Sappi posted 4Q operating profit up four times to $49 million

Feb 06, 2006. /Lesprom Network/. Sappi reported sales of $1 175 million in the quarter ended in December 2005, slightly down from $1 256 million in corresponding period in 2004.

In million dollars

	Quarter ended			Year ended
	December 2005	September 2005	December 2004	September 2005
Sales	1 175	1 388	1 256	5 108
Operating profit	49	12	12	-109
EBITDA	163	135	137	381

“Operating conditions remained very difficult in our fine paper business. Despite a modest improvement in industry shipments on the prior year and the closure of coated fine paper capacity by a number of manufacturers, raw materials and energy cost escalation was not matched with price increases.

However, the supply/demand balance of the coated fine paper market, as measured by industry shipments to capacity, continued to improve and business drivers such as GDP growth and advertising spend growth remain positive.

Currency movements were the primary reason for a $81 million reduction in group sales to $1.175 billion. Our operating profit was $49 million compared to $12 million recorded in both the prior quarter and the equivalent quarter last year. This disguises a weaker underlying performance when taking into account the significant pension restructuring credit this quarter and impairment and restructuring charges reflected in the comparative quarters.

The price impact of higher wood, energy and chemical costs this quarter reduced our operating earnings by $11 million in comparison to the prior quarter and $29 million in comparison to the same quarter last year. Our cost savings programmes yielded $17 million of savings, calculated from the base of the fourth quarter of 2005. These savings are not yet at the rate required to reach our overall cost savings target for 2006.”

Discussing each of the principal business units, Mr. Leslie continued, “Sales volumes from our fine paper businesses fell 1.7% on the equivalent quarter last year which is disappointing in light of the modest increase in shipments achieved by the industry in both Europe and North America.

The key concern for management is the slower than anticipated rate of improvement in the earnings of our North American business. The ramp-up of our reconfigured North American mill system following the closure of PM 4 at Muskegon Mill was slower than anticipated which reduced production volumes and delayed the realization of cost savings from the restructuring. Sales volumes were also constrained by lower than expected production at Somerset Mill, resulting in coated fine paper market share losses in October and November. Average realized prices also fell 1.7% in comparison to the prior year.

Sappi Fine Paper Europe’s coated fine paper market share was unchanged from the prior year level. In comparison to the prior quarter, average realized sales price in Euro terms was down 0.6%; in US dollar terms the price reduction was greater due to the weakening of the Euro.

Our South African fine paper business broke even at the operating level which was a marked improvement on the $15 million loss in the prior quarter. This was due to a higher proportion of domestic sales and the benefits of higher pulp integration.

Pulp and paper sales volumes from our forest products business fell 9.2% on the prior year. The key reasons for this were reduced waste paper sales, the curtailment of low-priced export sales, and the fact that the prior quarter included significant sales from inventory at Usutu Mill. Demand for chemical cellulose remained strong, and this business benefited from the weakening of the Rand in comparison to the US Dollar. NBSK pulp price increases have been announced for February 2006 – if accepted, this will have a positive impact on Sappi Saiccor’s profitability, although the current strength of the Rand will be an offsetting factor.”

Looking forward, Mr. Leslie stated, "The short term outlook for our business is difficult and will be dependent in the coming quarters on the outcome of the price increases that we are currently implementing. In addition to these price increase initiatives, we will continue to focus on cost control in all of our businesses, but we are unlikely to recover enough costs to fully offset recent input price increases, particularly higher energy prices. In this environment, we could experience some deterioration in underlying earnings per share in the second quarter relative to the first quarter before any plantation valuation adjustments.

The longer-term outlook for supply and demand in our coated fine paper business has, however, improved. Paper machine closures that total approximately 10% of North American coated fine paper capacity have been announced. We believe that further rationalization of high cost capacity, particularly in Europe, is necessary, but the closures already announced should have a positive impact. In addition to improvements on the supply side of our business, positive GDP indicators in key consuming countries such as Germany and Japan and related improvements in advertising spend forecasts suggest that the demand side of our business is also likely to improve. The likelihood of higher pulp prices is also a positive indicator for our business.”

Sappi is the world's largest producer of coated fine paper, which is high-quality printing paper that has a multitude of end-uses ranging from glossy magazines and catalogues to books, direct mail and general commercial print and also chemical cellulose (dissolving pulp), used primarily in the manufacture of viscose fibre.