The past year has been difficult and disappointing for PaperlinX. In last year’s Annual Report I indicated that we did not foresee any short-term changes in market conditions and unfortunately this proved correct. In fact we saw an unprecedented drop in demand for paper as a result of the global recession as confidence collapsed and paper consumption slumped. Conditions deteriorated sharply in the last quarter of calendar year 2008 and remained at depressed levels throughout the balance of the financial year.
These adverse market conditions had a substantial negative impact on our operating earnings and put significant pressure on our balance sheet. Although we undertook an equity raising in October 2008 to reduce Group debt, we did breach borrowing covenants at 31 December 2008. While our lenders subsequently provided waivers for the breaches, the company has incurred significant additional costs in the second half of the year, including higher borrowing costs and related waiver fees. The higher borrowing costs include penalty interest rates and increased line fees.
It is very disappointing that the fall in earnings and consequent covenant breach meant that we were unable to pay dividends on our ordinary shares and the June distribution on our Step-up preference securities. We are looking to reinstate these as soon as we are able.
However, on a positive note our external debt was substantially reduced by the proceeds of the sale of Australian Paper (excluding the Tasmanian operations) to the Nippon Paper Group, which was completed on 1 June 2009. This is an important strategic step for PaperlinX as it moves us closer to being purely a global paper merchant.
The sale to Nippon Paper was underpinned by the new bleach plant and the upgrade of the pulp capacity at the Maryvale Mill. Although the pulp mill project did not meet our original cost and timing expectations, it was completed in December 2008. The plant started up well and provided the benefits expected, which included reduced production costs, improved environmental performance and improved product quality. PaperlinX has retained some of the upside benefits of the project through both an agreement for pulp to be supplied to our Tasmanian mills and through a potential earn-out should Australian Paper exceed agreed earning levels over the next three years.
In addition to our focus on both the financial position of the Company and the strategic direction of the Group, the Board has maintained focus on corporate governance and risk management issues. Our Board committees meet regularly and as the table on page 27 in the Directors’ Report indicates, the Board met many times in 2009 to monitor and overview the progress on the strategic agenda.
As part of our ongoing process of director transition, Andrew Guy retired from the Board in December 2008. I thank Andrew for the contribution he made during his term as a director.
I would also like to thank our management team, headed by our Chief Executive, Tom Park, who have worked tirelessly for your Company over the year. Our employees remain committed to the Company and to its strategic direction and to supporting management into the future. I would also like to thank our shareholders and other stakeholders for their ongoing support.