CHAIRMAN’S
REPORT
David Meiklejohn
Chairman
2008 was another year where the external environment again proved to be extremely difficult and increasingly challenging. The profit results for the Group were down but the benefits of the strategic initiatives undertaken in recent years ameliorated to some extent the negative impacts of the adverse market conditions. We have been operating in difficult economic conditions now for some years and this has had a negative impact on our profits, our share price and on returns. Although we do not see any short-term changes in market conditions we will continue to focus on the key strategic areas which are under our control which involve reducing costs, improving productivity and improving production efficiencies.
A major focus of the management and the Board over the past year has been on the completion of the new bleach plant and pulp upgrade at our Maryvale Mill. This project has not proceeded in line within our original cost and timing expectations and is now scheduled for completion later in the 2008 calendar year. However, the strategic rationale for the upgrade involving increased capacity, reduced production costs, improved environmental performances and improved product quality remains unchanged. Although the completion of the project has been protracted, we are obtaining benefits from the work completed to date and are confident of delivering targeted returns on completion.
The industry structural issues I have commented on in previous reports have shown some signs of resolution, with recent closure announcements of paper production facilities by European paper manufacturing companies. This has the potential to improve the supply imbalance in Europe while the increase in Asian demand for paper is seeing a tightening in the regional Asian supply/demand balance. Nonetheless, we must continue to focus on the areas under our own control, and ensure that our Company maintains the flexibility, both financially and operationally, to continue to pursue its chosen path.
Operationally we continue to progress our list of strategic initiatives, including the pulp mill upgrade. These initiatives have helped buffer the Company results against the negative pressures of recent years and new initiatives have been added as opportunities arise. In some cases investment in these initiatives has had a negative impact on short-term returns, but have been undertaken because they will yield improved results in the longer term.
A consequence of taking some restructuring actions now, combined with the difficult external environment, has been the need to manage our financial resources prudently. In an operational sense this has led to a significant focus on reducing working capital on ongoing cost reduction programmes and on the sale of non-strategic property assets. It has also resulted in tight management of the Group balance sheet and of our sources of funding. We issued step-up preference shares in 2007, and continued the roll-over of the Group’s short-term debt in February 2008. We will consider other funding options as appropriate to ensure the Company continues to retain the funding flexibility it needs, especially in these more uncertain times.
The announcement that PaperlinX is considering the partial or total sale of Australian Paper to external investors is consistent with this approach, though to date no firm offers have been received, nor any decision made at the time of writing.
Another key focus of the Board during the past year has been to overview risk management throughout the Group to ensure that the Company adequately addresses changes in our external environment. Operational and external risks are monitored by the Board through formal reporting systems and also through regular discussions with management. Our Board Committees ensure that proper governance of Company activities is maintained at the highest standards and that we focus on key identified risk areas.
As part of our ongoing process of Director transitions, Mr David Walsh retired from the Board at the end of 2007. I thank David for the contribution he made both to the Board and to the development of the Company during his tenure. I am pleased to welcome Mr Harry Boon to the Board. Harry, an experienced Director with a strong management background, joined the Board in May 2008.
It has been a challenging year for the Company, placing pressure on management and all our employees. I thank our Chief Executive, Tom Park and his team for the efforts of the past year, and the ongoing commitment they have shown towards the future of our Company. Again I would also like to thank our shareholders and other stakeholders for their ongoing support.
David Meiklejohn
Chairman