JOHANNESBURG, South Africa--July 31, 2003-- Sappi, the world's leading producer of coated fine paper, today announced results for the third quarter to June 2003.
"Our third quarter results were achieved against a background of lower pulp prices, weak demand for coated fine paper and increasingly competitive markets. This has been a particularly difficult quarter for the company.
"South Africa held up well following significant Rand price reductions due to imports and the stronger Rand. Coated fine paper markets in Europe weakened and North America remained poor with low priced imports from Asia and Europe continuing to depress prices in this quarter, seasonally a weak quarter for Sappi."
Results for the Quarter
As in the second quarter, currency movements continued to have a major influence on results.
The group's sales for the quarter reflected the difficult conditions and although sales increased 9% compared to the previous year, the currency effect on translation into Dollars masked the decline in local currencies in South Africa and Europe. The North American sales were flat compared to a year earlier but included the Potlatch fine paper business for the full period this year and only half the period last year. The group's sales were down 3% compared to the March quarter.
Net profit of US$29 million was approximately half of the prior quarter and 56.1% below the equivalent quarter last year.
Earnings per share for the quarter were 13 US cents, 52% of the prior quarter and 55.2% below a year earlier. Headline earnings per share were 12 US cents.
Group operating profit for the quarter decreased by 52.6% to US$46 million, compared to the prior year. This was largely as a result of weak demand and pricing pressure on the coated fine paper business and the pressure on prices in the Southern African businesses due to the weak US Dollar relative to the Rand.
Operating costs were generally well managed, although a concentration of mill maintenance shuts in the quarter and higher inflation in South Africa led to increased costs in the Forest Products business. The real cost performance was distorted by translation to US Dollars.
Cash generated by operations was US$124 million, 39.5% lower than the previous year.
Capital expenditure for the quarter was US$70 million, approximately 80% of depreciation. In light of the uncertain outlook, capital expenditure for the full year, which was planned at a level of 100% of depreciation, will remain at approximately 80%.
Net debt increased by US$62 million to US$1,571 million in the quarter largely as a result of translation of Euro and Rand debt into the group's reporting currency, the US Dollar, which has weakened during the period.
Since the second quarter results announcement in May 2003, the group has re-purchased approximately 1.1 million shares at an average price of approximately US$12.60 per share.
Conditions in Fine Paper's main markets remained poor, with fierce competition in all markets. Operating profit decreased by 44.4% to US$30 million.
Sales volume in Europe increased slightly compared to a year ago as a result of increased overseas exports. Average prices realised in Euros were down 11% compared to a year ago, partly as a result of lower Euro price realisations on exports resulting from the stronger Euro relative to the US Dollar.
The European market as a whole remains weak, with no sign yet of a turnaround in economic growth or advertising spending.
Sales volumes in North America declined by 3.8% compared to a year earlier, although average prices realised were US$40 per metric ton higher. Advertising pages in the US were 1% lower for the quarter compared to the equivalent quarter last year due to the sluggish economy.
Increased competition in South Africa due to imports following the strong Rand squeezed margins. However, the diverse product range, access to different markets and manufacturing flexibility allowed this region to achieve acceptable results.
Commenting on Fine Paper's overall performance, Bill Sheffield, Fine Paper CEO, said:
"Although there is no sign of a turnaround in the European market, our South African business remains strong and our market share in North America has now stabilised.
"We managed to improve our manufacturing efficiencies in North America, particularly at Somerset where throughput has now returned to normal levels. Although our margins and returns are not close to their potential, the rationalisation of our brands and merchant distribution over the last year has positioned us well to benefit when the US economy improves."
South African demand for pulp and paper products increased during the quarter, while export demand was mixed. Although average pulp prices were significantly higher in the quarter, prices peaked in May and have since dropped by US$40 per ton.
The impact of the stronger Rand on revenues more than offset the effect of the higher pulp prices and resulted in severe margin pressure. Exchange rates also impacted on prices realised for other exports and for domestic sales of containerboard as imported products became more competitive.
Sales increased by 22% in US Dollar terms, although they decreased by 12.6% in Rand terms. Operating profit declined by 53.8% in Dollar terms and 67% in Rand terms.
Costs in the quarter increased due to a concentration of mill maintenance shuts, which is not expected to be repeated in the next quarter.
Commenting on the performance of Forest Products, the Chairman of Sappi's South African businesses, John Job, said:
"Demand in South Africa remains reasonable in some sectors although the slowing economy is impacting others. Rand prices are reducing due to the exchange rate and softening world markets. In these tough circumstances, the operating margins achieved reflect the hardiness of the South African businesses."
Looking forward, Leslie said that market conditions had not improved since the trading update issued by Sappi in June and remain uncertain.
Economic growth in Europe remained elusive, with the strength of the Euro negatively impacting on conditions as export markets become less attractive to manufacturers. Improvements in the US economy were also taking longer than anticipated. Although there were some encouraging developments, a substantial improvement was not expected before the end of the calendar year.
In Southern Africa, the strong Rand would continue to put pressure on revenue and margins.
"The group increased inventories during the quarter in anticipation of the usual seasonal increase in demand in our final quarter. It is already clear that we are likely to increase curtailment of production to maintain our long-standing policy of matching output to customer demand. We will continue to focus on improving our competitive position through driving costs down and enhancing our quality and complete service package in order to regain our traditional market shares," said Leslie.
The group said that under current conditions it was no longer clear that earnings for the fourth quarter would be better than for the third quarter. Earnings per share for the full year are therefore likely to be well below last year.
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