Open Briefing Paperlinx MD on 16% Profit Growth

Document date:  Fri 16 Aug 2002
Published:  Fri 16 Aug 2002 10:33:21
Document No:  193533
Document part:  A
Market Flag:  Y
Classification:  Open Briefing 

PAPERLINX LIMITED                             2002-08-16  ASX-SIGNAL-G

HOMEX - Melbourne                                                     

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CORPORATEFILE.COM.AU

PaperlinX Limited reported a net profit of $123.0 million for the
year ended June 2002, up 16 percent from the previous year. EBIT was
up 6 percent to $213.1 million. Broadly, what were the drivers of
your profit growth?

MD IAN WIGHTWICK

We successfully offset the dilutionary impact of our divestment of
the Edwards Dunlop, Commonwealth Paper, plantation and chemical
trading businesses with contributions from our acquisitions. We
achieved the projected cost restructuring, bringing our costs down
and driving down our working capital. Our merchants performed
exceptionally strongly relative to others in the sector, both here in
Australia, and in Asia and North America.

In the Australian Paper manufacturing sector, we had record
production rates and therefore low cost and high efficiency. We were
also helped by the low Australian dollar, which meant we could
successfully export all the product we couldn't sell in Australia and
New Zealand.

Another profit driver was pulp prices - import pulp costs were low
and our own pulp manufacturing continued to be cost effective - and
that paper prices didn't collapse with the lower pulp prices. And
profit also continued to be driven by our emphasis on product
development, particularly in the packaging area.

Given that for virtually the whole of 2002 we had pretty tough
economic conditions in most of our markets, with lower demand for
printing and publishing papers, we believe the results were excellent
in all businesses and in all regions, each of which was profitable.

CORPORATEFILE.COM.AU

PaperlinX's EPS was 38.2 cents, up 3 percent from the previous year
reflecting a higher capital base as a result of the Spicers
acquisition in January 2001. What's the outlook for earnings and EPS
for the current year ending June 2003?

MD IAN WIGHTWICK

We're not issuing any forecasts ourselves, but we're comfortable with
the current range of analyst forecasts, discounting the extremes.
Earnings will depend on the general level of economic performance in
North America, the UK and Australasia. If we see a pick-up in
confidence, we'd expect to be higher in the forecast range. If we see
further depressed activity or stay where we are, earnings won't be as
high in the range.

CORPORATEFILE.COM.AU

You acquired UK paper merchant Bunzl Fine Paper (BFP) on July 1, 2002
as a beachhead in European paper merchanting. How has BFP's
performance compared with expectations so far and what's the outlook
for the current year?

MD IAN WIGHTWICK

Clearly it's early days. But we're exceptionally pleased with the
performance against BFP's internal expectations and although BFP
acknowledges that Europe, as with most markets, is tight, it's
looking to deliver in line with our forecasts.

CORPORATEFILE.COM.AU

What opportunities do you see for BFP in the current environment and
how do you propose to develop your European merchanting operations?

MD IAN WIGHTWICK 

Firstly, there are opportunities for small bolt-on acquisitions in
the UK market. BFP has a market share of around 14 percent in the UK
and is quite well represented geographically, with a very good
structure, good management and good systems. And there's a number of
small companies in the UK that could offer synergy benefits for us.

More importantly, BFP gives us the opportunity to grow our presence
in Continental Europe, and thereby get some synergies with the UK
platform. There's a lot of potential restructuring activity in the
sector in Europe and it's certainly our strategy to look hard at the
opportunities there, be they acquisitions, joint ventures or
whatever. BFP has certainly raised our profile in Europe, and we've
been contacted by a number of people since the acquisition.

CORPORATEFILE.COM.AU

The BFP acquisition was partially funded via your recent placement
and a share purchase plan offered to private investors, which
together raised about $175 million. PaperlinX's gearing stood at 27.3
percent at the end of June. Are you adequately funded to pursue
expansion by acquisition?

MD IAN WIGHTWICK

Yes. Our balance sheet remains strong after the acquisition. For
example, we'd have the capability today to buy something at least the
size of BFP without having to go back to the market, should such an
opportunity come up.

We felt the recent equity raising was appropriate given the size of
BFP. What we wanted to do was leave our balance sheet structured in
such a way that if for example, we make a couple of bolt-on
acquisitions, we don't end up stretching it.

CORPORATEFILE.COM.AU

There's some concern among investors that you're pursuing
acquisitions too aggressively and that the model of building a
business as an independent, international paper merchant is not yet
proven. Do you believe these concerns are justified?

MD IAN WIGHTWICK

I would absolutely reject those assertions. As we've stated before,
we've set ourselves extraordinarily strict guidelines relating to
return targets and risk in pursuing our growth strategy. We're
looking for well run businesses that are already performing well,
have a wide customer base, good systems, good people and the ability
to reach our financial targets.

If you look at where we are after the BFP and North American
acquisitions, it can hardly be said we've been aggressive. In each of
the European and North American markets we've got a share of only
about 3 percent. If we were very dominant in those markets and
aggressively pursuing further growth, you might question our ability
to retain market share. But with 3 percent of the market, we have
lots of opportunities.

On concerns about the independent merchant model, it's not a new
concept. Spicers has been an independent merchant for years and was
certainly not influenced by the 41 percent shareholding we owned at
the time. I believe independence is a significant advantage. One of
the reasons we're doing so well in the US is that we're not allied to
a paper company. We're not bound to one particular range of products
and can choose the best products to represent to printers, to
publishers, designers and graphic designers.

The major paper suppliers also support the independent model, even
those who have a merchanting operation. They know they've got to have
their products represented by independents. And at the same time,
most of the suppliers are under pressure to pursue scale in their
manufacturing operations and get their production costs down. They're
not set up for the detailed logistics of merchanting.

