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Sappi Reports $88 Million profit in Q3

Press release from the issuing company

(July 31, 2008) Results for the third quarter ended June 2008

    * Operating profit excluding special items US$88 million (Q3 2007: US$81 million)
    * Special items an unfavourable pre-tax adjustment of US$111 million – mainly plantation price fair value
    * Basic EPS a loss of 28 US cents (unfavourably impacted by special items)
    * Selling price increases in North America and South Africa
    * Severe input cost increases
    * Saiccor expansion commissioning in the fourth quarter

Commenting on the results, Sappi chief executive Ralph Boëttger said:

"In a seasonally slower quarter, our operating performance improved compared to last year. The quarter was marked by severe input cost increases, offset to some extent by our cost savings efforts across the group and successful price increases in North America and South Africa.

Globally our sales increased by 15.2% compared to a year ago to US$1.50 billion. Selling prices in Europe were flat quarter-on-quarter, but declined from last year. We have announced price increases in Europe effective 01 September 2008 of between 8% and 10% in order to offset the input cost price increases.

The unfavourable impact of wood, energy and chemical price increases on the group results was US$19 million compared to the prior quarter and US$45 million compared to a year earlier.

Operating profit excluding special items increased to US$88 million from US$81 million a year ago. Special items of US$111 million include an unfavourable plantation price fair value revaluation adjustment of US$105 million, mainly due to a sharp increase in fuel prices, and a loss of contribution resulting from a flood at Saiccor amounting to US$6 million.

Basic earnings per share for the quarter was unfavourably impacted by special items, higher debt finance costs and a high tax charge resulting from losses in certain regions that could not be brought to account."

Looking forward, Boëttger commented:
"Continued upward pressure on input costs remains our biggest challenge in the short term.  Further increases are expected in energy, fibre and chemical costs during the fourth quarter. In South Africa wage negotiations have been completed. Wage inflation remains an important factor in all our businesses. To mitigate high energy costs, we have initiated further energy projects in all regions.

Although demand remains fairly robust for our products in all regions, a global economic slowdown would impact demand. We are responding to these challenges by continuing to focus on cost control, harnessing our buying power through a global procurement drive and through maximising manufacturing efficiencies. Increasing selling prices continues to be essential to restore and improve profitability. We are implementing price increases in all our businesses.

The operating performance for our Southern African and US businesses is expected to remain strong, while margins in all our businesses, particularly in Europe, will be under pressure due to high input costs. Our Southern African business will be further impacted by a recovery boiler rebuild at our Usutu mill, which will have an unfavourable impact of approximately US$12 million on operating profit in the fourth quarter.

In light of unrelenting input cost increases, we expect our fourth quarter operating profit, excluding special items, to be lower than the third quarter, however for the full year, we expect operating profit, excluding special items, to be well above last year."