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Management Side
Sappi
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Johannesburg, South Africa, 02 February 2009 - Sappi has posted first quarter results to its Web site at http://www.sappi.com/SappiWeb/News/Financial+news/1Q+2009+Financial+results.htm. Highlights for the quarter include the following: 

-- European acquisition completed on 31 December 2008 (post quarter end)
-- Declining global demand leads to weak operating profit
-- Significant production curtailment in December
-- Coated paper prices increased in Europe; under pressure elsewhere
-- Pulp prices declined more than US$200 per ton
-- Basic EPS 6 U.S. cents (favorably impacted by special items)

Commenting on the results, Sappi chief executive Ralph Boettger said: "Sales volumes declined 8% in the quarter compared to a year earlier as a result of the global market turndown. Prices for coated paper increased relative to the prior quarter and a year earlier in Europe but were under pressure in the USA and many other markets. Pulp prices, including prices for chemical cellulose, fell sharply and by the end of the quarter NBSK prices were more than USD 200 per ton lower than at the end of the previous quarter.

"Demand fell off sharply as the quarter progressed, resulting in lower sales in all our businesses, particularly Saiccor. We took extensive production curtailment in December to match output to demand in addition to major planned maintenance outages during the quarter.

"Operating profit excluding special items was USD 25 million for the quarter compared to USD 92 million a year ago and USD 89 million in the prior quarter. Basic EPS of 6 U.S. cents per share for the quarter was favourably impacted by special items of 6 US cents per share. Cash generated from operations was USD 95 million, down from USD 155 million a year ago, as a result of lower operating profit. Working capital increased USD 96 million during the quarter compared to an increase of USD 133 million a year ago. Net debt, excluding the proceeds of the rights offer, increased to USD 2.5 billion from USD 2.4 billion at September 2008."

Looking forward, Boettger commented: "The sharp decline in demand and the inventory reductions in the downstream supply chains for our products in the latter part of the last quarter has continued in January in most of our businesses. The impact on the sales of chemical cellulose was particularly sudden and is continuing.

"In Europe demand for coated graphic paper was particularly weak in the first half of January. We curtailed output by about 25% in January and will continue to match output to demand going forward. M-real has announced that it will cease coated graphic paper production at Gohrsmuhle and Hallein mills, which have a capacity of 640,000 tons, by the end of April, which is expected to improve the industry supply/demand balance. Pricing for coated paper in Europe remains firm.

"The integration of the European Acquisition is proceeding well. The focus remains on customer relations and service, engaging our new and existing employees, integration of systems and delivery of synergies. The enlarged business gives us greater flexibility to manage our output to match demand, to negotiate improved input prices and to improve our service and product offering to customers. Although current market conditions, and particularly a slow-down in demand, will make it more difficult to realise the synergies in the short term, we remain confident that we should deliver the targeted EUR 120 million per annum of synergies within three years.

"In North America demand for coated paper was very low in the first weeks of January accompanied by downward pressure on pricing. We continue to curtail production to match output to demand. In addition, the weakness of pulp demand and the fall in pulp prices will impact the region's profitability as it is a net seller of pulp. Release paper is also experiencing weak markets particularly in China and to the U.S. motor industry. The North American business has taken steps to reduce its overhead costs and is exploring all means to further streamline its operations to reduce its cost base.

"We expect the Southern African fine paper and packaging paper businesses to continue to perform moderately well. Demand in the local market has weakened less than global markets generally. We have taken and will continue to take commercial downtime when necessary. The viscose grade chemical cellulose and other exports, however, continue to be significantly affected by the major fall in demand and sharp fall in prices which has continued into the current quarter. The additional capacity at Saiccor following the commissioning of the expansion in September 2008 is not being utilised. We are therefore shutting certain elements of the old plant to reduce output to match demand while utilizing the more efficient new plant as much as possible.

"We expect input prices to continue to decline and for the reduction in our variable costs to accelerate as our higher cost inventories are utilised. We continue to focus on managing input price reductions and more efficient usage of raw materials. Curtailing output is likely to result in less efficient usage of raw materials, which will slow the expected reduction in input costs. The European business, which is a major pulp buyer, should benefit from the sharp fall in pulp prices. NBSK prices declined to USD 610 per ton in January from an average of USD 739 for the quarter ended December 2008 and USD 885 for the quarter ended September 2008. The other regions will, however, be unfavourably impacted by this. Following the European acquisition, the group is a net buyer of pulp. Our level of pulp integration is now approximately 92%.

"Our short-term outlook is for difficult global economic conditions to continue and for these to be reflected in demand for our products and our operating results. We do, however, expect some improvement in demand levels from the very low levels experienced late last quarter and in the first part of January. The operating profit excluding special items for the quarter ending March 2009 is expected to remain weak.

"We will continue to prioritise cash flow management including managing inventory levels and reducing capital expenditure to the minimum level needed to keep our assets in good condition.

"We have implemented a number of actions which position the group well going forward, and we will continue to act decisively to manage our business through the current turmoil. The greater flexibility to manage output following the European Acquisition, the improved efficiency of the Saiccor mill combined with our actions to reduce input costs and reduction of fixed costs will all help deal with current tough market conditions.

"When market conditions improve, both the European acquisition and the Saiccor expansion will help us to achieve the improvement in return on capital employed which we target."

The full results are available at www.sappi.com


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