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SAPPI LIMITED
REGISTRATION NUMBER 05/08963/06
INTERIM REPORT FOR THE HALF YEAR ENDED 31 MARCH 1998
HIGHLIGHTS
- STRONG EARNINGS RECOVERY
- ASSET DISPOSALS PROGRAMME ACCELERATED
- EUROPEAN INTEGRATION ON TRACK
- NEW GLOBAL IMAGE
CONSOLIDATED INCOME STATEMENT
UNAUDITED UNAUDITED AUDITED
6 MONTHS 6 MONTHS 12 MONTHS
TO % TO TO
31.03.98 CHANGE 31.03.97 30.09.97
R MILLION R MILLION R MILLION
SALES 10 208,0 42,6 7 157,0 16 216,2
OPERATING INCOME BEFORE
DEPRECIATION 1 748,9 1 011,2 2 172,1
DEPRECIATION 701,5 460,6 1 008,0
OPERATING INCOME 1 047,4 90,2 550,6 1 164,1
NON-TRADING INCOME (LOSS) (36,5) (77,1) 37,2
INCOME BEFORE FINANCE COSTS
AND TAXATION 1 010,9 113,5 473,5 1 201,3
NET FINANCE COSTS 402,5 395,0 611,5
PAID 600,0 568,1 1 013,0
CAPITALISED (197,5) (173,1) (401,5)
INCOME BEFORE
MINORITY INTERESTS 608,4 78,5 589,8
TAXATION - CURRENT 135,6 27,3 93,6
INCOME AFTER TAXATION 472,8 51,2 496,2
INCOME ATTRIBUTABLE TO
MINORITY INTERESTS 42,7 20,2 92,3
NET INCOME 430,1 31,0 403,9
NUMBER OF SHARES
IN ISSUE ('000) 203 787 159 186 159 186
AVERAGE NUMBER OF
SHARES USED FOR EPS
CALCULATION ('000) 267 142 198 003 201 959
EARNINGS PER SHARE (CENTS) 161 16 200
EARNINGS BEFORE EXCEPTIONAL ITEMS
(HEADLINE EARNINGS)
PER SHARE (CENTS) 201 42 215
ORDINARY DIVIDENDS PER
SHARE (CENTS) - - -
CALCULATION OF EARNINGS BEFORE EXCEPTIONAL ITEMS (HEADLINE EARNINGS)
NET INCOME 430,1 31,0 403,9
PROFIT ON DISPOSAL OF
BUSINESS AND
FIXED ASSETS (75,4) (0,6) 0,5
MILL CLOSURE COSTS 121,3 - -
RESTRUCTURING COST
PROVISIONS 33,5 - -
INCREASE IN OTHER
PROVISIONS 28,9 53,2 30,4
EARNINGS BEFORE EXCEPTIONAL
ITEMS (HEADLINE
EARNINGS) 538,4 83,6 434,8
EARNINGS BEFORE
EXCEPTIONAL ITEMS
(HEADLINE EARNINGS) PER
SHARE (CENTS) 201 42 215
CONSOLIDATED BALANCE SHEET
UNAUDITED AUDITED
AT AT
31.03.98 30.09.97
R MILLION R MILLION
CAPITAL EMPLOYED
ORDINARY SHAREHOLDERS' INTEREST 11 862,8 9 209,0
MINORITY INTERESTS 1 222,7 975,2
LONG-TERM BORROWINGS 11 997,7 7 773,7
OTHER LONG-TERM LIABILITIES 1 051,5 770,9
26 134,7 18 728,8
EMPLOYMENT OF CAPITAL
FIXED ASSETS 20 476,8 13 733,1
PLANTATIONS AND TIMBERLANDS 3 100,1 2 873,4
OTHER NON-CURRENT ASSETS 1 281,4 1 332,7
CURRENT ASSETS 8 777,0 5 634,6
BANK BALANCES AND DEPOSITS 1 756,3 1 214,9
OTHER CURRENT ASSETS 7 020,7 4 419,7
TOTAL ASSETS 33 635,3 23 573,8
CURRENT LIABILITIES 7 500,6 4 845,0
INTEREST BEARING LIABILITIES 1 351,7 560,2
BANK OVERDRAFT 1 514,5 1 239,3
OTHER CURRENT LIABILITIES 4 634,4 3 045,5
