30th Jun 2005 07:00
Smith (DS) PLC30 June 2005 30 June 2005 DS SMITH PLC - 2004/05 PRELIMINARY RESULTS DS Smith Plc (LSE:SMDS), the international packaging manufacturer and officeproducts wholesaler, announces its results for the year ended 30 April 2005. HIGHLIGHTS Financial • Turnover £1,624.9m (2003/04: £1,488.5m) • Adjusted(1) profit before tax £76.1m (2003/04 restated(2): £64.8m; as previously reported: £81.4m) • Adjusted(1) earnings per share 14.7p (2003/04 restated(2): 13.6p; as previously reported: 16.9p) • Free cash inflow before dividends and net acquisitions £55.4m (2003/04: £63.0m) • Final dividend up 0.2p to 5.8p giving a full year dividend of 8.4p (2003/04: 8.2p) • Results after exceptional items and amortisation of intangibles: profit before tax £57.1m (2003/04 restated(2): £61.2m; as previously reported: £77.8m); earnings per share: 10.1p (2003/04 restated(2): 12.6p; as previously reported: 15.9p) Operations • Results impacted by a weak paper market and c.£16m of higher energy andpolymer costs • Corrugated Packaging: - Existing business continued its profit growth - Linpac Containers contributed £21.0m to operating profit in first full year's ownership • Office Products Wholesaling increased profits for the third successive year (1) before exceptional items and amortisation of intangibles - see note 2 to the accounts (2) restated for the changes in accounting policy resulting from the adoption of FRS 17 "Retirement benefits" and UITF Abstract 38 "Accounting for ESOP trusts" Commenting on the results, Chairman, Antony Hichens said: "Our strategy to enhance earnings through acquisition and organic developmentenabled the Group to produce a commendable result in a very challengingenvironment which adversely affected profits in both our Paper and PlasticPackaging businesses. We made progress in Corrugated Packaging, thanks both toan improved result from our existing business and to the substantialcontribution from our first full year of ownership of Linpac Containers. TheSpicers Office Products Wholesaling business continued to advance, helped bymoving into profit in Germany. Given the benefits now accruing from ourenlarged Corrugated Packaging business, the improving performance of Spicers andthe Group's commitment to generating strong free cash flow, the Board isproposing an increased final dividend. "As stated in our April trading update, we have begun 2005/06 with energy andother input costs at considerably higher levels than at the start of 2004/05.Since April, future energy costs look like being even higher than previouslyexpected. We anticipate delivering the previously indicated synergies from theintegration of Linpac Containers and achieving a further advance at Spicers, butthe extent to which these benefits will be offset by additional energy costs isuncertain. We will continue our focus on cost recovery and cash generation." Enquiries DS Smith Plc 020 7932 5000Tony Thorne, Group Chief ExecutiveGavin Morris, Group Finance DirectorPeter Aubusson, Group Communications Manager Financial Dynamics 020 7269 7291 Richard Mountain/Robert Gurner A briefing for analysts and investors will take place today at 9.30am BST atFinancial Dynamics, Holborn Gate, 28 Southampton Buildings, London WC2A 1PB.The presentation slides from this briefing will be posted on the Company'swebsite (www.dssmith.uk.com) at 9.30am and a recording of the briefing will beavailable on the website within 24 hours of the meeting. CHAIRMAN'S STATEMENT In 2004/05, a further weakening in the paper market and sharply higher energyand polymer costs created a very challenging environment, which was reflected inlower profits in both our Paper and Plastic Packaging businesses. Nevertheless,our strategy to enhance earnings through acquisition and organic developmentenabled the Group to produce a commendable result. We made progress inCorrugated Packaging, thanks both to an improved result from our existingbusiness and to the substantial contribution from our first full year ofownership of Linpac Containers. The Spicers Office Products Wholesalingbusiness continued to advance, helped by moving into profit in Germany. The Group's adjusted(1) earnings per share were 14.7 pence (2003/04 restated(2):13.6 pence). A strong cash flow, before dividends and acquisitions, of £55.4million (2003/04: £63.0 million) enabled the Group to maintain a healthy balancesheet, benefiting from the new financings put in place in the year. The resultincludes a significant charge in respect of DS Smith's UK defined benefitpension scheme for the first time for many years and is now reported under theFRS 17 pensions accounting standard. As required in the accounting standard,the 2003/04 result has been restated to include a pension charge in that year.In May 2005, the Group introduced further changes to the pension scheme tomitigate the higher cost of providing pensions. We also increased the cashpayments into the scheme from £10 million to £14 million per annum. We are now well advanced with the integration of Linpac Containers andgenerating the expected synergies, despite the delay which resulted from thereferral of the acquisition to the Competition Commission; the acquisitionfinally received unconditional clearance in October 2004.The Group's financial performance reflects the benefits