Commenting on the results, Sappi Chief Executive Officer Ralph Boettger said:
“Sappi continued its improving trend in operating performance for 2011. Sales for the year increased 11%, almost entirely as a result of higher prices in US Dollar terms. Operating profit excluding special items was US$404 million for the year, up 19% compared to 2010. Special items were largely a result of the strategic actions we have undertaken and planned. Impairment and restructuring charges amounted to US$302 million for the year, of which US$167 million are non-cash charges.
“For the quarter, operating profit excluding special items of US$80 million was 33% higher than for the third fiscal quarter of 2011, but lower than the US$129 million for the equivalent quarter last year. The North American business and Southern African chemical cellulose business continued to perform well during the quarter. The European business generated positive operating profit excluding special items. In addition to the actions taken to improve the European business, we have announced actions to fix the Southern African paper business. We incurred impairment and restructuring charges in the quarter on these actions amounting to US$165 million of the US$168 million special items. Of this amount, US$98 million related to non-cash items.
“Conditions in many of our markets remained uncertain throughout the quarter. As regards the chemical cellulose business, global demand showed some signs of softening largely as a result of lower growth in China. We, however, sold a record 190,000 tons of chemical cellulose during the quarter.
“The prices of our major inputs of wood, pulp, energy and chemicals were approximately US$290 million higher than in 2010, which maintained pressure on margins in all of our businesses. These costs were high for the quarter under review, but did start to decline during the quarter as economic growth slowed.
“As a result of the impairment and restructuring costs and once-off refinancing costs, the group incurred a net loss for the year as well as for the quarter under review. The loss per share for the year was 45 US cents (including a charge of 65 US cents in respect of special items including financing items) compared to earnings per share of 13 US cents (including a gain of 4 US cents of special items including financing items) in 2010. For the quarter under review, the loss per share was 24 US cents (including a charge of 26 US cents in respect of special items) compared to earnings per share of 16 US cents (including a gain of 7 US cents in respect of special items) in the equivalent quarter last year.
“Net cash generated for the full year was US$163 million. Net cash generated for the quarter was US$279 million, of which US$266 million was generated from working capital. Cash generation for 2011 was lower than for 2010 as a result of higher working capital (largely as a result of the cut-off effect of including an additional accounting week), increased capital expenditure and once-off refinancing costs.
“Net debt was further reduced from US$2.2 billion to US$2.1 billion, which is US$700 million below the peak level in mid-2009. During the year, we successfully refinanced US$1.1 billion of our debt in order to extend the maturities and reduce our finance costs.
“At September 2011, we had adequate liquidity consisting of US$639 million of cash on hand and the undrawn balance of euro 250 million (US$335 million) of our committed revolving credit facility. We utilised US$125 million of our cash shortly after the year end to repay debt.”
Looking forward, Boettger commented:
“Market conditions remain uncertain, making it difficult to forecast demand globally. Industry demand levels have softened in all our major markets. We are experiencing reasonable demand for graphic paper in North America and somewhat slower demand in Europe; however, the supply/demand balance in many of our export markets has been affected by the significant new paper capacity commissioned in China during the past six months.
“Pulp prices have declined, partly as a result of weaker demand from China, but remain above historical average levels. The group as a whole sells slightly more pulp than it purchases and is therefore generally neutral to pulp prices. Our European business is a net purchaser and North America and South Africa are net sellers of pulp.
“We expect the chemical cellulose business to continue to perform well, albeit with slightly lower prices in US Dollar terms.
“The board has approved an additional investment in chemical cellulose. We will invest approximately US$170 million to convert the pulp mill at our Cloquet Mill in North America to produce 330,000 tons of low cost, high quality chemical cellulose. We expect the conversion to be commissioned during 2013. This investment, together with the Ngodwana Mill conversion will increase total group chemical cellulose capacity to over 1.3 million metric tons, further entrenching Sappi’s leading position in this business.
“The volatility of currencies adds to the difficulty of forecasting. Sappi is very sensitive to the value of the Rand/US Dollar exchange rate. Other things being equal, a 10% weakening of the Rand adds approximately US$60 million to the group’s operating profit. The recent weakening of the Rand to the US Dollar is therefore favourable to Sappi.
“There has been some relief from high input costs but they remain at historically high levels.
“We will start benefiting from our European initiatives from the beginning of the new financial year. These include the closure of Biberist Mill which was completed in August 2011, and further fixed cost and variable cost saving actions, which together are expected to result in benefits of US$100 million per annum.
“We do not expect any significant benefits from the Southern African restructuring until the second half of the 2012 financial year.
“We expect net cash generation to remain positive for the year ahead, after increasing our capital expenditure on strategic investments. We expect our finance costs to be lower following our refinancing during 2011 and intend to continue to reduce our financing costs including through refinancing our existing higher cost debt, such as our 2014 bonds.
“Provided there is no further major deterioration in global market conditions, we expect to continue the past two year’s trend in improving operating performance and to achieve a net profit for the full year of 2012.
“We are confident that the actions we have taken and those planned will position the group well for the future, resulting in growth and improved returns for the group.”
The full results announcement is available at www.sappi.com
