2007 Annual Report - Sappi

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Chief financial officer’s report continued The 495,000 ton decrease in timber sold to third parties (US$28 million in monetary terms) was more than off-set by the 159,000 tons increase in sales of pulp and paper (US$151 million) at the much higher prices per ton commanded by pulp and paper products compared to timber. The net impact of the changes in volume compared to 2006 was US$123 million. The Forest Products business has benefited from higher international pulp prices and better pricing in the local South African market (US$175 million). This, together with improved prices in the South African Fine Paper business (US$41 million), has been offset by lower prices in Europe (US$35 million) and North America (US$9 million) compared to 2006. The net impact of price changes was to increase sales in 2007 by US$172 million. The Euro strengthened substantially against the US Dollar in 2007 (from an average of Euro/US Dollar 1.2315 in 2006 to 1.3336 in 2007) while the Rand weakened on average over the year against the US Dollar in 2007 (from an average ZAR6.6039 in 2006 to ZAR7.1741 vs the US Dollar) despite ending up stronger at the end of 2007 compared to the end of 2006. The net impact of these currency movements was to increase sales in US Dollars by US$68 million in 2007. US$ million 2007 2006 2005 Operating profit 383 125 (109) Plantation fair value price adjustment (54) (34) (60) Asset impairments/ (reversals) – (31) 231 Restructuring and closure costs/(reversal) (7) 50 21 Fire, flood, storm and related events 17 9 – Pension restructuring gain – (28) – Sale of fixed assets (26) – – Special items before tax (70) (34) 192 Operating profit excluding special items 313 91 83 Operating profit excluding special items has showed a steady improvement since its low point in 2005, as is reflected in the bar chart below: Operating profit In considering operating profit, we believe that it is useful to highlight special items. Special items are those items which management believes are material in nature or amount to the year’s results and require separate disclosure in accordance with IAS 1 paragraph 86. Such items would generally include profit and loss on disposal of property, investments and businesses; asset impairments; restructuring charges; natural disasters, and non-cash gains or losses on the price fair value adjustment of plantations. The table below shows the items classified as special items in each of the past three years and the reconciliation of operating profit to operating profit excluding special items: 36 sappi limited | 07 | annual report
Divisional contributions to operating profit excluding special items in the last three years are set out in the table below: The US$169 million (6,6%) increase in variable costs is analysed as follows: Operating profit excluding special items US$ million 2007 2006 2005 Fine Paper 87 (23) 17 – North America 22 (30) (56) – Europe 56 13 84 – South Africa 9 (6) (11) Forest Products 224 115 72 Corporate 2 (1) (6) Total 313 91 83 The underlying reasons for the movement in the group’s operating profit excluding special items in 2006 and 2007 can be explained as follows (the green bars indicate an improvement whereas the red bars indicate deterioration compared to the previous year): Exchange US$ million Volume Cost rate Total Fine Paper 75 64 81 220 North America 43 3 – 46 Europe 20 38 98 156 South Africa 12 23 (17) 18 Forest Products (18) – (33) (51) Pulp & Paper 4 (19) (28) (43) Forestry (22) 19 (5) (8) Total 57 64 48 169 The higher volume of sales by Fine Paper (159,000 tons) in 2007 contributed to the increase in variable costs (US$75 million). This was partly off-set by the lower costs associated with the lower timber sales to third parties (US$22 million) in Forest Products – the net impact on the 2007 variable costs of these volume changes was US$57 million. The net impact of input cost price increases was US$64 million and these arose largely in the European (US$38 million) and South African Fine Paper (US$23 million) businesses and in the Southern African forestry operations. The main causes of these increases were wood and energy price increases. The cost of wood per ton of product sold in Europe and South Africa increased by 44% and 22% respectively while in North America wood prices returned to 2005 levels. Exchange rates contributed US$48 million to the increase in our variable costs in 2007. The major impact was due to the weakening of the US Dollar against the Euro which led to a US$98 million increase in our European costs when translated into US Dollars. The weaker on average South African Rand had the effect of showing reduced costs in US Dollar terms, for our South African businesses, although the costs in Rands actually increased by R223 million. Operating profit excluding special items improved by US$222 million to US$313 million in 2007. The major reasons for this improvement are the US$363 million increase in sales discussed in paragraph 2.1 above, partly off-set by a US$169 million increase in variable costs. Variable costs are those costs that vary with production volumes. Our major variable costs are wood, energy, pulp and chemicals. Fixed costs declined in 2006 and 2007 compared to 2005 as a result of specific cost reduction initiatives, particularly in Europe and North America. In 2007 in North America fixed costs declined US$19 million. In Europe fixed costs declined by €38 million in local currency, however in US Dollar terms increased US$8 million due to the impact of exchange rates on translation. Fixed costs in the South African businesses, while increasing in SA Rand, declined US$3 million at Sappi Forest Products and increased US$3 million at Sappi Fine Paper South Africa. The increases in South Africa were mainly in labour costs and maintenance. sappi limited | 07 | annual report 37
Page 1 and 2: annual report 2007
Page 3 and 4: Our business Sappi is a global pape
Page 5 and 6: Our top risks These risks are furth
Page 7 and 8: Financial targets and performance*
Page 9 and 10: Our Charter commitments Examples of
Page 11 and 12: Business structure Johannesburg Asi
Page 13 and 14: Our brands and products Coated pape
Page 15 and 16: Non-executive directors continued D
Page 17 and 18: Divisional and corporate management
Page 19 and 20: In Europe we face major challenges.
