2007 Annual Report - Sappi

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