of the drive over thelast three years to raise the profit contribution of our non-Paper activities.This has largely compensated for both the sharp cyclical fall in Paper profitsand accounting for the cost of the pension scheme. In Paper and CorrugatedPackaging we began to generate considerable benefits from our enlarged positionin UK Corrugated Packaging, which materially offset the challenging conditionsin UK Paper, while we continued the development of our corrugated packagingbusiness in continental Europe. We further strengthened the UK Paper businessby enlarging our recovered paper collection operations and by concluding a majorlong-term supply agreement with BPB plc for plasterboard liner paper, animportant diversification for our paper sales into a growth market. In OfficeProducts, Spicers continued its development in continental Europe; the Germanbusiness advanced into solid profit, the Spanish operation grew rapidly, and wesuccessfully launched the new Italian business. Although trading conditions remain difficult, the Group has in recent yearstaken steps to reduce its reliance on the cyclical Paper business and hasdemonstrated its commitment to generating strong free cash flow. With thebenefits now accruing from the enlarged Corrugated Packaging business and theimproving performance of Spicers, the Board is proposing a 0.2 pence increase inthe final dividend to 5.8 pence, giving a full year dividend of 8.4 pence (2003/04: 8.2 pence). Outlook As stated in our April trading update, we have begun 2005/06 with energy andother input costs at considerably higher levels than at the start of 2004/05.Since April, future energy costs look like being even higher than previouslyexpected. We anticipate delivering the previously indicated synergies from theintegration of Linpac Containers and achieving a further advance at Spicers, butthe extent to which these benefits will be offset by additional input costs isuncertain. We will continue our focus on cost recovery and cash generation. Antony HichensChairman CHIEF EXECUTIVE'S REVIEW Overview At the start of 2004/05, we predicted a difficult year ahead and this proved tobe the case. The external trading environment in Paper and Corrugated Packagingremained weak, the Group had to absorb approximately £9 million of increasedenergy costs and approximately £7 million of higher polymer costs, we faced aCompetition Commission inquiry into our acquisition of Linpac Containers, andour results included an £11.7 million net pension charge, the first such chargeincurred in many years. I believe the Group has responded well to thechallenges, generating satisfactory earnings, particularly at this low point inthe paper cycle, and maintaining a strong balance sheet. We had a significantadvance in profit in our enlarged Corrugated Packaging business; in addition theSpicers Office Products Wholesaling business increased profits for the thirdsuccessive year, while further developing its continental European business. Following the completion of the triennial valuation of our UK defined benefitpension scheme, the Group introduced a number of changes to the scheme to reducethe impact of the increasing cost of pensions. We also raised our payments intothe scheme from £10 million to £14 million per annum. The Group's result for2004/05, which includes a significant charge in respect of the UK pensionscheme, is now reported under the FRS 17 pensions accounting standard and the2003/04 result has been restated as required by accounting standards; under the previously applied SSAP 24 accounting standard there was no charge. This change aids comparison between financial years and largely anticipates the International Accounting Standard 19 for Pensions which the Group will apply in 2005/06. Financial Results Group sales advanced by 9.2% to £1,624.9 million, the full year contribution ofLinpac Containers more than offsetting small reductions in some other segments.Adjusted group operating profit was £83.9 million (2003/04 restated: £75.4million) including a full year's contribution from Linpac Containers of £21.0million, comprising £14.9 million (2003/04: £1.2 million from six weeks of DSSmith ownership) from its operations and £6.1 million of synergy benefits in DSSmith's existing operations. The Group adjusted return on sales was 5.2% (2003/04 restated: 5.1%) while adjusted return on average capital employed was 9.0%(2003/04 restated: 9.6%). Adjusted profit before tax was £76.1 million (2003/04restated: £64.8 million). If the £4.5 million of interest paid on the increaseddebt attributable to the Linpac Containers acquisition is taken into account,the acquisition after synergies contributed a net £16.5 million to adjustedprofit before tax. The adjusted profit contribution from Linpac Containers of£21.0 million represents a return on invested capital of 12.3% even before thefull synergy benefits have been realised and its contribution to 2004/05earnings per share was 3.0p. The cash inflow before, dividends and net acquisitions, was £55.4 million (2003/04: £63.0 million). After net expenditure on acquisitions, there was a net cashinflow of £12.1 million, which resulted in net borrowings of £260.4 million(2003/04: £274.7 million) after the effect of exchange rate movements. Thebalance sheet remains strong with gearing