26 134,7 18 728,8
DEBT/EQUITY RATIO 0,96 0,82
CURRENT ASSET RATIO 1,17 1,16
CONSOLIDATED SUMMARISED CASH FLOW STATEMENT
UNAUDITED UNAUDITED AUDITED
6 MONTHS 6 MONTHS 12 MONTHS
TO TO TO
31.03.98 31.03.97 30.09.97
R MILLION R MILLION R MILLION
CASH GENERATED BY
OPERATIONS 1 888,5 1 205,6 2 449,9
MOVEMENT IN WORKING CAPITAL (136,9) (193,3) 72,4
NET FINANCE COST (600,0) (568,1) (1 013,0)
TAXATION (86,7) (16,3) (64,5)
DIVIDENDS PAID - (48,5) (48,5)
CASH RETAINED FROM
OPERATING ACTIVITIES 1 064,9 379,4 1 396,3
NET CAPITAL EXPENDITURE
AND INVESTMENT
IN PLANTATIONS (613,0) (527,0) (789,4)
INCREASE IN INVESTMENTS
AND LOANS (277,6) (19,9) (738,4)
NET CASH GENERATED (UTILISED) 174,3 (167,5) (131,5)
COMMENTS
MARKETS
DEMAND FOR PAPER PRODUCTS WAS STEADY THROUGHOUT THE PERIOD AND SELLING PRICES
HELD AT THE LEVELS ACHIEVED IN THE FINAL QUARTER OF THE PRECEDING FINANCIAL
YEAR WHEN THERE WAS SOME RECOVERY IN PRICES, PARTICULARLY IN EUROPE.
PULP MARKETS SOFTENED SIGNIFICANTLY FOLLOWING THE ECONOMIC TURMOIL IN MANY FAR
EASTERN COUNTRIES AND THIS SEVERELY AFFECTED THE DISSOLVING AND UNBLEACHED PULP
OPERATIONS IN SOUTHERN AFRICA WHICH SELL A LARGE PORTION OF THEIR OUTPUT IN
ASIA.
PRODUCTION
PRODUCTION VOLUMES INCREASED TO MEET PAPER DEMAND BUT DISSOLVING AND UNBLEACHED
PULP PRODUCTION WAS CURTAILED BECAUSE OF LOWER DEMAND IN THE FAR EAST.
THE NEW PAPER MACHINE AT GRATKORN IS PERFORMING BETTER THAN PLANNED WHICH HAS
PERMITTED THE EARLIER PERMANENT CLOSURE OF PAPER MACHINES NO'S. 8 AND 10 BY THE
END OF JUNE 1998. OTHER RECENT MACHINE EXPANSIONS ARE OPERATING WELL. DURING
THE PERIOD THE WOLVERCOTE MILL WAS PERMANENTLY CLOSED. FULL PROVISION HAS BEEN
MADE FOR THE COST OF THESE CLOSURES.
RESULTS
THE FINANCIAL RESULTS FOR THE PERIOD HAVE BEEN REVIEWED BY THE GROUP'S
AUDITORS, DELOITTE & TOUCHE. THEIR REPORT IS AVAILABLE FOR INSPECTION AT THE
COMPANY'S REGISTERED OFFICES.
CONSOLIDATED SALES FOR THE HALF YEAR AMOUNTED TO R10,2 BILLION (1997 - R7,2
BILLION) AN INCREASE OF 42% ON 1997 MOST OF WHICH IS RELATED TO THE INCLUSION
(FOR THREE MONTHS) OF THE RESULTS OF KNP LEYKAM. COSTS WERE GENERALLY WELL
CONTAINED AND PAPER SELLING PRICES HELD UP AT THE CLOSING LEVELS OF THE
PREVIOUS FINANCIAL YEAR. HOWEVER THERE WAS WEAK DEMAND AND DOWNWARD PRESSURE ON
THE SELLING PRICES OF DISSOLVING PULP AND (IN PARTICULAR) OF UNBLEACHED KRAFT
PULP. OVERALL SELLING PRICES IN THE REPORTING PERIOD WERE BETTER THAN THOSE OF
THE CORRESPONDING SIX MONTHS LAST YEAR.
