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Sappi Limited - Results For The Third Quarter Ended June 2002
SAPPI LIMITED
The word for fine paper
(Registration number 1936/008963/06)
JSE Code: SAP
ISIN Code: ZAE 000006284
Results for the third quarter ended June 2002
- EPS increases
- Market conditions remain difficult in USA
- Strong free cash flow of US$180 million
- Cloquet integration well advanced
summary
Quarter ended Nine months
ended
June March June June June
2002 2002 2001 2002 2001
Sales (US$ million) 974 871 967 2,677 3,186
Operating profit (US$ 97 105 91 267 355
million)
EBITDA (US$ million) 188 186 175 522 622
Operating profit to sales 10.0 12.1 9.4 10.0 11.1
(%)
EBITDA to sales (%) 19.3 21.4 18.1 19.5 19.5
Operating profit to 11.8 15.1 10.5 10.3 13.4
average net assets (%)
EPS before exceptional 28 26 24 68 90
items (Headline) (US
cents)
EPS (US cents) 29 25 (27) 64 39
Return on equity (%) 18.2 17.8 14.1* 12.9 18.2*
Net debt (US$ million) 1,572 1,194 1,250 1,572 1,250
*Before Mobile restructuring charge
comment
Performance of our North American business improved in the quarter, but
there is still a strong contrast between the poor performance in North
America and the good results reported by our European and Southern African
businesses.
Industry shipments of coated fine paper improved by 8% in Europe compared to
a year earlier but declined 5% compared to its seasonally stronger previous
quarter. Industry shipments in the USA were 2.5% down year on year but 4% up
compared to the previous quarter. Imports into the USA continue to represent
approximately 23% of coated fine paper sales despite the relatively weaker
US dollar.
In Europe prices have, on average, remained stable quarter on quarter. In
North America prices remain very weak with continued downward pressure on
prices by domestic producers. As the US economy continues to grow and
European growth rate also improves, there has been a modest improvement in
advertising expenditure but the print media has not yet benefited. If the
trend continues an improvement should be seen in the next six months. Our
order books in Europe have lengthened partly due to increased exports, but
in North America order books remain short. We took approximately 100,000
tons of pulp and paper production downtime across the group during the
quarter to match supply to demand, compared to 150,000 tons in the second
quarter.
Net profit before exceptional items of US$66 million was up 20% on the same
quarter last year. Earnings per share before exceptional items were 28 US
cents, 4 US cents up on last year and 2 US cents up on the sequential
quarter. Basic earnings per share were 29 US cents.
Net finance costs were US$7 million after marking financial instruments to
market and foreign exchange gains of a net US$10 million. Before this net
impact, finance costs were at the same level as last quarter and 30% below
the corresponding quarter last year despite the acquisition of the Potlatch
fine paper business for US$480 million, which was completed in May.
The effective tax rate for the quarter was 27%, which is consistent with the
expected rate for the full year.
cash flow and debt
EBITDA for the quarter was a strong US$188 million, slightly above the prior
quarter and free cash flow before the acquisition investment was US$180
million. There was a US$39 million reduction in working capital in the
quarter.
The acquisition of the Potlatch fine paper division for approximately US$480
million was funded by debt. Because of our strong cash flow the net impact
after expending US$480 million was an increase in net debt of only US$378
million to US$1,572 million from US$1,194 million last quarter. Debt to
total capitalisation is just below 40%.
Other capital expenditure, excluding the recent acquisition, on fixed assets
and plantations was US$150 million for the first three quarters, which as
planned was below the sum of depreciation, amortisation and fellings.
Sappi`s US denominated bond issue in June was a great success. We raised
US$750 million in two tranches: US$500 million 10 year and US$250 million 30
year. The bonds priced with coupons of 6.75% and 7.50% respectively, as low
as any in our sector. The proceeds of the bonds have been used to extend the
maturity of debt.
The effect of extending maturities, replacing very low variable interest
short-term debt, will be to increase finance costs in the short term.
However, we believe that the benefits of improving the capital structure at
favourable long-term rates outweigh the short-term penalty. We will enter
into interest rate swaps in respect of a portion of our fixed long-term
debt, to variable rates, to soften the impact of this move in the short
term.
operating review for the quarter
sappi fine paper
Markets for coated fine paper have not shown the turnaround seen in other
sectors as a result of continued poor advertising spend. Analysts continue
to expect advertising expenditure to pick up later this calendar year.
Merchants appear to have started restocking in Europe but in the USA their
inventories remain low. Producers have continued to curtail production to
match output to demand.
