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Sappi Limited (NYSEMKT: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

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.

Dealing then with European business, on slide 13 you can look at the shipments or deliveries and prices in Europe. And that essentially shows a good recovery in mechanical coated deliveries, but that for coated woodfree sheets towards the end of the quarter saw a flattening or even a slight decline in deliveries for coated woodfree. Prices, however, are moving in the right direction, with further price increases having been announced for coated woodfree very recently, as recently as Friday and coated mechanical prices having gone up from January. That will improve margins in the second quarter and going out into the year.

If we move to slide 14, as I said to you, prices are recovering for all grades of paper and we expect further improvements going forward. Much work needed to be done to further improve that business and indeed the industry, but we are positive that we are dealing with those to the extent that we can.

If one looks at volumes, year-on-year for the quarter 7% up to over 1 million tons. And very encouraging sales in dollar terms, 10% up, with prices in Europe a ton up a full 12% year-on-year for the quarter. Unfortunately, costs also up quite dramatically from €655 a ton to €726 per ton, 11% up. But operating profit up from $25 million for the quarter, the previous, the quarter-on-quarter year ago to $34 million during our first quarter.

Moving on to our North American business, a positive story here with both demand and pricing moving in the right direction and consistently selling now for a number of quarters. And where we are today we are continuing to experience a good demand and pricing for our products, which is also explained on slide number 18, where you can look at the coated paper prices all going in the right direction.

If one looks at the financial summary, tons up 13% to the equivalent quarter a year ago and sales up 19%. The operating profit excluding special items up to $23 million, a 21% increase on the equivalent quarter, but down from the previous quarter, essentially as I pointed out on the margin side as a result of the Somerset recovery boiler upgrade, which led to a shut. But a very strong underlying performance of this business with a positive outlook.

So now, divisional overview for Southern African business, moving on to slide number 21. NBSK pulp prices still at very high levels, a slight tick down, but we don't see any softening in pulp prices at this point in time, neither for chemical cellulose.

Leading then in slide 22 to what we regard as a particularly pleasing performance for the Southern African business, given that the paper businesses still have a lot of upside. Tons sold, 452,000 tons for the quarter, but more importantly than that, with the price per ton in dollar terms up 27% from a year ago from $778 per ton to $989 per ton. And the operating profit excluding special items in dollar terms $79 million versus $29 million for the equivalent quarter a year ago and $58 million for the fourth quarter. So strong demand for most of our products now, perhaps with the exception of paper and with real upside potential for our paper businesses and a continued strong performance for chemical cellulose.

In summary then and looking forward, we are more confident about the sustainability in the profitability trend that we've displayed over the past number of quarters. Chemical cellulose business continues to outperform our other businesses, in that it's in a growth market with high demand. On the basis of that, we intend to accelerate our plans for further investment in expanded capacity in this business going forward.

Costs pressures are very real as commodity prices continue to increase. But in most of our businesses now we do have some pricing power. And also, we have launched a number of actions to deal with these costs in order to ensure that we increase our margins. We intend to reduce our net debt this year and also to improve on our cash generation particularly on a net basis, as we go forward. We very importantly aim to also reduce finance costs by applying cash towards debt. We have today announced a tender offer of $150 million for our 2012 bonds.

We expect our second quarter operating profit excluding special items to continue this improving trend relative to a year ago. Although it might be and we expect it probably to be slightly lower than the first quarter results mainly for seasonal reasons, this positive trend in operating performance and indeed general performance of the company is expected to continue.

That brings me to the end of the presentation. We as a team will be happy to answer any questions that you might have for us. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Myles Allsop from UBS.

Myles Allsop - UBS

Yes, first of all, could you give us an update on coated fine paper prices in Europe? Some of the list prices seem to have been eroding during the end of the fourth quarter and in December, January time. What is behind this erosion? And do you think that is going to stop soon?

Ralph Boëttger

Berry, would you like to answer that? You are in the (inaudible).

