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Sappi Limited - Results For The Quarter Ended December 2003
Release Date: 02/02/2004 09:00:02 Code(s): SAP
SAPPI LIMITED - RESULTS FOR THE QUARTER ENDED DECEMBER 2003
SAPPI LIMITED
(Registration number 1936/008963/06)
Issuer Code: SAVVI
JSE Code: SAP
ISIN Code: ZAE 000006284
RESULTS FOR THE QUARTER ENDED DECEMBER 2003
Net loss after previously announced charges
Weak US market
Strong demand in Europe
SA businesses profitable despite stronger Rand
SUMMARY
Quarter Quarter Quarter
ended ended ended
Dec Sept ** Dec **
2003 2003 2002
Sales (US$ million) 1,120 1,123 1,019
Operating profit (US$ million) - 48 95
EBITDA (US$ million) * 114 115 189
Operating profit to sales (%) - 4.3 9.3
EBITDA to sales (%) * 10.2 10.2 18.5
Operating profit to average net - 4.3 10.0
assets (%) *
Headline EPS (US cents) * (9) 11 22
EPS (US cents) (9) 4 22
Return on average equity (%) * (4.3) 1.9 12.3
Net debt (US$ million) * 1,694 1,491 1,525
Net debt to totalcapitalisation (%) * 34.7 30.9 35.9
* Refer to the Supplemental Information for the definition of the term.
** Restated for AC 137
Comment
The performance of our fine paper businesses was disappointing in the United
States, encouraging in Europe although prices remain weak, and satisfactory in
South Africa. The forest products business experienced strong demand and
performed well notwithstanding the strength of the Rand.
Market conditions in the quarter were very different in our two major fine paper
markets. In Europe apparent consumption of coated fine paper (defined as
shipments plus imports less exports) showed growth of 6% in the quarter compared
to a year earlier. However, prices remain weak. In the United States the
strength of GDP growth did not translate into a recovery in demand for coated
paper. Coated fine paper apparent consumption for the quarter was down
approximately 13% compared to a year earlier and 6% compared to the prior
quarter. Despite the weakening of the US Dollar against the Euro, imports into
the United States for October and November remained at a high level but were
down 2% compared to a year earlier. Prices remained under pressure and in the
case of sheeted product this is reflected in a shift towards lower priced
products, including imports.
As anticipated in our last quarterly results announcement, we took charges in
this quarter in respect of the closure costs of paper machine 14 at the
Westbrook mill (US$15 million pre-tax); staff reduction (US$14 million pre-tax)
and increased costs in connection with major maintenance shuts at all our North
American mills (US$15 million pre-tax higher than last year). These charges and
additional shut costs amount to approximately US$44 million pre-tax, US$33
million post-tax, and 15 US cents per share.
After these charges and costs we recorded a net loss and headline loss of US$21
million.
Costs have generally been well controlled but North American wood and energy
costs were US$6 million higher than last year. Selling, General and
Administrative expenses for the quarter were US$125 million, US$48 million
higher than last year, partly as a result of the US$29 million charge for the
Westbrook closure and staff reduction and partly as a result of currency
translation to the weaker US Dollar (US$12 million).
Following the application of the new Agriculture Accounting Standard - AC137
(IFRS 41) in the quarter movements in the fair value of plantations now impact
operating profit. The change had a favourable impact of US$7 million after tax
in the quarter as a result of volume growth and operating efficiencies.
Net finance costs for the quarter were US$28 million compared to US$29 million
last year. They were US$7 million higher than the September quarter as a result
of changes in the fair value of financial instruments.
Tax for the quarter was at an effective rate of 25% which is higher than the
expected rate for the balance of the year, as a result of the charges and losses
in the United States.
CASH FLOW AND DEBT
Cash generated by operations remained positive at US$106 million for the quarter
despite weak trading conditions but was 29% lower than the previous quarter and
40% lower than the same quarter last year.
