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Sappi Posts Weaker Q2 Earnings

Tuesday, May 09, 2006

Press release from the issuing company

JOHANNESBURG, South Africa, May 8 -- Commenting on the results, Sappi Chairman, Eugene van As, said: "We are enjoying strong demand growth in our major markets and operating rates are at some of the highest levels that I have seen. Despite the healthy supply/demand conditions, we have so far had limited success in raising prices for coated fine paper in Europe and in the US. The price increases that have been achieved have been dwarfed by input cost increases -- price increases for wood, energy and chemicals this quarter alone increased our costs by US$38 million compared to a year ago. To offset just this requires a price increase of more than 3%. Pulp prices have been rising. This is typically a positive development as paper prices tend to move in tandem, but we haven't yet seen this effect. Purchased pulp costs in our European business have increased; the resulting margin squeeze would typically be offset by higher pulp sales prices realised by our South African Kraft and Saiccor businesses. However, the further strengthening of the Rand against the US dollar this quarter has negated any margin benefit from the higher pulp sales prices. These issues were in part responsible for the decline in Sappi's underlying earnings. We continue to suffer from operating inefficiencies and during the quarter from high unplanned maintenance costs at our Somerset and Ngodwana mills. Rectifying this situation is our primary focus." Looking forward, van As continued: "We have already identified cost improvements and operating efficiencies, which without any benefit of price increases could substantially improve earnings. These improvements are being addressed vigorously and are likely to start having an impact towards the end of the financial year. In the current cost environment, our pricing model in many markets has led to a significant proportion of business being conducted at unprofitable levels. We are in the process of changing this. Furthermore, we are limiting the time horizon on which we will commit prices. We are evaluating the effectiveness and the costs of our distribution model and will be working with our distribution partners to streamline the supply chain. During this process, average selling prices should continue to rise. To reverse the trend of continuing consumption of cash, we have cut back capital expenditure and we will rigorously manage our working capital - in particular our finished goods inventories, and will curtail manufacturing operations whenever necessary to ensure that we operate to our customers' requirements at a normalised inventory holding. We do not expect to see much impact from our turnaround actions next quarter and are likely to see a similar underlying result to the current quarter."




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