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SAPPI LIMITED
(Reg. No. 1936/008963/06)
quarterly results for the second quarter ended March 2001
2nd Quarter 2001
Summary
Quarter ended Half-year ended
March December March March March
2001 2000 2000 2001 2000
Sales (US$ million) 1,104 1,115 1,187 2,219 2,302
Operating profit (US$ million) 121 143 165 264 292
EBITDA (US$ million) 210 237 262 447 489
Operating profit to sales (%) 11.0 12.8 13.9 11.9 12.7
EBITDA to sales (%) 19.0 21.3 22.1 20.1 21.3
Operating profit to average
net assets (%) 13.6 15.8 16.2 14.7 15.2
EPS before exceptional
items (Headline) (US cents) 32 34 32 66 58
EPS (US cents) 32 34 29 66 58
Return on equity (%) 18.6 20.1 17.9 19.6 18.2
Net debt (US$ million) 1,277 1,269 1,621* 1,277 1,621*
*Restated for reclassification of minority interest to debt
EPS matches last year
ROE 18.6%
Operating profit down 27%
Production curtailed substantially
Mobile mill closure
Comments
Earnings met expectations during the quarter, however, trading conditions were
difficult resulting in squeezed margins and lower operating income than a year
earlier. Earnings were boosted by lower finance costs and a lower effective tax
rate.
Sales were 7% below the same quarter last year, reflecting lower demand for
coated woodfree paper and the sale of Novobord last year. We continued to
manage our inventories and during the quarter we idled more than 10% of coated
woodfree capacity and in total curtailed more than 70,000 tons of paper
production.
Group Results
The group's net profit for the quarter increased 7% compared to the same
quarter last year, to US$75 million. Earnings per share were 32 US cents, up
10% compared to a year ago but earnings before exceptional items (Headline) of
32 US cents were the same as last year.
Sales volumes of continuing operations declined by 4% but market shares
generally improved and prices were slightly above a year earlier in dollar
terms, although in local currency terms the prices in Europe and Southern
Africa were significantly higher.
Operating profit however was down 27% to US$121 million because of the tough
trading conditions, particularly in North America. However, net finance costs
for the quarter were US$16 million compared to US$43 million last year which
included a US$17 million charge relating to refinancing.
Taxation for the quarter was US$28 million, an effective tax rate of 27%, which
was lower than the prior quarter as a result of the regional mix of profit.
Cash Flow and Debt
The group continued to generate strong cash flow (EBITDA US$210 million) in the
quarter. Over 30% of this, approximately US$66 million, was used to repurchase
shares. Capital expenditure of US$58 million was lower than the previous
quarter. Expenditure in the first two quarters is in line with the plan for the
year. A further US$60 million was paid to shareholders in the form of the year
2000 dividend.
Net debt was stable during the quarter at US$1,277 million and the debt to
total capitalisation ratio was 33.8%.
Sappi fine paper
Quarter ended
March 2001 March 2000 %
US$ million US$ million change
Sales 909 961 ( 5)
Operating profit 62 114 (46)
Operating margin (%) 6.8 11.8 -
EBITDA 131 183 (28)
EBITDA Margin (%) 14.4 19.0 -
RONOA p.a. (%) 9 16 -
The performance of Sappi Fine Paper was affected by weaker demand in the major
markets with some decline in paper prices, which resulted in reduced margins
and returns.
Europe
We experienced lower order inflow and cut back our production in the quarter to
match output to customer requirements and hold inventory levels.
Although prices achieved were 9% higher in Euros than a year earlier, they were
slightly lower in dollar terms and lower volumes, down 4%, resulting in a lower
operating income. The strong dollar added pressure on pulp, energy and latex
costs in Euro terms. Fixed costs continued to be tightly managed and remained
at approximately last year's level in Euros.
Quarter ended
March 2001 March 2000 % change % change
US$ million US$ million (US$) (Euros)
Sales 470 497 ( 5) 3
Operating profit 40 66 (39) (34)
Operating margin (%) 9 13 - -
EBITDA 78 107 (27) (21)
EBITDA Margin (%) 17 22 - -
RONOA p.a. (%) 11 17 - -
In addition to commercial shuts during the quarter, the Gratkorn PM11 was shut
for an extended period for upgrades to further enhance paper quality. The
upgrade will add capacity but this will not be utilised until market conditions
are suitable.
