2008 Annual report - Sappi

sappi
We have derived these target ratios to meet the group’s weighted average cost of capital after adjusting book assets for inflation.
These key target ratios are closely monitored and benchmarked against peer groups.
Major sensitivities
Some of the more important factors which impact the group’s operating profit excluding special items, based on current anticipated
revenue and cost levels, are summarised in the table below.
SFPE SFPNA SFPSA Forest
Operating profit excluding EURO US$ ZAR Products Group
special items sensitivity million million million ZAR million US$ million
Volumes Change 1% 9 6 11 36 25
Selling Prices Change 1% 29 18 35 105 78
Pulp Price Change/Ton US$10 7 2 8 (56) 6
Variable Costs Change 1% 18 11 22 56 46
Fixed Costs Change 1% 7 5 9 29 19
The calculation of these sensitivities on operating profit excluding
special items assumes all other factors remain the same and does
not take into account potential management interventions to
mitigate negative impacts or enhance benefits. As the table
shows, the impact on the individual businesses of one sensitivity
may be different as indeed is the case with changes in inter -
national pulp prices which affect Forest Products (which is a
net seller of pulp) and the European business (which is a net
purchaser of pulp) in opposite ways.
The table above shows that operating profit excluding special
items is most sensitive to changes in the selling prices of our
products.
Finance costs
Details of net finance costs are set out below:
US$ million 2008 2007 2006
Interest paid 181 173 162
Interest earned (38) (21) (26)
Finance costs capitalised (16) (14) (2)
Net foreign exchange gains (8) (13) (7)
Net movement on
marking-to-market of
financial instruments 7 9 3
Net finance costs 126 134 130
Net interest paid (interest paid less interest earned) in fiscal
2008 was US$143 million compared to US$152 million in 2007.
The decrease was mainly due to the lower level of US Dollar
interest rates in 2008 and the resulting lower interest cost on
the group’s floating rate debt.
The much higher finance costs capitalised in fiscal 2008 and
fiscal 2007 relate to the Saiccor Mill expansion project in South
Africa. The expansion was commissioned during fiscal 2008
and capitalisation of finance costs on this project has ceased.
The group’s policy is to identify foreign exchange transaction
risks when 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 (ie gain of US$8 million
in 2008) are shown as part of Finance Costs.
The ‘net movement on marking-to-market of financial instru -
ments’ 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 of fixed rate debt to floating rates and
in order to manage the interest and currency exposure on
US$233 million of cross border inter-company loans.
// 2008 Annual report
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