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Sappi Increases Headline Earnings Per Share By 64% in Sluggish Markets

Press release from the issuing company

JOHANNESBURG, South Africa--Feb. 3, 2003--Sappi, the world's leading producer of coated fine paper, today announced results for the first quarter to December 2002. Highlights * Headline EPS 23 US cents - up 64%; * Sales up 22% in sluggish markets; * Pockets of improvement in markets. Commenting on the results, Sappi Executive Chairman, Eugene van As, said: "This quarter's performance was accomplished against a background of sluggish economies in our major markets. The December quarter is typically seasonally quiet in most of our businesses as reflected by the 3% reduction in sales relative to the September quarter. The group achieved sales and earnings growth year on year, albeit off a low base as the comparable quarter last year was negatively impacted by the shock of September 11 and included an extraordinary cluster of maintenance shuts at our mills. "Prices in Europe remained under pressure, however in North America a $40 per ton price increase, announced for October 2002, was realised as prior delivery commitments expired and a further price increase of $40 per ton, announced for January 2003, is being implemented. When these increases have been fully implemented less than half of the recent price erosion will be recovered. Pulp prices softened further in the quarter but now appear to have turned upwards with increases announced by major producers in January 2003 and the price of futures moving up." Results for the Quarter Net profit before exceptional items increased by 63% to US$ 52 million with earnings per share before exceptional items 23 US cents up from 14 US cents in the equivalent quarter last year. Basic earnings per share was 23 US cents. Selling, general and administration (SG&A) expenses were US$ 81 million, up US$ 19 million, the largest component of which was the inclusion of the Potlatch acquisition. It was also affected by translation to a weaker US dollar and higher insurance costs. In the previous results announcement, Sappi indicated that annual pension accruals would increase. This increase has been absorbed in cost of goods sold and SG&A. Sappi expects the impact to be approximately 1.25 US cents per quarter after tax. Group operating profit increased 42% to US$92 million and the operating profit margin increased to 9.0% from 7.8% a year ago. Despite adverse market conditions EBITDA for the quarter was a solid US$190 million, 28% higher than last year. However, net working capital rose significantly, in line with the historical trend in the first quarter due to slow deliveries during the last two weeks of December. Inventories, which rose by US$65 million, were also influenced by deferring commercial production shuts from December to early January. Working capital was increased further by a decrease in payables, annual pre-payment of insurance and quarterly and half-yearly interest payments. Net debt increased by US$106 million, with half being a result of translating Euro and Rand debt into US dollars at the much weaker exchange rate of the Dollar. Divisional Review Fine Paper There has been some improvement in advertising spending in the major markets and this is starting to filter through to the print media, particularly in the USA. Demand for coated fine paper was marginally higher in Europe but grew substantially in North America off the low base a year earlier. Prices remain low relative to those prevailing two years ago. As capacity continues to exceed demand, Sappi continued to curtail production to match output to demand. Against this background, the Fine Paper business improved its operating profit by 58% to US$57 million for the quarter but returns for the business are still well below our target levels. In Europe the stronger Euro relative to the Dollar had a positive impact on the performance of the business, which purchases much of its pulp in Dollars. It also had a favourable impact on the translation of the results to Dollars. The operating profit of US$39 million was in line with last year. The North American business reported modest operating profit but returns are still disappointing. The Southern African business experienced strong demand for the quarter with operating profit increasing 28.6% to US$9 million. Commenting on the fine paper division's overall performance, Bill Sheffield, Fine Paper CEO said: "We continue to face challenging market conditions in both Europe and North America. However, advertising spending on print media grew in the latter part of the quarter compared to a year earlier, resulting in increased demand." Forest Products Local demand for Kraft products was firm, driven by strong activity in export fruit packaging but global demand and pricing was weak. In the dissolving pulp market, excess capacity and aggressive competitors' pricing drove prices down. However, demand in the non-woven textile sector is strong and most viscose staple fibre plants are running at full capacity. The division's operating profit increased 54.5% to US$34 million. John Job, Chairman of Sappi's South African businesses, said: "The pulp price cycle has passed through a trough and with consumer and producer inventories in December 2002 at low levels, there should be scope for further price increases. This will have a positive impact on our Forest Products business." Outlook Looking forward, van As said that although the outlook for the world economy for the balance of this year remains uncertain, there were a number of positive signs emerging for the group. "The announced closure of a major dissolving pulp mill in the USA is expected to tighten the supply-demand balance in that sector which will benefit Sappi's business. While an improvement in demand for coated fine paper depends on a sustained increase in advertising in the print media, there are some signs that this process may have started. We expect the performance of our North American business to continue to improve as the benefits of the Potlatch fine paper acquisition are achieved and the announced price increases are implemented. A stronger Euro will help our European business and although the current weakness of the US dollar will have some impact on their margins, our Southern African businesses remain very competitive. He concluded: "In the second quarter, we expect market conditions to be slow and we will incur the costs of extended shuts to rebuild a machine at our Somerset mill. Earnings per share for the quarter are therefore expected to be similar to this quarter. However, we still expect earnings for the full year to show some improvement over last year."