Our performance in 2009 - Sappi

Danie Cronjé
chairman
Letter to shareholders from
the chairman and chief executive officer
Ralph Boëttger
chief executive officer
2009 annual report
We are of the opinion that it is
prudent to maintain a higher
cash balance as a cushion
in view of the economic
uncertainty, and are confident
the group has sufficient
liquidity to meet its business
requirements going forward.
Market conditions in the year ending September 2009 were amongst the worst in the group’s 73-year existence.
The year was marked by the rapid fall in demand which began late in the first quarter in the chemical cellulose
business, closely followed by the global decline in coated paper demand.
We started the year announcing the acquisition of M-real’s coated graphic paper business (the acquisition)
and a rights offer to partly finance the transaction. The acquisition was completed on 31 December 2008
after a successful rights offer.
Faced with sharply lower volumes and price pressure in many markets, we acted rapidly to curtail production
and align our output to demand. Management also took decisive action to reduce costs to support the
business in these extreme conditions.
Performance against objectives
We had some successes in relation to our targets for the year, but failed in our primary objective of meaningful
progress towards acceptable returns. In a year in which our shareholders took up a r450 million rights offer,
our key measure of return on capital employed declined to less than 1% from 9.1% the year before.
Pleasingly, the integration of M-real’s coated graphic paper business went extremely well. Our European
team focused on building customer relationships, engaging with employees and realising synergies. We
received considerable support from our customers and worked closely with them during the integration
process. Our people were quick to form a single team to tackle both the challenges of integration and the
grave market conditions. While business performance deteriorated sharply as a result of the conditions, we
exceeded our synergy target of r60 million for the nine months to September 2009.
Synergies were achieved mainly in procurement savings in excess of market price declines, the benefits of
order books taken over when M-real ceased coated paper production at its Gohrsmühle and Hallein Mills,
and reduced selling, general and administrative expenses.
The ramp up of chemical cellulose production to full capacity following the expansion of the Saiccor Mill
was initially deferred due to the slump in demand earlier in the year, but recommenced in April. By September
2009, we were successfully operating at close to full capacity with high quality output. In the fourth quarter,
interruptions caused by an industry-wide wage strike led to further delays and a loss of some 30,000 tons
of output.
At the beginning of the year, we singled out generating cash flow, containing capital expenditure and
preserving group liquidity as priority objectives. As the year progressed these became our main priorities.
Net cash generated by the group was US$289 million, excluding the cash outlay to finance the acquisition,
compared to net cash utilised of US$139 million the year before. Capital expenditure reduced from
US$505 million in 2008, which included part of the Saiccor expansion, to US$175 million. This was allocated
mainly to keep our asset base in safe and efficient condition, and represented approximately 47% of
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our performance