2007 Annual Report - Sappi

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Chief financial officer’s report continued Our total operating costs, including special items, for the past three years are summarised in the table below: Operating costs US$ million 2007 2006 2005 Delivery costs 453 441 451 Variable costs 2,685 2,516 2,426 Fixed costs 1,808 1,799 1,934 Impairments/(reversal) – (31) 231 Restructuring and closure costs (7) 50 21 Plantation price fair value adjustment (54) (34) (60) Other 36 75 124 Total 4,921 4,816 5,127 Important operating indicators Our important operating indicators are derived from the cashflows we need to generate in order to earn our cost of capital and these indicators have generally shown improvement over the past two years. However, performance is still well short of the operating targets we have set for ourselves in relation to some of those indicators. This is indicated in the table to the right. Operating Target 2007 2006 2005 Indicator % % % % Operating profit to sales – 7.2 2.5 (2.2) Operating profit excluding special items to sales 12 5.9 1.8 1.7 Operating profit excluding special items to average net assets 12 7.6 2.3 1.9 EBITDA excluding special items to sales – 13.0 9.8 10.1 We monitor these indicators carefully and also use them to compare our operating performances to that of our peers. Major sensitivities Some of the more important factors which impact the group’s operating profit, based on anticipated revenue and cost levels, are summarised in the table below. Sappi Sappi Sappi Fine Paper Fine Paper Fine Paper North South Fine Forest US$ million Europe America Africa Paper Products Group 1% change in volume 9 6 1 16 6 22 1% change in price 24 17 4 45 13 58 1% change in variable cost 14 9 2 25 5 30 1% change in pulp prices 5 (2) 1 4 (4) – 1% change in fixed costs (excl. depreciation) 5 3 1 9 3 12 1% change in SG&A 1 1 – 2 – 2 1% change in labour cost 4 3 1 8 2 10 1US$ change in energy input costs 4 1 – 5 1 6 38 sappi limited | 07 | annual report
The impact of these changes on operating profit assumes all other factors remain the same and does not take into account potential management interventions to mitigate negative impacts or enhance benefits. As the table shows, the impact on the individual businesses may be different. For example changes in international pulp prices affect Forest Products (which is a net seller of pulp) and the European business (which is a net purchaser of pulp) in opposite ways. Operating profit is most sensitive to changes in the prices of our products. Finance costs Net finance costs for the year were US$134 million compared to US$130 million in 2006 and $80 million in 2005. These figures are further analysed as follows: US$ million 2007 2006 2005 Interest paid 173 162 161 Interest earned (21) (26) (36) Finance costs capitalised (14) (2) (1) Net foreign exchange gains (13) (7) (5) Net movement on marking-to-market of financial instruments 9 3 (39) Net finance costs 134 130 80 Net interest paid in fiscal 2007 was US$152 million compared to US$136 million in 2006. The increase was mainly due to the higher average level of borrowings in 2007 compared to 2006. The much higher finance costs capitalised in 2007 relate to the Saiccor expansion project in South Africa. During 2007 US$247 million was spent on the project in addition to the US$32 million spent in 2006. A further US$236 million is expected to be spent in fiscal 2008 (US$232 million) and 2009. Finance costs will be capitalised until the plant is ready for use which is expected to be in the third quarter of fiscal 2008. The group’s policy is to identify foreign exchange risks immediately as they arise and to cover these risks to the functional currency of the operation where the risk lies. The majority of the group’s foreign exchange exposures are covered centrally by the group Treasury which nets the internal exposures and hedges the residual exposure with third party banks. Due mainly to the timing of the netting process, some residual foreign exchange results arise and these results are disclosed in net finance costs as net foreign exchange gains. The “net movement on marking-to-market of financial instruments” relates to the net impact of currency and interest rate movements after hedge accounting for certain interest rate and currency swaps the group has entered into in order to swap US$857 million fixed rate debt to floating rate and in order to manage the interest and currency exposure on US$350 million of cross border inter-company loans. Taxation US$ million 2007 2006 2005 Profit (loss) before taxation Profit-making entities 424 268 207 Loss-making entities (175) (273) (396) Total 249 (5) (189) Expected tax charge 68 (13) (109) Tax rate reductions (19) (1) (13) Net effect of profits and losses not taxed (1) 3 93 Secondary Tax on Companies (“STC”) 8 9 8 Other (9) 1 16 Taxation charge (benefit) 47 (1) (5) Effective tax rate 19% 15% 3% The expected tax charge, which is derived by applying the average statutory tax rate applicable to our profit and loss making tax entities respectively, was favourably impacted in 2007 by the announced tax rate reductions in Germany and The Netherlands. Furthermore certain of the group’s profits are not taxed as a result of losses carried forward or favourable permanent differences whilst, on the other hand, relief was not taken on the tax losses of certain loss-making entities due to management’s judgement that these tax losses are not currently recoverable. The Secondary Tax on Companies of US$8 million in 2007 relates to South African tax on the group dividend paid during the year at a rate of 12,5%. sappi limited | 07 | annual report 39
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 and 38: Sales Sales volume (in metric tons)
Page 39: Divisional contributions to operati
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
Page 89 and 90: Owner-occupied investment propertie
Page 91 and 92:
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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