at 53.1% (year end 2003/04 restated:54.9%) and net debt/adjusted EBITDA of 1.7 times (2003/04 restated: 2.0 times).The adoption of the FRS 17 pension accounting standard has resulted in a netpension scheme deficit of £80.3 million being recognised on the balance sheetwhich accounts for the gearing increasing from the previously reported figurefor 2003/04. The sharp rise in energy costs during the year significantly affected our 2004/05 result, particularly in Paper which incurs approximately three-quarters ofthe Group's energy and fuel costs. The Group's total costs for gas, electricityand diesel increased from circa £64 million in 2003/04 to circa £73 million in2004/05, principally due to a 30% year-on-year rise in the UK average price ofgas, which was partially hedged; gas accounted for approximately 50% of the 2004/05 total energy and fuel expenditure. The Group has benefited from havinghedged its UK electricity until October 2005 but current market prices aresubstantially higher. Looking forward, the Group expects to incur in 2005/06 alevel of increase in energy and fuel costs at least of the scale of that seen in2004/05 and possibly even greater, depending on energy price developments. Paper and Corrugated Packaging In our largest segment, Paper and Corrugated Packaging, which accounted for 55%of Group sales and 62% of adjusted operating profit, demand was slightlystronger than in the previous financial year but pricing remained verycompetitive throughout the supply chain. Adjusted operating profit was 26%higher than last year as a result of a full year's contribution from LinpacContainers and increased profits from our existing UK Corrugated operationswhich was partly offset by a further significant fall in profits from Paper. We achieved a good result from our UK Corrugated Packaging operations, despitethe heavy demands placed on management during the five-month-long CompetitionCommission inquiry into the Linpac Containers acquisition. After receivingunconditional clearance for the deal from the Commission, we proceeded rapidlywith the integration and restructuring. We have already generated substantialsynergies and are confident that, by early 2006/07, we will achieve the £14.5million per annum originally indicated. Our continental European operationsalso produced a good result, with the Polish business continuing to performstrongly, our Turkish operation reporting a profit after a number of difficultyears and our associate in the Ukraine making further good progress. Although profits in Paper were significantly affected by the pressure on marginsfrom depressed selling prices and higher energy costs, we continued to raiseproductivity and strengthened the business through a number of strategic moves.We enlarged our important Severnside Recycling recovered paper collectionoperation through the acquisition of BPB plc's waste collection depots andadvanced the development of sales in higher added-value paper products byconcluding a long-term agreement to supply plasterboard liner paper to BPB plc,representing an important diversification into a growth market. Plastic Packaging Our Plastic Packaging business had a tough year. Sales, which account for 12%of the Group total, were 6% lower than the previous year and adjusted operatingprofit was 29% lower. The sharp fall in adjusted operating profit was mainlydue to the reduced sales and an approximate £3 million under-recovery of thepolymer cost increases, this despite securing price increases across ourcustomer base. Sales of industrial returnable transit packaging (RTP) werelower due to a slowdown in new crate contracts, exacerbated by some RTPcustomers deferring orders owing to the sharp rise in polymer prices. Sales inthe liquid packaging and dispensing business were affected by lower demand fromthe US carbonated soft drinks sector. The combined result of our three smallerspeciality businesses was flat year-on-year and, as indicated previously, anexceptional impairment charge of £5.8 million was taken against the goodwill ofone of these, a business providing packaging management services. Office Products Spicers, our Office Products Wholesaling business, accounted for 31% of totalGroup sales and 26% of adjusted operating profit. Sales were flat whileadjusted operating profit increased by 10%. Spicers' UK and French businessescontinued to perform well with the UK having returned to sales growth during thesecond half of the year. Spicers' development businesses in continental Europemade good progress: Spicers Germany moved into profit; Spicers Spain continuedto grow well and reduced its losses; and initial sales in Italy have beenencouraging since our launch there in November. In Office Products Manufacturing, adjusted operating profit fell to break-even,reflecting the continued difficult trading conditions in the envelope market. Strategy The strategy we have pursued for the last four years of Improve and Developremains in place. We have reduced the Group's reliance on the cyclical Paperbusiness and developed and improved our Corrugated Packaging, Plastic Packagingand Office Products Wholesaling activities in order to enhance the quality ofearnings. Our aggressive programme to raise operational performance whilepursuing opportunities to develop our strong market positions has