NET FINANCE COSTS AMOUNTED TO R402,5 MILLION (1997 - R395 MILLION). COSTS
INCREASED AS A RESULT OF THE ACQUISITION OF KNP LEYKAM BUT WERE OFFSET BY LOWER
BORROWINGS IN SAPPI'S NORTH AMERICAN OPERATIONS, WHICH DECLINED BY 30% IN
DOLLAR TERMS COMPARED TO THE PREVIOUS PERIOD.
INTEREST CAPITALISED RELATES MAINLY TO THE HOLDING COST OF FORESTS AND TO
CAPITALISED INTEREST ON MAJOR PROJECTS UNDER CONSTRUCTION. THE NET CREDIT TO
INCOME FOR THE SIX MONTHS IS SUMMARISED AS FOLLOWS:
1998 1997
R MILLION R MILLION
GROSS INTEREST CAPITALISED 197,5 173,1
AMORTISATION OF PREVIOUSLY
CAPITALISED INTEREST ON
FORESTS - CHARGED
AGAINST OPERATING INCOME 84,9 88,1
NET INTEREST CAPITALISED 112,6 85,0
AN IMPORTANT REASON FOR THE LEVEL OF CAPITALISED INTEREST IN 1998 WAS THE
CONTINUATION OF THE EARLIER DECISION TO CONSERVE SAPPI TIMBER RESOURCES IN
SOUTH AFRICA FOLLOWING IMPROVED RAINFALL AND INCREASED MARKET AVAILABILITY OF
THIRD PARTY TIMBER. THIS PRACTICE HAD A NEGATIVE EFFECT ON SHORT TERM CASH FLOW
(APPROXIMATELY R45 MILLION), BUT THE REAL LONG TERM BENEFIT IS SUBSTANTIAL.
SOUTH AFRICAN ACCOUNTING STANDARDS HAVE RECENTLY BEEN CHANGED AND REQUIRE THAT
SOUTH AFRICAN COMPANIES NOW ACCRUE FOR FUTURE COSTS IN RESPECT OF
POST-EMPLOYMENT BENEFITS. THE SAPPI GROUP ALREADY DOES THIS IN ITS NON - SOUTH
AFRICAN OPERATIONS AND SUBSEQUENT TO SEPTEMBER 1997 HAS DONE SO IN RESPECT OF
THE SOUTH AFRICAN OPERATIONS TO COMPLY WITH THE CHANGED ACCOUNTING STANDARDS
AND IN PREPARATION FOR SAPPI'S PROPOSED LISTING ON THE NEW YORK STOCK EXCHANGE.
THIS HAS REQUIRED THAT THE GROUP RAISES AN ASSET IN RESPECT OF THE ACTUARIAL
SURPLUS IN THE PENSION FUND AND A LIABILITY FOR THE DEFICIT IN RESPECT OF THE
MEDICAL BENEFITS. THE GROUP HAS PREVIOUSLY EXPENSED MEDICAL COSTS ANNUALLY AND
CONSIDERED THAT THE SURPLUS IN THE PENSION FUND WAS SUFFICIENT TO OFFSET
LIABILITIES IN RESPECT OF HEALTH CARE BENEFITS. BY COMPLYING WITH THE CHANGED
STANDARD, THE EFFECT HAS BEEN TO INCREASE OPERATING INCOME FOR THE 1998 INTERIM
BY R30 MILLION (DECREASE 1997 INTERIM BY R0,5 MILLION) AND TO REDUCE THE
DEBT/EQUITY RATIO BY THREE BASIS POINTS TO 0,82 AT SEPTEMBER 1997. THE CHANGE
OF POLICY HAD NO EFFECT ON THE TAXATION CHARGE NOR THE MINORITY INTEREST FOR
THESE PERIODS.
