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Original Source: FD (FAIR DISCLOSURE) WIRE
OPERATOR: Good day, ladies and gentlemen, and welcome to the Sappi first-quarter results conference call. My name is Alicia and I will be your operator. At this time all participants are in a listen-only mode. And we will facilitate a question-and-answer session towards the end of the call. (OPERATOR INSTRUCTIONS) As a reminder this conference call is being recorded. I would now like to introduce your host for today's call, Mr. Jonathan Leslie, Chief Executive Officer for Sappi. Please go ahead, sir.
JONATHAN LESLIE, CEO, SAPPI LIMITED: Thank you, and welcome everybody. If I could just straightaway go to slide 2 draw your attention to the forward-looking statements set out there. Then I just got a couple of introductory slides before getting into the quarter's results. If we look at slide 3, this just summarizes the Sappi Group. To remind you all we are the world's largest producer of coated Fine Paper accounting for about two-thirds of our sales. We've got leading market shares across a number of businesses and regions. Importantly we have got market shares in coated Fine Paper of around 24 percent in North America and 20 percent in Europe.
We've also got a significant coated specialties business. You see this paper used as beer bottle labels, (indiscernible) bags, soup sashays, (ph) and it's even used in making imitation leather. The company still sticks close to its South African origins. We have got leading regional businesses down here in most grades of paper everything from coated Fine Paper and office paper to containerboard, Sappi Kraft (ph) newsprints and tissue. South Africa is also home to another undisputed world leader, Sappi Saiccor. Our chemical cellulose business with a global capacity share of around 16 percent.
This is a very exciting asset which makes the raw material going into viscos (ph) fiber and a multitude of specialties. To give you an idea of Sappi's global leadership its capacity has more than doubled the size of the next largest mill. Moving to slide 4, our business model set up on simple foundations of products and cost leadership. We are focused on coated paper and have a global manufacturing platform to support this. We've got mills including a share in one under construction in nine countries on four continents. We believe that low-cost raw materials are key and therefore are economically integrated as opposed to physically integrated with low-cost South African pulp, fed by some of the world's fastest growing trees.
Sappi has a group of excellent businesses in South Africa that we aim to continue to nurture, short-term, painful currency strength notwithstanding. Finally we are committed to financial discipline. Cash generation is of paramount importance. And we are determined to spend that cash only on projects or acquisitions that will return that cost of capital. So as I move onto the quarters results, slide 5 gives you the highlights. Headline earnings are somewhat ahead of our expectations at 6 cents per share.
We saw a very strong demand growth in both Europe and the U.S. U.S. paper prices improved further; in fact somewhat ahead of our original expectations. However, there were a couple of significant downsides this quarter. Raw materials prices continue to escalate. Currency movements were again seriously unfavorable, and related to this point we were obliged to impair our Usulu Mill in Swaziland. This meant a 41 million charge to the income statement although the charge is not reflected in the headlines and earning number. I will discuss this impairment charge in more detail a little later.
Turing to slide 6 which covers the progression of our quarterly sales, this is a trend we like to see. Our quarterly sales have now exceed a $5 billion per year run rate. This has been a function of improving markets and volumes but also I have to say it has been flattered lately by currency changes. If you look at slide 7 unfortunately the earnings progression has not been maintained in the last quarter. As we cautioned at our last results that it would be difficult to achieve positive earnings, we actually delivered 6 cents, although we had some help from plantation revaluation credits.
The next slide is rather busy, but we produced the same slide last quarter and it seemed to be generally appreciated, and its a way of trying to understand the underlying earnings movement from the prior quarter and how it relates to the headline earnings numbers. If you back out the impact of plantation revaluation credits and tax anomalies from both quarters, along with a large periodic maintenance charge in the quarter just finished you will see that underlying earnings went from 16 cents down to 12 cents. Clearly this still isn't something to brag about but in a seasonally weaker quarter with both costs and currencies running against us I think this is a decent achievement.
Turning to the next slide what is driving the demand pickup we are seeing and why are we positive about the outlook? Here you will see the progression over more than a decade of one of our fundamental business drivers, advertising spend. You can clearly see the 2001 to 2003 trough that had a huge impact on our business. On the upside you can also see the pickup in 2004 that is a flowthrough into our business. And the dotted line shows (indiscernible) forecasts of strong growth continuing for the next few years and this is a view shared by the other industry research groups.
Turning to slide 10 you will see a striking similarity with the previous chart. In this case we're looking at the progression of European industry shipments of coated Fine Paper since 1990. The impact of the advertising recession has clearly seen as is the rebound afterwards. The difficulty in Europe has been overcapacity. The advertising recession actually coincided with capacity additions of more than 10 percent, resulting in lower operating rates and declining prices pretty much ever since. The current good news is that operating rates are solidly back up into the '90s. Shipments over the past year grew at 12 percent, and there is no new capacity coming on in Europe.
Moving from the macrolevel to focus on the quarter, slide 11 summarizes our European division's performance. And overall the improvement in earnings in the face of escalating costs and (indiscernible) prices was (indiscernible). We go to slide 12, the same cannot be said for North America where we continue to face a number of serious challenges. 12 million of the 15 million operating loss can be attributed to maintenance costs, and bearing in mind that there were some indirect costs to these shops, earnings were basically flat on the prior quarter. This is frustrating in light of good progress on price realization but problems still lie on the cost side.
For example price increases in purchased raw materials cost us 16 million in comparison to the same quarter last year. We are tackling this cost escalation and have identified some significant cost saving opportunities that I will come to in a minute. Slide 13 shows the demand developed in the U.S. also since 1990. The impact of the advertising …