1st Feb 2008 07:01
Smith (DS) PLC01 February 2008 1 February 2008 DS SMITH TO INVEST £104 MILLION IN HIGH-QUALITY LIGHTWEIGHT CORRUGATED CASE MATERIAL AT ITS PRIME UK PAPER MANUFACTURING FACILITY AT KEMSLEY Summary DS Smith, the international packaging manufacturer and office productswholesaler, announces that it is substantially strengthening the competitivenessof its UK Paper and Corrugated Packaging business through an investment toproduce high-quality lightweight corrugated case material (CCM) at its prime UKpaper mill at Kemsley in Kent. It has agreed with M-real Corporation the termsof the acquisition of the adjacent New Thames Paper Mill (NTPM) as well as the50% balance of Grovehurst Energy Limited, the mills' energy and servicessupplier, not already owned by DS Smith. The consideration for the transactionis £60 million in cash. In addition, DS Smith will incur a net cash cost of £7million from a one-off payment, net of tax, towards the costs of the transfer ofthe associated pension scheme to a third party. The acquired facility currentlyproduces fine uncoated paper and, using the latest paper-making technology, DSSmith intends to invest, over the next 12 months, a further circa £37 million inthe modification of the acquired facility to enable it to produce high-qualitylightweight recycled CCM with effect from January 2009. The total cost of theproject is expected to be circa £104 million and will be funded from the Group'sexisting debt facilities. The Board expects that the acquisition and investment will: • materially strengthen the long-term competitiveness of DS Smith's important UK Paper and Corrugated Packaging business: - provide DS Smith with 260,000 tonnes per annum of high-quality lightweight CCM to satisfy the Group's own growing demand and that of its customers; currently, DS Smith has very limited capacity to produce this product; - enable this new capacity to be added at a highly-competitive investment cost per tonne; - create one of Europe's most flexible and cost-competitive CCM manufacturing operations at DS Smith's already highly-competitive, well-invested prime mill at Kemsley; • generate good financial returns in the project's first full year of operation (2009/10): - enhance earnings; - produce a return on capital employed equal to DS Smith's cost of capital and over the long-term produce returns in excess of the Group's cost of capital; - generate positive cash flow and make an important ongoing cash contribution. Tony Thorne, Group Chief Executive of DS Smith Plc, said: "This significant development will create, in a highly cost-effective way, oneof the most flexible and cost-competitive CCM mills in Europe at our principalsite at Kemsley. It will strengthen our important UK Paper and CorrugatedPackaging business and give us a significant capability in the growth segment ofhigh-quality lightweight CCM paper. We are confident it will provide very goodreturns for our shareholders." Enquiries DS Smith Plc 020 7932 5000Tony Thorne, Group Chief ExecutiveGavin Morris, Group Finance DirectorPeter Aubusson, Group Communications Manager Financial Dynamics 020 7269 7140Andrew Dowler A conference call briefing for analysts and investors, hosted by Tony Thorne andGavin Morris, will take place today, 1 February, at 9.00 GMT. The dial-innumbers are: UK participants: 020 8817 9301 International participants: +44 20 8817 9301 Alternative back-up number: +353 1 436 4265 The presentation slides for this briefing will be posted on the Presentationspage of the Investor Relations section of the Group's website www.dsmith.uk.comat 8.45 GMT. A recording of this conference call will be available by telephone from twohours after the call has ended until 17.00 GMT on 8 February 2008. The dial-innumbers for this recording are: UK callers: 020 7769 6425 International callers: +353 1 436 4267 Replay security code: 1155382# A recording of the call will also be available through the Investor Relationssection of our website: www.dssmith.uk.com from 14.00 GMT today. DS SMITH TO INVEST £104 MILLION IN HIGH-QUALITY LIGHTWEIGHT CORRUGATED CASE MATERIAL AT ITS PRIME UK PAPER MANUFACTURING FACILITY AT KEMSLEY The Project DS Smith Plc has agreed with M-real Corporation and its subsidiary, M-real UKHoldings Limited (M-real), the terms of the acquisition of the whole of theissued share capital of M-real New Thames Limited and the balance of the sharesin Grovehurst Energy Limited not already owned by DS Smith Plc. The facilitiesof M-real New Thames Limited include the New Thames Paper Mill (NTPM), togetherwith the land and associated buildings, warehousing and infrastructure, and arecycled fibre (RCF) plant. NTPM and the RCF plant are located adjacent to DSSmith's existing St Regis paper mill on a combined site at Kemsley, nearSittingbourne, Kent. Grovehurst Energy Limited is also located on the Kemsleysite and provides energy and other services to the entire site through a 50:50joint venture between