Arctic Paper swings to H1 loss of 50.1M Polish zloty from profit of 755,000 zloty in year-ago period with depreciation, amortization charges, poor exchange rates, weaker market; sales up 14.1% to 1.2B zloty amid increase in volumes

POZNAN, Poland , August 31, 2011 (press release) – Arctic Paper S.A., the second-largest European producer of bulky book paper and one of Europe’s leading producers of high-quality graphic paper, generated revenues in the 1st half of 2011 of over PLN 1.2 billion, 14.1% higher than in the 1st half of 2010, and EBITDA of almost PLN 47.05 million, 39.1% higher than in the 1st half of 2010. The company recorded a net loss in 1st half of 2011 of PLN 50.1 million, mainly due to higher depreciation and amortisation charges (PLN -14,2 million), unfavourable exchange rates (PLN -12,2 million) and higher interest costs (PLN -7,8 million). The company was also affected by weaker demand for high-quality paper in Europe and continued high pulp prices.

Arctic Paper has announced increases in paper prices of 5-8% from mid September in both the coated and uncoated segments. The level of implementation of price increases depends on the market situation and terms previously agreed with specific buyers of the group’s products.

The group is implementing a saving programme across all of its business units, with the goal of reducing costs by about PLN 60 million per year. The programme has been implemented since March 2011, and the full effect will be visible next year.

FINANCIAL RESULTS – DETAILS

The financial results of the Arctic Paper Group are presented in the table below:

(PLN ’000)

1H 2011

1H 2010

Change (%)

2Q 2011

2Q 2010

Change (%)

Sales revenue

1,212,119

1,062,308

+14.1%

577,487

582,948

-0.9%

EBITDA

47,046

33,816

+39.1%

16,548

1,443

+353.8%

Operating profit/loss

-16,353

-9,522

n/a

-15,190

-22,247

n/a

Net profit

-50,113

755

n/a

-41,647

85

n/a

 


The Arctic Paper Group’s sales revenue in the 1st half of 2011 was up over 14% from the same period in 2010, and gross profit on sales was over 10% higher than in the 1st half of 2010. However, the group shows a net loss of more than PLN 50.1 million.

Factors affecting the financial results in the 1st half of 2011

The start of the year, in January and February, was characterised by growing demand in Europe for graphic paper, and on this basis the expectations for development of the situation in subsequent months were cautiously optimistic. However, from the beginning of April there was a decline in demand, which was most severe for the Arctic Paper Group in June. Market data show a decline in demand in the 2nd quarter by about 8% from the previous quarter and from the same period in the prior year. This means that demand in the 2nd quarter of 2011 was similar to that during the crisis in 2009. Consequently, Arctic Paper decided to cut production temporarily at selected plants, resulting in the use of production capacity during 2nd quarter as a whole of 91%.

The decline in demand was reflected in the volume of paper sold, which was down in the 2nd quarter of 2011 by 8.6% from the 1st quarter of 2011. However, the group shows an increase in volumes sold of 5,5% for the 1st half of 2011 as a whole compared to the 1st half of 2010.

The group continues to face higher variable cost. At the end of the 2nd quarter of 2011, pulp prices stood at USD 1,023 per tonne for NBSK and USD 874 per tonne for BHKP. The average price for NBSK in 2Q 2011 was up 6.5% from the same period of the previous year, and BHKP was 0.2% higher. The average price of pulp in the 2nd quarter of 2011 compared to the 1st quarter of 2011 was up 5.5% for NBSK and 2.8% for BHKP. Only at the end of June and beginning of July there was a break in this negative trend, when a minor but steady decline in pulp prices began.

In the 2nd quarter of 2011 the EUR/SEK exchange rate was 2.1% higher than in the 1st quarter of 2011 and 6.5% lower than in the 2nd quarter of 2010. Despite the positive change from the 1st quarter of 2011, the exchange rate was still significantly lower than in the same period of the previous year. This had a decidedly negative impact at the level of revenue invoiced in EUR at plants in Sweden (AP Munkedals and AP Grycksbo). During the 2nd quarter of 2011, the USD/SEK exchange rate was 2.9% lower than in the 1st quarter of 2011 and 17.5% lower than in the 2nd quarter of 2010, which translates into lower costs of raw materials quoted in USD, primarily pulp.

The negative result on operating activity and the net loss in the 2nd quarter and for the year to date were mainly affected by higher depreciation and amortisation charges of PLN -14,2 million compared to 1st half of 2010 connected with market revaluation of Arctic Paper Grycksbo assets in 2010, and negative exchange rate differences resulting from valuation of the intra-group loan by Arctic Paper S.A. to the subsidiary Arctic Paper Investment AB (special-purpose vehicle for acquisition of Arctic Paper Grycksbo). In total unfavourable exchange rates had a negative impact of PLN -12,2 million compared to 1st half of 2010 and the higher interest costs had an unfavourable impact of PLN -7,8 million compared to 1st half of 2010.

IMPROVED EFFICIENCY

Because of the market situation and unsatisfactory financial results, Arctic Paper suspended the investment programme involving expansion of the production capacity of the Kostrzyn plant. The smaller projects being carried out currently are focussed on improving efficiency, reducing energy consumption and production costs, and product development—primarily for non-graphic applications. The project for expansion of the hydroelectric plant in Munkedal is at the stage of obtaining the required administrative permits. The company anticipates that approvals and decisions should be issued prior to the end of this year, which should allow work to begin in the spring of 2012.

The group has conducted a thorough analysis of its activity, based on which it has prepared and is now implementing a cost savings programme across all business units, with the target of cutting costs by about PLN 60 million annually. The programme has been implemented since March 2011, and the full effects will be visible next year.

Michał Jarczyński, CEO of Arctic Paper S.A., commented: “In the 1st half of 2011 there was a combination of a number of unfavourable market factors, forcing some European producers to take decisions to close or temporarily reduce production capacity, or to sell plants. Despite cutting production in the 2nd quarter, Arctic Paper generated good revenue and profit on sales, but our net result and operating result were impacted by higher depreciation and amortisation charges referring to the acquisition of Arctic Paper Grycksbo, unfavourable exchange rates and higher interest costs. We also see reduced demand for graphic paper in Europe and continued high pulp prices. We are currently concentrating on projects connected with improving our efficiency, energy consumption and production costs. We are also working on product development of our line of papers which may be used for non-graphic applications.”

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