WITH EFFECT FROM THIS HALF YEAR SAPPI HAS STRUCTURED ITS OPERATIONS FOR
REPORTING AND MANAGEMENT PURPOSES INTO:
- SAPPI FINE PAPER PLC HEADQUARTERED IN LONDON WHICH INCLUDES THE FORMER SD
WARREN, SAPPI EUROPE (INCLUDING KNP LEYKAM FROM JANUARY 1998) AND SAPPI FINE
PAPERS (SOUTH AFRICA),
- SAPPI FOREST PRODUCTS (PTY) LTD (COMPRISING THE FORESTRY, TIMBER PRODUCTS,
PULP, AND NEWSPRINT AND PACKAGING PAPER BUSINESS BASED IN SOUTHERN AFRICA),
- SAPPI TRADING, WHICH WILL CONTINUE TO SELL THE GROUP'S PRODUCTS OUTSIDE OF
THE HOME MARKETS OF THE OPERATING COMPANIES,
- CORPORATE WHICH WILL CONTINUE TO PROVIDE FINANCIAL SERVICES TO THE GROUP
COMPANIES.
BY THE END OF THE FINANCIAL YEAR THE OPERATING COMPANIES WILL HAVE BEEN SO
STRUCTURED THAT THE NET EARNINGS CAN BE REPORTED BY COMPANY. AS THIS REQUIRES
RESTRUCTURING OF THE BALANCE SHEETS OF THE COMPANIES ONLY TURNOVER AND
OPERATING PROFIT IS REPORTED FOR THE HALF:
6 MONTHS 6 MONTHS
TO 31.03.98 TO 31.03.97
R MILLION R MILLION
TURNOVER:
FINE PAPER 7 764 4 896
FOREST PRODUCTS 2 028 1 831
SAPPI TRADING 416 430
TOTAL 10 208 7 157
OPERATING INCOME:
FINE PAPER 871 347
FOREST PRODUCTS 190 139
SAPPI TRADING 53 50
CORPORATE (67) 15
TOTAL 1 047 551
THE TURNOVER AND OPERATING INCOME OF THE FINE PAPER BUSINESS REFLECT IMPROVED
TRADING CONDITIONS AND THE INCLUSION OF KNP LEYKAM FOR THREE MONTHS.
EARNINGS BEFORE EXCEPTIONAL ITEMS OF R538,4 MILLION (1997 - R83,6 MILLION) WERE
R108,3 MILLION HIGHER THAN NET INCOME OF R430,1 MILLION (1997 - R31,0 MILLION).
EARNINGS PER SHARE BEFORE EXCEPTIONAL ITEMS FOR THE PERIOD WERE 201 CENTS (1997
- 42 CENTS PER SHARE) IN SPITE OF A SUBSTANTIAL INCREASE IN THE NUMBER OF
SHARES REPRESENTING DEFERRED AND ISSUED EQUITY. NET EARNINGS PER SHARE WERE 161
CENTS (1997 - 16 CENTS PER SHARE).
THE ADJUSTMENTS TO NET INCOME TO ARRIVE AT EARNINGS BEFORE EXCEPTIONAL ITEMS
RELATE TO ONCE OFF PROVISIONS FOR RESTRUCTURING COSTS OF THE INTEGRATION OF THE
EUROPEAN BUSINESSES, THE ASSET WRITE-OFF ON THE CLOSURE OF THE WOLVERCOTE MILL,
THE NET MOVEMENT OF PROVISIONS AND THE AFTER TAX PROFIT ON THE SALE OF THE
PRESSURE SENSITIVE BUSINESS.