Berry Wiersum

Certainly our prices have not eroded in the current months. I have seen some deals done on the margins, but it is not significant. I think that owing to some weakness in demand, there may have been some deals done. But it is not a structural decline in pricing. Costs are continuing to go up. So we are very confident that the price rise that we announced on Friday to take place starting in March and for the contracted business in April will go through.

Myles Allsop - UBS

Has anyone else followed that price increase yet?

Berry Wiersum

Well, I am not privy to other people's boardrooms, but I expect them to be followed. I did see an announcement by one of the competitors in the RISI daily update that they were announcing a price increase. So yes, I do expect those because I think everybody is confronted with exactly the same cost rise.

Myles Allsop - UBS

Can you give us a quick update on the tariffs in Europe against the Chinese imports? There's been various reports, but it seems that that is moving forward at this stage.

Berry Wiersum

Yes, that is moving forward. Preliminarily, tariffs were announced in November last year. The commission has recently given its definitive case team result on the anti-subsidy investigation in which they also have found further complainants. In other words, that subsidies are proven. A final vote on both the antidumping and anti-subsidy complaints will be made in May, so we can't expect a final result until the 17th of May. But at the moment, that looks as if it is going in the right direction as far as we are concerned.

Myles Allsop - UBS

Okay. Just jumping on to dissolving pulp, could you give us some -- help us understand why the market is so tight? Is it the cotton crop? How sustainable is the current pricing level, do you believe?

Ralph Boëttger

I will ask Alex Thiel, our newly appointed Chief Executive of the South African business, to answer this question.

Alex Thiel

In terms of the markets being tight, really very strong demand for the end product, the viscose type of fiber which goes into textiles. There are some capacity additions coming onstream, being announced, but obviously it will take a while. So our view is that pricing will remain -- or the demand will remain strong and pricing will remain good into the foreseeable future.

Ralph Boëttger

And yes, cotton price is a big role here and the fires and droughts and all of that and floods that we have seen over the world has -- exactly right, will affirm that demand for viscose type of fiber.

Myles Allsop - UBS

Are you concerned, if we have a good cotton crop this year, then the dynamic will change and suddenly there will be an oversupply of dissolving pulp?

Ralph Boëttger

No, we don't, Myles. Not at all. We think this is a continuing thing. Myles, we have to give the other people a chance to ask questions as well.

Myles Allsop - UBS

Okay, perfect.

Operator

(Operator Instructions) Our next question comes from Tassin Meyer from Citigroup.

Tassin Meyer - Citigroup

Hi, it's Tassin here. Can you hear me?

Ralph Boëttger

Yes, we can hear you, Tassin.

Tassin Meyer - Citigroup

Perfect. I just have two hopefully short questions. Firstly, can you give me an idea of how your export business in Europe fared over the last quarter and what you are seeing at the moment in terms of demand and competitive forces within your export business from the European plants? Then secondly, could you just perhaps expand on the chemical cellulose investment plans? I know it's probably early days; but if can give an idea of just what you are looking at, what you are considering at this stage in terms of markets, potentially product grades and where you think the growth will be. Where do you think you will position yourself?

Ralph Boëttger

I will ask Berry to answer the first portion of that question. I will then give an attempt on the second one.

Berry Wiersum

As far as (inaudible) were concerned, there was some slackening of demand during the quarter up to December 2010, due to overstocking which had taken place. There was, as you may remember, somewhat of a run on the market; and there was a fear of shortage of paper, which meant that there was a lot of extra buying going on in a number of our export markets. That led to some destocking towards the end. However from January onwards that demand seems to be coming back quite nicely.

Ralph Boëttger

As far as the accelerated plans for investment in chemical cellulose, we have not announced any details of that as yet and we still have some work to do. Although being the world leader in this business in terms of capacity and cost, in our opinion, we have had plans and have been planning for a long time to expand our capacity. The expansion of that capacity, we have options to do that at quite a number of different locations, which would serve different markets. And we are quite excited about that. We expect during this course of the calendar year to make more details available of what we intend doing.

