2008 Annual report - Sappi

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Letter to shareholders from the chairman and the chief executive officer // continued (US$2.7 billion), as a result of good cash flow and the effect of currency movements on the translation into US Dollars. There are no major long-term borrowings scheduled for repayment in fiscal 2009. Further, we are of the opinion that our committed facilities and cash holdings provide sufficient liquidity in respect of our short-term cash requirements. In the light of the rights offer and taking into account factors including macro-economic and global financial market conditions, the board decided to re-base the dividend. Accordingly, a dividend of 16 US cents per share was declared on all shares in issue on 28 November 2008. A dividend of 32 US cents per share was paid in respect of the prior year. Sustainability Our fourth sustainability report will be published at the same time as this annual report. In the report we review our progress against our sustainability charter and specific goals under the areas of sustainable development: Prosperity, People and Planet. We manage sustainability as an integral part of our business and decision-making processes and strive to meet our commitment to create value for current and future generations of stakeholders. Black Economic Empowerment (BEE) During the year we set up new structures to ensure we effectively manage the changes needed to achieve our BEE targets. The conditions to the transaction to sell a 25% undivided right to our forestry land to a broad based BEE consortium led by Lereko have been fulfilled and the transaction has been completed. A next step in our transformation strategy is to enter into a value-adding and broad based equity transaction. Looking forward World financial markets and macro-economic conditions have worsened since our financial year ended in September. We are of the opinion that we will experience a slowing in demand in all our major markets and downward pressure on pricing in many markets, but we may not see the full impact until the new calendar year. International pulp prices softened during the last quarter of 2008 and have declined further since then. As we are economically hedged in respect of pulp (we sell only slightly more than we buy, and after the Saiccor Mill expansion and M-real acquisition we will sell slightly less than we buy), the effect on the group will be small. On a regional basis, however, lower pulp prices will help lower costs in our European business, which buys more than half of its pulp requirements, but will have an unfavourable impact in North America and Southern Africa, which are both net sellers of pulp. To date, our Southern African pulp export businesses have been compensated for the lower pulp prices by the weakening of the Rand against the US Dollar. The recent weakening of the Euro against the US Dollar is also expected to have a positive effect on our margins in Europe. Our North American markets are, however, likely to be more susceptible to imports as a result of the stronger US Dollar. The net effect of a stronger US Dollar is expected to be favourable for our business in terms of impact on margins and the value of our debt when translated into US Dollars. The prices of many of our variable cost inputs including wood, energy and chemicals, have stopped rising and are beginning to decline from the very high levels reached. Many of these input prices are responding, with a time lag, to the steep decline in the oil prices from record highs achieved during the year. As the prices of these inputs had an unfavourable impact of US$208 million in 2008 compared to 2007, reducing them is crucial for our business and provides an opportunity to maintain our margins in the difficult market conditions we expect in the current financial year. Our strategic initiatives, including the acquisition of M-real’s coated graphic paper business, are progressing well. We expect the acquisition to be completed at the end of December 2008. Our plans to integrate the business are well developed and will focus on close customer contact, motivating all our people in the larger business and delivering the synergies, which we estimate at O120 million a year. We expect to achieve these synergies within three years and without material capital investments. This transaction will enable us to deal with the slowing economies and challenging market conditions in Europe more effectively. Production at our expanded Saiccor Mill is ramping up well, but NBSK pulp prices (used as a benchmark for chemical cellulose pricing) have softened over the last few months as a result of slowing economic activity globally. Our customers for chemical cellulose are now starting to experience reduced demand for their products. Although we will see a slow down in demand and lower pricing in the short term, prospects for this business going forward remain excellent. The markets for chemical cellulose are varied and exciting, our production cost base is one of the lowest in the world and price realisation in Rand terms is higher now despite US Dollar prices dropping, compared to the previous quarter. Focusing on cash generation remains a priority. We plan to reduce the level of capital expenditure to conserve cash and reduce our indebtedness using internally generated cash flow. We are also aware that with the uncertainty in financial markets, refinancing existing or raising additional debt and the associated terms are likely to be more challenging. We are of the opinion that successful implementation of our strategic initiatives coupled with capacity closures in Europe and 24
sappi input cost reductions across all our businesses will place the group in a good position to face the uncertainties of the year ahead. At present we believe it will be difficult to maintain last year’s operating performance in our North American business but in Europe the combination of reduced capacity, lower pulp and other input costs, the weaker Euro and the expected benefits from the M-real acquisition should position us for significant improvement. Market conditions are likely to be less favourable for our Southern African business, but we will tightly manage the factors under our control and if the Rand exchange rate remains weak, we expect to achieve a creditable performance. Appreciation We highly value the support of our shareholders, customers and suppliers in all our businesses. We are delighted by the positive reception of the announcement of the M-real transaction by so many of our existing and future customers and look forward to working with them to achieve a smooth integration of our new business and to develop our relationships to new levels. Our people in all our businesses have played a vital role in meeting the challenges of the last year, with nimbleness and dedication. They have also developed robust and flexible plans to tackle next year. We thank you for your wholehearted efforts and look forward to achieving new success with you in future. Our board has provided invaluable insights and support as we have mapped our new direction and we thank you for your con - fidence as we continue to steer the group to deliver acceptable returns for our shareholders. Change in directorships During the year, Eugene van As retired as chairman of the board and as a director. He was a director of Sappi for 31 years and chief executive for most of that period. Under his leadership the group expanded globally into the major inter national pulp and paper group it is today. The board thanks him for his vision and the diligence and energy he devoted to the group. Danie Cronjé joined the board in January 2008 and succeeded Eugene van As as chairman in March 2008. Danie Cronjé chairman 23 December 2008 Ralph Boëttger chief executive officer // 2008 Annual report 25
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 and 24: sappi Divisional and corporate mana
Page 25: sappi We are of the opinion that su
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
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Page 70 and 71: Corporate governance // continued r
Page 72 and 73: Compensation report Compensation co
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Directors’ approval The directors
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Directors’ report // continued fo
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Group income statement for the year
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Group cash flow statement for the y
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Group income statement in Rands con
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Group cash flow statement in Rands
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Notes to the group annual financial
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Condensed Sappi Limited company inc
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Condensed Sappi Limited company cas
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Notes to the condensed Sappi Limite
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Glossary General definitions bleach
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Glossary // continued Non-GAAP fina
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Notice to shareholders // continued
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Notice to shareholders // continued
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Shareholder’s diary Annual genera
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Notes to proxy The form of proxy mu
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Notes 1. To be effective, this form
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Notes 1. To be effective, this form
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2008 Annual report - Sappi

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