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Sappi Earnings Up 30% in Final Quarter, US Business Improves

Press release from the issuing company

JOHANNESBURG, South Africa--Nov. 7, 2002--Sappi the world's leading producer of coated fine paper, today announced year-end and fourth quarter results for the period to September 2002. Commenting on the results, Sappi Chairman, Eugene van As, said: "The past year has been a difficult one. The sharp decline in print advertising and advertising pages has had a marked effect on the demand for coated paper, particularly in the United States. The effect of this decline, compounded by declining prices, has been severe on our business but in spite of this our US business, which was loss-making earlier in the year, has returned to profitability. Our European business performed well although it too faced an extremely difficult market situation. In contrast our South African businesses saw reasonably robust growth and benefited from a weaker currency but the geographic spread of our assets has enabled the Group to withstand the changing global conditions well." Results for the Year The Group's headline earnings per share were 98 US cents, 13.3% below last year, a good performance in difficult markets. In Rand terms the Group's headline earnings were 14.9% above last year. For the year, Group sales shrank 11% to $3.7 billion. Sales increased in the last two quarters of the year in spite of continuing weak prices, indicating a renewed growth pattern. As a result of the reduction in sales, EBITDA reduced 7% to $741 million (2001 $797 million), however EBITDA margin was slightly up at 19.9% (2001 19.0%) reflecting the Group's operating efficiencies. Return on equity for the year was 14.2%. Sappi ended the year with a strong balance sheet and the business generated healthy free cash flows of US$150 million in the final quarter. During the year the Group restructured its debt profile and now has an average debt maturity of approximately 10 years. Operational Review Fine Paper It remained difficult in the fine paper markets, particularly in North America, which continued to experience low prices. Advertising spend and more specifically advertising print pages, which are key drivers of our performance have been slow to pick up. Since July we have seen a gradual improvement from a very low base and the outlook is that this should continue. Our European business continued to report solid results despite difficult market conditions. Sales volume remained depressed but was about 2% up on a year earlier and 3% up on the previous quarter. Average prices realised in the domestic market held up well throughout the year and were only 2% lower in Euro compared to the equivalent quarter last year, which was very good under the circumstances. Our North American business returned to profitability, benefiting from seasonally strong demand, what appears to be the start of a pick up in print advertising and the benefits of the Cloquet acquisition and integration. The Cloquet integration is on track and we remain confident that the acquisition will be accretive by 20 US cents per share in 2003. We achieved the targeted benefits in the quarter. The Southern African fine paper order book remains strong. Compared to a year earlier, average prices realised declined slightly in dollar terms but were up 26% in Rand terms. We are focusing on cost control to avoid inflationary pressure following the weakening of the Rand last year. Return on net operating assets was 46.0%. Commenting on the fine paper division's overall performance Bill Sheffield, Fine Paper CEO said: "Against very tough market conditions the division's operations performed well overall, particularly in Europe and South Africa, both of which enjoy low cost bases. Our European business fared better than many of its competitors and continued to deliver a high level of service and product to our customers. Our North American business has improved and is on track to meet the targets for its recent acquisition." Forest Products Demand for packaging paper and newsprint in South Africa remained firm on the back of solid GDP growth and continued import replacement. International demand for pulp, including dissolving pulp, improved slightly. The sharp decline in the Rand at the end of 2001 resulted in upward pressure on domestic costs particularly of imported goods and we will continue to maintain very tight control on all of our input costs to ensure we maintain our very competitive cost base. Dissolving pulp markets were weak. Commenting on the Forest Product division's overall performance John Job, the division's CEO, said: "The Forest Products business delivered good results. It has a low cost base and it benefited from the weaker currency, which improved margins on its export business. Sappi Usutu, which was loss-making in the previous year, has staged an impressive turnaround and beat its cost of capital in 2002, while Saiccor continued to achieve reasonable margins despite operating at low capacity utilization because of weak market conditions." Outlook Looking forward there are signs that advertising spending is at last recovering. We also believe that the inventory reduction throughout the coated fine paper customer chain in our major markets has come to an end. As a result of these factors we expect apparent demand for coated fine paper to resume growth next year even if world economic growth is muted. The industry capacity for coated fine paper in Europe remains above consumption and we therefore expect further growth in exports. The closure of 600,000 tons of US coated fine paper capacity over the last 6 months should tighten the supply-demand balance in the US and we expect a modest improvement in operating rates and prices, an expectation supported by the late, but healthy, demand for catalogues this season. In both regions we will continue to match our output to customer demand. Pulp prices, which had strengthened since the beginning of the second calendar quarter, declined in recent weeks as global inventories increased. We do not expect this decline to be a long-term trend. Provided there is reasonable economic growth in the year ahead, as predicted by most analysts, we would expect pulp demand to increase and pulp prices to rise modestly in the second half of the year. We are cautiously optimistic that, barring a major shock in the world economy, our earnings will show reasonable growth next year.