Working capital increased by US$113 million in the quarter mainly as a result of
lower payables. This movement was significantly lower than the equivalent
quarter last year.
Capital expenditure in the quarter was US$83 million, 83% of depreciation.
We repurchased approximately 1 million of our shares in the quarter at a cost of
US$13 million.
Net debt increased by approximately US$203 million in the quarter. US$56 million
of the increase was a result of translation to US Dollars from the relatively
stronger Euro and Rand.
OPERATING REVIEW FOR THE QUARTER
SAPPI FINE PAPER
Quarter ended Quarter ended
Dec 2003 Dec 2002 %
US$ million US$ million change
Sales 905 862 5.0
Operating (loss) profit (34) 57 -
Operating (loss) profit (3.7) 6.6 -
to sales (%)
EBITDA 51 133 (61.7)
EBITDA to sales (%) 5.6 15.4 -
RONOA pa (%) (4.2) 7.5 -
Our fine paper business continued to be impacted by low prices and higher costs
in all regions. In the United States this was exacerbated by weak demand and the
high level of imports. Our South African business was faced with increased
competition from imports as a result of the relatively strong currency. The
average exchange rate was R6.86 per US Dollar in the quarter compared to R9.73 a
year earlier.
The highlight of the quarter was improving order levels and sales volumes in
Europe, primarily for the European market.
We are focusing management attention on improving the performance of our North
American business.
Europe
Quarter ended Quarter ended
Dec 2003 Dec 2002 % change % change
US$ million US$ million (US$) (Euros)
Sales 518 434 19.4 0.4
Operating 15 39 (61.5) (67.8)
profit
Operating 2.9 9.0 - -
profit to
sales (%)
EBITDA 63 82 (23.2) (35.4)
EBITDA to 12.2 18.9 - -
sales (%)
RONOA pa (%) 3.5 10.7 - -
Our sales volumes, including exports, increased 12% compared to a year earlier,
reflecting the stronger apparent consumption in Europe.
Price pressure continued in the quarter and average prices realised in Euros
were about 10% below a year earlier. This includes the effect of the relatively
weaker US Dollar on the realised value of exports to the United States and
elsewhere.
North America
Quarter ended Quarter ended
Dec 2003 Dec 2002 %
US$ million US$ million change
Sales 316 369 (14.4)
Operating (loss) profit (54) 9 -
Operating (loss) profit (17.1) 2.4 -
to sales (%)
EBITDA (20) 40 -
EBITDA to sales (%) (6.3) 10.8 -
RONOA pa (%) (15.3) 2.4 -
There has been no sign of a recovery in our sector in the United States despite
strong economic growth figures. In the past there has generally been a good but
lagging correlation between corporate profits and coated paper consumption,
which we still expect will result in improved consumption of coated fine paper
once market inventories return to normal levels.
The underlying performance of our North American business was unsatisfactory and
the results were further impacted by the charges for the paper machine closure,
staff reduction and increased major shut costs. The closure of the Westbrook
paper machine and transfer of its output proceeded smoothly and we expect to see
the benefits in subsequent quarters.
Sales volume of coated fine paper was 11% lower than last year reflecting
industry conditions. This reduction is emphasised by the strong seasonal demand
in the comparative quarter last year.
Average prices realised for paper were 6% lower than last year and 3% lower
compared to the prior quarter, which includes the effect of a mix-shift to lower
priced products. We have continued to enhance our product offerings and are in a
strong position to meet our customers" requirements and to benefit from the
stronger economy.
Operating costs were influenced by the higher wood and energy costs and this
trend has continued into our second quarter.
Fine Paper South Africa
Quarter ended Quarter ended
Dec 2003 Dec 2002 % change % change
US$ million US$ million (US$) (Rands)
Sales 71 59 20.3 (15.2)
Operating 5 9 (44.4) (60.8)
profit
Operating 7.0 15.3 - -
profit to
sales (%)
EBITDA 8 11 (27.3) (48.7)
EBITDA to 11.3 18.6 - -
sales (%)
RONOA pa (%) 13.7 36.0 - -
Demand in the South African market was firm in the quarter; however, the
strength of the Rand has resulted in increased competition from imports and
downward pressure on prices. This has resulted in a continued squeeze on our
margins.
