Our performance in 2009 - Sappi

Group variable costs in fiscal 2009 were US$260 million lower than in fiscal 2008 (US$3,322 million
in 2009 compared to US$3,582 million in 2008). Our variable costs are impacted by sales volumes,
the underlying price of inputs and the exchange rate effects on translation of our European and
South African businesses into US Dollars. The impact on 2009 operating profit of volume and
price changes in variable costs in regional home currencies, as discussed earlier in this report,
was negative US$86 million, offset by a US$346 million positive currency translation effect.
Cost management remains a major focus area in our group. We continue to engage in a number
of cost reduction initiatives aimed at offsetting the impact of increases in input costs. These
initiatives are aimed at improved procurement strategies and product re-engineering initiatives to
reduce raw material input costs through substitution. Product design and raw material inputs are
constantly reviewed to ensure that product attributes and quality meet market specifications.
Fixed costs
The major components of fixed costs were as follows:
2009 annual report 51
US$ million 2009 2008
Personnel 1,046 1,017
Maintenance 250 252
Depreciation 396 374
Services and administration 278 276
1,970 1,919
Fixed costs increased by US$51 million (3%) compared to 2008 from US$1,919 million in 2008
to US$1,970 million in 2009. However, fixed costs of the European and South African businesses
were favourably impacted by the stronger US Dollar in 2009 compared to 2008 in an amount of
US$206 million. So, in local currency terms, group fixed costs actually increased by the equivalent
of US$257 million.
The main reason for this increase was the acquisition which added r198 million to the group’s
fixed cost base.
To mitigate the impact of challenging market conditions, we have engaged in many restructuring
actions and fixed cost reduction programmes in all our regional businesses. Some of these are
mentioned earlier on in the operating performance of our divisions.
Key operating targets
Our financial targets and our performance against these targets are set out and discussed on
page 6 of the annual report.
Our key operating target is for operating profit excluding special items to exceed 12% of capital
employed (ROCE). This target has been derived to meet the group’s weighted average cost of
capital after adjusting book assets for inflation. Our performance against this target for 2009 was
below 1% – clearly not an acceptable return for our shareholders.
In order to meet our ROCE target we need to improve operating profit excluding special items to
around US$520 million, given our current level of debt and equity.
our performance