If one looks at that market, however, what is very positive is that demand is very strong in all sectors of the market and not only in certain sectors in the specialty side but also in the VSF part, which is by far the biggest section of the market. We have the knowledge, the experience and the ability, together with the very important factor that we have good relationships with most all of our customers – and they are the world leaders themselves. So there is huge opportunity for us to tap here. What kept us really from doing that up until now was that we dealt with certain balance sheet constraints in funding. We now have the confidence to move forward both from a market and an ability to fund point of view.

Operator

Thank you. The next question comes from Lars Kjellberg from Credit Suisse.

Lars Kjellberg - Credit Suisse

Yes, hi, gentlemen. Two questions. First of all, I would like you to expand a bit on your guidance. Given that we come from a comparatively low base, in particularly on the North American side and you are generally seeing positive trends in the business, one would almost expect that to offset the seasonality effect you're talking about. If you want to expand on that a bit and also talking about cost pressures that you are seeing, et cetera. The second question, if I may just follow up on that, to start with the guidance first, please?

Ralph Boëttger

That's a very good question. I think we are trying to guide you as accurate as we can; also, we only know so much about the future. One area that is particularly difficult for us to get a handle on in terms of where our profitability will go is exchange rate. It's been very volatile and it influences our businesses to a large extent. A 10% movement or a 5% movement in the rand versus the dollar is quite a significant impact on our margins and profitability. For us to sit at the beginning of a quarter or any point in time and say this is -- you know, give guidance, we have got to be so careful, because those things can swing around a lot.

We are comfortable about the trend in our underlying business. Demand trends for our business is fairly robust and good. We have seen pricing for most of our products being positive and good. But costs are also rising. I think one needs -- you say it is coming off a low base. Yes, compared to the equivalent quarter a year ago. But we have had a particularly strong quarter now in quarter one.

Generally and historically, our quarter 1 results are lower than our quarter 4 results. This quarter, however, was better than quarter 4, which was the best quarter that we have had in five years. Perhaps therefore us being cautious in trying to give any guidance -- which we are not; we are just giving an outlook here, in terms of what... And what we are saying is that we will be better and we are not saying a little bit better, than the equivalent quarter a year ago. It will be a lot better. But it will be as good as the first quarter? We don't think so. It's seasonality that plays a role here and perhaps tempered by lack of visibility in terms of particularly exchange rates. More than that I think we cannot say, because we know not more.

Lars Kjellberg - Credit Suisse

Okay, understood. Just a follow-up then on the cash flow components, if you want to elaborate a bit. Maybe Mark can answer that question. When you look at the substantial working capital outflow and you also mentioned some technical aspects to that, if you can please elaborate so I understand exactly what is going on.

Ralph Boëttger

Exactly. It will take quite some time because it is very technical. From a pure normal day-to-day business point of view, working capital increased because of increased activity and the increased cost of input costs, which increases the value of your stocks. And then prices went up, which increased the value of your debtors. That is the normal increase, which we expected. But on top of that we had technical issues, which I am going to ask Mark Thompson, our CFO, to explain to you because he is the cause of this. Mark?

Mark Thompson

Now, our reporting periods are 13 weeks per quarter. If you add that up in terms of days, it comes to 364 days a year. So every six years including leap year, we end up a week behind. And that is what happened up to 2010 and we this year are taking an extra week. But when we slip behind in that cycle our period-end cutoff becomes earlier and earlier in the month. So take for example, our September cutoff was the 26th of September, which meant that at that point in time in many parts of our groups we had not paid substantial creditors, for example. So now in January our cutoff date was the 2nd of January. So we had at the cutoff data paid a substantial amount of our creditors.