Forest Products
Quarter ended Quarter ended
Dec 2003 Dec 2002 % change % change
US$ million US$ million (US$) (Rands)
Sales 215 157 36.9 (3.5)
Operating 35 37 (5.4) (33.3)
profit
Operating 16.3 23.6 - -
profit to
sales (%)
EBITDA 64 55 16.4 (18.0)
EBITDA to 29.8 35.0 - -
sales (%)
RONOA pa (%) 12.4 18.6 - -
Demand in the local market was firm in the quarter. Our dissolving pulp business
continued to perform well with good demand from the viscose and acetate markets.
Our total volume of pulp and paper sold increased 14% compared to a year
earlier. Average prices realised were 12% lower in Rands but as a result of
currency translation, significantly higher in US Dollars than a year earlier.
OUTLOOK
World economic conditions appear to be improving on a wide front. We are seeing
improved demand in Europe, which we expect to continue.
Our biggest turnaround opportunity remains in the United States where the paper
sector has not yet benefited from the strength of GDP growth.
We expect strong demand to continue for our South African businesses but the
volatility of the Rand continues to play a major role in their profitability.
With no recovery yet discernible in our fine paper business in the United
States, and assuming no marked changes in our other major markets, the next
quarter"s earnings are likely to be at a similar level to the last quarter
excluding charges and additional costs. Given the delay in the turnaround it is
now less likely that we will achieve an improvement in earnings for the full
fiscal year compared to 2003, before the paper machine closure and staff
reduction charges.
On behalf of the Board
J C A Leslie D G Wilson
Director Director 2 February 2004
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 first quarter ended December 2003
GROUP INCOME STATEMENT
Reviewed Reviewed
Quarter Quarter
ended ended
Dec 2003 Dec 2002
US$ million US$ million % change
Sales 1,120 1,019 9.9
Cost of sales 995 847
Gross profit 125 172 (27.3)
Selling, general & 125 77
administrative expenses
Operating profit - 95 (100.0)
Net finance costs 28 29
Net paid 26 25
Capitalised (1) (1)
Net foreign exchange (2) 5
(gains) losses
Change in fair value of 5 -
financial instruments
(Loss) profit before tax (28) 66 -
Taxation - current 8 14
- deferred (15) 1
Net (loss) profit (21) 51 -
(Loss) earnings per share (9) 22
(US cents)
Headline (loss) earnings (9) 22
per share (US cents) *
Weighted average number of 226.5 230.1
shares in issue (millions)
Diluted (loss) earnings per (9) 22
share (US cents)
Diluted headline (loss) (9) 22
earnings per share (US
cents) *
Weighted average number of 228.4 233.1
shares on fully diluted
basis (millions)
* Headline (loss) earnings disclosure is required by the JSE Securities
Exchange South Africa. The reconciling differences between Net (loss) profit and
Headline (loss) earnings are immaterial.