North America
Trading conditions in North America were particularly difficult in the quarter
with pressure on coated woodfree paper volume and prices and high energy costs.
The continued drain of the uncoated paper business' operating loss which
amounted to approximately US$10 million in the quarter further depressed the
operating performance.
Sales volume from our North American mills was 6% below a year earlier and
average prices achieved were at the same level but lower than the prior quarter
Quarter ended
March 2001 March 2000 %
US$ million US$ million change
Sales 384 408 (6)
Operating profit 13 43 (70)
Operating margin (%) 3 11 -
EBITDA 43 69 (38)
EBITDA Margin (%) 11 17 -
RONOA p.a. (%) 4 14 -
The operating margin and return on net operating assets were disappointing,
driven by higher pulp, energy and other raw material costs, compounded by some
one-time productivity issues at Muskegon where the start-up costs, after two
capital projects, were higher than expected.
The prospects for the North American business' performance should be improved
by lower pulp prices and the elimination of the operating problems at Muskegon
mill.
South Africa
The South African fine paper business had a good quarter. Sales volumes were 8%
higher than a year earlier and prices, although 10% lower in dollar terms, were
higher in rands. Control of fixed costs resulted in a significant decrease of
costs per ton even in nominal terms.
Operating income increased 80%, compared to last year (which was very
depressed), to US$9 million, increasing the operating margin to 16% and the
return on net operating assets to 36%.
Sappi forest products
This division had a strong quarter. Demand in the domestic market was firm and
domestic prices strengthened because of the strength of the dollar. Newsprint
prices strengthened in export markets, but pulp prices started softening in the
quarter.
The sales volume of continuing operations (excluding Novobord and Mining
Timber) was 5% below last year and average prices were only slightly higher in
dollars.
Costs continued to be tightly controlled and in dollar terms the cost per ton
of goods sold declined by 14%.
Quarter ended
March 2001 March 2000* % change % change
US$ million US$ million (US$) (Rands)
Sales 195 226 (14) 7
Operating profit 60 48 25 56
Operating margin (%) 31 21 - -
EBITDA 80 75 7 33
EBITDA Margin (%) 41 33 - -
RONOA p.a. (%) 27 17 - -
*Includes discontinued businesses
The improvement in operating margin and return on assets resulted from good
cost control and the benefits of producing in a low cost country.
Share repurchase
Since the commencement of the share repurchase in December 2000, we have
repurchased 10.1 million shares at an average price of R55.84 with a low of
R48.10 and a high of R67.50.
In accordance with JSE Securities Exchange rules on share buy-backs we have not
purchased shares since early March.
There has been strong foreign buying of Sappi shares and the spread of our
shareholders is now wider than ever. When we listed on the New York stock
exchange, we stated that our target was to attain 65% foreign shareholding in
the company to reflect more or less the spread of our assets. At the end of
April the foreign shareholding had risen to about 61%.
Mobile mill
The Sappi Fine Paper North America mill at Mobile, Alabama was acquired when
the group bought the SD Warren Company from Scott Paper. The mill has a
capacity of approximately 300,000 short tons per annum of which 80,000 tons is
coated and the balance uncoated paper. At the time of the acquisition it was
intended to rebuild the mill into a coated facility when the market opportunity
arose.
Mobile is located on a multi-user site. The energy complex which supplies the
Sappi mill and another mill is in the hands of a company which filed for
chapter 11 bankruptcy protection 29 months ago after the closure of a pulp mill
on the site which provided fuel for the complex. As a result energy costs
soared as the energy complex increased reliance on fossil fuel. We cannot
invest in the site without a better overall cost structure and the group has,
therefore, decided to close the facility subject to the completion of a final
review.
Closure of Mobile would lead to a restructuring charge of approximately US$120
million after tax in the third quarter. The restructuring charge and the
closure would not impact earnings before exceptional items this year. The
closure would result in a positive cash generation of approximately US$30
million. Assuming that the mill had been closed in December 2000, the second
quarter operating profit in North America would have increased by more than 75%
to US$23 million and Sappi group earnings would have increased by 2.5 US cents
a share for the quarter.
Effect on customers
The closure of Mobile would result in the phase-out of the production of
uncoated products including the Spectratech range, which would be done in a
manner to minimise the impact on customers.
