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Sappi Limited Reports Q3 Loss

Friday, August 04, 2006

Press release from the issuing company

JOHANNESBURG, South Africa, Aug. 3 -- Commenting on the results, Sappi Chairman, Eugene van As, said: "The underlying earnings for the quarter were in line with the guidance we gave last quarter. They were influenced by one-off items and the plantation fair value adjustment which was negative for the first time since the accounting standard was introduced. "Although we experienced strong demand for our products, resulting in increased sales, the benefits were negated by high input costs. There are encouraging signs that the rate of increase of input prices has slowed. We continue to focus on achieving acceptable margins through changing business practices including our pricing policy and distribution model, and we expect improvement in the coming quarters." Net sales for the group of US$1.2 billion was up 6.1% compared to a year earlier, mainly as a result of an increase in the average price realised by the South African business and the regional mix. There have been price improvements in the USA for coated fine paper but in Europe prices remained flat. The South African businesses benefited from the weaker rand towards the end of the quarter but for the first time since the introduction of plantation fair value accounting (IAS41), the non-cash plantation fair value adjustment (net after fellings) was unfavourable. This represented a US$22 million charge compared to gains of US$60 million last quarter and US$8 million a year earlier. Although the rate of increase of raw material and energy costs slowed, wood, chemical and energy prices were still US$34 million higher compared to a year ago. The direct cost of major repairs and planned maintenance shuts added to the cost pressure in the quarter, said van As. "Work will begin on the project to expand chemical cellulose production at our Saiccor mill in the fourth quarter and is expected to be completed in the third quarter 2008. The project will expand capacity by 300,000 tons, 75,000 of which will replace existing higher cost capacity. It will also substantially improve the environmental impact of the mill. The estimated cost of the combined project is US$460 million," said van As. Outlook Looking forward, van As commented: "Our short term goal is to return to reasonable profitability next year and we have identified the steps we believe can deliver this." The group is confident that the North American and southern African businesses will return to operating profitability next quarter. The group is making progress in Europe with cost reductions but is unlikely to see much of the effect of price improvements before the end of the third calendar quarter. "We believe the group is on track to return to profitability in the next quarter, excluding any possible variations in fair value adjustments. We feel confident that we will soon be in a position to focus on attaining our longer term objectives."




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