GROUP BALANCE SHEET
Reviewed Audited
Dec 2003 Sept 2003
US$ million US$ million
ASSETS
Non-current assets 4,454 4,242
Property, plant and equipment 3,697 3,554
Plantations 461 432
Deferred taxation 44 41
Other non-current assets 252 215
Current assets 1,422 1,575
Cash and cash equivalents 398 584
Trade and other receivables 280 290
Inventories 744 701
Total assets 5,876 5,817
EQUITY AND LIABILITIES
Shareholders" equity
Ordinary shareholders" interest 1,937 1,945
Non-current liabilities 2,661 2,541
Interest-bearing borrowings 1,814 1,742
Deferred taxation 527 517
Other non-current liabilities 320 282
Current liabilities 1,278 1,331
Interest-bearing borrowings and bank 278 333
overdraft
Taxation payable 79 82
Other current liabilities 856 916
Shareholders for dividend 65 -
Total equity and liabilities 5,876 5,817
Number of shares in issue at balance 226.1 226.9
sheet date (millions)
GROUP CASH FLOW STATEMENT
Reviewed Reviewed
Quarter Quarter
ended ended
Dec 2003 Dec 2002
US$ million US$ million
Cash generated by operations 106 178
Movement in working capital (113) (142)
Net finance costs (26) (30)
Taxation paid (15) (5)
Cash (utilised) retained from operating (48) 1
activities
Cash effects of investing activities (89) (34)
(137) (33)
Cash effects of financing activities (74) 39
Net movement in cash and cash (211) 6
equivalents
GROUP STATEMENT OF CHANGES IN SHAREHOLDERS" EQUITY
Reviewed Reviewed
Quarter Quarter
ended ended
Dec 2003 Dec 2002
US$ million US$ million
Balance - beginning of year 1,958 1,601
Change in accounting policy (13) (4)
Balance - beginning of year restated 1,945 1,597
Net (loss) profit (21) 51
Foreign currency translation reserve 88 154
Revaluation of derivative instruments 2 (11)
Dividends declared - US$0.29 (2003: (66) (65)
US$0.28) per share
Share buybacks net of transfers to (11) (5)
participants of the share purchase
trust
Balance - end of period 1,937 1,721
NOTES TO THE GROUP RESULTS
1. Basis of preparation
The financial statements are prepared in conformity with South African
Statements of Generally Accepted Accounting Practice(SA GAAP). The preliminary
results have been prepared in compliance with AC 127 (Interim financial
reporting) and are based on accounting policies which are consistent with those
used in the annual financial statements. The same accounting policies have been
followed as in the annual financial statements for September 2003, except for
the new agriculture accounting standard - Agriculture - AC 137 (IAS 41) which
became effective during the period.
The effect on equity for the above change is reflected in the Group statement of
changes in shareholders" equity. The effect on net profit for the current period
is an increase of US$7 million (September 2003 quarter: decrease of US$1
million; December 2002 quarter: decrease of US$1 million). Where appropriate,
comparative figures have been restated.
The preliminary results for the quarter have been reviewed by the group"s
auditors, Deloitte & Touche. Their unqualified review report is available for
inspection at the company"s registered offices.
2. Comparative figures
Comparative figures have been restated to take into account the effects of the
new agriculture accounting standard which became effective during the period.
The effect on operating profit is the inclusion of the market value changes in
the value of plantations and the expensing of the costs incurred to establish
and maintain plantations (siliviculture costs) and the amortisation of interest
which had been previously capitalised. Net finance costs have increased. In
terms of the new accounting standard, interest is no longer capitalised to the
carrying value of plantations.
The effect on the cash flow statement is a reclassification of investments in
plantations from cash utilised in investing activities to cash generated by
operations. Net cash flows remain the same.
In September 2003, cash and overdraft were restated to gross up amounts
previously set-off. The December 2002 cash flow statement has been restated to
take the effects of this into account.