We intend to move the Lusterprint range of coated products to other Sappi
facilities.
We will be communicating with customers immediately regarding the potential
effect on their business.
Effect on employees
Regrettably this closure would result in the loss of more than 480 jobs. The
company is sensitive to the effect of such closure on employees and will treat
them accordingly.
Outlook
Conditions in our markets worsened in recent weeks. However, inventories in the
coated paper pipeline are stable and demand on producers should rebound once
economic prospects in the USA improve.
Weakening pulp prices (NBSK has dropped to approximately US$600 per ton at the
time of writing, from US$710 per ton in January) will lower the cost structure
of our fine paper business but have an unfavourable impact on our forest
products business, the reverse of what happened last year as pulp prices
increased.
The Euro/Dollar exchange rate has moved sharply recently. The strong dollar is
likely to have a favourable impact on the South African business' dollar profit
as prices are largely determined in dollars and costs are predominantly in
rands. In Europe, however, the strong dollar has a net negative effect both on
costs and the translation of profit to dollars. The sensitivity to a move of 10
US cents in the US$/Euro rate amounts to approximately US$40 million per annum
in after tax profit.
If current market and particularly currency conditions persist, earnings before
exceptional items for the second half are likely to be modestly below those for
the first half.
On behalf of the Board
E van As D G Wilson
Director Director
3 May 2001
Sappi limited
(Registration No. 1936/008963/06)
Forward looking statements
Certain statements in this report that are neither reported financial results
nor other historical information, are forward-looking statements, including,
but not limited to statements that are predictions of or indicate future
events, trends, plans or objectives. Undue reliance should not be placed on
such statements because, by their nature, they are subject to known and unknown
risks and uncertainties and can be affected by other factors, that could cause
actual results and company plans and objectives to differ materially from those
expressed or implied in the forward-looking statements (or from past results).
Such risks, uncertainties and factors include, but are not limited to the
highly cyclical nature of the pulp and paper industry (and the factors that
contribute to such cyclicality, such as levels of demand, production capacity,
production and pricing), adverse changes in the markets for the group's
products, consequences of substantial leverage, changing regulatory
requirements, unanticipated production disruptions, economic and political
conditions in international markets, the impact of investments, acquisitions
and dispositions (including related financing) and currency fluctuations. The
company undertakes no obligation to publicly update or revise any of these
forward-looking statements, whether to reflect new information or future events
or circumstances or otherwise.
Group Income Statements
Unaudited Unaudited
Quarter ended Half-year ended
March March March March
2001 2000 2001 2000
US$ US$ % change US$ US$ % change
million million million million
Sales 1,104 1,187 (7.0) 2,219 2,302 (3.6)
Cost of sales 891 922 1,773 1,820
Gross profit 213 265 (19.6) 446 482 (7.5)
Selling, general
and administrative
expenses 92 100 182 190
Operating profit 121 165 (26.7) 264 292 (9.6)
Non-trading
profit (loss) (2) (1) (3) 4
Net finance costs 16 43 40 70
Net paid 26 53 58 89
Capitalised (10) (10) (18) (19)
Profit before tax 103 121 221 226
Taxation - current 20 24 43 36
- deferred 8 23 21 47
Profit after tax 75 74 1.4 157 143 9.8
Income attributable to
minority interests - 4 - 7
Net profit 75 70 7.1 157 136 15.4
EBITDA 210 262 (19.9) 447 489 (8.6)
Basic earnings per
share (US cents) 32 29 66 58
Basic earnings before
exceptional items
(Headline earnings)
per share (US cents) 32 32 66 58
Weighted average number
of shares in
issue (millions) 231.7 239.1 235.4 234.8
Diluted earnings
per share (US cents) 32 29 66 57
Diluted earnings before
exceptional items
(Headline earnings)
per share (US cents) 31 31 65 57
Weighted average
number of shares
on fully diluted
basis (millions) 237.0 244.8 240.6 240.4
Calculation of Earnings
before exceptional
items (Headline)
net of tax
Net profit 75 70 157 136
Profit on disposal
of business
and fixed assets 1 1 1 (2)
Accelerated cost
of early buy
back of loan notes - 11 - 11
Decrease in other
provisions (2) (6) (3) (9)
Earnings before
exceptional
items (Headline) 74 76 155 136
Group Balance Sheet
Unaudited Audited
March 2001 September 2000
US$ million US$ million
ASSETS
Non-current assets 3,481 3,600
Property, plant and equipment 3,017 3,095
Plantations 350 372
Deferred taxation 35 37
Other non-current assets 79 96
Current assets 1,116 1,168
Cash and cash equivalents 190 294
Trade and other receivables 333 319
Inventories 593 555
Total assets 4,597 4,768
EQUITY AND LIABILITIES
Capital and reserves
Ordinary shareholders' interest 1,584 1,618
Minority interest 4 53
Non-current liabilities 1,935 1,996
Long-term borrowings 1,207 1,278
Deferred taxation 506 500
Other long-term liabilities 222 218
Current liabilities 1,074 1,101
Interest bearing liabilities 243 162
Bank overdraft 17 76
Other current liabilities 814 863
Total equity and liabilities 4,597 4,768
Number of shares in issue (millions) 230.6 239.1
Net Debt (US$ million) 1,277 1,270*
Net Debt to Total Capitalisation (%) 33.8 32.5*
Net asset value per share (US cents) 891 870
*Restated for reclassification of minority interest to debt in March 2001, as
if processed in September 2000.
