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Sappi Results for the First Quarter Ended 28 December 2008

Posted on: Monday, 2 February 2009, 09:44 CST

JOHANNESBURG, South Africa, Feb. 2 /PRNewswire/ --

• European acquisition completed on 31 December 2008 (post quarter end)
• Declining global demand leads to weak operating profit
• Significant production curtailment in December
• Coated paper prices increased in Europe; under pressure elsewhere
• Pulp prices declined more than US$200 per ton
• Basic EPS 6 US cents (favourably impacted by special items)

Summary Quarter ended ------------- Dec Dec Sept 2008 2007 2008 Key figures: (US$million) Sales 1,187 1,377 1,519 Operating profit 57 91 25 Special items - (gains) losses* (32) 1 64 Operating profit excluding special items 25 92 89 EBITDA excluding special items * 106 188 180 Basic EPS (US cents) 6 12 (9) Net debt* including rights offer cash 1,965 2,495 2,405 Net debt* excluding rights offer cash 2,497 2,495 2,405 Key ratios: (%) Operating profit to sales 4.8 6.6 1.6 Operating profit excluding special items to sales 2.1 6.7 5.9 Operating profit excluding special items to Capital Employed (ROCE)* 2.6 8.8 8.5 EBITDA excluding special items to sales 8.9 13.7 11.8 Return on average equity (ROE)* 5.3 9.3 (7.8) Net debt to total capitalisation* including rights offer cash 51.3 58.3 60.0 Net debt to total capitalisation* excluding rights offer cash 57.3 58.3 60.0 * Refer to the published results for details on special items, the definition of the terms, the reconciliation of profit / loss for the period to EBITDA excluding special items and the revision of comparative figures in accordance with IAS33 to reflect the impact of the rights offer. The table above has not been audited or reviewed.

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

"Sales volumes declined 8% in the quarter compared to a year earlier as a result of the global market turndown. Prices for coated paper increased relative to the prior quarter and a year earlier in Europe but were under pressure in the USA and many other markets. Pulp prices, including prices for chemical cellulose, fell sharply and by the end of the quarter NBSK prices were more than US$200 per ton lower than at the end of the previous quarter.

"Demand fell off sharply as the quarter progressed, resulting in lower sales in all our businesses, particularly Saiccor. We took extensive production curtailment in December to match output to demand in addition to major planned maintenance outages during the quarter.

"Operating profit excluding special items was US$25 million for the quarter compared to US$92 million a year ago and US$89 million in the prior quarter. Basic EPS of 6 US cents per share for the quarter was favourably impacted by special items of 6 US cents per share. Cash generated from operations was US$95 million, down from US$155 million a year ago, as a result of lower operating profit. Working capital increased US$96 million during the quarter compared to an increase of US$133 million a year ago. Net debt, excluding the proceeds of the rights offer, increased to US$2.5 billion from US$2.4 billion at September 2008."

Action Plan and Outlook

Looking forward, Boettger commented:

"The sharp decline in demand and the inventory reductions in the downstream supply chains for our products in the latter part of the last quarter has continued in January in most of our businesses. The impact on the sales of chemical cellulose was particularly sudden and is continuing.

"In Europe demand for coated graphic paper was particularly weak in the first half of January. We curtailed output by about 25% in January and will continue to match output to demand going forward. M-real has announced that it will cease coated graphic paper production at Gohrsmuhle and Hallein mills, which have a capacity of 640,000 tons, by the end of April, which is expected to improve the industry supply/demand balance. Pricing for coated paper in Europe remains firm.

"The integration of the European Acquisition is proceeding well. The focus remains on customer relations and service, engaging our new and existing employees, integration of systems and delivery of synergies. The enlarged business gives us greater flexibility to manage our output to match demand, to negotiate improved input prices and to improve our service and product offering to customers. Although current market conditions, and particularly a slow-down in demand, will make it more difficult to realise the synergies in the short term, we remain confident that we should deliver the targeted Euro 120 million per annum of synergies within 3 years.

"In North America demand for coated paper was very low in the first weeks of January accompanied by downward pressure on pricing. We continue to curtail production to match output to demand. In addition, the weakness of pulp demand and the fall in pulp prices will impact the region's profitability as it is a net seller of pulp. Release paper is also experiencing weak markets particularly in China and to the US motor industry. The North American business has taken steps to reduce its overhead costs and is exploring all means to further streamline its operations to reduce its cost base.

