Sappi Increases Earnings Per Share in Tough Markets

Press release from the issuing company

JOHANNESBURG, South Africa--May 8, 2003-- Introducing the results, Sappi Chairman, Eugene van As, said that Jonathan Leslie, the newly appointed CEO, who had joined the group a month ago, would in future announce the company's results. He continued: "These results were achieved in very uncertain markets. Coated fine paper prices were under pressure in our main markets. In North America uncertainty about demand, a surge of Asian imports and active discounting by some competitors has resulted in slower than expected implementation of our price increases. "Average prices for US-produced sheet products have declined since December but imported products have shown some price improvement. In Europe price erosion has continued despite largely successful price increases in Southern Europe. Advertising spending, an important driver of coated paper demand, remained mixed, with increases in the USA off a low base, but no sustained increase in Europe. "Against this tough background, we managed to achieve a reasonable performance. Our leadership position across the major markets, supported by our excellent distribution systems and pulp integration strategy, left us better positioned than many of our competitors." Results for the Quarter Currency movements had a major influence on results. A stronger Euro favours the trading performances of Sappi's European business and a stronger Rand is detrimental to the Southern African business. As the group reports in US dollars, a stronger Euro and a stronger Rand have a positive translation effect on the results of the European and Southern African businesses and leads to an increase in liabilities and assets recorded in those currencies. The net positive effect of currency movements on shareholder equity this quarter was US$69 million. Net profit was marginally below the same quarter last year at US$58 million and 11.5% above the quarter ended December. Basic and diluted earnings per share were 25 US cents. Costs of goods sold have been well controlled but reflect significant increases compared to a year ago as a result of the currency translation effect. Selling, General and Administration (SG&A) expenses were at the same level as the December quarter but 33% higher than a year earlier mainly as a result of the currency impact, increased insurance and higher pension costs and the inclusion of the Potlatch coated paper business. Group operating profit decreased 2.9% compared to a year earlier to US$102 million, and increased 11% compared to the December quarter. Cash generated by operations was US$194 million, 6.0% higher than a year earlier and 10.2% higher than the December quarter. However, net working capital increased by US$23 million partly as a result of increased inventories. Net debt declined slightly to US$1,509 million from US$1,525 million in March after the dividend payment of US$65 million in the quarter. At constant September 2002 exchange rates, net debt at March 2003 would have been in line with the September 2002 level of US$1,419 million. The ratio of net debt to total capitalisation declined to 35.4% from 36.7%, well within our target range. Divisional Review Fine Paper The fine paper business grew sales volume by 15%, with operating profit increasing by 16.1% to US$72 million. The group has continued to curtail production in order to manage output to customer demand levels. In Europe, consumption of coated fine paper was flat and prices remained under pressure. Margins were squeezed by higher pulp prices and lower paper prices, resulting in a 35.4% drop in operating income to US$42 million. However, the stronger Euro buffered the performance with dollar pulp purchases impacting favourably on results. In North America, market conditions remained difficult. Following the acquisition of Potlatch, certain products and merchant relationships were discontinued to focus on Sappi's core strengths. This resulted in a short-term loss of volume and market share. Recovery is underway with momentum building. We expect to regain the lost share and will have a stronger and better distribution network as a result. The operating profit of US$20 million compared to a previous quarter loss of US$10 million is still disappointing, but signals the beginning of a profit recovery. In spite of difficult wood sourcing conditions in Minnesota, we are still on target to achieve synergies of at least US$80 million in the current year. Competition in the South African business increased due to imports in the domestic markets following the strong Rand. Margins increased slightly due to tight cost control, with operating profit increasing by 42.9% as a result of the currency translation to US dollars. However, margins will not be maintained as prices are discounted to reflect the changed currency conditions and the threat of imports. Commenting on the fine paper's overall performance, Bill Sheffield, Fine Paper CEO, said: "We managed to increase sales volumes and operating profits in difficult conditions, largely as a result of the inclusion of the Potlatch fine paper business. This, plus our geographic spread, helped us maintain a reasonable performance in the face of currency volatility and weaker markets." Forest Products Although pulp prices in dollars have continued to increase and the impact is now being seen in dissolving pulp prices, little benefit was reflected in the quarter as most of these products are sold on quarterly prices. The strength of the Rand has depressed the business' export margins. The operating profit declined 36% compared to a year ago to US$27 million. The supply/demand balance for dissolving pulp has been tightened by improved demand for textiles and the announced closure of a major dissolving pulp mill in the USA. The Saiccor mill has returned to full production and together with the sharp improvement in pulp prices will have a positive impact in the quarter ahead. John Job, Chairman of Sappi's South African businesses, said: "Domestic market demand was strong. However, if the Rand maintains its momentum, economic activity will slow and local markets will experience strong downward pressure on prices." Outlook Looking forward, Van As said that although market conditions remain difficult and unpredictable, the recent boost in the US business confidence index may indicate a positive change in the future. "There is great uncertainty in our markets. Pulp prices have moved up strongly since the start of the year and consumer and producer pulp inventories remain low. At the same time, there is severe price pressure from imports on paper prices in the USA and downward pressure from discounting in Europe." Van As said that the continued weakness of markets in Europe and the disruption of economic growth in Asia, particularly in China and Hong Kong, together with the changes in energy costs and the volatility in the currencies in which we operate, make it increasingly difficult to predict earnings accurately. He indicated that it will be a challenge for the group to meet its earlier forecast that full year earnings per share are expected to exceed those of last year but that remains our aim. "However, changes in prices and currency movements have an immediate effect on our revenue line, while the benefits associated with lower input costs resulting from a change in energy prices and currency movements tend to come through more slowly. It is therefore clear that our third quarter earnings per share will not match those of the immediate past quarter."