We don't give an equivalent offset with our debtors, because our debtors are collected more regularly across the month. So really it is a question of previously, because of the earlier cutoff, some of our creditors were only paid after that cutoff. Now in this January – in this December quarter end, all our creditors had been paid before the cut off.

Ralph Boëttger

Essentially we are not concerned about the working capital movements (inaudible) therefore many technical reasons that negatively affect the net cash generation. We expect that to unwind as we go forward in the year and end up with a good net cash generation for the year. However, because of these cutoffs it won't unwind completely. Working capital will be higher than the equivalent year ago, but the business has grown in all our states.

Lars Kjellberg - Credit Suisse

Okay. Thank you.

Ralph Boëttger

Pleasure.

Operator

Our next question comes from David Smith from Macquarie.

David Smith - Macquarie

My key questions have been already answered. Thank you very much.

Ralph Boëttger

Thanks, David.

Operator

Thank you. Our next question comes from (inaudible) Capital Group.

Unidentified Analyst

Good morning, gentlemen. I was wondering on the capital upgrade project at Somerset, I recall from a previous presentation that you estimated the North American system was about 73% energy self-sufficient on a gigajoule basis. I was wondering how much your new project in Somerset will move that metric.

Ralph Boëttger

Mark, would you like to answer that question?

Mark Thompson

Yes, sure. At Somerset now, after the recovery boiler expansion and rebuild, we are able to burn at that site about 85% to 90% renewable fuels, reducing our exposure now in terms of fossil fuels and oil considerably from where it was. As Ralph has already mentioned, it does substantially boost our production of the pulp mill also.

Unidentified Analyst

In North America, Mark, would you say that the biggest cost headwind that you are facing now is chemicals? Or is it coming from other places as well?

Mark Thompson

Chemicals are definitely -- we are seeing pressure on the cost side of chemicals, but we're seeing a little bit of pressure on most raw materials. It is all driven by the impact of fuel prices and oil coming down through the whole system, impacting chemicals and deliveries of all materials. But we have got a lot of things in place to maintain that cost and manage the cost and we are pretty optimistic about where we are going with it.

Unidentified Analyst

Okay, very good. The final question on chemical cellulose business. I just wanted to get a sense how often those contracts are negotiated. I know they're long-term contracts, but would you say that most are renegotiated annually, or is it less frequent than that?

Ralph Boëttger

Much less frequent than that and they are also staggered, even by customer.

Unidentified Analyst

Okay. Then all of them have quarterly price resets?

Ralph Boëttger

Yes.

Unidentified Analyst

Okay, thank you very much.

Ralph Boëttger

Thank you.

Operator

Thank you. Our next question comes from Alex Ovshey from Goldman Sachs.

Alex Ovshey - Goldman Sachs

Good morning. Can you hear me?

Ralph Boëttger

Good morning.

Alex Ovshey - Goldman Sachs

Good morning. Can you hear me? A couple of questions. First on the South African segment in the pulp business, looking at the pulp price realizations, they went up meaningfully sequentially; while the NBSK list price has actually moved down modestly. I think in the past you talked about the NBSK list price being a good benchmark and proxy for how prices in the South African pulp business tend to move. Can you just reconcile why or what was the main reason that pulp prices in South Africa moved up while the index moved down slightly and just looking ahead, how we should think about the pulp price outlook in South America relative to the NBSK list price?

Ralph Boëttger

Alex?

Alex Thiel

I think one can clearly say that NBSK is a good reference. The reason that you may be seeing the discrepancy is to do with the fact that the mix changed slightly and we actually sold more chemical cellulose, which moves it.

Ralph Boëttger

And exchange rate plays a major role here, if you look at our margins and realized prices.

Alex Ovshey - Goldman Sachs

Okay, thank you. Then shifting to the North America coated paper business, just looking at the price realizations there, they moved up sequentially but modestly lower than what we had anticipated and what was listed as the RISI pricing for the quarter. Can you just talk to why North America coated paper prices didn't move up as much as what was indicated by the indices?

