AUST'S PAPERLINX SAYS 2009 UNDERLYING EBIT CUT 35% AFTER UNIT SALE

MELBOURNE, Jun 01, 2009 (AsiaPulse via COMTEX) -- PPXLF | Quote | Chart | News | PowerRating -- PaperlinX Ltd (ASX:PPX) has warned its 2009 underlying earnings will be cut by up to 35 per cent after the paper merchant finally closed the chapter on its A$700 million (US$562.1 million) sale of Australian Paper unit to Japan's Nippon Paper Group (TSE:3893).

PaperlinX managing director Tom Park completed negotiations with the group's bankers on Monday over its A$1.06 billion debt, waivers for previous debt covenant breaches and the sale to Nippon that has taken one year to complete.

The effect of the sale, as well as weaker inventory levels across the industry, will see full year 2009 underlying earnings drop by between 30 and 35 per cent to A$100 million, down from A$154.4 million in 2007/08.

"Our reported EBIT (earnings before interest and tax) will be further depressed by around A$95 million in costs," Mr Park said.

These costs relate to the bank and noteholder charges, consultants' costs to lenders, costs associated with the Australian Paper sale, and previously flagged foreign exchange losses and corporate overheads, he said.

PaperlinX's reported EBIT for 2007/08 was A$160.4 million, down 14 per cent on the previous year.

The effect of rising costs will be partially offset by annualised cost savings across the group of between A$40 million and A$50 million as well as regional expense reductions of A$US25 million (A$A31.13 million) and 45 million (A$A79.2 million) for PaperlinX's North American and European operations respectively, Mr Park said.

"It's been necessary for us to be quite strong and aggressive across our merchanting business in reducing expenses and variabilising that business," Mr Park said.

PaperlinX will decide on the future of its two Tasmanian pulp mills by the end of June.

Closure costs of around A$150 million would result in a net cash impact of A$70 million to A$80 million, Mr Park said.

"That wouldn't be favourable to the organisations, so we continue to look for better options."

PaperlinX received A$600 million in initial proceeds from Nippon and will share in an earnout arrangement that allows it to participate in earnings growth of up to A$100 million of the divested unit over the next three years.

The arrangement is a 50/50 sharing of earnings before interest, tax, depreciation and amortisation (EBITDA) above an agreed target level.

The sale of Australian Paper allows PaperlinX to complete its evolution from a paper manufacturer to a pure paper merchant, with its top priority being debt reduction as industry-wide inventory reductions have hit company volumes.

"The inventory reduction cycle is expected to bottom ahead of the economic cycle," Mr Park told reporters late on Monday, adding he expected a pickup in the first half of fiscal 2010.

PaperlinX has been at the mercy of its lenders, comprising Australia's big four banks in a syndicate with HSBC Group and Deutsche Bank, together with a group of US private placement noteholders.

The lenders were required to approve the completion of the Australian Paper sale after the Foreign Investment Review Board ticked off the deal in March.

Mr Park said permanent waivers for the previous covenant breaches have now been secured and PaperlinX would immediately pay down A$500 million in debt and reduce its gearing ratio from 40.4 per cent to 17 per cent by June 30, 2009.

Another A$70 million in debt will be paid after an adjustment for the Australian Paper sale is made in September 2009, with all debt now maturing in February 2011.

PaperLinX's shares will resume trading on Tuesday after being placed in a trading halt on Monday.

The shares last traded at 54 cents.

(AAP)

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