Reviewed Reviewed
Quarter Quarter
ended ended
Dec 2003 Dec 2002
US$ million US$ million
3. Operating profitIncluded in
operating profit are the following non-
cash items:
Depreciation and amortisation
Depreciation of property, plant and 100 85
equipment
Fellings 14 8
Other amortisation - 1
114 94
Fair value adjustment on
plantations(included in cost of sales)
Changes in volume (15) (10)
Changes in fair value (7) 1
(22) (9)
4. Capital expenditure
Property, plant and equipment 83 38
Reviewed Audited
Dec 2003 Sept 2003
US$ million US$ million
5. Capital commitments
Contracted but not provided 98 86
Approved but not contracted 200 193
298 279
6. Contingent liabilities
Guarantees and suretyships 47 47
Other contingent liabilities 24 24
Supplemental Information
DEFINITIONS
Average - averages are calculated as the sum of the opening and closing balances
for the relevant period divided by two
*EBITDA - earnings before interest (net finance costs), tax, depreciation and
amortisation
*EBITDA to sales - EBITDA divided by sales
Fellings - the amount charged against the income statement representing the
standing value of the plantations harvested
Headline earnings - as defined in circular 7/2002 issued by the South African
Institute of Chartered Accountants, separates from earnings all items of a
capital nature. It is not necessarily a measure of sustainable earnings. It is a
listing requirement of the JSE Securities Exchange South Africa to disclose
headline earnings per share
*Net assets - total assets less current liabilities
*Net asset value - shareholders" equity plus net deferred tax
*Net asset value per share - net asset value divided by the number of shares in
issue at balance sheet date
*Net debt - current and non-current interest-bearing borrowings, and bank
overdrafts (net of cash, cash equivalents and short-term deposits)
*Net debt to total capitalisation - net debt divided by shareholders" equity
plus minority interest, non-current liabilities, current interest-bearing
borrowings and overdraft
*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. Net operating
assets are total assets (excluding deferred taxation and cash) less current
liabilities (excluding interest-bearing borrowings and bank overdraft)
* The above financial measures, other than headline earnings per share, are
presented to assist our shareholders and the investment community in
interpreting our financial results. These financial measures are regularly used
and compared between companies in our industry.
Supplemental Information
ADDITIONAL INFORMATION
Reviewed Reviewed
Quarter Quarter
ended ended
Dec 2003 Dec 2002
US$ million US$ million
Net (loss) profit to EBITDA *
reconciliation
Net (loss) profit (21) 51
Net finance costs 28 29
Taxation - current 8 14
- deferred (15) 1
Depreciation 100 85
Amortisation (including fellings) 14 9
EBITDA * 114 189
Reviewed Audited
Dec 2003 Sept 2003
US$ million US$ million
Net debt (US$ million) ** 1,694 1,491
Net debt to total capitalisation (%) ** 34.7 30.9
Net asset value per share (US$) ** 10.70 10.67
* In connection with the U.S. Securities Exchange Commission ("SEC") rules
relating to "Conditions for Use of Non-GAAP Financial Measures", we have
reconciled EBITDA to net profit rather than operating profit and recalculated
EBITDA to exclude interest (net finance costs), taxes, depreciation and
amortisation (including fellings). As a result our definition has been amended
to retain non-trading profit/loss as part of EBITDA. The comparative information
has been restated to take this into account. There was no effect on EBITDA in
the current and prior year quarter for the amended definition.
We use EBITDA as an internal measure of performance and believe it is a useful
and commonly used measure of financial performance in addition to operating
profit and other profitability measures under SA GAAP. EBITDA is not a measure
of performance under SA GAAP. EBITDA should not be construed as an alternative
to operating profit as an indicator of the company"s operations in accordance
with SA GAAP. EBITDA is also presented to assist our shareholders and the
investment community in interpreting our financial results. This financial
measure is regularly used as a means of comparison of companies in our industry
by removing certain differences between companies such as depreciation methods,
financing structures and taxation regimes. Different companies and analysts may
calculate EBITDA differently, so making comparisons among companies on this
basis should be done very carefully.