resulted in asignificant rise in the profit contribution from the Group's non-Paperoperations. Adjusted return on average capital employed was 9.0%, primarilyreflecting our current poor returns in Paper at this low point in the papercycle. Return on average capital employed is a key measure for us and we aremaking determined efforts to improve it. We are continuing our programme toreduce costs and raise operational performance while concentrating capital inareas offering good profit opportunity. We will maintain investment in our keyassets; capital expenditure projects in 2005/06 will include completion of thenew green-field corrugated packaging plant in Poland and upgrading papermanufacturing at our Kemsley and Wansbrough mills to underpin the supply ofplasterboard liner paper to BPB plc. In Paper and Corrugated Packaging our focus in the UK is on realising theremaining synergies from the Linpac Containers acquisition and improving thereturn from our substantial integrated position. This will be through costreduction and growing the sales of differentiated products. In continentalEurope we will seek development opportunities arising from any furtherconsolidation in the industry and in the higher growth markets of easternEurope. In Plastic Packaging, the priority is to improve significantly the profitabilityof our two strategic businesses. In liquid packaging and dispensing this willbe through increasing cost competitiveness in the mature end-use sectors, suchas wine and carbonated soft drinks, while concentrating development resource infaster-growing end-use sectors such as dairy products and fruit juice. Inindustrial RTP, profit growth will be through maintaining our strong existingmarket positions while following our customers into new geographic markets. Spicers is already producing high levels of return on its capital employed butwe believe it has potential for further profit improvement. Our medium termgoal is to see the Spicers' business model profitably established in the majormarkets of western Europe. In our established markets of the UK, Ireland andFrance, the key objective is to generate profitable sales growth; our goal inGermany is to build profits further; we expect the Spanish business to be inprofit in 2005/06 while we shall be driving sales in our new Italian operation. Our People I would like to thank all our employees worldwide for their considerable effortsover the last year. As I travel around the Group, I am continually impressedwith the skills of our people and their contribution to raising our performance.I particularly wish to acknowledge the support and commitment that our newcolleagues from Linpac Containers maintained through the uncertain period of theCompetition Commission hearing. Prospects The considerable operational and strategic progress made over recent yearsprovides a sound base from which to tackle the current tough trading environmentand the uncertainty as to the future level of increase in energy costs. We haveopportunities for improvement and we will be pursuing these hard in 2005/06. Tony ThorneGroup Chief Executive FINANCIAL REVIEW The major drivers of the 2004/05 results were a full year's contribution fromLinpac Containers, significant energy and polymer cost increases and theadoption of FRS 17 "Retirement benefits" for pensions accounting; the effects ofwhich are explained in detail below. The 2003/04 figures have been restated forthe effects of changes in accounting policy, as required by the accountingstandard. Group Profit and Loss Account Turnover for the financial year ended 30 April 2005 increased by 9.2% over theprior year; it was 7.4% higher in the first half of the year and 10.9% higher inthe second half compared to the same periods in 2003/04. Excluding the netincrease in turnover from Linpac Containers and the effect of movements inforeign exchange rates, turnover was up 0.8% on 2003/04 (down 1.2% in the firsthalf of the year and up 2.7% in the second half). Adjusted group operating profit, which includes an operating pension charge of£12.8 million (2003/04 restated: £13.4 million), increased by 11.3%, from £75.4million in 2003/04 (as restated) to £83.9 million in 2004/05. The adjustedreturn on sales grew from 5.1% in 2003/04 (as restated) to 5.2% in 2004/05. Theadjusted return on capital employed (which is defined as the period's annualisedadjusted operating profit divided by the average month-end capital employed overthe period) decreased from 9.6% (as restated) to 9.0%. The Group's 2004/05 adjusted total operating profit included £4.1 million as theGroup's share of associated undertakings' adjusted operating profit, up £1.1million from last year. This increase related mainly to the inclusion of profitfrom Tri-Wall KK, the Group's 33.3% owned Japanese packaging company (a previousimpairment against this business was also released as an exceptional item, asdescribed below). The Group's share of operating profit from OJSC Rubezhansk,the Group's 39% owned paper and packaging company in the Ukraine, was slightlyahead of last year. Net interest expense rose from £10.4 million in 2003/04 to £13.0 million in 2004/05. The Group benefited from lower average interest rates as a result ofincreasing the proportion of borrowings in euros, but the total interest chargewas higher as a result