2008 Annual report - Sappi

More documents

Recommendations

Info

Danie Cronjé | chairman Ralph Boëttger | chief executive officer Letter to shareholders from the chairman and chief executive officer Overview The operating performance of Sappi improved during the year. Operating profit excluding special items in the second half of the year was, however, flat compared to the second half of 2007, reflecting worsening macro-economic conditions and rising input costs. We had a good performance from our North American businesses but continued underperformance from Europe, which generated the same level of profit, excluding special items, as in 2007. As a result of the North American performance, EBITDA excluding special items for the Fine Paper business increased to 62% of the group total from 56% in 2007. Strategy review The group completed a strategy review during the year. Our main focus was the need to improve profitability and shareholder returns using the key measurement of return on capital employed. Particular emphasis was placed on restoring the level of profitability in Europe and strengthening the balance sheet. We identified three key issues that in our opinion had prevented a return to acceptable profitability in Europe over several years.These were overcapacity, the fragmented structure of the market, and the strong Euro/US Dollar exchange rate. We concluded that since Sappi’s European business is the leader in the European coated paper market with a strong customer base, good brands and products, as well as some of the most efficient manufacturing assets, and is Sappi’s largest regional investment, we should be proactive in doing what we could to improve operating conditions and profitability. Strategic actions After exploring various options, Sappi entered into an agreement to acquire the coated graphic paper business of M-real, for J750 million. The transaction is expected to be completed at the end of December 2008. We will acquire approximately 1.9 million tons of paper capacity, increasing our European paper capacity to about 4.4 million tons and our market share of coated fine paper in Europe from around 18% to 30%. In our opinion this acquisition will bring about meaningful changes to the structure of the European coated fine paper market and allow us to achieve much improved returns. Sappi has reduced its coated fine paper capacity by 190,000 tons by closing the Blackburn Mill in the United Kingdom and the Maastricht Mill Paper Machine No 5 in The Netherlands. Together with closures announced by other producers, including closures of 640,000 tons announced by M-real, we expect a total coated fine paper capacity reduction of over 1.2 million tons before April 2009, which represents about 11% of current 22
sappi We are of the opinion that successful implementation of our strategic initiatives coupled with capacity closures in Europe and input cost reductions across all our businesses will place the group in a good position to face the uncertainties of the year ahead. production capacity. The weakening of the Euro relative to the US Dollar should also help market dynamics by improving the margins on exports from Europe and reducing the threatof imports. Sappi has financed the M-real transaction with J500 million of equity with the balance in long-term debt (mainly in the form of vendor loan notes), which will therefore strengthen our balance sheet ratios. The credit rating agencies consulted prior to announcing the transaction, confirmed their ratings with a stable outlook subsequent to the announcement of the acquisition and the related financing. There are further details of the acquisition on page 32. A key element of our strategy in the Southern African business was the completion of the expansion at our Saiccor Mill, which has increased the annual capacity of chemical cellulose by 225,000 tons to 800,000 tons reinforcing our leadership in this market. As part of our strategy, Sappi will also invest in plantations to increase its low-cost fibre base to provide a platform for future growth. We plan to establish about 150,000 hectares of plantations in Southern Africa over the next five to 10 years. In North America, we will continue to focus on customer service and reliability, improved product design and operating and cost efficiencies, which have been key to our improved performance over the last two years. Regional operating performance The performance of the North American business was the best since 2000. Sales increased strongly as a result of good increases in prices for paper and pulp. Unfortunately input costs also rose but improved product design and operating efficiency, served to offset some of the input cost pressure. Our European business experienced continued low prices for coated fine paper but reversed this trend in the final months of the year as announced price increases were realised. Management did well to hold operating profit at the same level as last year in spite of a weak pricing environment and sharp input cost increases. particular international pulp prices were very strong for most of the year although they started to decline in the final quarter. Production volumes were unfavourably impacted by the expansion project at Saiccor Mill and a refurbishment project at Usutu Mill, both of which are now behind