Our performance was mixed with continued strong performances in Europe and
South Africa, but disappointing results in North America.
Operating income increased 25.6% to US$54 million representing a return on
net operating assets of 7.9%.
Quarter ended
June 2002 June 2001 %
US$ million US$ change
million
Sales 820 799 2.6
Operating profit 54 43 25.6
Operating margin 6.6 5.4 -
(%)
EBITDA 126 105 20.0
EBITDA Margin (%) 15.4 13.1 -
RONOA p.a. (%) 7.9 6.6 -
Europe
The sales volume held up well in the seasonally quiet early summer and was
similar to the prior quarter with sales of sheeted products performing
better than web. Efforts to increase prices were only partly successful. We
have been able to raise indent prices in some markets but in others, notably
in southern Europe, price levels fell.
The strengthening of the Euro against the US dollar helped to counteract the
dollar increase in purchased pulp prices.
The return on net operating assets was 17.2%, slightly lower than the
previous quarter.
Quarter ended
June 2002 June 2001 % %
change change
US$ million US$ (US$) (Euro)
million
Sales 442 401 10.2 4.2
Operating profit 60 26 130.8 118.1
Operating margin 13.6 6.5 - -
(%)
EBITDA 104 61 70.5 61.1
EBITDA Margin (%) 23.5 15.2 - -
RONOA p.a. (%) 17.2 7.7 - -
North America
The North American market for coated fine paper remained weak. The industry
reported increases in apparent consumption off a depressed level, of 7%
versus last year and 6.5% versus last quarter. Average industry prices for
sheets were down slightly compared to the prior quarter and down 4.6% versus
the last year. Web prices continue to decline and were down 4.5% versus last
quarter and 14.6% versus last year.
Operating profit, prior to non-recurring integration costs of approximately
US$13 million, improved versus the sequential quarter by approximately US$7
million. Our results include the coated freesheet business and Cloquet mill
acquired from Potlatch from 13 May 2002. The integration has proceeded well
and the benefits of synergies will start to impact results in the next
quarter. The mill was closed for a few days after which we restarted it with
a workforce of 550 people, about 20% less than the previous workforce. The
mill is currently running at higher rates than previously. We have also
integrated and streamlined the salesforce and moved the production to
Cloquet and other Sappi mills. The combination of Sappi and the acquired
business lost some market share as we shed unprofitable business and in the
transition lost some sales of the Potlatch products, as we had expected. We
anticipate recovering most of these sales. Price developments were in line
with the market.
Sales of US$319 million, including the coated fine paper business acquired
from Potlatch, were 6% below last year`s US$340 million which included US$47
million of discontinued Mobile products.
Operating margins on North American assets are on track to improve. The
North American market continued to be profitable when the sales of products
from our European business are included.
Quarter ended
June 2002 June 2001 %
US$ million US$ change
million
Sales 319 340 (6.2)
Operating (loss) (16)* 9 -
profit
Operating margin (%) - 2.6 -
EBITDA 12 35 (65.7)
EBITDA Margin (%) 3.8 10.3 -
RONOA p.a. (%) - 3.1 -
*Includes US$13 million of non-recurring integration costs
Fine Paper SA
Order books remained strong in local markets partly as a result of import
substitution. Average prices realised were 19% higher than last year in Rand
terms, however, as a result of the weakening of the Rand year on year, they
were 10% lower in dollars.
Return on net operating assets increased to 47.3%.
Quarter ended
June 2002 June 2001 % %
change change
US$ million US$ (US$) (Rand)
million
Sales 59 58 1.7 35.5
Operating profit 10 8 25.0 66.5
Operating margin 16.9 13.8 - -
(%)
EBITDA 10 9 11.1 48.0
EBITDA Margin (%) 16.9 15.5 - -
RONOA p.a. (%) 47.3 33.0 - -
forest products
Local demand remained firm for all pulp and paper products. Some local and
export price increases were implemented, but many local prices still remain
below international levels. Local demand for packaging paper was strong and
the export markets started to show signs of improved demand and pricing.
Demand for dissolving pulp has firmed modestly resulting in improved sales
volumes and prices are expected to firm. Viscose manufacturers have
announced new capacity, which is encouraging for future demand.
Operating performance continues to be favourably affected by the weak
Rand/Dollar exchange rate. The Rand`s depreciation has, however, led to
increased inflation, which is expected to lead to higher input costs going
forward.
The return on net operating assets was a strong 22.2%.
