2007 Annual Report - Sappi

Chairman’s statement continued
report that we are largely on track to achieve that. The nominal
increase in debt between 2006 and 2007 is entirely because
of the translation difference in our Rand and Euro debt into
US Dollars – the actual debt in local currency declined slightly.
We have applied rigorous hurdles to capital expenditure and
will continue to do so going forward. This has allowed us to
proceed with the Saiccor project and will allow us to invest in
the future into value creating step-change projects from time
to time, rather than a myriad of small investments. The final
cost of the Saiccor project, which in purchasing currencies is
approximately 9% over budget, may show a larger increase
when translated to US Dollars on completion.
In the year we generated US$585 million of cash from operations
– an increase of US$189 million on the previous year. Despite the
growth in our businesses, working capital declined slightly, and
debt levels remained essentially unchanged except for currency
movement. In view of the improved operating performance and
the debt levels, the board decided to declare an increased
dividend of 32 US cents (2006: 30 US cents) a share to be paid
in January 2008.
Sustainability
We will publish our third sustainability report at the same time
as this annual report to give our stakeholders greater insight
into our approach to sustainability, our achievements and the
challenges we face. We manage sustainability as an integral
part of our business processes and we strive to be a reliable,
responsible corporate citizen. In 2005, we formalised these
values in our Sustainable Development Charter which sets
out clearly defined, groupwide commitments. Our sustainability
report describes progress against these commitments.
Particular areas of focus of the group are reducing our specific
consumption of energy and increasing our use of renewable
sources of energy, and we are making good progress.
Looking forward
We expect continued growth in demand for coated fine paper
and we expect the supply/demand position to tighten further.
In assessing the supply/demand balance, one has to recognise
that there are seasonal demand patterns. Our customers
demand regular, uninterrupted supply of paper throughout the
year. In the coated fine paper market much of this product is
made to order and to measure and if we were to run at 100%
capacity, seven days a week, 52 weeks of the year, we would
be unable to meet demand in the busy season or would
alternatively have to build significant volumes of inventory
without knowing the order specifications in the slack seasons.
We aim to run our business to our customers’ needs in both the
busy and the slack seasons.
We aim to earn our cost of capital when our operating rate
reaches the 90% level and we recognise that we will, in the
busy season, run at close to 100% as we often have. However,
we cannot hope to average that rate.
We have to manage the massive cost rises which we and the
industry have faced in the past years, and we have to widen
our margins if we are going to prosper. There may be some
significant consolidation activities in our sector and we have
already seen the announcement of one such transaction in
North America – there may be more in Europe. Sappi will
consider all the opportunities which will add value to our
shareholders, but we will not overpay, nor will we close viable
paper machines which we need in the future. In spite of having
grown rapidly by acquisition in the 1990s, Sappi has also
closed 15 paper machines and two pulp mills, taking one million
tons of paper capacity out of the market. Those units have
been scrapped.
In the year ahead we believe there will be opportunities to
improve our margins through better control of our sales and
marketing efforts, and by focusing on cost control. The start-up
of the Saiccor expansion in the second quarter of 2008 will
have a significant improvement in our profitability, but the results
will only be seen towards the end of this financial year. There
will be some increase in net debt as the expansion nears
completion over the next two quarters, but it should return to
current levels by the end of the financial year. We expect to
continue our improving profit trends and to be achieving our
target return-on-net-assets’ objectives by the end of the current
financial year, although not for the full year.
There are a number of organic growth opportunities for our
business, and Ralph Boëttger expands on those in the interview
with him in the following section.
Appreciation
I will be retiring from the board at the annual general meeting in
March 2008. After nearly 30 years with the Sappi group, I have
a huge number of people in the company and in the industry,
to thank for support, advice and camaraderie over the period.
In Sappi I have worked with many impressive, dedicated people
who helped build this company into the force it is today. I would
like to thank each and every one of the Sappi people for their
dedication to Sappi and for their support and hard work. The
past few years have been very difficult, but they are seeing the
benefits of their labours again, and I am sure that the future will
once again be buoyant and positive.
The current Sappi board is made up of experienced business
people of many nationalities from around the world with varied
18
sappi limited | 07 | annual report