kent

PO Box 61051

Church Street Station

BR3 4TU, DX 91750

Marshalltown 2107

New York, NY 10286-1258

Beckenham West

Tel +27 (0)11 370 5000

Tel +1 610 382 7836

Tel +44 (0)208 639 2157

Printed on Sappi Avalon Supreme Matt 250g/m

and 150g/m

www.sappi.com

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: August 8, 2006

SAPPI LIMITED,

by
/s/ D. J. O'Connor

Name: D. J. O'Connor
Title: Group Secretary