"We expect the Southern African fine paper and packaging paper businesses to continue to perform moderately well. Demand in the local market has weakened less than global markets generally. We have taken and will continue to take commercial downtime when necessary. The viscose grade chemical cellulose and other exports, however, continue to be significantly affected by the major fall in demand and sharp fall in prices which has continued into the current quarter. The additional capacity at Saiccor following the commissioning of the expansion in September 2008 is not being utilised. We are therefore shutting certain elements of the old plant to reduce output to match demand while utilising the more efficient new plant as much as possible.

"We expect input prices to continue to decline and for the reduction in our variable costs to accelerate as our higher cost inventories are utilised. We continue to focus on managing input price reductions and more efficient usage of raw materials. Curtailing output is likely to result in less efficient usage of raw materials, which will slow the expected reduction in input costs. The European business, which is a major pulp buyer, should benefit from the sharp fall in pulp prices. NBSK prices declined to US$610 per ton in January from an average of US$739 for the quarter ended December 2008 and US$885 for the quarter ended September 2008. The other regions will, however, be unfavourably impacted by this. Following the European Acquisition the group is a net buyer of pulp. Our level of pulp integration is now approximately 92%.

"Our short term outlook is for difficult global economic conditions to continue and for these to be reflected in demand for our products and our operating results. We do, however, expect some improvement in demand levels from the very low levels experienced late last quarter and in the first part of January. The operating profit excluding special items for the quarter ending March 2009 is expected to remain weak.

"We will continue to prioritise cash flow management including managing inventory levels and reducing capital expenditure to the minimum level needed to keep our assets in good condition.

"We have implemented a number of actions which position the group well going forward, and we will continue to act decisively to manage our business through the current turmoil. The greater flexibility to manage output following the European Acquisition, the improved efficiency of the Saiccor mill combined with our actions to reduce input costs and reduction of fixed costs will all help deal with current tough market conditions.

"When market conditions improve, both the European Acquisition and the Saiccor expansion will help us to achieve the improvement in return on capital employed which we target."

ENDS

The full results announcement is available at www.sappi.com

There will be a conference call to which investors are invited. Full details are available at www.sappi.com using the links Investor Info; Investor Calendar; 1Q09 Financial Results

Forward-looking statements

Certain statements in this release that are neither reported financial results nor other historical information, are forward-looking statements, including but not limited to statements that are predictions of or indicate future earnings, savings, synergies, events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties and can be affected by other factors, that could cause actual results and company plans and objectives to differ materially from those expressed or implied in the forward-looking statements (or from past results). Such risks, uncertainties and factors include, but are not limited to, the impact of the global economic downturn, the risk that the European Acquisition will not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected, expected revenue synergies and cost savings from the acquisition may not be fully realized or realized within the expected time frame, revenues following the acquisition may be lower than expected, any anticipated benefits from the consolidation of the European paper business may not be achieved, the highly cyclical nature of the pulp and paper industry (and the factors that contribute to such cyclicality, such as levels of demand, production capacity, production, input costs including raw material, energy and employee costs, and pricing), adverse changes in the markets for the group's products, consequences of substantial leverage, including as a result of adverse changes in credit markets that affect our ability to raise capital when needed, changing regulatory requirements, unanticipated production disruptions (including as a result of planned or unexpected power outages), economic and political conditions in international markets, the impact of investments, acquisitions and dispositions (including related financing), any delays, unexpected costs or other problems experienced with integrating acquisitions and achieving expected savings and synergies and currency fluctuations. The company undertakes no obligation to publicly update or revise any of these forward-looking statements, whether to reflect new information or future events or circumstances or otherwise.

We have included in this announcement an estimate of total synergies from the acquisition of M-real's coated graphic paper business and the integration of the acquired business into our existing business. The estimate of synergies that we expect to achieve following the completion of the acquisition is based on assumptions which in the view of our management were prepared on a reasonable basis, reflect the best currently available estimates and judgments, and present, to the best of our management's knowledge and belief, the expected course of action and the expected future financial impact on our performance due to the acquisition. However, the assumptions about these expected synergies are inherently uncertain and, though considered reasonable by management as of the date of preparation, are subject to a wide variety of significant business, economic and competitive risks and uncertainties that could cause actual results to differ materially from those contained in this estimate of synergies. There can be no assurance that we will be able to successfully implement the strategic or operational initiatives that are intended, or realise the estimated synergies. This synergy estimate is not a profit forecast or a profit estimate and should not be treated as such or relied on by shareholders or prospective investors to calculate the likely level of profits or losses for Sappi for fiscal 2009 or beyond.

SOURCE Sappi

Source: PR Newswire

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