CORPORATEFILE.COM.AU

Merchanting and Paper Trading generated EBIT of $57.9 million in
2002, up from $43.0 million previously. EBIT margin fell to 2.6
percent from 3.0 percent previously. To what extent do the lower
margins reflect lower paper prices and what's the outlook for prices
and margins in the current year?

MD IAN WIGHTWICK

Lower prices certainly squeezed margins, even though they held up
relatively well compared with past downturns in the demand cycle. Yet
our merchants were profitable in all areas and the margins of some
were at the top end of merchants worldwide.

The outlook is somewhat more positive in Australia. Two of our
competitors have recently announced price increases and our merchants
won't be far behind them, reflecting price increases from most of our
overseas suppliers and Australian Paper, who's in the process of
increasing prices. We'd expect to see margins improve for our
Australian merchants as the price increases take effect in the next
one to two months.

Overseas, the outlook for margins depends very much on the economy.
The US is still patchy. And until the economy and demand pick up
there, we don't foresee any major opportunity for stronger prices in
coated papers, the key product segment. In the UK and Europe, a major
competitor announced price increases in May, which BFP followed, and
to a large extent those increases have held. There are signs that
these economies could pick up later in the financial year and while
we don't see any immediate opportunity for further increases in
prices, we certainly don't foresee any dramatic fall.

CORPORATEFILE.COM.AU

EBIT from your North American merchanting operations rose to $19.7
million from $10.1 million previously, reflecting geographic
expansion in the US and the acquisition of Canadian paper merchants
Coast Paper in May 2001 and LP Turgeon in April 2002. EBIT margin
fell to 2.1 percent from 2.4 percent. What factors will drive growth
in your market share in North America going forward and can you
continue to grow market share without further eroding margins?

MD IAN WIGHTWICK

It's important to say we haven't set out to achieve market share
growth by being a price cutter. We're not driving just for market
share per se. We're driving for returns. Obviously returns will come
from growing our business as long as we're able to get the synergies
and benefits through to the bottom line. Ultimately, growth is
important but it's all about doing it profitably.

And we've grown organically as well as through acquisition. For
example, we started a merchanting business from scratch in Kansas
City that's had great growth and while it started with a low base of
sales, we had a very low cost of entry. We believe we've been able to
win market share at our competitors' expense because a number of the
major publishers and printers value our independence and the wide
range of papers, both domestic and offshore, we offer. Spicers, the
brand under which our North American merchants operate, is the
quintessential customer-focused merchant. It has a reputation for
reliability and rapid, customised service.

CORPORATEFILE.COM.AU

How would you characterise the current trading environment in
merchanting in the Australian and New Zealand markets and how do you
expect it to be affected by recent consolidation in the sector?

MD IAN WIGHTWICK

We need to see more business confidence to return to more normal
levels of demand, particularly in the area of promotions and
advertising. We do see some very early signs of recovery. There are
good bookings for the months ahead in the web-fed publishing area,
which is usually the early-cycle leader in demand for high-value
coated paper for magazines and more expensive promotional activity.

Industry consolidation should see a drive to seek better returns from
investments. And the price increases just announced could be a
reflection of that. In our view, there's more potential for
consolidation in the sector. All of which should drive a more
rational market.

CORPORATEFILE.COM.AU

The Australian Paper communication papers manufacturing business
booked EBIT of $134.8 million in 2002, up from $97.2 million in the
previous year. What's the outlook for earnings in the current year
and how might they be affected by recent increases in pulp prices?

MD IAN WIGHTWICK

Pulp price increases will raise some of our costs. But don't forget
we make 70 percent of our own raw material, and only import 30
percent. As I said earlier, Australian Paper has announced price
increases, of 3 to 5 percent, mainly for uncoated offset papers and
copy paper, and will look to increase coated paper prices in the
current year. Obviously, pulp prices can't continue to rise unless
world demand takes off, so with the paper price increases and the
maintenance of the export markets we developed last year, we don't
see any major threat to the profitability of the communications paper
sector.

CORPORATEFILE.COM.AU

The Australian Paper packaging papers business was affected by
industrial trouble at its main client, Amcor, in the first half but
recovered to some degree in the second half, reporting a full-year
EBIT of $43.2 million, down 20 percent. What's the outlook for
packaging papers for the current year?

MD IAN WIGHTWICK

The outlook's for improved conditions going forward. We've seen a
drive in the distribution chain for packaging that more effectively
withstands the rigours of handling. And our products are right in the
sweet spot of that, with high strength and low basis weights. And
there's every sign those trends will continue as we go forward.

On top of that, in the third quarter of 2003 we'll install a new
semi-extensible sack kraft paper unit supplying paper for multiwall
sacks, not only for cement, which is the traditional use, but also
for high performance packaging suitable for food contact, a market
Australian Paper is developing. There's growing demand for this
product in Australia and New Zealand and particularly in Southeast
Asia, where we see export opportunities at excellent prices.

CORPORATEFILE.COM.AU

PaperlinX paid a 75 percent-franked final dividend of 14 cents per
share, unchanged from the previous year. The full-year dividend
payment was 27 cents, unchanged, and equivalent to a payout ratio of
71 percent. What's the outlook for dividends and franking for the
current year?

MD IAN WIGHTWICK

With our earnings growing offshore, our dividends will continue to be
less then fully franked. But the exact amount of franking will depend
on how well we do in the various regions. That aside, we don't
foresee any dramatic changes in our payment policy as we go forward.

CORPORATEFILE.COM.AU

Thank you Ian.

For previous Open Briefings with PaperlinX, view
www.corporatefile.com.au

For more information about PaperfinX, view www.paperlinx.com.au