Group Cash Flow Statement
Unaudited Unaudited
Half-year Half-year
ended ended
March 2001 March 2000
US$ million US$ million
Cash generated by operations 433 498
Movement in working capital (123) (56)
Net finance costs (58) (89)
Taxation paid (9) (8)
Dividends paid (60) (44)
Cash retained from operating activities 183 301
Cash effects of investing activities (137) 4
46 305
Cash effects of financing activities (148) (156)
Net movement in cash and cash equivalents (102) 149
Group Statement of Changes in Shareholders' Equity
Unaudited Unaudited
Half-year Half-year
ended ended
March 2001 March 2000
US$ million US$ million
Balance - beginning of year 1,618 1,463
Changes in accounting policies 8 (27)
Balance - beginning of year restated 1,626 1,436
Net profit 157 136
Foreign currency translation reserve (72) (92)
Dividends declared - US$ 0.25
(2000: US$ 0.19) per share (60) (45)
Goodwill written off to equity - (1)
(Share buybacks)/issuance of ordinary shares (62) 114
Loss on transfer of shares to Share Purchase
Trust (5) -
Balance - end of year 1,584 1,548
notes to the group results
1. Basis of Preparation
The group results have been prepared in conformity with South African
Statements of Generally Accepted Accounting Practice. The same accounting
policies have been followed as in the annual financial statements for September
2000, except for new or revised accounting standards adopted in the first
quarter of the current year.
The financial results for the quarter have been reviewed by the group's
auditors, Deloitte & Touche. Their report is available for inspection at the
company's registered offices.
Unaudited Unaudited
Quarter ended Half-year ended
March 2001 March 2000 March 2001 March 2000
US$ million US$ million US$ million US$ million
2. Cost of sales
Included in cost of sales are:
Depreciation 76 84 156 167
Fellings 8 8 16 19
84 92 172 186
3. Capital expenditure
Fixed assets 137 72
Plantations 14 16
151 88
Unaudited Audited
Half-year ended Year ended
March 2001 September 2000
US$ million US$ million
4. Capital Commitments
Contracted but not provided 116 73
Approved but not contracted 162 150
278 223
5. Contingent liabilities
Guarantees and suretyships 53 80
Other contingent liabilities 61 46
Regional information
Unaudited Unaudited
Quarter ended Half-year ended
March 2001 March 2000 March 2001 March 2000
US$ million US$ million % US$ million US$ million %
change change
Sales
- Metric
tons (000's)
Fine Paper
- North America 326 346 (5.8) 654 669 (2.2)
Europe 557 580 (4.0) 1,120 1,148 (2.4)
Southern
Africa 67 62 8.1 138 132 4.5
Total 950 988 (3.8) 1,912 1,949 (1.9)
Forest Products 609 712 (14.5) 1,230 1,361 (9.6)
Total 1,559 1,700 (8.3) 3,142 3,310 (5.1)
Sales
Fine Paper
- North America 384 408 (5.9) 779 788 (1.1)
Europe 470 497 (5.4) 936 971 (3.6)
Southern
Africa 55 56 (1.8) 112 115 (2.6)
Total 909 961 (5.4) 1,827 1,874 (2.5)
Forest Products 195 226 (13.7) 392 428 (8.4)
Total 1,104 1,187 (7.0) 2,219 2,302 (3.6)
