Cham Paper: Carried along by strong tailwind in the face of powerful headwinds
16.03.11 17:50

- Positive business trend leads to increased volume of 11.9%
- Net revenue increase of 8.6%; 16.3% in terms of local currencies
- Operating profit of CHF 8.4 million burdened by raw material prices and currency effects
- Distribution of CHF 5.00/share proposed
- Cautiously optimistic outlook for 2011

In 2010 the Cham Paper Group achieved a net revenue of CHF 339.5 million. This corresponds to an increase of ca. 8.6% as compared to 2009, or 16.3% in terms of local currencies. The volume sold of 204,126 tonnes of specialty papers was 11.9% above the 2009 figure, and 9.0% above the figure for 2008. Consequently, not only has the stabilization of market demand continued, the Cham Paper Group has also successfully returned to a growth path after the brief - yet sharp - decline in demand at the beginning of 2009.

As already in 2009, the Consumer Goods segment (47% of the Group's revenue) exhibited an extremely favorable showing, particularly with regard to the flexible packaging product group, which achieved an additional growth of 8.5%. The net revenue increase of 11.4% in the company's second largest segment, Industrial Release, (45% of Group revenue) reflected the economic recovery in the industry. The as-yet small Digital Imaging segment (8%) exhibited a strong performance, thanks to now-established innovative products like the Transjet paper.

Unfortunately the Cham Paper Group's successful positioning in the marketplace and the brisk demand for its products are not reflected in its profitability. In the favorable market environment of last year the company was forced to absorb skyrocketing raw material costs; our Swiss mill was unexpectedly confronted with a sudden sharp decline in the value of the euro, the currency of its key export markets. Whereas the Italian mills again operated more profitably as compared to 2009, the margins at the traditionally profitable Swiss plant shrank substantially. The Group's operating profit of CHF 8.4 million for the year (2009: CHF 13.6 million) is nevertheless disappointing despite the Group's strong market performance. In the last analysis, the Group's net profit for 2010 slipped as the result of non-recurring items (reversal of capitalized tax loss carryovers) to minus CHF 1.8 million. The operating profit was negatively impacted by forex effects of almost CHF 10 million, the financial result being worsened by an additional CHF 4.2 million.


Strategic planning at two levels

The Board of Directors and the Executive Management Board were forced to deal simultaneously with two central issues: planning to satisfy rising demand in the medium term and initiating quick-acting measures to preserve the profitability of production in Switzerland, particularly in Cham's primary market Europe (80% of sales revenue).

The Board of Directors has been intensively engaged in the Group's strategic medium-term planning since 2009. Based on the Group's strong position in the specialty papers market and the successful development and market launch of innovative products in the next few years to come, the Executive Management Board and the Board of Directors are reckoning with an increase in the volume sold that will exceed today's capacities. The Group is currently in a position to produce identical 'Cham Paper quality' at all locations, and this enables flexible planning. This development is the result of standardized processes, quality management improvements and the standards introduced over the past three years. At the same time a growing requirement for specialty papers with attractive growth rates has arisen in Asia that cannot be satisfied from Europe in the medium term, and necessitates local production capacities.


Expansion of Cham's own capacity in Italy and production alliances in Europe

In the course of strategic production planning, the three existing mills in Switzerland and Italy were subjected to in-depth analysis to gauge their future optimization and expansion capability. In addition, an investment project for China was fully developed subsequent to in-depth market and site investigations.

In a policy decision the Board of Directors spoke out in favor of gradually increasing the production capacity in Condino and engaging in the project planning of a strategic expansion of the Carmignano mill or, in the alternative, examining strategic production alliances in the northern eurozone. The positioning and further development of the Cham site is also being examined in detail. In the second half of this year the Board of Directors plans to present a detailed strategy for the optimal utilization of the Group's market opportunities in the specialty papers market during the coming decade.


Focus on maintaining profitability in Europe

The forex effects during the year under review underscores the timeliness of these strategic projects. The sizable strengthening of the Swiss franc against the euro had a negative impact on the profitability of production in Switzerland. Almost 100% of the products manufactured by the Cham mill are exported, the euro area accounting for the company's largest market. Raw material prices - which increased by approximately one third during 2010 - were passed on in a delayed manner by way of price increases of just under 10%. Unfortunately offsetting exchange losses in a similar manner was not possible. Whereas the Italian mills proved successful in maintaining their EBIT margin in the lower part of the 5%-12% target range, this was not possible at the Swiss production site.

Although sales prices continue to be upwardly adjusted and the sales team is able to prevail with this pricing to a certain extent - particularly with regard to passing on increased raw material costs -, at the end of 2010 the Board of Directors and the Executive Management Board decided that strategic objectives would be prioritized. In so doing, the focus in the short term is on boosting profitability and achieving margin targets in the primary markets of Europe, with global growth being a secondary objective.

The expansion into China is to take place in two steps. In order to better capitalize on the market opportunities offered there, the Group will continue to optimize its supply chain into Asia so as to be able to more quickly serve customers locally. Should the current market success prove sustainable in the next few years to come, the fully developed plant project will be reactivated.


Optimization efforts to come to fruition in 2011

In 2011 the Group's earnings will benefit from the price increases gradually going into effect in parallel with stabilizing raw material
costs. On the cost side the results of the optimization projects in purchasing and procurement will also take effect, these projects having been identified in concert with a specialist consulting partner and implemented step by step throughout the year under review. Among other things, this extends to pooling purchases of pulp and chemicals with other paper manufacturers. In addition, further components of the procurement volume in Switzerland such as the sourcing of energy and services were switched from CHF to EUR in order to counter the currency problem.


Balance sheet remains stable

The Cham Paper Group continues to have a sound balance sheet. Thanks to the strict discipline exercised in payables and receivables management, the Group's net working capital dropped to only CHF 83.5 million (2009: CHF 90.4 million) despite the substantial increase in volume, the drop being due not least to exchange rate effects. At year end cash and cash equivalents amounted to CHF 61.8 million, with the Group's net debt amounting to CHF 19.4 million and the gearing ratio a modest 9.8% (2009: 13%). During the year under review, the equity ratio increased from 55.3% to 57.6%.


Tax-favorable capital repayment of CHF 5.00 per share proposed

The operating result achieved by the Cham Paper Group during 2010 does not permit an ordinary dividend to be disbursed under the dividend policy established in 2009. In view of the Group's sound financial situation, its high amounts of cash on hand and its intact business prospects, the Board of Directors proposes that the general meeting of shareholders approve a special distribution in the form of a tax-favorable capital repayment of CHF 5.00 per share.


Outlook for 2011

We are reckoning with a continued positive development of demand for our products. Our sales efforts are paying off and our product innovations are meeting with a positive response in the marketplace. Based on a budgeted euro exchange rate of CHF 1.30, we expect a renewed increase in sales volume in the mid-single-digit range and an improvement in profitability.
 
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