2008 Annual report - Sappi

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Risk management // continued Risk management philosophy The Sappi Limited board recognises that risk management success can only be achieved if all three elements of risk, namely threat, uncertainty and opportunity, are recognised and managed in an integrated fashion. The board is also fully committed to: • complying with the risk management requirements of the Code of Conduct of the Second Report of the King Committee on Corporate Governance (King 2). • complying with the risk management requirements of the Sarbanes-Oxley Act; • evaluating its risk management processes in terms of the COSO framework (adjusted to Sappi’s own needs) to enhance the overall risk management framework; • ensuring that an integrated enterprise-wide risk management system is implemented throughout its operations. Risk management mandate The Group Risk Management Team is mandated by the Sappi Limited Board to establish, coordinate and drive the Risk Management process throughout Sappi. It has established a comprehensive risk management system to identify and manage significant risks. Risk management methodology Complete risk assessments are conducted at least annually in our operations and for the group, and are updated every six months. The process uses our strategy as the base against which to assess risk scenarios. The scope of the risk assessment includes risks that may lead to a significant loss, or loss of opportunity or may affect the current strategic plan. These risks are identified and analysed, and risk responses to each individual risk are designed, planned, implemented and monitored. Risks classified as ‘uncontrollable’, or those risks where the root causes are outside of the control of Sappi, are identified. The responses to the risks are classified under the headings of Transfer, Treat, Tolerate, Terminate, Exploit and Avoid. The risk assessments are reviewed by the Sappi Group Risk Management Team during facilitated workshops where the risks are evaluated and ranked. The resultant risk profiles are reviewed by our group executive and are reported to the Audit committee at least once every six months and are reported to the board at least annually. In addition to the above mentioned risks, the risks and opportunities that may only manifest over the longer term (three to five year horizon), are identified and reported to the Audit committee at least annually. This methodology ensures that risk assessments are under - taken at least annually; are reviewed every six months; that identified risks are prioritised according to the potential impact on the company; and cost-effective responses are designed and implemented to counter the effects of identified losses. Risk financing The risk assessment process is conducted by external risk engineers, who conduct both underwriting surveys as well as risk control surveys of all the Sappi facilities. The risk control survey reports rate and rank the identified risks and make recommendations to address the probability and/or severity of these risks. This process is focused primarily on the risk exposures associated with insurable risks. Insurance Sappi follows a practice of insuring its assets against unavoidable loss arising from catastrophic events. These events include fire, flood, explosion, earthquake and machinery breakdown. Insurance also covers the business interruption which may result from these events. Specific environmental risks are also insured. In line with previous years, the board decided not to take separate cover for losses from acts of terrorism, which is consistent with current practice in the paper manufacturing industry. This insurance cover excludes insurance for plantations, which is placed separately. Sappi has a global insurance structure and the bulk of its insurance is placed with its own captive insurance company in Stockholm, Sweden; Sappisure Försäkrings AB, which in turn reinsures those risks outside the company’s self-insurance capabilities in the global reinsurance markets. Sappi has successfully negotiated the renewal of its 2009 insurance cover at rates similar to those of 2008. Self-insured retention for any one property damage occurrence has remained at US$25 million, with an unchanged annual aggregate of US$40 million. For property damage and business interruption insurance, cost-effective cover to full value is not readily available. However, the directors believe that the loss limit cover of US$1 billion should be adequate for what they have determined as the reasonably foreseeable loss for any single claim. Insurance cover for credit risks currently applies on a regional basis to Sappi’s North American, European and South African domestic trade receivables. Sappi places the insurance for its plantations on a stand-alone basis into local and European insurance markets. The wide - spread fires that occurred in South Africa and which resulted in extensive damage to our plantations, exhausted our plantation insurance cover. As the fires occured at the end of the high risk season, reinstatement insurance cover was not purchased for the remainder of the current insurance period. Plantation insurance cover will be renewed effective 01 April 2009 before commencement of the next high risk season. For a summary of our top risks, please see page 40 of this report. 42
sappi Chief financial officer’s report Introduction The objective of this discussion and analysis is to provide additional insight into the operating performance and financial position of the group. This report should be read in conjunction with the operational reviews on pages 28 to 37 and the group annual financial statements beginning on page 72. Mark Thompson The group reports its financial results in US Dollars and the main exchange rates used in preparing the group financial statements were: Income statement Average rates Balance sheet Closing rates 2008 2007 2006 2008 2007 2006 US Dollar/SA Rand 7.4294 7.1741 6.6039 8.0751 6.8713 7.7738 EURO/US Dollar 1.5064 1.3336 1.2315 1.4615 1.4272 1.2672 Operating performance Since fiscal 2006, Operating Profit excluding Special Items (which we believe is a good indicator of underlying operating performance) has improved year by year from US$91 million in fiscal 2006 to US$366 million in fiscal 2008. The key indicators of the group’s operating performance are: Key figures: (US$ millions) 2008 2007 2006 Sales 5,863 5,304 4,941 Operating profit/loss 314 383 125 Special items – losses (gains)* 52 (70) (34) Operating profit excluding special items** 366 313 91 EBITDA excluding special items** 740 688 483 Basic EPS (US cents) 45 89 (2) Net working capital*** 422 395 424 Key ratios: (%) Operating profit to sales 5.4 7.2 2.5 Operating profit excluding special items to sales 6.2 5.9 1.8 Operating profit excluding special items to Capital Employed (ROCE)* 9.1 8.3 2.6 EBITDA excluding special items to sales 12.6 13.0 9.8 Return on average equity (ROE)* 6.0 12.6 (0.3) Net working capital to sales 7.2 7.5 8.6 * Refer to page 188 for the definition of the term. ** Refer to page 59 for the reconciliation of operating profit and EBITDA excluding special items to operating profit. *** Net working capital = Inventory plus trade and other receivables minus trade and other payables and provisions. // 2008 Annual report 43
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 and 26: sappi We are of the opinion that su
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 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
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
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Condensed Sappi Limited company inc
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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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