Ralph Boëttger

Mark?

Mark Gardner

Yes, a couple of things I would point out. One is that we saw price increases maybe ahead of what the RISIs were. If you go back to prior quarters our prices were generally higher than the RISI index prices. We also have a fair amount of contractual business that will roll over at the end of each quarter. So we are still expecting to see some improvement in pricing going forward. But again we tend to be a little bit higher than the RISI index on some things.

Alex Ovshey - Goldman Sachs

Did pulp price realizations in North America change much sequentially in the first quarter versus the fourth fiscal quarter?

Mark Gardner

I'm sorry. Was the question on pulp or paper?

Alex Ovshey - Goldman Sachs

Question on (inaudible)

Ralph Boëttger

The question was on pulp, Mark.

Mark Gardner

Question on pulp? Well, year-over-year the pulp price quarter-over-quarter -- year-over-year quarters were up, was up considerably. We were down slightly quarter-over-quarter. Our pulp pricing from the prior quarter was down about 5.5%, 6%.

Operator

Our next question comes from (inaudible)

Unidentified Analyst

With American price utilization, how much of the sales volume was coated paper versus other paper or pulp?

Ralph Boëttger

Would you please repeat that a bit louder? We could not hear you properly.

Unidentified Analyst

Sorry. I am just following up to the prior question about North American realized prices. My question is -- how much of the volume in North American Fine Paper was coated paper versus other paper or pulp?

Ralph Boëttger

Mark, would you like to comment on that, the volume increases both in paper. There is no other paper; we only have coated paper and then the pulp.

Mark Gardner

Right. I'm not sure; the question didn't come through very clearly. But the only paper we sold was coated paper, so I'm not sure what the question was.

Ralph Boëttger

Maybe let me take that. Our pulp volumes quarter-on-quarter from the fourth quarter actually went down. But quarter-on-quarter year-on-year went up. For paper, volumes went up. Other – if you exclude again the effect of the mill shuts -- particularly went up as a result of the mill shut in the first quarter (inaudible).

Unidentified Analyst

What about prices, realized prices? Because the number in the presentation is a blended number. So what about realized prices for coated paper versus the other stuff?

Ralph Boëttger

Well, the other stuff really is a very small portion (inaudible) our paper volumes. In terms of volume, 90% of our volume is coated paper. The other is release; and their prices also went up, realized prices.

Unidentified Analyst

Okay. Thank you.

Operator

Our next question comes from Phyllis Camara from Pax World Fund.

Phyllis Camara – Pax World Fund

Thank you. Can you talk about -- do you have any more opportunities to increase your self-sufficiency on the energy front in any of your other plants? Or do you feel like you are at the level that you have to be right now for that?

Ralph Boëttger

If I look at the Group, in North America we are pretty much self-sufficient and not that much more we can do, although there are areas where we still have opportunity for further improvement in self-sufficiency or expansion. But less so, because we are very efficient there. In South Africa I think the biggest opportunity lies for increased self-sufficiency. You might have noticed that we have announced some contracts where we actually supply energy to the electricity provider, the utility in South Africa. Then we are working in Europe as well to make ourselves more self-sufficient and efficient in the use of energy. So yes, it will remain an area of great attention. But we're not foreseeing at this point in time massive investments on a continuous basis. We will invest only on short payback projects.

Phyllis Camara – Pax World Fund

Okay. Then as far as other raw material costs go, would chemicals be your largest input cost after maybe energy? Or would that be pulp, even though across the board I know (inaudible).

Ralph Boëttger

Pulp and wood remains the big one for us, pulp and wood. But chemicals is a big cost; so is energy. We have seen pulp I would say leveling off in costs. In energy we have seen increases and so also for chemicals. Therefore, a lot of attention on reducing cost and usage, very importantly, of energy as well as chemicals in our business.

