JOHANNESBURG, South Africa--May 7, 2002--Sappi, the world's leading producer of coated fine paper, today announced results for the second quarter 2002. Highlights * Earnings per share 86% up from the previous quarter * Strong recovery delivered by fine paper Europe, offsetting continued weak performance by North American operations * Potlatch acquisition to be completed in May Commenting on the results, Sappi Executive Chairman, Eugene van As, said: "Considering the challenging conditions that remain in most of our markets, Sappi's performance this quarter was excellent and we are cautiously optimistic that the declining trend seen in the last year has begun to turn. In particular Europe staged a strong recovery, offsetting persistent weakness in the US market. Our South African operations also performed well. The geographic spread of our operations continued to underpin the group's performance in weaker areas." Results for the Quarter Sales volumes were 9% higher than the previous quarter and similar to a year earlier (excluding the Mobile mill). On average prices realized in Europe were stable compared to the prior quarter but 4% down on last year in Euros (8% down in US Dollar terms). Average prices in North America were down 2% from the previous quarter and 9% lower than a year earlier. In view of improved market conditions, Sappi curtailed production by 150,000 tons of pulp and paper worldwide compared to 250,000 tons in the first quarter. Operating profit to average net assets (RONA) improved to 15% as a result of improved performance in Europe and South Africa, significantly exceeding Sappi's cost of capital. Net profit before exceptional items was US$60 million, 19% below last year but almost double the previous quarter. Earnings per share before exceptional items were 26 US cents, 86% up on the previous quarter, but 19% below a year ago. Cash flow (EBITDA) for the quarter continued to be strong at US$186 million. Don Wilson, group Financial Director said, "good cash management ensured that the group's balance sheet remains strong". Net debt increased slightly to US$1,194 million from US$1,156 million in December, mainly as a result of the dividend payment of US$60 million and tax payments of US$58 million. Net debt to total capitalization rose to 37% from 35% in December. Fine Paper Overall the group's Fine Paper operations performed well, despite difficult markets. In particular Europe experienced an 8% increase in sales volumes, boosted, in part, by strong exports. Low pulp prices and a continued focus on driving operational efficiencies resulted in healthy margins and a 20% return on net operating assets. The US market remained very weak and continued to be negatively affected by low advertising spend and high industry inventories. Shipments from all North American mills were once again impacted by imports from Europe and Asia. The group expects the US operations to return to profitability in the second half of the year, as previously predicted. Commenting, Bill Sheffield, CEO of Fine Paper said that the overall outlook is better than three months ago, as most commentators expect advertising spending in Sappi's major markets to improve from the third calendar quarter, which will lead to improved demand for coated fine paper. "In addition, we expect to close the acquisition of Potlatch Corporation's coated fine paper business shortly," he said "which isexpected to be accretive this year and add at least US20 cents to earnings for next year" Sappi Fine Paper South Africa performed well with strong demand for its products locally and in the export markets. As a result of the weakness of the Rand, imported products are increasingly being replaced by locally produced paper in the domestic market. Merchant's inventories remain relatively low and order books have lengthened. Prices were 11% higher than last year in Rand terms, however, as a result of the strong dollar they were lower in dollar terms. Return on net operating assets was a strong 34%. Forest Products Sappi's Forest Products division continued to perform well with strong local demand for all pulp and paper products during the quarter, and packaging paper and newsprint machines fully booked. Price increases have been implemented locally, but prices remain below import parity leading to strong demand for local producers. Demand for dissolving pulp remained soft, but sales volumes improved on the last quarter and prices were stable at very low levels. The restructuring of Usutu mill has been completed successfully, and the business is now viable even at bottom-of-cycle prices. The mill returned satisfactory operating profits for the quarter. Operating margins and return on net assets were at pleasing levels but operating profits in dollar terms still lag behind the previous year because of low pulp sales volumes and prices. Commenting, John Job, CEO of Forest Products, said that world pulp inventories remain relatively low and pulp prices appear to have lifted off the bottom, which has improved the pricing outlook. "We expect modest increases in volumes but will continue to control our inventories by matching production to continued demand," he said. Outlook Looking forward Sappi believes that there is significant scope for improvement in its global order levels, particularly in the US, where an increasing number of reports indicate increased advertising spend in the third calendar quarter which, if correct, should translate into improved demand for coated fine paper. Coated fine paper prices are already increasing modestly in Europe and the recent slight upturn in pulp prices is another indication of improved conditions. Commenting Eugene van As said that Sappi expected to see a slowly improving trend in quarterly earnings per share for the balance of this year provided there are no major shocks in world economies. "We continue to manage inventories to target levels," he said, "and we have the capacity to respond rapidly to increases in demand as they occur".