DS Smith Plc and M-real. The consideration of £60 million on a debt free basis will be paid in cash oncompletion and funded through DS Smith's existing debt facilities. In addition,DS Smith will incur a net cash cost of £7 million from a one-off payment, net oftax, towards the costs of the transfer of the associated pension scheme to athird party. The value of the gross assets acquired as at 31 December 2007, asextracted from the management accounts, was £49.1 million. In the financialyear to 31 December 2007, the profit attributable to the acquired assets, asextracted from the management accounts, was £0.9 million. NTPM currently produces 230,000 tonnes per annum of fine uncoated business andgraphic paper per annum. During the course of the next 12 months, using thelatest paper-making technology, DS Smith intends to modify the NTPM papermachine (PM6) to enable it to produce approximately 260,000 tonnes per annum ofhigh-quality lightweight recycled CCM and to install a new high-specificationstock preparation plant to supply the feedstock required for this production.It is planned that NTPM will convert from production of fine uncoated paper inautumn 2008 and commence production of lightweight CCM in January 2009. The total capital expenditure associated with the project, which will be fundedfrom the Group's existing debt facilities, is expected to amount toapproximately £37 million and will be incurred very largely in financial year2008/09. It is envisaged that there will be opportunities to reduce costs onthe Kemsley site which will result in potential restructuring charges of circa£5 million in total during 2008/09 and the two subsequent financial years.These charges will be more than offset by the income from the transitionalsupply arrangements agreed with M-real, which are detailed below Background to and reasons for the project High-quality lightweight paper - a growing segment of the CCM Market This acquisition and investment project will enable DS Smith to establish acompetitive position in high-quality recycled lightweight CCM (testliner of 100grams per square metre or lighter and fluting of 90 grams per square metre orlighter), a differentiated and fast-growing segment of the overall CCM market. The total demand for CCM in Europe is approximately 25 million tonnes and isestimated to have grown by circa 2.5% in 2007. Approximately 80% of the CCMused in Europe is made from recycled fibre. Taking into account recent economicforecasts, DS Smith estimates that annual growth in the European CCM marketduring 2008-2010 will be circa 2.0% per annum; within this, growth in westernEurope is expected to be circa 1.5% per annum while growth in central andeastern Europe is expected to be 6-7% per annum. Based on this forecast, DSSmith estimates that there will be an increase in demand for recycled CCM of 1.5million tonnes by 2010. There is a trend across Europe towards the greater use of lighter-weightcorrugated boxes, for cost and environmental reasons. The UK remains at theforefront of this trend, which is particularly significant in the importantfast-moving consumer goods (FMCG) sector of the market. The availability oflightweight recycled CCM with good strength characteristics is a key element inenabling box manufacturers to produce packaging with high performancecharacteristics while reducing the weight of material used. Lightweightrecycled CCM is estimated to account for circa 7% (circa 1.8m tonnes) of thetotal European CCM market currently and this share is expected to rise to circa15% (circa 4 million tonnes) by 2010, representing a growth of circa 2 milliontonnes. Growth in the high-performance lightweight segment of the CCM market willcontinue to be limited by the available supply of lightweight paper as themajority of the existing CCM machines are unable to manufacture lightweightpapers cost-effectively or to an acceptable quality. Lightweight CCM accounts for approximately 25% (approximately 150,000 tonnes perannum) of the CCM usage of DS Smith's UK corrugated packaging operations. TotalUK demand for lightweight recycled CCM is estimated to have been 400,000 tonnesin 2007 and is expected to grow to over 600,000 tonnes by 2010. At present, UKdemand is very largely met by imports from continental Europe as total UKmanufacturing of this product is less than 100,000 tonnes per annum and DS Smithhas very limited capacity to produce lightweight CCM. A number of European recycled CCM producers have announced their intentions toinvest in new capacity, which will be capable of producing lightweight CCM.These machines, to be located in Germany, Poland and Hungary, are scheduled tostart production from the third quarter of 2009. The new capacity, including DSSmith's investment at Kemsley, will produce circa 1.8 million tonnes per annumwhen it is fully operational, which will represent an overall increase incapacity of approximately 7%. It is expected that the production from the newmachines