Although sales for the South African paper manufacturer were up to £2.9bn for the year from £2.7bn in 2004, operating profit dropped from £107.7m to the £78.5m loss. Restructuring charges of £133.5m for two mills in the US and Swaziland also had an impact on the results.
Sappi CEO Jonathon Leslie says operating conditions created challenges this quarter and input costs, particularly energy and chemicals, rose in part due to the hurricanes in the US.
However, significant production downtime saw inventories reduced by 120,000 tons and the company managed to improve cash generation and reduce debt.
“There were no paper price increases to offset these higher costs but there were some encouraging signs in terms of demand improvement,” he says. “The many initiatives that we put in place to offset cost increases delivered US$96 million in savings for the fiscal year and our focus on reducing inventories and lowering working capital this quarter resulted in a significant improvement in cash flow.”
Sales in the fine paper segment were better than the previous two quarters and the market share of Sappi’s European business recovered this quarter after suffering a severe decline in volumes in the prior quarter due to attempts to increase prices.
Leslie says the process of turning around the earnings of Sappi’s North American business was also gaining traction, but he admits there are still many challenges ahead.
“The paper industry continues to face persistent increases in input costs without commensurate price increases and, until recently, an apparent unwillingness to close inefficient excess capacity. This volatile environment provides poor earnings visibility,” says Leslie.
“However, some of the prerequisites for earnings improvement are now in place, including sharply reduced inventories and improving order and shipment levels.
“We expect an improvement in earnings in the first quarter of 2006 compared to the fourth quarter of 2005 but this is likely to be limited by further input cost increases and it will be a challenge to achieve earnings for the quarter much above breakeven.”
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