Quarter ended
June 2002 June 2001 % %
change change
US$ million US$ (US$) (Rand)
million
Sales 154 168 (8.3) 22.1
Operating profit 39 41 (4.9) 26.7
Operating margin 25.3 24.4 - -
(%)
EBITDA 58 63 (7.9) 22.6
EBITDA Margin (%) 37.7 37.5 - -
RONOA p.a. (%) 22.2 18.2 - -
Splitting the role of Chairman and Chief Executive
The process of finding a successor to the chief executive is well underway.
The board is not yet ready to make an announcement.
outlook
We have seen some improvement in demand in many parts of our business,
however, in North America in particular, demand for coated fine paper
remains patchy.
Pulp prices have continued to increase steadily to approximately US$490 per
ton for NBSK in July. Pulp inventories at both consumers and producers are
at low levels as a result of improved consumption and production discipline.
The relative strength of the Euro compared to the US dollar is expected to
enhance the dollar earnings of our European business because its sales are
predominantly in Euros, while part of its costs (particularly purchased
pulp) is in US dollars. We estimate that, other things remaining unchanged,
a 10% strengthening in the Euro would result in approximately 13 US cents
improvement in earnings per share.
For our Southern African businesses a strengthening of the rand against the
dollar of approximately 10% would result in approximately 11 US cents
reduction in earnings per share. On balance, however, the weakening of the
US dollar is favourable to Sappi.
Improved demand for coated paper is largely dependent on improved
advertising expenditure, which we expect in the coming months provided
recent shocks in the US financial markets do not further affect economic
growth.
A further slight improvement in quarterly earnings per share in the final
quarter is expected given current conditions.
On behalf of the Board
E van As D G Wilson
Director Director
31 July 2002
definitions
Debt/total capitalisation - current and non-current interest bearing
borrowings, and bank overdrafts (net of cash, cash equivalents and short-
term deposits), divided by shareholders` equity plus minority interest, non-
current liabilities, current interest-bearing borrowings and overdraft
EBITDA - earnings before interest, tax, depreciation, amortisation and
fellings (before non-trading profit/loss)
EBITDA Margin - EBITDA divided by sales
Fellings - the amount charged against the income statement representing the
standing cost of the plantations harvested
Net asset value - shareholder`s equity plus net deferred tax
Net assets - total assets less current liabilities
NOPAT - net operating profit after current tax
ROE - return on average equity. Net profit divided by average shareholder`s
equity
RONA - operating profit divided by average net assets
RONOA - operating profit divided by net operating assets, which are total
assets (excluding deferred taxation and cash) less current liabilities
(excluding interest-bearing borrowings and bank overdraft)
forward-looking statements
Certain statements in this release 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 earnings, savings, synergies, 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), any delays, unexpected costs
or other problems experienced with integrating acquisitions and achieving
expected savings and synergies 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.
Financial results for the third quarter ended June 2002
group income statement
Unaudited Unaudited
Unaudited Unaudited Nine Nine
Quarter Quarter months months
ended ended ended ended
June 2002 June 2001 June 2002 June 2001
US$ US$ % US$ US$ %
million million change million million change
Sales 974 967 0.7 2,677 3,186
(16.0)
Cost of sales 768 786 2,147 2,559
Gross profit 206 181 13.8 530 627
(15.5)
Selling, 109 90 263 272
general and
administrative
expenses
Operating 97 91 6.6 267 355
profit (24.8)
Non-trading - 201 19 204
loss
Net finance 7 16 45 56
costs
Net paid * 13 25 68 83
Capitalised (6) (9) (23) (27)
Profit (loss) 90 (126) 203 95
before tax
Taxation - 8 (2) 24 41
current
- 16 (58) 32 (37)
deferred
Net profit 66 (66) 147 91 61.5
(loss)
EBITDA 188 175 7.4 522 622
(16.1)
Basic earnings 29 (27) 64 39
(loss) per
share (US
cents)
Earnings 28 24 68 90
before
exceptional
items
(Headline
earnings) per
share
(US cents)
Weighted 230.4 230.7 230.2 233.8
average number
of shares in
issue
(millions)
Diluted 28 (27) 63 39
earnings
(loss) per
share (US
cents)
Diluted 28 24 67 89
earnings
before
exceptional
items
(Headline
earnings) per
share (US
cents)
Weighted 233.9 230.7 233.5 236.1
average number
of shares on
fully diluted
basis
(millions)
Calculation of
Earnings before
exceptional
items
(Headline) net
of tax
Net profit 66 (66) 147 91
(loss)
Loss (profit) 1 (1) 2 -
on disposal of
business and
fixed assets
Mill closure - 120 5 120
costs and asset
impairment
Debt - - 6 -
restructuring
costs
(Decrease) (1) 2 (3) (1)
Increase in
provisions
Earnings before 66 55 157 210
exceptional
items
(Headline)
* Includes net income from foreign exchange gains and the mark to market of
financial instruments of US$10 million (June 2001: US$8 million) for the
quarter and US$1 million (June 2001: US$16 million) for the nine months.
