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Sappi - Results For The Quarter Ended December 2002
Release Date: 03/02/2003 09:00:01 Code(s): SAP
Sappi - Results for the quarter ended December 2002
Sappi
The word for fine paper
(Registration number 1936/008963/06)
JSE Code: SAP
ISIN Code: ZAE 000006284
Results for the quarter ended December 2002
first quarter
2003
- Headline EPS 23 US cents up 64%
- Sales up 22%
- Pockets of improvement in markets
summary
Quarter Quarter Quarter
ended ended ended
Dec. Sept. Dec.
2002 2002 2001
Sales (US$ million) 1,019 1,052 832
Operating profit (US$ million) 92 122 65
EBITDA (US$ million) 190 219 148
Operating profit to sales (%) 9.0 11.6 7.8
EBITDA to sales (%) 18.6 20.8 17.8
Operating profit to average net assets 9.6 13.0 8.8
RONA (%)
EPS before exceptional items 23 32 14
(Headline)* (US cents)
EPS (US cents) 23 32 10
Return on equity (%) 12.5 18.6 6.3
Net debt (US$ million) 1,525 1,419 1,156
* EPS before exceptional items (Headline) has been restated as required by
the new JSE Securities Exchange South Africa Listing Requirements. Refer to
note 2 of the financial results for further details.
comment
Market conditions remained difficult with sluggish economies in our major
markets. Prices for coated fine paper remained under pressure in Europe. In
North America a price increase of US$40 per short ton on web products,
announced for October 2002, was realised as prior delivery commitments
expired and was in place in January 2003.
A second increase of US$40 per short ton on web and on most sheet products
was announced for January 2003 and is being implemented. Even when the
increases have been fully implemented, less than half of the recent price
erosion will be recovered.
Pulp prices softened further in the quarter but now appear to have turned
upwards with increases announced by major producers in January 2003 and the
price of futures also moving up.
The December quarter is typically seasonally quiet in most of our businesses
as reflected by the 3% reduction in sales relative to the September quarter.
However, group sales increased 22% compared to a year earlier which would
have been 10% if we had had the Potlatch fine paper business in the earlier
period.
The equivalent quarter last year was impacted by the shock of 11 September
and included an extraordinary cluster of maintenance shuts at our mills and
is therefore a low base.
Net profit before exceptional items increased by 63% to US$52 million
compared to a year earlier. Earnings per share before exceptional items was
23 US cents up from 14 US cents in the equivalent quarter last year. Basic
earnings per share was 23 US cents.
SG&A expenses were US$81 million, up US$19 million, the largest component of
which was the inclusion of the Potlatch acquisition. It was also affected by
translation to a weaker US dollar and higher insurance costs.
In the previous results announcement, we indicated that annual pension
accruals would increase. This increase has been absorbed in cost of goods
sold and SG&A. We expect the impact to be approximately 1.25 US cents per
quarter after tax.
Group operating profit increased 42% to US$92 million and the operating
profit margin increased to 9.0% from 7.8% a year ago.
As a result of refinancings, net finance costs of US$24 million were 4%
below the equivalent quarter last year despite increased debt following the
Potlatch acquisition.
The effective tax rate for the quarter was 23.5% which is in line with our
expectation for the full year.
cash flow and debt
Despite adverse market conditions, EBITDA for the quarter was a solid US$190
million, 28% higher than last year. However, net working capital rose
significantly which it usually does in the first quarter as a result of slow
deliveries during the last two weeks of December. Inventories, which rose by
US$65 million, were also influenced by deferring commercial production shuts
from December to early January. Working capital was increased further by a
decrease in payables, annual pre-payment of insurance and quarterly and half-
yearly interest payments.
Capital expenditure for the quarter was US$44 million, less than half of
depreciation, amortisation and fellings, however, capital commitments
increased by US$27 million to US$255 million and if the business outlook
improves as anticipated, we expect capital expenditure for the full year to
approach the level of depreciation. We continue to apply our rigorous
evaluation criteria to all new capital expenditure projects.
