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Sappi Limited Reports 3Q Results, Lower Sales, Curtails Production

Press release from the issuing company

JOHANNESBURG, South Africa--July 30, 2001--Sappi Limited, the world's largest producer of coated fine paper, announced results for the third quarter ended June 2001. Quarterly results for the third quarter ended June 2001 * Tough trading conditions * Production curtailment * Lower Sales * Headline EPS 24 US cents * $120 million non-recurring charge for Mobile closure * Share buyback to continue Summary Quarter ended 9 months ended June March June June June 2001 2001 2000 2001 2000 ---- ---- ---- ---- ---- Sales (US$ million) 967 1,104 1,170 3,186 3,472 Operating profit (US$ million) 91 121 181 355 473 EBITDA (US$ million) 175 210 278 622 767 Operating profit to sales (%) 9.4 11.0 15.5 11.1 13.6 EBITDA to sales (%) 18.1 19.0 23.8 19.5 22.1 Operating profit to average net assets (%) 10.5 13.6 18.0 13.4 16.2 EPS before exceptional items (Headline) (US cents) 24 32 39 90 97 EPS (US cents) (27) 32 41 39 99 Return on equity (%) 14.1(b) 18.6 25.1 18.2(b) 20.7 Net debt (US$ million) 1,250 1,277 1,562(a) 1,250 1,562(a) (a) Restated for reclassification of minority interest to debt (b) Before Mobile restructuring charge Comment Trading conditions remained difficult during the quarter with reduced apparent demand and shipments of coated woodfree paper as well as downward pressure on prices of pulp and coated paper in USA and export markets. As a result we idled more capacity during the quarter and curtailed approximately 230,000 tons of production in order to match our output to demand. Group results The group's net profit before exceptional items for the quarter was US$55 million, 41% below last year. The decision to close Mobile mill in Alabama, USA, was confirmed during the quarter and a one-time charge of US$120 million after tax representing the full estimate of the closure costs was taken. The closure will be cash flow positive as a result of the liquidation of current assets and tax credits. Future income will be favourably impacted by the elimination of the losses incurred at Mobile. After exceptional items the net loss for the quarter was US$66 million. Earnings per share before exceptional items were 24 US cents, compared to 32 US cents last quarter and 39 US cents a year ago. The loss per share after the one-time restructuring charge was 27 US cents. Sales volumes of continuing operations were 6% lower than last year. This reduction was in the fine paper business reflecting slower economic activity in Europe and North America and inventory reduction by merchants and printers. Prices were 7% lower than a year earlier in dollar terms largely reflecting the movement in exchange rates because of the strength of the US dollar. Operating margins were impacted by the lower shipments and price erosion. Operating profit was down 50% to US$91 million, but finance costs after currency adjustments and capitalised interest were US$16 million which was US$15 million (48%) lower than the equivalent quarter last year. As a result of the US$80 million tax credit relating to the Mobile restructuring charge and tax rate reductions in Europe, taxation for the quarter was a credit of US$60 million. The group tax charge for the 9 months to June is 4.2%. The estimated effective tax rate for ongoing operations (excluding Mobile) is now estimated to be approximately 25% for the current financial year. Cash flow and debt The group generated cash flow of US$175 million for the quarter (EBITDA). Capital expenditure, which was in line with the rate of spend of the first half year at US$74 million for the quarter, represented 94% of depreciation and fellings. For the next financial year this percentage will decline to approximately 70% of depreciation and fellings. Net debt was marginally lower at US$1,250 million and the debt to total capitalisation ratio was 34.5%, slightly up on the prior quarter as a result of the Mobile write down. We expect net debt to reduce further in the next quarter. We have recently completed a EUR 900 million (US$770 million) finance facility, which comprises two tranches. The first is a EUR 562.5 million five-year revolving credit facility for general corporate purposes. The second tranche of EUR 337.5 million will be used to refinance existing high cost debt in the United States, including approximately US$140 million of 14% debentures that we intend to call in December 2001. Both tranches carry interest rates at LIBOR plus a margin of 0.55% with a floating utilisation fee of up to 0.15% on the first tranche, depending on usage. This rate reflects the strong credit standing of the group. This new facility will reduce Sappi's finance cost in the USA by approximately US$13 million pre-tax in a full year. The cash cost of calling the debentures will be approximately US$6 million as a once-off premium. Sappi Fine Paper Quarter ended June 2001 June 2000 % US$ million US$ million change Sales 799 948 (15.7) Operating profit 43 117 (63.2) Operating margin (%) 5.4 12.3 - EBITDA 105 189 (44.4) EBITDA Margin (%) 13.1 19.9 - RONOA p.a. (%) 6.6 16.4 - The Fine Paper business experienced difficult trading conditions throughout the quarter with reduced demand and some decline in paper prices. This was partly offset by lower pulp