producer of coated fine paper
is sold *
- Headline EPS 6 US cents
- Demand remains strong
- Further price realisation for US coated paper
- Weak US Dollar/Strong Rand
- Usutu asset impairment US$41 million
Demand for coated paper continued to grow in our major markets in the quarter supported by
strong growth in advertising spending. Apparent consumption of coated fine paper increased
9.7% in North America and 9.1% in Europe compared to the same quarter last year. Although apparent consumption in North America grew strongly year on year it showed a typical seasonal
decline, compared to the September quarter, of 7.5%.
Prices realised by our North American business continued to improve. In Europe, however,
prices did not increase in local currency but reflected a significant increase in US Dollar terms
due to the weakening of the US Dollar.
Pulp prices softened in the early part of the quarter, however, softwood pulp prices at the end
of the period had returned to levels similar to September 2004 and hardwood pulp prices had
increased to slightly higher levels than September 2004. The average price for softwood pulp
during the quarter was 9% below the September quarter and for hardwood was slightly higher.
A number of factors offset the benefits of the improved market conditions. Raw material input
cost pressure continued particularly in respect of wood costs in North America and energy and
energy related costs.
The Rand strengthened a further 5% on average to the US Dollar compared to the September
2004 quarter, further squeezing the margins of our South African businesses as a result of lower
Rand price realisation and most of the businesses' costs being incurred in Rands. At quarter
end the Rand/Dollar exchange rate was R5.65, almost 7% stronger than the average for the
quarter and 14% stronger than the end of the prior quarter. It has since lost some ground and
is almost back to the average level of the first quarter. Our southern African business has done
well to offset the near doubling in the value of the currency since December 2001.
In our 2004 annual report we anticipated that certain of our Southern African operations would
incur losses in the new financial year at prevailing exchange rates. Accounting Standard IAS 36
(AC128) - Impairment of Assets requires us to evaluate potential impairment of assets using the
quarter end exchange rate. Our Usutu mill reported operating losses in the quarter and is very
sensitive to currency movements. At the very strong quarter end rate of R5.65 to the US Dollar,
the mill does not meet its cost of capital at the period end cost of capital and projected prices.
We have therefore recorded an impairment charge of US$41 million in the quarter. Plans are in
place to improve the mill's productivity in the face of the stronger exchange rate. The mill has a
valuable plantation resource and when the currency turns it will have good prospects of
returning to profitability.
comment
sappi limited page 2
Our South African fine paper business' sales volume for the quarter increased 8% compared to a year ago. The strength of the Rand continues to result in a margin squeeze. Nevertheless, our profit improvement projects which include pricing, material usage and productivity improvements, contributed to a good performance.
Forest Products
Quarter
Quarter
Quarter
ended
ended
%
%
ended
Dec 2004
Dec 2003
change
change
Sept 2004
US$ million
US$ million
(US$)
(Rand)
US$ million
Sales
242
215
12.6
(0.4)
253
Operating profit (loss) *
(11)
35
-
-
46
Operating profit (loss) to sales (%)
(4.5)
16.3
-
-
18.2
* Operating profit for the quarter ended December 2004 reduced by US$41 million in respect of asset
impairment
Our Forest Products business performed well despite the massive pressure from the relative strength of the Rand. Demand for our products in both the southern African and international markets was strong and our volumes of pulp and paper sold increased slightly compared to a year ago. Our chemical cellulose business in particular had strong demand.
Prices realised in local currency terms continue to be impacted by the strength of the Rand
relative to the US Dollar, which continues to squeeze margins.
We have effective programmes to reduce fixed and variable costs. As a result total costs per
ton in local currency were 5.4% below the equivalent quarter last year.
Usutu Mill, which exports all of its output of unbleached pulp and is particularly sensitive to
currency movements, reported operating losses. At the December end rate of R5.65 per
US Dollar, projections for the mill indicate an impaired asset. The mill, which has a valuable
plantation resource, has plans in place to improve efficiency and productivity. The recent
announcement of the closure of the Usutu's second largest competitor representing 5% of the
market for unbleached pulp, is expected to have a favourable impact on operating rates and
therefore the pricing of unbleached pulp.
sappi limited page 6
operating review for the quarter (continued)
outlook
The market outlook for our major products is positive. Demand for coated fine paper continues to grow on the back of good economic growth and increased advertising spending in the major markets and on the supply side there is limited new capacity on the horizon. This positive demand and supply scenario is leading to higher operating rates, which will support price increases in our major markets.
We will continue to experience headwinds as a result of a strong Rand relative to the US Dollar
and high energy and other raw material costs including high wood costs in North America. To
counteract these pressures we have active profit improvement plans in each of our businesses,
with a particular focus on improving the efficiency of our logistics in North America.
Although we are faced with a buoyant Rand and cost increases, we are positive about the outlook
for the balance of this year and we expect our headline earnings per share for the second
financial quarter to be similar to the earnings per share reported in the equivalent quarter last year.
On behalf of the Board
J C A Leslie
D G Wilson
Director
Director
31 January 2005
sappi limited
(Registration number 1936/008963/06)
NYSE Code: SPP
JSE Code: SAP
ISIN Code: ZAE 000006284
sappi limited page 7
shareholders' equity
Earnings before interest (net finance costs), tax, depreciation and amortisation.
EBITDA for the quarter ended December 2004 reduced by US$ 41 million in respect of asset impairments.
In connection with the U.S. Securities Exchange Commission ("SEC") rules relating to "Conditions for Use of Non-GAAP Financial Measures", we have reconciled EBITDA to net profit rather than operating profit. As a result our definition retains other income/expenses as part of EBITDA.
We use EBITDA as an internal measure of performance and believe it is a useful and commonly used measure of financial performance in addition to operating profit and other profitability measures under SA GAAP. EBITDA is not a measure of performance under SA GAAP. EBITDA should not be construed as an alternative to operating profit as an indicator of the company's operations in accordance with SA GAAP. EBITDA is also presented to assist our shareholders and the investment community in interpreting our financial results. This financial measure is regularly used as a means of comparison of companies in our industry by removing certain differences between companies such as depreciation methods, financing structures and taxation regimes. Different companies and analysts may calculate EBITDA differently, so making comparisons among companies on this basis should be done very carefully.
Title: Executive Director: Finance