Net debt increased by US$106 million of which half was a result of
translating Euro and Rand debt into US dollars at the much weaker exchange
rate of the Dollar. The translation effect of the weaker US dollar, however,
increased the net asset value of the group in US dollar terms and
consequently, in spite of debt increasing, the ratio of net debt to total
capitalisation improved slightly to 36.7% compared to 37.0% in September
2002.
operating review for the quarter
sappi fine paper
Quarter ended Quarter ended
Dec. 2002 Dec. 2001 %
US$ million US$ million Change
Sales 862 697 23.7
Operating profit 57 36 58.3
Operating margin (%) 6.6 5.2 -
EBITDA 133 101 31.7
EBITDA margin (%) 15.4 14.5 -
RONOA p.a. (%) 7.5 5.9 -
There has been some improvement in advertising spending in the major markets
and this is starting to filter through to the print media particularly in
the USA.
Demand for coated fine paper was marginally higher in Europe but grew
substantially in North America off the low base a year earlier. Prices
remain low relative to those prevailing two years ago.
As capacity continues to exceed demand, we have continued to curtail
production to match our output to demand.
Against this background, the business improved its operating profit by 58%
to US$57 million for the quarter but returns for the business are still well
below our target levels.
Europe
Demand for coated fine paper increased by 0.7% compared to a year earlier
and prices remain under pressure. Our average prices achieved in Euros for
the quarter were approximately 1.5% below the September quarter reflecting
lower prices in Southern Europe and in overseas markets. Sales volumes
decreased by approximately 5% compared to a year earlier.
The stronger Euro relative to the Dollar had a positive impact on the
performance of the business which purchases much of its pulp in Dollars. It
also had a favourable impact on the translation of the results to Dollars.
The operating profit of US$39 million was the same as the equivalent quarter
last year. The return on net operating assets was 10.7%.
Quarter ended Quarter ended
Dec. 2002 Dec. 2001 % change % change
US$ million US$ million (US$) (Euro)
Sales 403 410 (1.7) (12.2)
Operating profit 39 39 - (11.4)
Operating margin (%) 9.7 9.5 - -
EBITDA 82 77 6.5 (4.7)
EBITDA margin (%) 20.3 18.8 - -
RONOA p.a. (%) 10.7 11.9 - -
North America
The North American business has reported a modest operating profit but
returns are still disappointing.
Price realisation was slower than expected, however, sales volumes improved
and on a pro forma basis, including the Potlatch fine paper business in the
comparative figure, were 21% above a year earlier.
Costs were impacted by higher wood costs, an increase in energy costs and
higher accruals for post retirement costs.
The business continues to achieve the synergies of the Potlatch fine paper
acquisition and we are confident of achieving the identified benefits during
this year.
Quarter ended Quarter ended
Dec. 2002 Dec. 2001 %
US$ million US$ million change
Sales 400 239 67.4
Operating profit 9 (10) -
Operating margin (%) 2.3 (4.2) -
EBITDA 40 15 166.7
EBITDA margin (%) 10.0 6.3 -
RONOA p.a. (%) 2.4 (3.8) -
Fine Paper SA
The Southern African business experienced strong demand for the quarter. The
strengthening of the Rand relative to major competitor`s currencies has
increased competitor activity in the local market and put pressure on
prices. Operating profit increased 28.6% to US$9 million and the return on
net operating assets increased to 36%.
Quarter ended Quarter ended
Dec. 2002 Dec. 2001 %
US$ million US$ million change
Sales 59 48 22.9
Operating profit 9 7 28.6
Operating margin (%) 15.3 14.6 -
EBITDA 11 9 22.2
EBITDA margin (%) 18.6 18.8 -
RONOA p.a. (%) 36.0 31.1 -
forest products
Local demand for Kraft products was firm, driven by strong activity in
export fruit packaging but global demand and pricing was weak. In the
dissolving pulp market, excess capacity and aggressive competitors` pricing
drove prices down. However, demand in the non-woven textile sector is strong
and most viscose staple fibre plants are running at full capacity. Demand
for unbleached Kraft pulp softened further in the quarter and prices were
below expectation.
