A solid EBIT margin despite rising pricing pressures

The Paper Division operates in a predatory market of falling product demand. This creates overcapacities which are only later modified to meet the lower market needs. In the newsprint segment alone, demand in Western Europe has declined by 45% over the past ten years. Newsprint is a commodity, and the competition in its market is largely based on price. The Paper Division of the CPH Group must achieve and maintain cost leadership if it is to effectively compete – particularly since 80% of its sales market lies outside Switzerland, where its competitors are free of any currency movement distortion. With its PM 7, the division continues to operate Europe’s most advanced paper machine, which outstrips its older counterparts in both its higher productivity and its lower running costs. The division operates two machines at its Perlen production site: the PM 7 is used to manufacture newsprint and the PM 4 produces magazine paper. The majority of the recovered paper used in the division’s production has been obtained from within Switzerland since 2018, with the shorter transport journeys involved both reducing costs and easing environmental strain.

Sustainability is a cornerstone of business and operating strategy at the division’s Perlen site, which, thanks to various actions taken in the last few years, is now almost carbon-neutral in its production activities. Perlen Papier recycles the majority of the waste paper that is recovered in Switzerland and, in doing so, plays a major role in minimizing the use of natural resources. It also operates its own paper sorting facility through its APS subsidiary, which ensures both operational flexibility and the consistently high quality of the waste paper used.

The division is also making major efforts to digitalize its core processes, to help customers and suppliers optimize their order handling.

The European media market has been undergoing radical change for years. The volumes of printed newspapers have been steadily declining as both information and advertising have been increasingly offered and consumed via digital channels. The demand for wood-based graphic printing papers has fallen accordingly. Despite these trends, however, after 2017 had seen relatively large production capacities withdrawn from the market, some price increases were effected in the last two years.

The demand for newsprint declined a further 7.5% in 2019 to 4.3 million tonnes. The demand for wood-based coated magazine paper saw an even steeper fall of 11.7%, down to 3.4 million tonnes. No newsprint capacities were withdrawn from the market in 2019, and the magazine paper capacity reductions either effected or announced were effectively offset by the decline in demand. As a result, the pressures on prices substantially increased. Various suppliers, Perlen Papier included, responded by temporarily halting their production.

Recovered paper prices declined in the course of the year, as the volumes of waste paper available exceeded the paper factories’ needs and Asian countries also substantially reduced their importing activities.

The Paper Division sold 517 165 tonnes of print paper in 2019, a decline of 4.3% from its prior-year volume. Of this total, 346 778 tonnes were of newsprint and 170 387 tonnes were of magazine paper. The division felt the benefit of higher paper prices in the first half of the year. These came under pressure in the second-half period, though, and the CHF 293.2 million net sales for 2019 as a whole were a 2.6% year-on-year decline. However, 1.5 percentage points of this were attributable to currency factors.

The division saw slight increases in its market share in Western Europe for both newsprint and magazine paper sales.

The efficiency of the division’s production facilities was further improved thanks to total investments of some CHF 11.5 million over the course of the year. On the expenditure front, lower recovered paper and energy costs had a positive impact on the EBITDA result, which, at CHF 54.5 million, was 7.2% above its prior-year level. EBIT for the year amounted to CHF 34.7 million, giving the division a new record EBIT margin of 11.8%.

Year-end personnel numbers increased slightly, from 369 to 376.

According to industry associations’ projections, 2020 is likely to see further declines of 6-8% in the demand for wood-based graphic papers in the Western European market. Given the existing market overcapacities, paper prices remain under sizeable pressure, and another wave of industry consolidation is to be expected. The Paper Division plans to make investments of CHF 9.9 million in the course of the year to further enhance its production processes. Net annual sales are likely to fall short of their 2019 level, though the division should still achieve another positive EBIT result.