THE EARNINGS PER SHARE WERE CALCULATED ON THE NUMBER OF SHARES OUTLINED BELOW,
WHICH INCLUDE THE ISSUE OF SHARES IN RESPECT OF THE PURCHASE OF KNP LEYKAM AT
THE END OF DECEMBER 1997 AND DEFERRED EQUITY:
MILLION
SHARES IN ISSUE (30 SEPTEMBER 1997) 159
SHARES ISSUED TO KNP BT (31 DECEMBER 1997) 45
TOTAL SHARES IN ISSUE (31 MARCH 1998) 204
TIME WEIGHTED SHARES IN ISSUE (AVERAGE NUMBER) 181
SHARES REPRESENTING DEFERRED EQUITY* (AVERAGE NUMBER) 86
TOTAL USED FOR CALCULATION OF EARNINGS PER SHARE
(AVERAGE NUMBER) 267
*SHARES REPRESENTING DEFERRED EQUITY HAVE BEEN CALCULATED ON THE BASIS THAT
100% OF THE PURCHASE PRICE OF THE INDUSTRIAL DEVELOPMENT CORPORATION OF SOUTH
AFRICA LIMITED (IDC) INVESTMENTS IN SAICCOR AND SAPPI MANUFACTURING AND OF THE
25% MINORITY SHARE IN SAPPI FINE PAPER NORTH AMERICA (WARREN), (INCLUDING
GROWTH ACCORDING TO AGREED FORMULAE), WOULD BE PAID IN SAPPI LIMITED SHARES
BASED ON THE AVERAGE SHARE PRICE ON THE JOHANNESBURG STOCK EXCHANGE IN THE
PRECEDING PERIOD. THE VERY LOW SHARE PRICE AT THE END OF MARCH 1998 INCREASED
THE NOTIONAL NUMBER OF SHARES WITH A CONSEQUENT ADVERSE EFFECT ON EARNINGS PER
SHARE. THE TRANSFER TO DEFERRED EQUITY FOR THE GROWTH IN REDEMPTION VALUE OF
THESE INSTRUMENTS FOR THE PERIOD WAS R82 MILLION (1997 - R77 MILLION).
THE GROUP'S DEBT/EQUITY RATIO MOVED OUT TO 0,96 COMPARED TO THE PREVIOUS
YEAR-END RESTATED LEVEL OF 0,82. THE ADVERSE MOVEMENT IS THE DIRECT RESULT OF
THE KNP LEYKAM ACQUISITION BUT ALSO REFLECTS INCREASED WORKING CAPITAL WHICH IS
PARTLY A SEASONAL MOVEMENT AT THIS TIME OF THE YEAR.
IDC'S SAICCOR INVESTMENT
IN MAY 1993 THE IDC FINANCED PART OF THE SAICCOR EXPANSION PROJECT AT UMKOMAAS
BY MAKING AN EQUITY INVESTMENT IN SAICCOR. SAPPI UNDERTOOK TO PURCHASE THE
IDC'S INVESTMENT AFTER 5 YEARS AND TO PAY USING SAPPI LIMITED SHARES OR CASH,
SUBJECT TO THE IDC'S OPTION TO LIMIT THE CASH PORTION TO 50%.
THE VALUE WAS FIXED, IN TERMS OF THE AGREEMENT, ON 5 MAY 1998 AT R1 005,7
MILLION OF WHICH R502,8 MILLION WAS PAID IN CASH AND THE BALANCE BY THE ISSUE
OF 19,8 MILLION SAPPI LIMITED SHARES TO THE IDC AT A PRICE OF R25,39 PER SHARE
- BEING THE AVERAGE CLOSING PRICE OVER THE PRECEDING 60 TRADING DAYS. IF THIS
SETTLEMENT HAD BEEN EFFECTED ON 31 MARCH 1998 THE DEBT/EQUITY RATIO ON THAT
DATE WOULD HAVE INCREASED TO 1,04 AND THE NUMBER OF SHARES REPRESENTING
DEFERRED EQUITY AND ISSUED SHARES WOULD HAVE BEEN REDUCED BY APPROXIMATELY 23,7
MILLION SHARES. THE COST OF FINANCING THE CASH PORTION WILL BE MATERIALLY BELOW
SAPPI'S AVERAGE COST OF CAPITAL. NOTIONALLY, IF THIS SETTLEMENT HAD BEEN IN
PLACE FOR THE PERIOD, EARNINGS PER SHARE BEFORE EXCEPTIONAL ITEMS WOULD HAVE
INCREASED BY APPROXIMATELY 17 CENTS.
TAXATION
THE INCREASED TAXATION CHARGE RELATES MAINLY TO THOSE OFFSHORE INVESTMENTS
WHICH ARE SUBJECT TO CERTAIN MINIMUM TAX CHARGES. THE LOW TAXATION RATE OVERALL
IS PRIMARILY THE RESULT OF PREVIOUS TAX LOSSES AND ALLOWANCES BROUGHT FORWARD.