Phyllis Camara - Pax World Fund

How can you reduce chemical usage in the business? Just (multiple speakers) waste that goes on?

Ralph Boëttger

There is waste; there is product design; there is substitution with other products. A lot of that has to do with research and development and that is an area where Sappi is particularly strong.

Phyllis Camara - Pax World Fund

Okay. Then I guess one last question. From the end-users of your products, I know you must keep in contact with them quite closely. But what worries you like a year down the road? I know advertising has come back and just where do you worry about the end demand? What worries you the most about end demand down the road?

Ralph Boëttger

I think general economic activity and general economic health, more than anything else. We know that electronic media plays a role. We think we have a reasonable handle of the effect on our products and demand for our product. What is very difficult to predict is what is going to happen to the general economic climate, in particularly Europe for that matter, but elsewhere in the world. We are, however, at this point in time seeing a constant slow improvement -- and even a good improvement in other markets, if one looks for instance at Germany and so forth.

But I think that is a single item where one can't easily get a handle and a visibility on just to know what is going to happen with the economies and demand therefore in general. That would be I think the biggest issue. For the rest, there are trends; and we have I think positioned our business to deal with the markets as we see them developing.

Phyllis Camara - Pax World Fund

Thank you.

Operator

Our next question comes from (inaudible) from Boston Company Asset Management.

Unidentified Analyst

Thanks for taking my call. I just want a little more clarity on understanding your guidance for Q2, with operating profit being slightly lower than Q1. If I look at slide 11, it shows the margins for the different regions. North American margin was low due to the shutdown and I believe you said it would be above 10% going forward. So I would expect margin in North America to be strong -- stronger quarter over quarter. Southern Africa you said was strong still. So is Europe going to be the weak area in Q2? I'm trying to figure out where that -- in light of North America having a rebound in Q2 in its margin -- where the weakness quarter over quarter in Q2 is going to come from.

Ralph Boëttger

I tried to explain it to a previous question. We are careful in the guidance we are giving you and we are very confident that compared to the equivalent quarter a year ago it will be much better. I think I need to point out and you know this was -- the first quarter was a particularly strong quarter, other than the shut in North America, particularly from a volume point of view. Looking forward now, we do not expect margins to worsen in any of our businesses. It is seasonally a slower quarter, generally than what quarter 1 is; and quarter 1 was a particularly strong quarter because we have had an extra week in that quarter for these accounting cutoff purposes.

We do have a shut at our Stockstadt mill in Europe during the coming quarter, which would have some effect; and then also a shut at Ngodwana. So all in all, some uncertainty about exchange rates and the effect of debt. There is generally good demand. But because of accounting reasons and seasonal trends, we believe that the quarter would be somewhat weaker in terms of operating profit than the quarter 1, which was an exceptionally strong quarter. But we are certainly not trying to guide you that the trend of improved performance will not be maintained or that we are concerned about our business going forward. In fact, if we look at our business now compared to the plans that we have made for the financial year, we feel good about the business. I can't really say more than that.

Unidentified Analyst

Okay, that's great. Just to remind myself, a weaker rand benefits your business?

Ralph Boëttger

A weaker rand significantly benefits our business, particularly with our as pulp businesses doing now well and pulp prices being high. Yes.

Unidentified Analyst

Great. Just wanted to check. Thanks a lot, guys. Appreciate it.

Ralph Boëttger

Pleasure.

Operator

Our next question comes from Terek Hamid from JPMorgan.

Terek Hamid - JPMorgan

Thank you, guys. Quick question on the North American paper business. When you look at the --

Ralph Boëttger

We lost you there. It seems we have lost everybody.

Operator

(Inaudible) We have no further questions in the question queue.

Ralph Boëttger

Thank you very much, if anybody can hear it. We really appreciate it. Thank you.

Operator

Thank you, sir. On behalf of Sappi Limited, that concludes this afternoon's conference. Thank you for dialing in. You may disconnect your lines.

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