Sappi Limited ( SPP)

F1Q11 Earnings Call

February 9, 2011 9:00 am ET

Executives

Ralph Boëttger - Chief Executive Officer

Berry Wiersum - Chief Executive Officer, Sappi Fine Paper Europe

Alex Thiel - Chief Executive Officer, Sappi Southern Africa

Mark Thompson - Chief Financial Officer

Mark Gardner - President and Chief Executive Officer, Sappi Fine Paper North America

Analysts

Myles Allsop - UBS

Tassin Meyer - Citigroup

Lars Kjellberg - Credit Suisse

David Smith - Macquarie

Alex Ovshey - Goldman Sachs

Phyllis Camara - Pax World Fund

Terek Hamid - JPMorgan

Presentation

Operator

Ladies and gentlemen, good afternoon and welcome to the Sappi Limited First-Quarter Results Conference Call. Please note that all participants on this call are currently in listen-only mode and will be presented with an opportunity to ask questions at the end of today's presentation. (Operator Instructions) Please note that this conference call is being recorded.

At this point in time I would now like to hand the conference call over to Sappi Limited Chief Executive, Mr. Ralph Boëttger. Thank you, and over to you, sir.

Ralph Boëttger

Thank you very much. Very good afternoon and good morning to you. And thank you for joining us for the Sappi first quarter 2011 results presentation. And I have with me a number of my colleagues as usual to answer any questions should you have.

I would like to draw your attention to the forward-looking statements and Regulation G disclosure requirements on slide 2.

Moving then on to the summary, our first quarter 2011 we had pleasing results, with earnings per share of $0.07 per share and that against a loss of $0.10 for the equivalent quarter in 2010. Operating profit excluding special items amounted to $137 million compared to $81 million for the same period a year ago. We have experienced improved demand and pricing for the majority of our products during the past quarter.

On slide 5, the financial summary. Pleasing to see that volumes went up by 7% to just over 2 million tons and our total sales up 16% compared to the equivalent quarter a year ago to nearly $1.9 billion. Operating profit excluding special items, as I have mentioned, $81 million to $137 million In fact, better than $129 million of our fourth quarter over the previous quarter. The earnings per share excluding special items, $0.10 versus the previous quarter of $0.09 and including special items $0.07 versus $0.16. The net debt to total capitalization down to 54.7%.

Moving on to slide number 6 showing the operating profit excluding special items. Here I think what's important is a continuing trend of improved performance, which we are pleased with and we hope to sustain going forward.

On slide 7 we are talking about our divisional contribution trend. I think what's important to note here is that not only is the contribution increasing quarter-on-quarter and continuing that trend, but that our Southern African business and therefore our pulp business is showing quite a dramatic improvement.

Moving onto cash generation from operations, we generated $245 million of cash from operations during the quarter, which is a continued improvement. But our net cash generation was an outflow due to a number of reasons including accounting cutoff dates and an increase in activity levels.

Consequently, if you move onto slide number 9, you will see that our net debt increased quarter-on-quarter, but still very much in line with our declining debt trend. We remain committed to work hard and manage tightly working capital, our debt and balance sheet strength, which remains priorities to us at Sappi.

Moving on to our earnings, quarter versus quarter, you will see that our adjusted earnings per share of $0.10 takes into account some special items of $0.03 for the quarter, which all were charges versus credits in the previous quarter, where our adjusted earnings per share was $0.09. But prior to adjustment, $0.07 versus $0.16. So solid performance for the quarter on an underlying basis.

Moving onto the operating margins, you'll notice on slide 11 that we've seen a significant recovery in the margins of our Southern African business to levels which are more in line with what they were historically. And that is very pleasing to us. Volumes of 17% and that despite the fact that our paper businesses in South Africa in the domestic market experiencing tough trading conditions and a very strong currency. On the other hand, the pulp and export business is doing very well indeed.

Our North American business' margins coming down to 6%, but one needs to take into account here that we have had a major plant shut at our Somerset mill, where we invested in the upgrading of a recovery boiler, which in turn will lead -- and in fact already producing more pulp. So increased capacity, lower energy costs and lower emissions. If we exclude the cost of the shut, then margins would have been nearly 12% for that quarter. So we have every reason to believe that during the next quarter margins will substantially return to levels above 10%.

In Europe, margin is still under pressure despite the fact that we've seen very good price increases for coated woodfree paper. However, for coated mechanical we have only seen increases coming through in January and that we expect to lead to improved margins going forward in our European business. One needs to take into account that input costs increased very dramatically and we will talk about that going on to the next slides.

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