2007 Annual Report - Sappi

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