Our performance in 2009 - Sappi

68
Business risks
Overall
ranking
3
4
5
6
10
11
12
13
14
15
16
17
Risk management continued
The current global liquidity and credit
crises could have a negative impact on
our major customers which in turn could
materially adversely affect our results of
operations and financial position
Fluctuations in the value of currencies,
particularly the Rand and the Euro, in
relation to the US Dollar, have in the past
had and could in the future have a
significant impact on our earnings in
these currencies
The inability to obtain energy or raw
materials at favourable prices could
adversely affect our operations
Catastrophic events affecting our
plantations, such as fires, may
adversely impact our ability to supply
our Southern African mills with timber
from the region
Our indebtedness may impair our
financial and operating flexibility.
Risk Risk description and mitigation
We require a significant amount of cash
to fund our business.
A limited number of customers account
for a significant amount of our revenues
There are risks relating to the countries
in which we operate that could impact
our earnings
Concerns about the effects of
climate change may have an impact
on our business
Because of the nature of our business
and workforce, we may face challenges
in the retention of skilled staff that
could adversely affect our business
A large percentage of our employees
are unionised and wage increases or
work stoppages by our unionised
employees may have a material adverse
effect on our business
We face certain risks in dealing with
HIV/AIDS which may have an adverse
effect on our Southern African
operations
The current global liquidity and credit crises are having a significant negative impact on
businesses around the world, including some of our major customers. We are working closely
with our customers, providing a high level of service and reliability. We manage and regularly
review credit and other exposures. We also purchase credit insurance to cover a significant
part of our outstanding receivables
Sappi is exposed to economic, transaction and translation currency risks. The objective of the
group in managing currency risk is to ensure that foreign exchange exposures are identified
as early as possible and actively managed. In managing currency risk, the group first makes
use of internal hedging techniques, with external hedging being applied thereafter. External
hedging techniques consist primarily of foreign forward exchange contracts and currency
options. Foreign currency capital expenditure on projects is covered as soon as practical
(subject to regulatory approval)
We require substantial amounts of wood, chemicals and energy for our production activities.
The prices for and availability of these energy supplies and raw materials may be subject to
change or curtailment. To mitigate the risk, we are improving procurement methods, finding
alternative lower-cost fuels and raw materials, further minimising waste, improving
manufacturing and logistics efficiencies and implementing energy reduction initiatives
The Southern African landscape is prone to, and ecologically adapted to, frequent fires. The
risk of uncontrolled fires entering and burning significant areas of plantations is high, but under
normal weather conditions this risk is managed through comprehensive fire prevention and
protection plans which include an increased focus on training our people, building community
awareness of the destruction caused by fires, and upgrading fire detection systems and
firefighting equipment
Cash generation and improving our balance sheet structure, including a reduction in
borrowings, are priorities for management as outlined in the chief financial officer’s report
Our ability to fund our working capital, capital expenditure, research and development
requirements, and to make payments on our debt principally depends on cash available from
our credit facilities, other debt arrangements and our operating performance. Our year end
cash balance following the refinancing of our debt profile provides us with adequate headroom
to fund our short-term requirements. We are also focusing on profit improvement in our
operations by reducing fixed and variable costs, spending capital prudently and tightly
controlling working capital
Any adverse development affecting our principal customers or our relationships with our
principal customers could have an adverse effect on our business and results of operations.
We maintain good relationships with our customers and work together with We maintain good
relationships with our customers and work together with our principal customers to address
developments that could adversely affect their business
We own manufacturing operations in six countries in Europe, three states in the United States,
South Africa and Swaziland, and have an investment in a joint venture in China. Country risks
arise from being subject to various economic, fiscal, monetary, regulatory, operational and
political factors that affect companies generally and which may change as economic, social or
political circumstances change. We manage these risks in each country. The broad spread of
countries we operate in helps mitigate the risks in any individual country
Concerns about the global warming and carbon footprint as well as legal and financial
incentives favouring alternative fuels are causing the increased use of sustainable, non-fossil
fuel sources for electricity generation. Electricity generation companies are competing for the
same raw material, namely wood and wood chips, in the same markets as us, driving prices
upwards, especially during winter in the Northern hemisphere
The increased emphasis on water footprint in Southern Africa is causing increased focus on
the sustainable use of water by mills, on ensuring the quality of water released back into the
water systems and on the control of effluent
We are facing an aging demographic work profile among our staff due to the mature nature of
our industry and the rural and often remote location of our mills, together with the generally
long tenure of employees at the mills. We have put in place a number of initiatives, including
engagement management, performance management and incentives to mitigate this risk
We may not be able to negotiate acceptable new collective bargaining agreements or future
restructuring agreements, which could result in labour disputes. We strive to have good relations
with our employees, even if general economic conditions may lead to strike action from time to
time as happened in South Africa in 2009. Our cordial relations have enabled us to negotiate
acceptable new collective bargaining agreements and we have recently reached agreements
with our employees regarding workforce reductions, closures and other restructurings
There is a serious problem with HIV/AIDS infection among our southern African workforce, as
there is in southern Africa generally. We have comprehensive programmes designed to mitigate
the impact of the disease on our people and our business and these are addressed more fully
in our sustainability report which can be accessed on our website