Paper Merchanting
Overview and results
Improved underlying operating earnings and returns in Paper Merchanting were the result of internal initiatives rather than from any real improvements in the external environment.
Paper Merchanting reported improved earnings before interest and tax of A$205.2 million, up 9 per cent on the prior year on sales revenue of A$7.2 billion, up 7 per cent on the prior year. Earnings growth was strong in North America, helped by the inclusion of Spicers Canada for the full period, while Europe saw a modest improvement in earnings. Earnings in Australia and New Zealand remained under significant pressure from lower priced paper imports and various currency impacts.
Merchanting has continued to produce sound returns in this difficult environment, with clear potential for upside from any improvements in market conditions. Total merchanting return on average funds employed (ROAFE) increased to 11.9 per cent from 11.4 per cent in 2006, and remains well above the cost of capital, meaning that this business has continued to increase value creation for shareholders. The shift from indent to stock sales and other cost pressures during the year resulted in a modest increase in overall costs of 2.1 per cent, after adjusting for acquisitions. Our continued focus on working capital resulted in a further improvement in our average working capital to sales ratio, a key measure of how efficiently we are using capital, down from 14.7 per cent to 13.5 per cent.
2007 was a year of good progress on a range of strategic initiatives underway across our Paper Merchanting platform. These initiatives have fallen into three key areas, in line with our core operating principles. Growing and strengthening our existing businesses; reducing our exposure to areas where we lack any competitive advantages; and thirdly, growing in complementary business areas that allow us to build new business streams off our existing infrastructure to meet our customers’ changing needs.
The growth of the PaperlinX Paper Merchanting platform has been a core plank of the Group’s successful strategy to balance its exposure to paper manufacturing. PaperlinX is now the leading global fine paper merchant with businesses in 27 countries. PaperlinX has continued to invest in this platform and in the people that make it happen. Investments in integrated IT platforms are underway in Europe and North America. A strategic selling programme, developed specifically for PaperlinX and our industry, is providing new tools to our sales force. It is currently being rolled out globally, with over 500 participants having already completed courses.
Looking to the future, PaperlinX sees good opportunities to continue to successfully grow its paper merchanting platform. Investing in its strategic advantages will provide the base for sustainable long-term returns for shareholders and provide the greatest opportunities for its employees, customers and suppliers.