prices, which declined to US$510 per ton in June from US$710 per ton in January, and our own control of costs. Europe Weak demand for coated woodfree paper has resulted in 15% lower sales volume. Prices were 2% above a year earlier in local currency but in dollar terms were 3% lower. We took approximately one week a month of production curtailment across all of our coated woodfree paper machines to match our output to market requirements. The rapid decline in pulp prices had a favourable impact on variable costs and fixed costs were tightly controlled. Operating income of US$26 million was less than half of that of the previous year. Quarter ended June 2001 June 2000 % change % change US$ million US$ million (US$) (Euros) Sales 401 489 (18) (11) Operating profit 26 66 (61) (57) Operating margin (%) 6.5 13.5 - - EBITDA 61 109 (44) (40) EBITDA Margin (%) 15.2 22.3 - - RONOA p.a. (%) 7.7 17.5 - - North America The North American business has continued to feel the negative impact of the slowing US economy and the strong US dollar. Overall consumption of coated woodfree paper is off considerably and imports from Asia and Europe have continued to reduce the domestic producers' share of the market. Weak capacity utilisation has translated into price erosion. To balance supply and demand we are curtailing a further 70,000 tons of production between June and September. Sales volume was 9% and prices were 6% below a year ago. Costs continue to be affected by higher energy costs, placing additional pressure on margins. Variable costs have been favourably impacted by the lower pulp prices. Operating income consequently declined to US$9 million for the quarter. -0- Quarter ended June 2001 June 2000 % US$ million US$ million change Sales 340 400 (15) Operating profit 9 46 (80) Operating margin (%) 2.6 11.5 - EBITDA 35 73 (52) EBITDA Margin (%) 10.3 18.3 - RONOA p.a. (%) 3.1 15.4 - A final decision was taken to close the Sappi Fine Paper North America mill at Mobile, Alabama during the quarter. The production of uncoated products will be phased out by September. Production of the Lusterprint range of speciality coated products is being moved to other Sappi facilities. The full profit improvement which will result from the closure of Mobile mill will be achieved from the beginning of the next calendar year. Fine Paper SA The South African fine paper business performed well. Sales volumes were slightly above a year earlier. Prices in domestic currency were 13% higher and in dollar terms prices were 4% lower. Costs were tightly controlled. Operating income increased 60%, resulting in a 13% operating margin and 33% return on net operating assets. Forest Products Our international markets have been affected by weakening prices. We curtailed dissolving pulp production during the quarter to match demand and manage inventories. Demand for packaging paper and newsprint in the South African market has remained stable. Sales volume of continuing business was at the same level as a year earlier. Average prices for paper increased strongly in local currencies but were flat in dollar terms. Pulp prices, however, were approximately 5% lower in dollar terms. Costs continue to be well controlled and were significantly lower than a year earlier. Quarter ended June 2001 June 2000(a) % change % change US$ million US$ million (US$) (Rands) Sales 168 222 (24) (11) Operating profit 41 65 (37) (26) Operating margin (%) 24.4 29.3 - - EBITDA 63 91 (31) (18) EBITDA Margin (%) 37.5 41.0 - - RONOA p.a. (%) 18.2 24.7 - - (a) Includes discontinued businesses Share repurchase During the quarter we continued to buy back shares and since December 2000 have repurchased 11.5 million shares. The average price paid in the quarter was R74.97 per share with a high of R79.50 and a low of R68.20 per share. We intend to continue the programme in the current quarter. Outlook There has not yet been any improvement in our markets but industry inventories are generally at low levels and any improvement in economic outlook should result in a turnaround in pulp and paper markets. Pulp prices are now below the production cost levels of many manufacturers, particularly in North America, which is not sustainable for an extended period. The continued strength of the US Dollar exposes the USA coated paper market to imports from Asia and Europe and puts pressure on the domestic currency costs of our European business to the extent that they are dollar based. Given current market and currency conditions we expect earnings before exceptional items for the fourth quarter to be similar to the third quarter's. Sappi Limited is the largest producer of coated free sheet paper in the world and produces fine papers in South Africa, the United Kingdom, Austria, Belgium, The Netherlands, Germany and in the United States. Sappi's net operating assets of approximately US$ 3.4 billion are located mainly in Europe (40%), North America (32%) and Southern Africa (28%). Sappi ordinary shares trade on the Johannesburg Stock Exchange and may be accessed on Bloomberg under the symbol SAP SJ, and on the Reuters Equities 2000 Service under SAPJ.J. In the US its ADRs trade on the New York Stock Exchange under the ticker symbol SPP (each ADR is equal to one ordinary share). Sappi shares are also traded in London and Frankfurt.

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