Operating profit
Fine Paper
- North America 13 43 (69.8) 31 81 (61.7)
Europe 40 66 (39.4) 94 119 (21.0)
Southern
Africa 9 5 80.0 15 10 50.0
Total 62 114 (45.6) 140 210 (33.3)
Forest Products 60 48 25.0 122 81 50.6
Corporate (1) 3 (133.3) 2 1 100.0
Total 121 165 (26.7) 264 292 (9.6)
Earnings before
interest, tax,
depreciation and
amortisation charges **
Fine Paper
- North America 43 69 (37.7) 89 134 (33.6)
Europe 78 107 (27.1) 170 202 (15.8)
Southern
Africa 10 7 42.9 19 14 35.7
Total 131 183 (28.4) 278 350 (20.6)
Forest Products 80 75 6.7 167 137 21.9
Corporate (1) 4 (125.0) 2 2 -
Total 210 262 (19.8) 447 489 (8.6)
Net operating assets
Fine Paper
- North America 1,252 1,188 5.4 1,252 1,188 5.4
Europe 1,362 1,535 (11.3) 1,362 1,535 (11.3)
Southern
Africa 97 129 (24.8) 97 129 (24.8)
Total 2,711 2,852 (4.9) 2,711 2,852 (4.9)
Forest Products 860 1,084 (20.7) 860 1,084 (20.7)
Corporate (13) (13) - (13) (13) -
Total 3,558 3,923 (9.3) 3,558 3,923 (9.3)
** before non trading profit (loss)
Summary rand convenience translation March 2001
Unaudited Unaudited
Quarter ended Half-year ended
March 2001 March 2000 % March 2001 March 2000 %
change change
Sales
(ZAR million) 8,636 7,442 16.0 17,103 14,254 20.0
Operating profit
(ZAR million) 947 1,028 (8.0) 2,035 1,808 12.5
Profit after
taxation
(ZAR million) 587 459 27.9 1,210 883 37.0
EBITDA
(ZAR million) 1,643 1,642 0.1 3,445 3,027 13.8
Operating profit
to sales (%) 11.0 13.9 11.9 12.7
EBITDA to sales
(%) 19.0 22.1 20.1 21.3
Operating profit
to average
net assets (%) 13.7 16.1 14.9 15.0
Basic EPS before
exceptional
items (Headline)
(SA cents) 250 197 26.7 508 356 42.5
Basic EPS
(SA cents) 253 181 39.8 506 356 42.1
EBITDA per share
(SA cents) 709 687 3.2 1,464 1,290 13.5
Net debt
(ZAR million) 10,226 10,504* (2.7) 10,226 10,504* (2.7)
Net debt to total
capitalisation
(%) 33.8 37.4* 33.8 37.4*
Cash generated by
operations
(ZAR million) 3,337 3,083 8.2
Cash retained
from operating
activities
(ZAR million) 1,410 1,864
Net movement in
cash and
cash equivalents
(ZAR million) (786) 923
Exchange rates:
Period end
rate: US $1 = R 8.0075 6.4800 8.0075 6.4800
Average rate:
US $1 = R 7.8224 6.2690 7.7076 6.1917
Period end
rate:
US $1 = EURO 1.1348 1.0358 1.1348 1.0358
Average rate:
US $1 = EURO 1.0968 1.0044 1.1295 0.9820
* Restated for reclassification of minority interest to debt
This report is available on the Sappi website -
www.sappi.com
Other interested parties can obtain printed copies of this report from:
South Africa:
Mercantile Registrars Limited, 8th Floor, 11 Diagonal Street, Johannesburg, 200
PO Box 1053, Johannesburg, 2000. Tel: +27 (0) 11 370-5000
United Kingdom:
Capita IRG plc, Bourne House, 34 Beckenham Road, Beckenham, Kent, BR3 4TU, DX
91750, Beckenham West.
Tel: +44 (0) 208 639-2000.
United States ADR Depositary:
Bank of New York, ADR Department, 101 Barclay Street, New York, NY 10286. Tel:
+1 212 815-5800.
www.sappi.com
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