/ 8 May 2007

Sappi smiles after strong quarter

A strong performance from its Forest Products division and long-awaited price increases in Europe have helped South African-based pulp and paper producer Sappi produce its best quarter for a number of years.

The group reported earnings per share of 25 United States cents for the quarter ended March, from 13 cents in the December quarter and four cents for the corresponding quarter in 2006. For the half-year ended March, earnings per share were 38 cents, compared with four cents at the same stage in 2006.

Sales rose to $1,318-billion in the March quarter from $1,267 billion in the December quarter and $1,256-billion a year ago.

Operating profit grew to $117-million from $92-million in the previous quarter and $59-million a year ago, while for the half-year, operating profit almost doubled to $209-million from $108-million before.

Speaking during a conference call on Tuesday, Sappi chairperson Eugene van As highlighted the importance of price increases in Europe, saying that after price declines since 2000, the modest price increases achieved were an important event and a “breakthrough for future results”.

He added that adjusted quarterly operating income — at $74-million from $64-million in the previous quarter — represented “the best quarter since the beginning of 2004”.

“We are slowly climbing out of the hole we were in,” he said.

Sappi’s March-quarter earning per share — at 25 cents — included a four-cent plantation revaluation credit and eight cents from the sale of the Nash Mill site in Hemel Hempstead in the United Kingdom. During the quarter, Sappi sold the Nash Mill site for £24,5-million. It stopped operations at the mill in May last year. A pre-tax profit of $25-million on the sale was reported in the results.

The plantation fair-value price adjustment for the quarter was $12-million as a result of higher market prices for wood partly offset by higher costs to deliver the wood to market.

Referring to the prices increase in Europe, Van As said Sappi had had a difficult time driving through these increases because its competitors did not immediately follow. He admitted that Sappi had lost some market share, but now that its competitors had also increased prices, it was regaining its market share and he said he was confident this would continue for the remainder of the year.

“This was compensated for in the short term by increasing our exports, but we aim to regain the lost volumes,” he added.

However, Van As raised concerns about the significant wood price increases in Europe, where European governments are subsiding the burning of forest waste. This has driven prices up about 30% to 50% in the past 12 months, he added.

At Sappi’s North American operations, market conditions were competitive with pressure on prices particularly for publication paper. “We implemented price increases in the quarter on certain sheet products. We expect that the provisional countervailing duties implemented in the US against Asian imports will result in higher prices for these imports and further opportunities to improve price levels for similar products,” Van As said.

The US import duties could benefit US prices in the second half and would therefore be good for Sappi, he added.

“We are working to reduce unit costs and will start to see the benefit in our fourth-quarter results. These actions will help offset high input costs and contribute to improving margins,” he added.

Sappi’s Southern African businesses reported strong demand for all pulp and paper products. Fine Paper South Africa’s margins are under pressure from high pulp prices as it purchases much of its pulp from Forest Products at market prices. Forest Products had a strong quarter with sales volumes of pulp and paper up 9% compared with a year ago. Prices in rand terms showed a substantial improvement largely as a result of strong pulp prices and the weaker rand relative to the dollar.

The Saiccor and Usutu mills benefited particularly from the strong pulp markets. The Kraft business continued to improve its productivity during the quarter and benefited from modest price increases in the South African market.

The result for the quarter included the plantation fair-value gain of $12-million as a result of higher wood prices and was partly offset by higher costs to deliver the wood to market. The gain in the equivalent quarter last year was $57-million.

The Saiccor expansion is progressing well and Van As commented that it was “on plan” in terms of time and would be about 5% over budget due to escalating stainless-steel prices.

Looking ahead, Van As said demand for all Sappi’s products is strong and pulp prices have recently risen again, but operating margins for coated fine paper remain low.

Global capacity utilisation for coated fine paper remains at a high level, but profitability in the sector does not yet reflect the improved market fundamentals.

“We expect to see further coated-fine-paper price increases before the end of this financial year to restore margins,” he said. He added conditions are conducive for further European price increases and while he was not sure when this would happen, he said they were likely at “the back end of Sappi’s fourth quarter”.

In North America, the implementation of duties against Asian imports is likely to lead to higher prices of certain coated fine papers in the second half.

Forest Products’ markets remain strong, but, Van As said, the stronger rand “does have some depressing effect”.

“We continue to focus on the reduction of costs, which remain a challenge. We expect further improvement in underlying earnings for the second half of the year,” he concluded. — I-Net Bridge