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Strong Aussie $ undercuts PaperlinX performance

Friday, 24 October 2003
By Print 21 Online Article

The rising Australian dollar is reducing returns from PaperlinX’s expanding overseas merchant network while facilitating extra competitive imports, effectively bringing down prices for paper in the domestic market. This double whammy on the communication paper division has slashed the company’s profits despite good results from its other businesses.

The likelihood of the Aussie dollar strengthening further bodes ill for the coming year. In addition, weak demand and depressed international paper prices continue to put margins under pressure, with little prospect of an early upswing in the cycle.

According to David Meiklejohn, chairman, PaperlinX, in his address to the AGM, the new year has begun badly and the outlook is uncertain. “The creditable results from PaperlinX’s other business segments together with substantially lower interest costs were only able to partially compensate for the negative impact of the strengthening Australian dollar and the reduction in the Communications Papers results. Accordingly, for PaperlinX overall, for the September 2003 quarter sales and earnings were behind both our expectations and the corresponding period last year.

“There are some signs of a pick up in paper merchanting activity in some key markets which have been in recession for over two years, most notably the USA. The outlook for the next twelve months remains difficult to predict as expectations of recovery on previous occasions have proved to lack resilience.

“However, our strategic expansion and our focus on cost management has positioned PaperlinX to benefit from any improvement in activity.”

The grim outlook came in remarkable contrast to the upbeat commentary on the annual report where 2003 was described as another year of consolidation and growth for PaperlinX. Highlights included the takeover and integration of the UK-based The Paper Company (formerly Bunzl Fine Paper).

For the PaperlinX Group overall, sales increased by 22%, profit after tax was up 7% and a profit return before interest and tax on average funds employed of 12.3% was achieved.

The company is now focused on the imminent acquisition of the Dutch-based Buhrmann paper merchanting division, it’s most ambitious takeover target yet. This will make PaperlinX the largest paper merchant in Europe. Regulatory hurdles have now been overcome and the deal is on track for closure in November. This now looks like a better deal with the final price for the division coming in at approximately Aus$1billion (€655 million) instead of the original Aud$1.25 billion (€746 million), which some analysts thought was on the high side.

“This is a very satisfactory outcome for PaperlinX and its shareholders and represents a major strategic step for future growth,” said Meiklejohn. “The acquisition will change our company in important and fundamental ways as a significant proportion of earnings will now be generated from our paper merchanting business and the European market becomes a major part of that business.”

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