SHARE CAPITAL
THE AUTHORISED SHARE CAPITAL OF THE COMPANY WAS INCREASED FROM 225 MILLION TO
325 MILLION SHARES OF R1 EACH AT THE EXTRAORDINARY MEETING OF SHAREHOLDERS HELD
ON 7 NOVEMBER 1997. THIS INCREASE WAS EFFECTED IN ORDER TO CATER FOR THE
IMPLEMENTATION OF THE KNP LEYKAM TRANSACTION AND TO GIVE THE COMPANY
FLEXIBILITY IN ITS PROGRAMME TO REDUCE DEBT.
ON 31 DECEMBER 1997, 44,6 MILLION SHARES WERE ISSUED TO KNP BT IN PART PAYMENT
FOR THE ACQUISITION OF 91,54% OF KNP LEYKAM.
INTEGRATION OF KNP LEYKAM
THE CLOSING DATE OF THIS TRANSACTION WAS 31 DECEMBER 1997, FROM WHICH DATE
91,54% OF THE OPERATING RESULTS ARE CONSOLIDATED. IN ITS FIRST THREE MONTHS AS
A SAPPI COMPANY THE NEW ACQUISITION MADE A SIGNIFICANT CONTRIBUTION TO THE
GROUP'S RESULTS AND HAS ENHANCED EARNINGS PER SHARE BEFORE EXCEPTIONAL ITEMS BY
41 CENTS.
GOOD PROGRESS HAS BEEN MADE WITH RATIONALISING THE EUROPEAN OPERATIONS AND
BEGINNING TO ACCESS THE SYNERGIES WHICH RESULT FROM THE INTEGRATION OF THE TWO
BUSINESSES. AS OF MAY 1998 THE MANAGEMENT OF KNP LEYKAM AND SAPPI EUROPE HAS
BEEN INTEGRATED INTO A NEW HEAD OFFICE LOCATED IN BRUSSELS. THE SALES OFFICES
HAVE BEEN MERGED AND SIGNIFICANT SAVINGS WILL BEGIN TO FLOW THROUGH IN THE
COMING MONTHS. THE PRESENT INDICATION IS THAT THE PLANNED ANNUAL BENEFITS OF
MORE THAN R2 PER SHARE WILL BE ACHIEVED BY 2000.
ALL THE COMPANIES IN THE FINE PAPER GROUP CHANGED THEIR NAMES TO SAPPI FINE
PAPER ON 27 APRIL 1998 AND NOW OPERATE WITH A SINGLE IDENTITY AND FACE TO
SAPPI'S CUSTOMERS.
DEBT REDUCTION/DISPOSAL OF ASSETS
THE MANAGEMENT OF CAPITAL EXPENDITURE COMBINED WITH THE PREVIOUSLY ANNOUNCED
PROGRAMME TO DISPOSE OF NON-CORE ASSETS WILL CONTRIBUTE MEANINGFULLY TO THE
REDUCTION OF DEBT.
THE GROUP HAS SOLD ITS PRESSURE SENSITIVE BUSINESS IN THE UNITED STATES FOR $52
MILLION IN CASH AND IS ACTIVELY PURSUING THE DISPOSAL OF OTHER ASSETS IN THE
US, EUROPE AND SOUTH AFRICA IDENTIFIED AS BEING NON-CORE TO THE GROUP'S
STRATEGY. A CONDITIONAL AGREEMENT FOR THE SALE OF THE NASH MILL IN THE UNITED
KINGDOM COULD NOT PROCEED BECAUSE THE PROSPECTIVE PURCHASER WAS UNABLE TO RAISE
THE AGREED PRICE IN CASH.
IN THE UNITED STATES A NUMBER OF PARTIES HAVE SUBMITTED INDICATIVE OFFERS FOR
CERTAIN OF THE ENERGY ASSETS AS WELL AS THE MONETISATION OF THE TIMBERLANDS. A
LIMITED NUMBER OF PARTIES WILL BE SELECTED AND INVITED TO MAKE FIRM BIDS DURING
THE COMING MONTHS AND WE SHOULD BE ABLE TO CONCLUDE SATISFACTORY TRANSACTIONS
BEFORE THE YEAR END.