group balance sheet
Unaudited Audited
June 2002 September
2001
US$ US$ million
million
ASSETS
Non-current assets 3,691 3,346
Property, plant and equipment 3,261 2,890
Plantations 300 324
Deferred taxation 1 4
Other non-current assets 129 128
Current assets 1,094 1,160
Cash and cash equivalents 193 445
Trade and other receivables 321 202
Inventories 580 513
Total assets 4,785 4,506
EQUITY AND LIABILITIES
Shareholders` equity
Ordinary shareholders` interest 1,543 1,503
Minority interest 2 3
Non-current liabilities 2,235 1,640
Interest-bearing borrowings 1,584 1,014
Deferred taxation 407 385
Other non-current liabilities 244 241
Current liabilities 1,005 1,360
Interest-bearing borrowings and bank 181 559
overdraft
Other current liabilities 824 801
Total equity and liabilities 4,785 4,506
Number of shares in issue (millions) 230.6 229.5
Net debt (US$ million) 1,572 1,128
Net debt to total capitalisation (%) 39.7 30.4
Net asset value per share (US$) 8.45 8.21
group cash flow statement
Unaudited Unaudited Unaudited Unaudited
Quarter Quarter Nine Nine
months months
ended ended ended ended
June June June June
2002 2001 2002 2001
US$ US$ US$ US$
million million million million
Cash generated by 205 174 518 607
operations
Movement in working 39 (3) (92) (126)
capital
Net finance costs (13) (25) (68) (83)
Taxation paid (4) (44) (63) (53)
Dividends paid - - (60) (60)
Cash retained from 227 102 235 285
operating activities
Cash effects of (535) (85) (641) (222)
investing activities
Normal investing (47) (85) (153) (222)
activities
Acquisition of net (488) - (488) -
assets
(308) 17 (406) 63
Cash effects of 365 18 160 (130)
financing activities
Net movement in cash 57 35 (246) (67)
and cash equivalents
group statement of changes in shareholders` equity
Unaudited Unaudited
Nine Nine
months months
ended ended
June June
2002 2001
US$ US$
million million
Balance - beginning of year 1,503 1,618
Net profit 147 91
Foreign currency translation reserve (57) (97)
Revaluation of derivative instruments 6 -
Dividends declared - US$0.26 (2001: US$0.25) (60) (60)
per share
Net transfers to share purchase trust (share 4 (77)
buybacks)
Balance - end of period 1,543 1,475
notes to the group results
1. Basis of preparation
The group results have been prepared in conformity with South African
Statements of Generally Accepted Accounting Practice. The same accounting
policies have been followed as in the annual financial statements for
September 2001.
The financial results for the quarter have been reviewed by the group`s
auditors, Deloitte & Touche. Their report is available for inspection at the
company`s registered offices.
Unaudited Unaudited Unaudited Unaudited
Quarter Quarter Nine Nine
months months
ended ended ended ended
June June June June
2002 2001 2002 2001
US$ US$ US$ US$
million million million million
2. Operating profit
Included in operating
profit are:
Depreciation 81 71 225 227
Fellings 7 8 19 24
Amortisation 3 5 11 16
91 84 255 267
3. Capital expenditure
Fixed assets (excluding 131 203
Cloquet assets
acquired)
Plantations 19 22
150 225
Unaudited Audited
June September
2002 2001
US$ US$
million million
4. Capital commitments
Contracted but not 44 78
provided
Approved but not 118 109
contracted
162 187
5. Contingent
liabilities
Guarantees and 70 79
suretyships
Other contingent 16 27
liabilities
6. Acquisitions
Sappi is currently in the process of fair valuing the acquired assets and
liabilities from the Potlatch Corporation at acquisition date. As the price
paid was less than the acquired book values, this may result in a negative
goodwill. The purchase accounting entry may be adjusted in the next quarter
to take into account this valuation.
