The acquisition of the Australian operations of Red Paper Group in the fourth quarter has established CPI as Australia’s second largest paper merchant, with pro forma full year revenues estimated in excess of $550m.

"Whilst gross profit margins improved during the half year, volumes in our paper products fell," says Cassell in an announcement to the stock exchange.

"The higher year on year sales were due to the combined impact of the acquisition and higher machinery sales. The group incurred certain restructuring expenses to reduce costs, the benefits of which are expected to flow through in the future.

"Debt levels increased significantly as a result of the acquisition of the Australian operations of Red Paper Group.

"Volumes in fine paper grades continued to come under pressure due to some competitor product discounting, coupled with a more consolidated customer base. In addition, the strong Australian dollar saw pricing fall in certain product groups against pcp. Despite these factors, gross profit margins improvedconsiderably against the prior year, as a continued focus on value added products began to take effect.

"Price increases were announced during the year by suppliers, although these were absorbed by many participants due to the strong Australian dollar.

"Inks and coatings products continued to perform solidly. The performance of these products is expected to be boosted by the acquisition of Choice Inks, which occurred in January 2008.

"Capital equipment operated in a subdued environment contributing a break even result, which was a significant improvement against the prior period. Overall demand was affected by a number of factors including rising borrowing costs, the Federal election and an uncertain economic outlook. As a result of these factors, the second half performance from machinery is expected to remain flat."

Red Paper Group acquisition

Cassell is enthusiastic about the acquisition of Red Paper Group whose operations comprised Edwards Dunlop Paper and Raleigh Paper. The transaction was completed on November 30 2007.
 
"The Board, management and staff were delighted to welcome the Red Paper staff, many of whom have significant experience in the industry, to the CPI Group," says Cassell.

"They in turn have enthusiastically embraced the new group and all of its associated challenges. The acquisition provides greater flexibility to deal with the emerging trends in
paper distribution. These trends not only include the emergence of large print groups, but also very small printers who have benefitted from recent technological improvements in print quality in the small volume sector. The acquisition has significantly broadened the product range of the Group.

"Taken together, the Group now has significant market positions in most sections of the industry including the Office Products supply market. The focus will be on maintaining the presence and market position in all these areas whilst continuing to evaluate processes in the back office and distribution areas to deliver higher value to shareholders.

"The group divested its paper distribution business in New Zealand to Edwards Dunlop (NZ) Limited, a company associated with the former owner of Red Paper Group. The Group simultaneously acquired a Right of First Refusal to purchase the enlarged New Zealand operations of Edwards Dunlop (NZ) Ltd, when they ultimately decide to sell these operations."

Other developments

During the half year reported, CPI Group successfully appealed against a legal judgment handed down against it. This resulted in the recovery of $5.7m paid as part of the adverse judgment in the prior year.

The Board considered it prudent to undertake a selective share buyback of shares owned by the former supplier who was the other party in the legal proceedings above and completed the buyback process in December 2007.

Outlook

"Volumes are expected to remain constrained in the current market," continues Cassell.

"A focus on improving processes and eliminating duplication in non value adding areas will be pursued rather than chase volume at low margins. Sales results and profitabilityare anticipated to benefit from the acquisition in the second half and beyond.

"Pulp prices continue to rise in USD terms along with sea freight. Pricing pressure is expected to build during the second half, as producers deal with a tighter market for pulp. A number of local industry participants including CPI have announced price increases on certain grades and it is anticipated more will follow.

"Whilst optimistic about the opportunities presented by the acquisition, the Group is concerned that rapidly rising interest rates and a potentially weaker economy could adversely affect demand and trading. As a consequence, positive asset management and cost control will be pursued."

Chairman

It was announced that, after six years as chairman of CPI, Gerry van Wyngen has decided to relinquish this position effective March 1 2008, in favour of Peter Reilly who joined the Board at the same time.

During his time as chairman van Wyngen successfully oversaw the reconstruction of CPI from the precarious position it found itself in during 2002 to becoming the second largest paper merchant in the country by the end of 2007.

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