Chairman’s report
David Meiklejohn, Chairman
What we know is that 2007 saw a welcome recovery in both the reported and the underlying earnings of PaperlinX, reflecting benefits from the restructuring and development initiatives initiated over recent years. Although Paper Merchanting has again contributed the majority of our earnings, the lift in returns for both merchanting and manufacturing is encouraging.
In previous reports I have commented on the strategy
we are following to build on our strong and sustainable
merchant base and to mitigate where possible the
challenging market conditions. We have maintained
this strategy in a difficult economic environment where
we face the impacts of global oversupply in the paper
industry, rising input costs and a continuing weak
US dollar. We do not see any significant changes in
these economic factors in the immediate period ahead.
We will continue to focus on key areas within our
control to ensure that our underlying profitability
continues to improve.
The theme of this year’s annual report is ‘What we can do’ and provides insight into the actions and strategies being implemented throughout the Group. Whilst the market conditions we have faced in 2007 have continued to impede progress towards our return targets, the level of activity across the Group to deliver the targeted returns from our strategic initiatives is encouraging. We are focussed on growing profitable volumes and improving sales margins, while at the same time reducing costs and improving productivity to ameliorate the impact of external cost increases.
The paper industry has demonstrated a cyclical pattern over many decades. However, while other business sectors have seen strong positive cyclical benefits over recent years, our industry has yet to see this. Accordingly, we continue to take the conservative and pragmatic approach in assuming that we should not rely on cyclical improvements in the immediate period ahead. We are concentrating on business restructuring and cost reduction and as a result are now in a strong position to leverage off any improvements in the external business environment should they emerge.
Our merchanting platform has demonstrated an ability to improve returns in difficult external conditions through capitalising on growth opportunities, managing working capital effectively and reducing costs. We have many initiatives underway across Paper Merchanting which involve building on our strong local positions, improving operational efficiency and capitalising on our key competitive advantages. Our people are well motivated and we are seeing good growth in personal competencies supported by training in many areas, including sales skills, leadership and safety.
Our Paper Manufacturing activities continue to face difficult market conditions. Nevertheless, in 2007 we did see an increase in earnings, albeit from a low base and with returns continuing at unacceptable levels. Our Paper Manufacturing strategy is to increase domestic sales through product, environmental and logistic innovations while managing costs through efficiency improvements. We are focussing attention on areas where we have competitive advantage and finding alternatives where we do not. Strong management attention will continue to be given to improving operating efficiencies, achieving cost reductions and improving our sales mix.
The new bleach plant and pulp upgrade at Maryvale Mill is well progressed with completion still on track for a full year contribution in 2009. This is a substantial project spread over many areas of the mill and is being undertaken at a time of strong demand for construction materials and labour. Although the cost will now be above the original budget, the project is anticipated to deliver returns in line with expectations due to continuing increases in imported pulp costs. When completed, this project will provide an important platform for our future plans and will provide lower operating costs, improved product quality and improved environmental outcomes. In conjunction with the pulp mill project, we are upgrading the wood yard at Maryvale Mill. This is another key project with important long-term benefits. It also continues to be on track to deliver a solid contribution and improved returns in 2009 and beyond.
During the year $285 million of step-up preference securities were successfully issued to Australian investors. This issue was important as it strengthens the underlying financial profile of the Group and provides increased financial flexibility for us to take advantage of future growth opportunities, particularly in Paper Merchanting.
As advised last year, the Board has commenced a programme of progressive retirement of directors to allow an orderly transition of the Board and avoid a situation where too many Directors retire at the one time. As also indicated, we intend to have an overlap in time between the appointment of new Directors and the retirement of existing Directors. In this regard we were pleased to welcome Mr Jim Hall to the Board during the year. Jim is an experienced Director with a sound financial background that will serve the Company and its shareholders well over coming years.
On behalf of the Board I congratulate Tom Park and his management team on the substantial effort they have made and the successes they have achieved over the past year and thank all employees for their effort and commitment during another year of challenging conditions. The Board also thanks shareholders and other stakeholders for their support as we continue to implement the strategic initiatives which are critical to underpin our long-term growth and expansion.
David Meiklejohn
Chairman