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Australian Paper hurts PaperlinX profits

Thursday, 27 October 2005
By Print 21 Online Article

The poor performance of Australian Paper, the local paper manufacturing division PaperlinX, was blamed for the dent in the companyÕs performance. Crippled by a strong Australian dollar, the local manufacturer struggled against cheaper imports. While merchant earnings were up 26 per cent to from $148 to $186 million, Australian Paper operating earnings plummeted by 66 per cent from $66 million to $22 million.

“The decline in overall earnings is attributable essentially to a further reduction in the profit of our domestic paper manufacturing business, Australian Paper,” said David Meiklejohn, chairman at PaperlinX, at the company’s AGM in Sydney this week.

Overall profit after tax (excluding an ATO tax break) was $91.5 million compared with $108.5 million last year, a reduction of 16 per cent. However, earnings before interest and tax of $184.9 million was only three per cent behind the prior year.

Shareholders were advised that no improvement is expected for the rest of the year. The poor performance of Australian Paper was attributed not only to the impact of the strong Australian dollar on domestic paper prices, but to the cyclical nature of demand, pricing and profitability of paper products worldwide.

Meiklejohn insists the cyclical nature of the pulp and paper industry has been demonstrated over many decades, with the pattern proving to be particularly negative in Australia over the past two years. “Selling prices have fallen, supply offerings from overseas manufacturers have increased dramatically, demand in Australia has remained steady,” says Meiklejohn.

While the company concedes that little can be done to influence cyclical trends worldwide, the board and management insist they will be directing their focus on matters within their influence and control.

“For Australian Paper we have committed capital to improve our product quality, to reduce costs and to build on our existing competitive advantages,” says Meiklejohn. ÒWe have upgraded our Maryvale No.1 machine to improve the quality of our sack kraft product and are confident that this project will improve our profitability and returns in the short term.”

He said the impending upgrade to the Maryvale Pulp Mill will offer substantial improvements in costs and quality, as well as boosting environmental performance.

“We are also focussed on narrowing our product portfolio to ensure that we direct our manufacturing capacity towards products that can provide an adequate return to our business through the total paper cycle,” said Meiklejohn, a statement that may mean tough decisions are about to be taken concerning production facilities such as Shoalhaven mill that produces specialty papers.

He maintained that the profit downturn in Australian Paper could have had a more dire impact but for management initiatives in recent years.

“In 2000 the Board recognised the vulnerability of PaperlinX to the negative impacts of the paper cycle and implemented a strategy to expand and grow our global paper merchanting operations. The success of this strategy has been demonstrated in 2005 when the merchanting businesses underpinned our total Group result and our dividend by contributing the majority of our operating earnings.

“If the Board had not followed this merchanting strategy and simply maintained the portfolio of businesses at the demerger in 2000, PaperlinX today would have made virtually no profit, would have paid no dividend and the share price would most likely have been substantially below.”

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