IN SOUTH AFRICA THE GROUP INTENDS TO STRENGTHEN ITS TIMBER INDUSTRIES DIVISION
AND ENABLE IT TO DEVELOP ON ITS OWN. IT IS PLANNED TO LIST THE TIMBER
INDUSTRIES COMPANY ON THE JOHANNESBURG STOCK EXCHANGE LATER THIS YEAR.
THE NASH AND TRANSCRIPT BUSINESSES DO NOT FORM PART OF THE GROUP'S CORE
BUSINESSES. THEY ARE BEING STRUCTURED AS SEPARATE, INDEPENDENTLY MANAGED
BUSINESSES AND WILL IN DUE COURSE BE SOLD.
THE INDICATION OF INTEREST WHICH THE GROUP HAS HAD FOR MANY OF THESE ASSETS
MAKES THE GROUP CONFIDENT OF REACHING APPROXIMATELY R2 BILLION OF TOTAL SALES
BY DECEMBER 1998. PROCEEDS OF THE SALES WILL BE USED TO REDUCE DEBT.
DUE CONSIDERATION WILL ALWAYS BE MADE IN SUCH TRANSACTIONS FOR ALL THE
STAKEHOLDERS, PARTICULARLY EMPLOYEES.
NEW YORK LISTING
THE LEVEL OF FOREIGN INTEREST IN SAPPI HAS INCREASED SIGNIFICANTLY IN THE PAST
TWELVE MONTHS AND FOREIGN INVESTORS NOW OWN APPROXIMATELY 45% OF THE TOTAL
STOCK IN THE GROUP. (PRIOR TO THE RECENT ISSUE OF SHARES TO THE IDC, THIS WOULD
HAVE REPRESENTED ABOUT 49% OF THE TOTAL STOCK THEN IN ISSUE). THE BOARD
BELIEVES THAT THIS INTEREST WILL BE STIMULATED FURTHER BY LISTING THE GROUP ON
THE NEW YORK STOCK EXCHANGE LATER IN THE YEAR.
THE PREPARATION WORK FOR THE LISTING IS ON TRACK AND IT IS PLANNED TO LIST IN
THE SECOND HALF OF 1998. IT IS NOT PLANNED TO RAISE EQUITY AT THE TIME OF THE
LISTING.
"YEAR 2000" ACTION PLAN
THE GROUP HAS HAD AN ACTIVE PROGRAMME TO MAKE ALL ITS SYSTEMS "YEAR 2000"
COMPLIANT. IT IS EXAMINING ALL ITS SYSTEMS AND ITS INTERFACES WITH BUSINESS
PARTNERS TO EVALUATE RISKS TO THE BUSINESS, AND APPROPRIATE ACTION IS BEING
TAKEN TO RESOLVE EACH PROBLEM WHICH IS IDENTIFIED.
DIVIDENDS
LAST YEAR THE GROUP DID NOT PAY A DIVIDEND BECAUSE OF POOR RESULTS AND THE KNP
LEYKAM TRANSACTION. IT IS EXPECTED THAT DIVIDEND PAYMENTS WILL BE RESUMED IN
RESPECT OF THE 1998 FINANCIAL YEAR. HOWEVER, THE BOARD HAS DECIDED THAT IN VIEW
OF THE PAST VOLATILITY IN MARKETS, DIVIDENDS WILL IN FUTURE ONLY BE CONSIDERED
ON AN ANNUAL BASIS. NO INTERIM DIVIDEND WILL THEREFORE BE PAYABLE.
THE GROUP AIMS TO PURSUE A POLICY OF PROVIDING REGULAR DIVIDEND PAYMENTS WHICH
WILL PROVIDE REAL GROWTH IN INCOME FOR SHAREHOLDERS. THE DIVIDEND COVER EACH
YEAR WILL VARY IN LINE WITH CHANGES IN THE BUSINESS CYCLE, BUT WILL BE
MAINTAINED AT A LONG TERM AVERAGE OF THREE TIMES EARNINGS.
REPORTING
IT IS THE GROUP'S INTENTION TO ISSUE QUARTERLY REPORTS WITH EFFECT FROM THE END
OF THE CURRENT FINANCIAL YEAR.
