Sappi Reports Quarter and Year End Results: Fine paper business up
Press release from the issuing company
Commenting on the results, Sappi Chief Executive Officer, Jonathan Leslie, said:
“Operating conditions continued to present major challenges this quarter. Input costs, especially energy and chemicals, escalated still further due in part to the hurricanes in the US. There were no paper price increases to offset these higher costs but there were some encouraging signs in terms of demand improvement. The many initiatives that we put in place to offset cost increases delivered US$96 million in savings for the fiscal year and our focus on reducing inventories and lowering working capital this quarter resulted in a significant improvement in cash flow.
In our fine paper business industry shipments in our major markets were better than the levels seen in the last two quarters, and order inflow picked up in-line or ahead of normal seasonal movements. The market share of our European business recovered this quarter after suffering a severe decline in volumes in the prior quarter in relation to our attempts to increase prices. Also, the process of turning around the earnings of our North American business is gaining traction. The performance of the South African fine paper business deteriorated as a result of lower than expected proportion of domestic sales.
For the Forest Products business, South African GDP growth had a positive effect on domestic demand for packaging grades which was further bolstered by strong fruit exports. Newsprint demand is currently strong, driven by higher publishing and advertising activity.
Demand for chemical cellulose was again strong and is likely to be supported by the announcement of the closure in 2006 of 125,000 tons of capacity by a competitor.
Looking forward, Leslie continued:
“The paper industry continues to face persistent increases in input costs without commensurate price increases and, until recently, an apparent unwillingness to close inefficient excess capacity. This volatile environment provides poor earnings visibility.
However, some of the prerequisites for earnings improvement are now in place, including sharply reduced inventories and improving order and shipment levels. Also, advertising spend and GDP growth, the drivers of coated paper demand, continue to support demand growth in excess of that seen in fiscal 2005. In addition, the capacity closures announced thus far in the grades in which we participate, while not sufficient on their own to effect major change, will still go some way to improving the supply-demand balance. We have targeted similar cost savings in fiscal 2006 to those achieved this year in order to help offset continued input cost escalation.
In light of these factors we remain positive about the outlook for our business.
We expect an improvement in earnings in the first quarter of 2006 compared to the fourth quarter of 2005 but this is likely to be limited by further input cost increases and it will be a challenge to achieve earnings for the quarter much above breakeven. “
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