** Refer to the Supplemental Information for the definition of the term.
Supplemental Information
REGIONAL INFORMATION
Reviewed Reviewed
Quarter Quarter
ended ended
Dec 2003 Dec 2002
Metric tons Metric tons
(000"s) (000"s) % change
Sales
Fine Paper - North America 337 368 (8.4)
Europe 588 525 12.0
Southern 72 74 (2.7)
Africa
Total 997 967 3.1
Forest Pulp and 384 337 13.9
Products - paper
operations
Forestry 317 298 6.4
operations
Total 1,698 1,602 6.0
Reviewed Reviewed
Quarter Quarter
ended ended
Dec 2003 Dec 2002
US$ million US$ million % change
Sales
Fine Paper - North America 316 369 (14.4)
Europe 518 434 19.4
Southern 71 59 20.3
Africa
Total 905 862 5.0
Forest Pulp and 201 145 38.6
Products - paper
operations
Forestry 14 12 16.7
operations
Total 1,120 1,019 9.9
Operating
profit
Fine Paper - North America (54) 9 -
Europe 15 39 (61.5)
Southern 5 9 (44.4)
Africa
Total (34) 57 -
Forest 35 37 (5.4)
Products
Corporate (1) 1 -
Total - 95 (100.0)
Earnings
before
interest,
tax,
depreciation
and
amortisation
charges
Fine Paper - North America (20) 40 -
Europe 63 82 (23.2)
Southern 8 11 (27.3)
Africa
Total 51 133 (61.7)
Forest 64 55 16.4
Products
Corporate (1) 1 -
Total 114 189 (39.7)
Net operating
assets
Fine Paper - North America 1,377 1,496 (8.0)
Europe 1,784 1,507 18.4
Southern 160 110 45.5
Africa
Total 3,321 3,113 6.7
Forest 1,217 885 37.4
Products
Corporate (104) (46) 126.1
Total 4,434 3,952 12.2
Supplemental Information
SUMMARY RAND CONVENIENCE TRANSLATION
Reviewed Reviewed
Quarter Quarter
ended ended
Dec 2003 Dec 2002 % change
Sales (ZAR million) 7,680 9,911 (22.5)
Operating profit (ZAR million) - 924 (100.0)
Net (loss) profit (ZAR million) (114) 496 -
EBITDA* (ZAR million) 782 1,838 (57.5)
Operating profit to sales (%) - 9.3
EBITDA * to sales (%) 10.2 18.5
Operating profit to average net - 10.1
assets (%)
EPS (SA cents) (62) 214 -
Headline EPS (SA cents) * (62) 214 -
Net debt (ZAR million) * 11,511 13,298 (13.4)
Net debt to total capitalisation 34.7 35.9
(%) *
Cash generated by operations (ZAR 727 1,731 (58.0)
million)
Cash retained from operating (329) 10 -
activities (ZAR million)
Net movement in cash and cash (1,447) 58 -
equivalents (ZAR million)
* Refer to the Supplemental Information for the definition of the term.
Supplemental Information
EXCHANGE RATES
Dec Sept June March Dec
2003 2003 2003 2003 2002
Exchange
rates:
Period end 6.7951 7.1288 7.4300 7.9550 8.7200
rate: US$1 =
ZAR
Average rate 6.8569 7.3866 7.6305 8.3550 9.7265
for the
Quarter:US$1
= ZAR
Average rate 6.8569 8.3300 8.6173 9.0866 9.7265
for the
YTD:US$1 =
ZAR
Period end 1.2410 1.1475 1.1417 1.0729 1.0387
rate: EUR1 =
US$
Average rate 1.1887 1.1328 1.1236 1.0686 0.9995
for the
Quarter:EUR1
= US$
Average rate 1.1887 1.0804 1.0655 1.0334 0.9995
for the YTD:
EUR1 = US$
The financial results of entities with reporting currencies other than the US
Dollar are translated into US Dollars as follows:
- Assets and liabilities at rates of exchange ruling at period end; and
- Income, expenditure and cash flow items at average exchange rates.
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 Limited
70 Marshall Street
Johannesburg 2001
PO Box 61051
Marshalltown 2107
Tel +27 (0)11 370-5000
United States ADR Depository:
The Bank of New York, Investor Relations, PO Box 11258, Church Street Station,
New York, NY 10286-1258, Tel +1 610 382 7836
United Kingdom:
Capita Registrars, The Registry, 34 Beckenham Road, Beckenham,Kent BR3 4TU, DX
91750 Beckenham West Tel +44 (0)208 639-2157
