SP base-case operating scenario
Our current base-case operating scenario includes the following key near-term assumptions:
— We believe that Sappi’s core European coated fine and magazine paper operations will
continue to be negatively affected by macroeconomic uncertainty. Still, we do not exclude the
possibility of minor price increases if the supply/demand balance improves somewhat.
Furthermore, we assume that the European division will benefit from ongoing cost
rationalization, including the closure in 2011 of the group’s Biberist mill in Switzerland.
— In North America, we believe that market conditions will be more favorable than in Europe
over the near term, on the back of macroeconomic recovery and healthy supply and pricing
discipline. Furthermore, Sappi’s increase of chemical cellulose capacity, through its $170
million Cloquet mill conversion, scheduled for start-up at the beginning of 2013 could boost
margins if demand remains favorable.
— We assume that Sappi’s South African business will continue to benefit from a weak South
African rand as costs are in rand while sales are predominantly in U.S. dollars. In addition, we
assume continued healthy demand for chemical cellulose, as well as benefits from the group’s
restructuring starting to affect results towards the end of 2012 and onwards.
These assumptions translate into a rather stable adjusted EBITDA margin of about 11% in
fiscal 2012 (11.3% in fiscal 2011). We assume no significant growth in revenue in 2012 over
2011. However, we recognize meaningful potential for revenue and earnings growth in 2013,
primarily driven by cost savings, increased chemical cellulose capacity, and a slightly more
favorable macroeconomic environment. In a downside scenario, driven by near-term macroeconomic
pressures, we believe that coated fine paper demand in Europe, already in structural decline,
will fall more quickly and further than in our base case. Pressure on selling prices and
additional industry capacity cuts could result. In our opinion, Sappi’s geographic diversity and
growing chemical cellulose pulp business, as well as the potential for lower input costs, may
mitigate these negative effects to an extent.
SP base-case cash flow and capital-structure scenario
Continued…
