2008 Annual report - Sappi

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
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