Our performance in 2009 - Sappi

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2009 annual report 21 in Europe and restructuring charges in respect of Muskegon Mill. These were partly offset by the cash benefit of alternative fuel tax credits in the United States. The group recorded a basic loss per share of 37 US cents after unfavourable special items of 13 US cents. This compares to last year’s earnings of 28 US cents, which reflected the unfavourable impact of 23 US cents of special items. Net debt rose by US$171 million to around US$2,6 billion at the end of the financial year. The debt incurred for the acquisition was US$317 million, nearly matched by cash of US$289 million generated in the year. Regional performance After a weak start to the year, the North American business returned to profitability in June and had a particularly strong final quarter. This resulted in operating profit, excluding special items at close to breakeven for the year. US demand for coated woodfree paper collapsed by as much as 30% in the early part of calendar 2009 and demand for the full year was 27% below last year. Despite gaining market share, we curtailed production for extensive periods and suspended operations at Muskegon Mill in March, and closed the mill in August. Pulp markets were weak and the price collapse took a heavy toll on our North American business. We worked closely with customers to adapt our product lines to changing needs and economics. Management’s action to reduce costs preserved healthy margins despite 11% lower prices on a year-onyear basis in the final quarter. The benefit of alternative fuel tax credits added US$87 million to operating profit and US$65 million to cash generated. We expect the credits to expire in December 2009, but we believe we will receive an additional US$45 million in the first financial quarter of 2010. Our European business realised improved prices for coated woodfree paper in the first half of the year after eight years of gradually declining prices. However, after the decline in demand of up to 30% in the first half of calendar 2009, excess supply over demand made the higher prices unsustainable. Prices declined gradually before stabilising in September. The acquisition strengthened our market position in Europe and enhanced our product and service offerings. Despite achieving r73 million in acquisition synergies, operating profit, excluding special items declined to around breakeven level. This indicates the extent of the decline in the business due to the exceptional drop in demand. Cost reduction was a major feature of the year and our operating profit breakeven production level improved to approximately 80% from approximately 95% of capacity last year. Subsequent to year end, we announced our discussions with labour representatives about the possible closure of the 210,000 ton Kangas Mill in Finland. Our South African businesses had a disappointing year. Although demand in the domestic market held up longer than in other regions, there is still no sign of recovery following a 15% drop in demand experienced since March. In addition, the stronger Rand resulted in increased competition from imports and downward pressure on pricing. The chemical cellulose business experienced a steep decline in demand and prices from the latter part of the first quarter. Demand levels recovered strongly from March and the NBSK pulp benchmark price improved steadily from its low point of US$577 per ton in March to US$720 per ton at the end of September. However, this was still US$180 per ton below the peak of August 2008. The business incurred additional operating costs as a result of the interrupted ramp up of the Saiccor Mill. These suboptimal operating conditions included the use of oil to fire the boilers, and increased chemical loads and people to operate the new plant. Input costs remained high in the first half of the year but wood, chemical and coal costs have since declined. The plant was operating efficiently and producing top quality products by September 2009. It is well positioned for the next financial year with strong order books, although the stronger Rand continues to depress margins. We took steps in the latter part of the year to reduce fixed costs across the business. In October 2009, we announced that we were in discussions with labour representatives about the intention to cease operations at the Usutu Pulp Mill in Swaziland in January 2010. All our South African businesses are focused on developing niche products and services to improve our customer offerings and profitability. Sustainability performance We manage sustainability as an integral part of our business and decision-making and strive to create value for current and future stakeholders. Particular themes in our sustainability efforts, discussed elsewhere in this report, include reducing carbon emissions and energy consumption, investing in renewable energy from biomass, sustainable forest management and chain of custody of our fibre inputs, water quality and our performance
22 Letter to shareholders continued consumption as well as managing the group’s safety performance and long-term viability of our manufacturing sites, together with measures to address the levels of HIV/AIDS infection in our Southern African business. Safety is prioritised throughout our group, with the objective of eliminating all harm to people in our operations. The lost time injury frequency rate, which is our primary measure, reflected an improving trend for employees and contractors in the year. Sadly and regrettably, nine people died in work-related accidents of which eight were in our forestry operations and one at our Tugela Mill, in Southern Africa. This is totally unacceptable and we view any fatalities in a most serious light. Safety is receiving attention at the highest level and in particular our forestry division is focusing on improving its safety management systems including specific protocols to prevent fatalities. Critical task analyses and procedures, planned job observations, root cause analyses and safety communication and promotion are being re-emphasised. Our behaviour-based safety systems are entrenched across the group and receive constant management attention. Our industry has been slow to demonstrate its strengths in relation to its carbon footprint relative to many other industries. For generations our wood has been sourced from sustainably managed sources, a high proportion of our energy has been derived from biomass, either in the form of forest and woodyard waste or as black liquor separated from the fibre in the pulping process. Our customers have also recycled large percentages of all paper consumed as new paper, moulded fibre products and as fuels. Please refer to the overview of sustainability performance against objectives starting on page 8 for more information on our specific sustainability initiatives. Black Economic Empowerment (BEE) Our South African business signed the Forestry Charter, which sets industry targets in seven categories broadly similar to the DTI’s Code of Good Practice for Broad-based BEE. Our BEE rating, independently audited by Empowerdex in terms of the DTI code, improved to 54% from 41%. We are of the opinion that it is imperative for the group to enter into a BEE equity transaction that seeks to broaden the base of shareholders and we aim to complete such a transaction within the foreseeable future. Saiccor Mill, South Africa
Page 1 and 2: SAPPI GROUP (Sappi Limited) ANNUAL
Page 3 and 4: • the impact of future investment
Page 5 and 6: Our reporting strategy As a leading
Page 7 and 8: 1 2 North America 2 4 1 San Francis
Page 9 and 10: 4 Our performance in 2009 Financial
Page 11 and 12: 6 Our performance against financial
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Page 21 and 22: 16 Our products 1 2 3 Coated paper
Page 23 and 24: Our objectives for 2010 Improve pro
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Independence Accountability Given t
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2009 annual report 75 Induction and
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2009 annual report 77 employment of
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2009 annual report 79 board to esta
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Compensation report In 2009, the co
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2009 annual report 89 R J Boëttger
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Group balance sheet at September 20
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Group statement of changes in equit
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Notes to the group annual financial
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• Financial assets and financial
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(iii) Dividends Dividends are recog
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2009 annual report US$ million 2009
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2009 annual report 9. Property, pla
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US$ million 2009 annual report 2009
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29. Share-based payments continued
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2009 annual report 31. Related-part
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2009 annual report 33. Environmenta
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Company auditor’s report for the
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Condensed Sappi Limited company bal
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2009 annual report Notes to the con
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not be comparable with similarly ti
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No issue and/or sale of these share
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Notes Confirmation of appointment o
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Proxy form for annual general meeti
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forward-looking statements Certain
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Our performance in 2009 - Sappi

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