The operating profit increased by 54.5% to US$34 million in the quarter
representing a 16.9% return on net operating assets.
Quarter ended Quarter ended
Dec. 2002 Dec. 2001 % change % change
US$ million US$ million (US$) (Rand)
Sales 157 135 16.3 12.5
Operating profit 34 22 54.5 49.8
Operating margin (%) 21.7 16.3 - -
EBITDA 56 40 40.0 35.6
EBITDA Margin (%) 35.7 29.6 - -
RONOA p.a. (%) 16.9 11.9 - -
outlook
The outlook for the world economy for the balance of this year remains
uncertain.
It looks as if the pulp price cycle has passed through a trough and first
price increases have been implemented from 1 February by major producers.
Pulp prices translated to non-Dollar currencies dropped much more because of
the weakness of the US dollar increasing pressure on non-Dollar producers.
With consumer and producer pulp inventories in December 2002 at low levels,
there should therefore be scope for further increases. The announced closure
of a major dissolving pulp mill in the USA is expected to tighten the supply
demand balance in that sector which will benefit our business.
An improvement in demand for coated fine paper depends on a sustained
increase in advertising in the print media. There are some signs that this
process may have started. Advertising has started to increase in the USA
with an approximately 9% increase in advertising pages reported for November
and December compared to a year earlier after a slight decline in October.
In Europe the return to growth is expected to be slower.
We expect the performance of our North American business to continue to
improve as the benefits of the acquisition are achieved and the announced
price increases are implemented. A stronger Euro will help our European
business which is expected to experience sluggish markets. Although our
Southern African businesses remain very competitive, the current weakness of
the US dollar will have some impact on their margins.
In the second quarter, we expect market conditions to be slow and we will
incur the costs of extended shuts to rebuild a machine at Somerset. Earnings
per share for the quarter are therefore expected to be similar to the first
quarter. We still expect earnings for the full year to show some improvement
over last year.
On behalf of the Board
E van As
Director
D G Wilson
Director
31 January 2003
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.
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
Headline earnings - as defined in circular 7/2002 issued by South African
Institute of Chartered Accountants, separates from earnings all items of a
capital nature. It is not neccessarily a measure of sustainable earnings. It
is a listing requirement of the JSE Securities Exchange South Africa to
disclose headline earnings per share
Net asset value - shareholders` 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 shareholders`
equity
RONA - operating profit divided by average net assets
RONOA - operating profit divided by average net operating assets, which are
total assets (excluding deferred taxation and cash) less current liabilities
(excluding interest-bearing borrowings and bank overdraft)
Financial results for the
quarter ended December 2002
group income statement
Reviewed Reviewed
Quarter Quarter
ended ended
Dec. 2002 Dec. 2001
US$ million US$ million % change
Sales 1,019 832 22.5
Cost of sales * 846 705
Gross profit 173 127 36.2
Selling, general and 81 62
administrative expenses *
Operating profit 92 65 41.5
Non-trading loss - 12
Net finance costs 24 25
Net paid 25 25
Capitalised (6) (7)
Net foreign exchange losses 5 7
Mark-to-market of financial - -
instruments
Profit before tax 68 28
Taxation - current 14 (9)
- deferred 2 15
Net profit 52 22 136.4
EBITDA 190 148 28.4
Basic earnings per share 23 10
(US cents)
Earnings before exceptional 23 14
items (Headline earnings) per
share (US cents) **
Weighted average number of
shares in issue (millions) 230.1 229.7
Diluted earnings per share 22 9
(US cents)
Diluted earnings before
exceptional items
(Headline earnings) per share 22 14
(US cents) **
Weighted average number of 233.1 233.2
shares on fully diluted basis
(millions)
Calculation of Earnings before
exceptional items (Headline)
net of tax **
Net profit 52 22
Mill closure costs - 4
Debt restructuring costs - 6
Earnings before exceptional 52 32
items (Headline)
* Reallocation of delivery charges. Refer to note 3 for further details.