us. As with our offshore operations, raw material input costs increased sharply during the year. In addition, the South African business also had to contend with high employee costs, which continue to rise faster than inflation. Our international sales network, Sappi Trading, achieved good margins on exports of all the group’s products around the world. The joint venture in China, in which we have a 34% stake, performed profitably during the year and achieved good returns. Group financial performance The group’s operating profit excluding special items increased from US$313 million in 2007 to US$366 million in 2008. The return on capital employed of 9.1%, however, fell well short of our target of 12%. Special items for the year resulted in a reduction in operating profit of US$52 million. These items related primarily to the charges associated with the European capacity closures and an impairment of the Usutu Mill, and were partly offset by favourable plantation price fair value adjustments. Basic earnings per share for the year totalled 45 US cents after an unfavourable impact of special items of approxi - mately 30 US cents compared to 89 US cents last year, which included a favourable impact of approximately 22 US cents from special items. Managing cash flow and liquidity remained a top priority as the turmoil in financial markets deepened through the year. Following the completion of the Saiccor Mill project in September 2008, we have been able to reduce our capital expenditure to only those items necessary for the continued health of the business, and certain high-return projects including energy conservation and energy self-sufficiency. We had a reasonably good year in Southern Africa, but not as good as 2007. Prices for all our products improved, and in Our net debt at the end of the year stood at US$2.4 billion, substantially lower than at the end of the third quarter // 2008 Annual report 23
Page 1 and 2: annual report 2008
Page 3 and 4: sappi Our report in overview In pro
Page 5 and 6: sappi Our performance The group’s
Page 7 and 8: sappi Target Target Net debt to tot
Page 9 and 10: sappi Our score on the DJSI World D
Page 11 and 12: sappi People continued Our commitme
Page 13 and 14: sappi Our business structure Johann
Page 15 and 16: sappi Pulp Paper pulp is the main r
Page 17 and 18: sappi Ideas that matter Print remai
Page 19 and 20: sappi Objectives for 2009 Meaningf
Page 21 and 22: sappi Deenadayalen (Len) Konar // (
Page 23: sappi Divisional and corporate mana
Page 27 and 28: sappi input cost reductions across
Page 29 and 30: sappi Q // Will the integration of
Page 31 and 32: sappi Sappi Fine Paper Mills/ Capac
Page 33 and 34: sappi deliver excellent service and
Page 35 and 36: sappi Transaction funding overview
Page 37 and 38: sappi Sappi Forest Products Mills/
Page 39: sappi Demand and prices in the inte
Page 42 and 43: Risk management Our top risks These
Page 44 and 45: Risk management // continued Risk m
Page 46 and 47: Chief financial officer’s report
Page 60 and 61: Five year review Not restated for I
Page 62 and 63: Share statistics at September 2008
Page 64 and 65: Corporate governance We are committ
Page 66 and 67: Corporate governance // continued E
Page 68 and 69: Corporate governance // continued A
Page 70 and 71: Corporate governance // continued r
Page 72 and 73: Compensation report Compensation co
Page 74 and 75:
Annual financial statements for the
Page 76 and 77:
Directors’ approval The directors
Page 78 and 79:
Directors’ report // continued fo
Page 80 and 81:
Group income statement for the year
Page 82 and 83:
Group cash flow statement for the y
Page 84 and 85:
Group income statement in Rands con
Page 86 and 87:
Group cash flow statement in Rands
Page 88 and 89:
Notes to the group annual financial
Page 90 and 91:
Page 92 and 93:
Page 94 and 95:
Page 96 and 97:
Page 98 and 99:
Page 100 and 101:
Page 102 and 103:
Page 104 and 105:
Page 106 and 107:
Page 108 and 109:
Page 110 and 111:
Page 112 and 113:
Page 114 and 115:
Page 116 and 117:
Page 118 and 119:
Page 120 and 121:
Page 122 and 123:
Page 124 and 125:
Page 126 and 127:
Page 128 and 129:
Page 130 and 131:
Page 132 and 133:
Page 134 and 135:
Page 136 and 137:
Page 138 and 139:
Page 140 and 141:
Page 142 and 143:
Page 144 and 145:
Page 146 and 147:
Page 148 and 149:
Page 150 and 151:
Page 152 and 153:
Page 154 and 155:
Page 156 and 157:
Page 158 and 159:
Page 160 and 161:
Page 162 and 163:
Page 164 and 165:
Page 166 and 167:
Page 168 and 169:
Page 170 and 171:
Page 172 and 173:
Page 174 and 175:
Page 176 and 177:
Page 178 and 179:
Page 180 and 181:
Page 182 and 183:
Page 184 and 185:
Condensed Sappi Limited company inc
Page 186 and 187:
Condensed Sappi Limited company cas
Page 188 and 189:
Notes to the condensed Sappi Limite
Page 190 and 191:
Glossary General definitions bleach
Page 192 and 193:
Glossary // continued Non-GAAP fina
Page 194 and 195:
Notice to shareholders // continued
Page 196 and 197:
Notice to shareholders // continued
Page 198 and 199:
Shareholder’s diary Annual genera
Page 200 and 201:
Notes to proxy The form of proxy mu
Page 202 and 203:
Notes 1. To be effective, this form
Page 204 and 205:
Notes 1. To be effective, this form
Page 206:
www.sappi.com
show all

2008 Annual report - Sappi

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?