OUTLOOK
IN GENERAL THE OUTLOOK FOR THE WORLD ECONOMY SEEMS POSITIVE. GROWTH IN THE US
HAS BEEN EXTREMELY ROBUST AND THERE IS A CONTINUATION OF STEADY GROWTH EVIDENT
IN EUROPE. HOWEVER, IT IS DIFFICULT TO JUDGE WHAT THE IMPACT OF THE SOUTH EAST
ASIAN SITUATION WILL BE ON WESTERN ECONOMIES. IN THE GROUP'S OWN SECTOR A
REVIVAL OF ACTIVITY HAS BEEN SEEN IN MOST OF THE SOUTH EAST ASIAN ECONOMIES
WHICH WERE AFFECTED. THE INTERNATIONAL MONETARY FUND SUPPORT APPEARS TO HAVE
HAD A CALMING EFFECT IN SOME COUNTRIES AND WHEREAS COUNTRIES LIKE KOREA,
THAILAND, MALAYSIA AND INDONESIA WERE VIRTUALLY ABSENT AS BUYERS FROM THE PULP
MARKETS IN THE PERIOD FROM NOVEMBER 1997 THROUGH TO FEBRUARY 1998, THEY HAVE
BEEN RETURNING TO ALMOST NORMAL LEVELS. THE CURRENT CRISIS IN INDONESIA COULD
HOWEVER AGAIN IMPACT ON PULP DELIVERIES.
CONSUMPTION FOR THE GROUP'S PAPER PRODUCTS SHOWS STEADY GROWTH AND PRICES ARE
HOLDING, AND IN EUROPE HAVE EVEN IMPROVED OVER THE PAST MONTHS. PULP
INVENTORIES HAVE DECLINED FOR A NUMBER OF MONTHS AND ARE NOW LOWER THAN THEY
HAVE BEEN SINCE SEPTEMBER 1995. MAJOR PRODUCERS HAVE SHOWN UNUSUAL DISCIPLINE
IN CURTAILING PULP PRODUCTION AND MANAGING INVENTORIES. PULP PRICES, (FOR
NORTHERN BLEACHED SOFTWOOD KRAFT PULP) HAVE RISEN TO $550 PER TON CURRENTLY AND
THE RECENTLY ANNOUNCED INCREASE TO $600 PER TON IS LIKELY TO BECOME EFFECTIVE
IN THE THIRD CALENDAR QUARTER OF THE YEAR WHICH SHOULD HAVE A STABILISING AND
POSITIVE EFFECT ON PAPER PRICES. IT WILL, HOWEVER, BE IMPORTANT THAT PAPER
MANUFACTURERS IN EUROPE MANAGE THEIR OUTPUT DURING THE EUROPEAN SUMMER
HOLIDAYS, WHEN DEMAND IS TRADITIONALLY VERY WEAK, TO ENSURE THAT EXCESSIVE
INVENTORIES ARE NOT CREATED.
BASED ON PRESENT TRADING CONDITIONS, AND OUR OWN IMPROVED COMPETITIVENESS IN
NORTH AMERICA AND IN EUROPE, AND IN SPITE OF THE WEAK TRADING CONDITIONS IN
SOUTH EAST ASIA THE BOARD EXPECTS THAT THE BALANCE SHEET IN THE SECOND
HALF-YEAR WILL IMPROVE AND THAT EARNINGS PER SHARE FOR THE FULL YEAR SHOULD BE
SATISFACTORY.
ON BEHALF OF THE BOARD
E VAN AS
DIRECTOR
W E HEWITT
DIRECTOR
26 MAY 1998
COPIES OF THIS REPORT WILL BE MAILED TO SHAREHOLDERS.
OTHER INTERESTED PARTIES CAN OBTAIN COPIES FROM:
SOUTH AFRICA: MERCANTILE REGISTRARS LIMITED, 6TH FLOOR, 94 PRESIDENT STREET,
JOHANNESBURG, 2001, PO BOX 1053, JOHANNESBURG, 2000
UNITED KINGDOM: INDEPENDENT REGISTRARS GROUP LIMITED, BOURNE HOUSE, 34
BECKENHAM ROAD, BECKENHAM, KENT, BR3 4TU
THESE RESULTS CAN BE VIEWED ON THE INTERNET AT HTTP://WWW.SAPPI.COM
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