** Earnings before exceptional items (Headline) has been restated as
required by the new JSE Securities Exchange South Africa Listing
Requirements. Refer to note 2 for further details.
group balance sheet
Reviewed Audited
Dec. 2002 Sept. 2002
US$ million US$ million
ASSETS
Non-current assets 3,826 3,639
Property, plant and equipment 3,317 3,189
Plantations 364 298
Deferred taxation 6 6
Other non-current assets 139 146
Current assets 1,219 1,002
Cash and cash equivalents 186 161
Trade and other receivables 411 320
Inventories 622 521
Total assets 5,045 4,641
EQUITY AND LIABILITIES
Shareholders` equity
Ordinary shareholders` interest 1,726 1,601
Minority interest 2 2
Non-current liabilities 2,208 2,110
Interest-bearing borrowings 1,493 1,455
Deferred taxation 441 399
Other non-current liabilities 274 256
Current liabilities 1,109 928
Interest-bearing borrowings and bank 218 125
overdraft
Other current liabilities 891 803
Total equity and liabilities 5,045 4,641
Number of shares in issue at balance 229.9 230.2
sheet date (millions)
Net debt (US$ million) 1,525 1,419
Net debt to total capitalisation (%) 36.7 37.0
Net asset value per share (US$) 9.40 8.66
group cash flow statement
Reviewed Reviewed
Quarter Quarter
ended ended
Dec. 2002 Dec. 2001
US$ million US$ million
Cash generated by operations 176 130
Movement in working capital (142) (100)
Net finance costs (30) (32)
Taxation paid (5) (1)
Cash utilised by operating (1) (3)
activities
Cash effects of investing activities (40) (63)
(41) (66)
Cash effects of financing activities 56 (115)
Net movement in cash and cash 15 (181)
equivalents
group statement of changes in shareholders` equity
Reviewed Reviewed
Quarter Quarter
ended ended
Dec. 2002 Dec. 2001
US$ million US$ million
Balance - beginning of year 1,601 1,503
Net profit 52 22
Foreign currency translation reserve 154 (193)
Revaluation of derivative instruments (11) 14
Dividends declared - US$0.28
(2002: US$0.26) per share (65) (60)
(Share buybacks) net transfers
to share purchase trust (5) 1
Balance - end of period 1,726 1,287
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 2002.
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.
2. Headline Earnings per share calculation
The headline earnings per share calculation has been restated as required by
the new JSE Securities Exchange South Africa Listing Requirements. These
require that all companies comply with circular 7/2002 issued by the South
African Institute of Chartered Accountants.
For Sappi the only change in the headline earnings calculation is that there
are no longer any adjustments for the movement in restructuring provisions.
Headline earnings are still adjusted for the movement in provisions relating
to the closure of a business.
The impact for this quarter is negligible (September 2002: increased by 2 US
cents to 32 US cents; December 2001: impact was negligible) for headline
earnings per share. Similarly the impact for this quarter for diluted
headline earnings per share was negligible (September 2002: increased by 3
US cents to 33 US cents; December 2001: increased by 1 US cents to 14 US
cents).
3. Reallocation of costs
In prior years, a portion of delivery charges was included in selling,
general and administrative expenses. It is now considered more appropriate
to reflect all delivery charges under cost of sales. The effect is to
increase cost of sales and decrease selling, general and administrative
expenses by US$20 million for the quarter (September quarter 2002: US$21
million; December quarter 2001:
US$16 million).