regional information
Unaudited Unaudited
Unaudited Unaudited Nine Nine
Quarter Quarter months months
ended ended ended ended
June 2002 June 2001 June 2002 June 2001
US$ US$ % change US$ US$ % change
million million million million
Sales -
Metric
tons
(000`s)
Fine North 313 297 5.4 765 951
Paper - Americ (19.6)
a
Europe 543 497 9.3 1,620 1,617 0.2
Southe 81 72 12.5 234 210 11.4
rn
Africa
Total 937 866 8.2 2,619 2,778 (5.7)
Forest 648 597 8.5 1,829 1,827 0.1
Products
Total 1,585 1,463 8.3 4,448 4,605 (3.4)
Sales
Fine North 319 340 (6.2) 809 1,119
Paper - Americ (27.7)
a
Europe 442 401 10.2 1,285 1,337 (3.9)
Southe 59 58 1.7 157 170 (7.6)
rn
Africa
Total 820 799 2.6 2,251 2,626
(14.3)
Forest 154 168 (8.3) 426 560
Products (23.9)
Total 974 967 0.7 2,677 3,186
(16.0)
Operating
profit
Fine North (16)* 9 - (36) 40 -
Paper - Americ
a
Europe 60 26 130.8 164 120 36.7
Southe 10 8 25.0 24 23 4.3
rn
Africa
Total 54 43 25.6 152 183
(16.9)
Forest 39 41 (4.9) 103 163
Products (36.8)
Corporate 4 7 (42.9) 12 9 33.3
Total 97 91 6.6 267 355
(24.8)
Earnings
before
interest,
tax,
depreciation
and
amortisation
charges **
Fine Paper - North 12 35 42 124
America (65.7) (66.1)
Europe 104 61 70.5 282 231 22.1
Southern 10 9 11.1 29 28 3.6
Africa
Total 126 105 20.0 353 383 (7.8)
Forest 58 63 (7.9) 157 230
Products (31.7)
Corporate 4 7 12 9 33.3
(42.9)
Total 188 175 7.4 522 622
(16.1)
Net
operating
assets
Fine Paper - North 1,464 1,081 35.4 1,464 1,081 35.4
America
Europe 1,476 1,336 10.5 1,476 1,336 10.5
Southern 84 98 84 98
Africa (14.3) (14.3)
Total 3,024 2,515 20.2 3,024 2,515 20.2
Forest 715 899 715 899
Products (20.5) (20.5)
Corporate 28 (38) - 28 (38) -
Total 3,767 3,376 11.6 3,767 3,376 11.6
* includes US$13 million of non-recurring integration costs
** before non-trading loss
convenience translation into rands
Unaudited Unaudited Unaudited Unaudited
Quarter Quarter Nine Nine
months months
ended ended ended ended
June 2002 June 2001 % June 2002 June 2001 %
change change
Sales 10,381 7,739 34.1 28,227 24,839 13.6
(ZAR million)
Operating 1,034 728 42.0 2,815 2,768 1.7
profit
(ZAR million)
Profit (loss) 703 (528) 1,550 709 118.5
after taxation
(ZAR million)
EBITDA 2,004 1,401 43.1 5,504 4,849 13.5
(ZAR million)
Operating 10.0 9.4 10.0 11.1
profit to
sales (%)
EBITDA to 19.3 18.1 19.5 19.5
sales (%)
Operating 11.4 10.8 11.2 13.7
profit to
average net
assets (%)
EPS before 298 191 56.4 717 700 2.4
exceptional
items
(Headline)
(SA cents)
Basic EPS 309 (216) 675 303 122.7
(SA cents)
EBITDA per 870 607 43.2 2,391 2,074 15.3
share
(SA cents)
Net debt 16,286 10,081 61.5
(ZAR million)
Net debt to 39.7 34.5
total
capitalisation
(%)
Cash generated 2,185 1,393 56.9 5,462 4,732 15.4
by operations
(ZAR million)
Cash retained 2,419 816 2,478 2,222
from operating
activities
(ZAR million)
Net 608 280 (2,594) (522)
movement in
cash and
cash
equivalents
(ZAR
million)
Exchange
rates:
Period end 10.3600 8.0650 10.3600 8.0650
rate:
US$1 = ZAR
Average 10.6581 8.0033 10.5443 7.7963
rate: US$1
= ZAR
Period end 1.0081 1.1788 1.0081 1.1788
rate:
US$1 = EUR
Average 1.0875 1.1508 1.1115 1.1358
rate: US$1
= EUR
This report is available on the Sappi website -
www.sappi.com
Other interested parties can obtain printed copies of this report from:
South Africa:
Computershare Investor Services Limited, 8th Floor, 11 Diagonal Street,
Johannesburg, 2001.
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)208 639-2157.
United States ADR Depositary:
Bank of New York, ADR Department, 101 Barclay Street, New York, NY 10286.
Tel +1 212 815-5800.
Date: 31/07/2002 09:00:00 AM Produced by the JSE SENS Department
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