Page 21 and 22: We expect to continue our improving
Page 23 and 24: Q: How will you improve delivery on
Page 25 and 26: Overview Description The main produ
Page 27 and 28: A major feature of the year has bee
Page 29 and 30: In the year ahead, we will continue
Page 31 and 32: Overview The Forest Products busine
Page 33 and 34: Value added statement for the year
Page 35 and 36: Sappi has a global insurance struct
Page 37: Sales Sales volume (in metric tons)
Page 41 and 42: The impact of these changes on oper
Page 43 and 44: Cash flow analysis In the table bel
Page 45 and 46: project and again aim to fund this,
Page 47 and 48: In 2006, both Standard & Poor’s (
Page 49 and 50: y certain of the individual direct
Page 51 and 52: Not restated for IFRS* September Se
Page 53 and 54: September September September Septe
Page 55 and 56: Element/Best practice Sappi applica
Page 57 and 58: The board of directors The basis fo
Page 59 and 60: Our compensation philosophy is base
Page 61 and 62: stakeholders with whom they interac
Page 63 and 64: Auditor’s report Independent audi
Page 65 and 66: Directors’ report for the year en
Page 67 and 68: Directors and secretaries The names
Page 69 and 70: Group balance sheet at September 20
Page 71 and 72: Group statement of recognised incom
Page 73 and 74: Group balance sheet in Rands conven
Page 75 and 76: Notes to the group annual financial
Page 77 and 78: Fair value hedge A hedge of the exp
Page 79 and 80: (ii) Associates The results and ass
Page 81 and 82: • it transfers (or it assumes an
Page 83 and 84: 2.3.8 Inventories Inventories are a
Page 85 and 86: 2.3.13 Plantations Plantations are
Page 87 and 88: the year that are declared after th
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Owner-occupied investment propertie
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into account, unadjusted current ma
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The group is required to record pro
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second where a share-based payment
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3. Segment information continued Sa
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US$ million 2007 2006 4.1 Operating
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US$ million 2007 2006 6. Taxation c
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7. Earnings per share and headline
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US$ million 2007 2006 10. Property,
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2007 2006 US$ million Assets Liabil
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US$ million 2007 2006 12. Deferred
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14. Joint ventures and associates c
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US$ million 2007 2006 17. Trade and
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17. Trade and other receivables con
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19. Reconciliation of changes in eq
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US$ million 2007 2006 21. Interest-
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21. Interest-bearing borrowings con
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23. Provisions continued September
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US$ million 2007 2006 24. Notes to
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US$ million 2007 2006 27. Contingen
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28. Post-employment benefits - pens
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Europe US$ million Southern Africa
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29. Post-employment benefits other
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30. Share-based payment The Sappi L
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30. Share-based payment continued T
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30. Share-based payment continued T
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31. Financial Instruments The group
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31. Financial Instruments continued
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33. Events after Balance Sheet date
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35. Summary of differences between
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36. New United States accounting st
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37. Directors’ remuneration conti
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38. Directors’ interests The foll
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M R Thompson (1) E van As Total 200
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M R Thompson (1) E van As Total 200
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Company auditor’s report Independ
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Condensed company balance sheet at
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Notes to the condensed company fina
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Investments at September 2007 Share
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Non-GAAP financial definitions The
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- the general authority shall only
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corporate governance requirements.
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Franklin Abraham Sonn (68) BA Hons,
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Proxy form for annual general meeti
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Forward looking statements Certain
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