notes to the group results
Reviewed Reviewed
Quarter Quarter
ended ended
Dec. 2002 Dec. 2001
US$ million US$ million
4. Operating profit
Included in operating profit are:
Depreciation 85 72
Fellings 8 7
Amortisation 5 4
98 83
5. Capital expenditure
Property, plant and equipment 38 62
Plantations 6 5
44 67
Reviewed Audited
Dec. 2002 Sept. 2002
US$ million US$ million
6. Capital commitments
Contracted but not provided 95 55
Approved but not contracted 160 173
255 228
7. Contingent liabilities
Guarantees and suretyships 69 66
Other contingent liabilities 12 14
regional information
Reviewed Reviewed
Quarter Quarter
ended ended
Dec. 2002 Dec. 2001
US$ million US$ million % change
Sales - Metric
tons (000`s)
Fine Paper - North America 400 218 83.5
Europe 493 518 (4.8)
Southern 74 73 1.4
Africa
Total 967 809 19.5
Forest Pulp and paper 337 326 3.4
Products - operations
Forestry 298 234 27.4
operations
Total 1,602 1,369 17.0
Sales
Fine Paper - North America 400 239 67.4
Europe 403 410 (1.7)
Southern 59 48 22.9
Africa
Total 862 697 23.7
Forest Pulp and paper 145 126 15.1
Products - operations
Forestry 12 9 33.3
operations
Total 1,019 832 22.5
Operating
profit
Fine Paper - North America 9 (10) -
Europe 39 39 -
Southern 9 7 28.6
Africa
Total 57 36 58.3
Forest 34 22 54.5
Products
Corporate 1 7 (85.7)
Total 92 65 41.5
Earnings
before
interest, tax,
depreciation
and
amortisation
charges *
Fine Paper - North America 40 15 166.7
Europe 82 77 6.5
Southern 11 9 22.2
Africa
Total 133 101 31.7
Forest 56 40 40.0
Products
Corporate 1 7 (85.7)
Total 190 148 28.4
Net operating
assets
Fine Paper - North America 1,496 1,085 37.9
Europe 1,507 1,299 16.0
Southern 110 80 37.5
Africa
Total 3,113 2,464 26.3
Forest 895 657 36.2
Products
Corporate (46) (86) -
Total 3,962 3,035 30.5
before non-trading loss
summary rand convenience translation
Unaudited Unaudited
Quarter Quarter
ended ended %
Dec. 2002 Dec. 2001 change
Sales (ZAR million) 9,911 8,364 18.5
Operating profit (ZAR 895 653 37.1
million)
Profit after taxation 506 221 129.0
(ZAR million)
EBITDA (ZAR million) 1,848 1,488 24.2
Operating profit to 9.0 7.8
sales (%)
EBITDA to sales (%) 18.6 17.8
Operating profit to 9.7 8.5
average net assets
(%)
EPS before
exceptional items
(Headline) (SA cents) 224 141 58.9
*
Basic EPS (SA cents) 224 101 121.8
EBITDA per share (SA 803 648 23.9
cents)
Net debt (ZAR 13,298 13,768 (3.4)
million)
Net debt to total 36.7 35.2
capitalisation (%)
Cash generated by
operations
(ZAR million) 1,712 1,307 31.0
Cash utilised by
operating activities
(ZAR million) (10) (30)
Net movement in cash
and cash equivalents
(ZAR million) 146 (1,820)
Exchange rates:
Period end rate: 8.7200 11.9100
US$1 = ZAR
Average rate: 9.7265 10.0530
US$1 = ZAR
Period end rate: 1.0387 0.8833
EUR1 = US$
Average rate: 0.9995 0.8935
EUR1 = US$
* EPS before exceptional items (Headline) has been restated as required by
the new JSE Securities Exchange South Africa Listing Requirements. Refer to
note 2 for further details.
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
70 Marshall Street
Johannesburg 2001
P.O. Box 61051
Marshalltown 2107
Tel +27 (0)11 370-5000
United States
ADR Depositary:
Bank of New York
ADR Department
101 Barclay Street
New York, NY 10286
Tel +1 212 815-580
United Kingdom:
Capita IRG plc
Bourne House
34 Beckenham Road
Beckenham, Kent
BR3 4TU, DX 91750, Beckenham West
Tel +44 (0)208 639-2157
www.sappi.com
Date: 03/02/2003 09:00:00 AM Produced by the JSE SENS Department
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