Business News
Sappi Trading Update as at the Annual General Meeting of 02 March 2009
Tuesday 03. March 2009 - Speaking today at the Annual General Meeting, Sappi (NYSE:SAP) non-executive chairman Dr. Danie Cronje provided the following update on trading conditions for the group:
We reported our results for our first quarter on 2, February 2009 which reflected a weak operating profit as a result of deteriorating global market conditions. At the same time we said that our short term outlook was for difficult global economic conditions to continue and for these to be reflected in demand for our products and our operating results. We also said at that time we expected some improvement in demand from the very low levels experienced in December and in the first part of January. We expected the operating profit for the quarter ending March to remain weak.
Since then we have seen no improvement in market conditions and have in fact experienced lower demand than expected as well as weaker pricing in some markets as global market conditions continued to deteriorate.
In Europe, demand for coated paper deteriorated further particularly for coated fine paper sheets. Prices have held up and we are implementing a further increase in the February/March timeframe for coated fine paper.
The integration of the recently acquired mills is proceeding well and we will start integrating the acquired order books and brands of the Gohrsmuhle and Hallein mills when M-real ceases coated fine paper production at these two mills, which have a capacity of 640,000 tons, in April. We have generally had good support from our existing and new customers following the acquisition.
Demand levels in Europe are expected to remain substantially below last year for the remainder of this year and we expect to continue to curtail production for the rest of this year. The second largest European coated fine paper producer announced in February that it expected to curtail its coated fine paper production more than 20% in the first 4 months of 2009 and that it had completed its previously announced permanent closure of 160,000 tons of coated fine paper capacity.
In North America, demand levels for coated fine paper are even weaker than in Europe and prices have also weakened further. Our North American business is further impacted by low demand for market pulp with prices which have continued to decline. We will continue to curtail production, and we have decided to suspend operations at our Muskegon Mill, which has a capacity of 170,000 tons of coated fine paper, pending developments in market conditions over the course of the year.
The Southern African business, which had previously experienced less deterioration in its domestic markets, is now also facing lower demand for newsprint and packaging paper. Demand for chemical cellulose pulp remains weak and prices have declined further in line with NBSK pulp prices.
Input costs continue to decrease gradually but the positive impact is partly offset by the relative weakness of the Rand and Euro against the Dollar, each a major operating currency for us. The disruption caused by stopping and starting production also has an unfavourable impact on usage of raw materials.
Visibility of future market demand remains poor but we now expect an operating loss before special items for the quarter to March 2009.
In light of current challenging market conditions and lack of visibility about future market developments we are prioritising cash generation and liquidity. Each of our operating businesses is implementing production curtailment and variable and fixed cost reduction plans to minimise the cash impact of the current weak market conditions, including the suspension of operations at Muskegon Mill. We are also tightly managing working capital down to minimum levels without compromising on service excellence. At current levels of business we are targeting a US$100 million reduction in working capital from December 2008 to our financial year end. In addition, we are reducing capital expenditure to a minimum. In the current financial year we expect capital expenditure in our operations to be below US$200 million compared to US$505 million last year.
We do not have any major borrowings maturing in the next 15 months and the group has sufficient cash and committed facilities to cover short term obligations.
Given the weak global market conditions, we are expecting the rest of 2009 to remain challenging. Our actions and plans are focused on dealing with these tough market conditions and importantly, to ensure that Sappi remains well positioned to take full advantage of our leading positions in coated graphic paper and chemical cellulose when markets start to recover.