will principally be targeted at satisfying the rapidly growing Europeandemand for lightweight paper. Investment strengthens DS Smith's competitiveness The project is expected to strengthen the long-term competitiveness of DSSmith's important UK Paper and Corrugated Packaging business, which representedapproximately 50% of the Group's operating profits and cash flow in financialyear 2006/07. In particular the project will: • provide the Group with 260,000 tonnes per annum of high-quality lightweight recycled CCM product to satisfy DS Smith's own demand and that of its customers; • enable this capacity to be added at an investment cost per tonne which is substantially lower than that of building a new machine, benefiting from the existing infrastructure on the site; • increase the efficiency of DS Smith's prime paper mill at Kemsley which is already well-invested and in the top quartile of European cost-competitiveness. Kemsley will in future produce over 850,000 tonnes per annum, accounting for over 75% of the Group's UK paper output; it will be one of the two largest recycled CCM manufacturing sites in Europe and the foremost CCM mill in the UK; • enable DS Smith to recycle, through its own mills, more of the waste paper collected by its Severnside Recycling business. Recycling on the Kemsley site will increase by over 30% to 1.2m tonnes per annum; • create at Kemsley a CCM manufacturing site which will provide the flexibility for further operational improvement and development of DS Smith's paper manufacturing in the medium- and longer-term. Financial benefits of the project During the transitional period until Autumn 2008, while NTPM continues toproduce fine paper by M-real under the commercial arrangements described below,the acquisition is expected to make a small contribution to the Group'soperating profit. Once PM6 is producing lightweight CCM, its revenue, based onthe current selling price of CCM, will be over £70 million per annum. Good financial returns The project is expected to generate good financial returns. In particular it isexpected, in its first full year of operation (2009/10) to: • enhance earnings; • produce a return on capital employed equal to DS Smith's cost of capital (estimated to be circa 12% before tax) and over the long-term on average produce returns in excess of the Group's cost of capital; • generate positive cash flow and make an important ongoing cash contribution. DS Smith has a strong balance sheet. Throughout the period of investment inthis project, the Group's borrowing level is expected to remain well within itsexisting facilities. Commercial and other transitional arrangements As part of the acquisition agreement, DS Smith has entered into certaincommercial arrangements with M-real to enable M-real to continue its involvementin the supply of fine uncoated paper. DS Smith will provide to M-real, under asupply contract, fine paper produced on PM6 for a period until the end ofNovember 2008. The sale and marketing of fine paper will be the responsibilityof M-real. Following the expiry of this supply arrangement, DS Smith willprovide to M-real's French operation, for a period of three years, the feedstockproduced by the RCF plant. DS Smith will also provide M-real with fine paperconverting services on the Kemsley site for the same period. Environmental benefits of the project DS Smith makes a major contribution in the UK to conserving resources andreducing landfill waste through its businesses Severnside Recycling, which isthe leading UK collector of waste paper for recycling, and St Regis PaperCompany, which is the largest UK producer of recycled paper. As noted above, theproject will further increase the proportion of the waste collected bySevernside Recycling that is recycled through the Group's own papermanufacturing facilities. The Group continually seeks to increase the energy efficiency of its operationsand is looking further to reduce its use of fossil fuels. The full ownership ofGrovehurst Energy is expected to facilitate faster implementation of projects toimprove energy efficiency, use alternative energy sources and enhance the site'sexisting combined heat and power and waste-to-energy facilities, thus furtherreducing the site's environmental impact. Completion Completion of the transaction is subject to obtaining German anti-trust approvaland is expected to take place within 30 days. Current trading As stated at the time of the Group's interim results in December 2007, the Boardremains confident that the Group will make substantial progress this financialyear. DS Smith will be announcing its Quarter 3 interim management statement,in respect of the period from 1 November 2007, on 5 March 2008. Note to Editors On the Kemsley site, M-real's New Thames Paper Mill employs 282 people,Grovehurst Energy Limited employs 27 people and DS Smith's St Regis Paperbusiness employs 270 people. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Smith (DS)