of the interest on the additional borrowings used tofinance part of the Linpac Containers acquisition in March 2004. Other financeincome of £1.1million (2003/04 restated: other finance expense of £3.2 million)is included in accordance with FRS 17 and is explained in detail in the pensionsaccounting section below. Adjusted profit before tax was £76.1 million (2003/04restated: £64.8 million). Group adjusted interest cover, excluding otherfinance income, was 6.8 times (2003/04 restated: 7.5 times). The Group's net exceptional charges against profit before tax of £9.6 million(£8.2 million after tax) (2003/04: £nil), comprise: exceptional restructuringcosts of £4.9 million related to the integration of Linpac Containers; aprovision of £5.8 million for an impairment against the goodwill related to asmall business in Plastic Packaging; and the release of a previous impairmentagainst the investment in Tri-Wall KK of £1.1 million. Total operating profitafter exceptional items and amortisation of intangibles fell from £74.8 millionin 2003/04 (as restated) to £69.0 million in 2004/05. Profit before tax afterexceptional items and the amortisation of intangibles was £57.1 million (2003/04restated: £61.2 million). The Group's effective tax rate, excluding exceptional items and the amortisationof intangibles, at 25.0%, was 1.2% below last year's rate of 26.2%. The ratebenefited from a prior year credit of £4.4 million following the agreement ofcertain matters with overseas tax authorities. The effective tax rate isexpected to return to a rate closer to the UK statutory rate in the coming year. Adjusted earnings per share (before exceptional items and amortisation ofintangibles) increased from 13.6p in 2003/04 (as restated) to 14.7p in 2004/05,reflecting the higher profit before tax and the lower effective tax rate. Theproposed final dividend is 5.8p, an increase of 0.2p or 3.6% on the finaldividend last year. The total dividend for the year is 8.4p (2003/04: 8.2p).Dividend cover before exceptional items and amortisation of intangibles rosefrom 1.5 times in 2003/04 (as restated) to 1.7 times in 2004/05. Cash Flow Cash flow from operating activities was £139.3 million, up £7.5 million fromlast year, reflecting higher operating profit. The Group made payments of £10.0million into the UK Group Pension scheme in both years (which form part of cashflow from operating activities) and has announced its agreement with theTrustees of the UK Group pension scheme to increase its contributions to £14.0million in subsequent years. Purchase of fixed assets was £53.6 million, £14.6million below depreciation, and included the first expenditure on thedevelopment of a corrugated box plant on a green-field site in Poland. Tax payments were £23.7 million, approximately the same as the current taxcharge for the year but higher than last year's payments of £17.9 million as aresult of reversing deferred tax timing differences, mainly arising from reducedcapital expenditures. Free cash flow (before dividends and net acquisitions) was £55.4 million (2003/04: £63.0 million). Cash dividend cover, defined as free cash flow divided bydividends paid/declared for the year, was 1.7 times, down from 2.1 times in 2003/04, reflecting higher interest costs and cash tax payments in 2004/05. The net cash outflow on acquisitions and disposals related mainly to theacquisition of BPB Recycling for £9.4 million during the period. The amount in2003/04 was primarily the consideration and costs, net of acquired cash, for theacquisition of Linpac Containers of £166.8 million. Financial Position Shareholders' funds totalled £482.3 million at 30 April 2005, down from £494.4million at 30 April 2004, as restated. Shareholders' funds have been decreasedby a total of £80.3 million at 30 April 2005 (2003/04 restated £54.7 million)through the inclusion of the after-tax FRS 17 pension liability. Net assets pershare were 126p (2003/04 restated: 129p), or 147p (2003/04: 143p) if the FRS 17pension scheme liability is added back. The Group's closing net borrowings were £260.4 million, £14.3 million lower thanat the end of last year. In August 2004, the bank borrowings repayable bySeptember 2005 used to part finance the acquisition of Linpac Containers wererefinanced from the proceeds of a private placement, due in 2014 and 2016, ofUS$200 million. In addition, the Group's previous £325 million revolving creditfacilities were replaced in April 2005 by a syndicated revolving credit facilityof £250 million which expires in 2010; these re-financings have extended theweighted average maturity of the Group's borrowings to 6.9 years and reducedtheir cost. Gearing was 53.1% (2003/04 restated: 54.9%; as previously reported: 48.9%). Theincrease in gearing relative to the previously reported figure is due to theinclusion of the net pension scheme liability. Adjusted interest cover was 6.8times, compared with 7.5 times last year (as restated), the lower coverreflecting the additional interest arising on the borrowings used to partfinance the purchase of Linpac Containers in March 2004. The ratio of net debtto EBITDA (before exceptional items) was 1.7 times (2003/04 restated: 2.0times). International Financial Reporting Standards (IFRS) The Group's project to implement the transition from reporting under UK GAAP toIFRS is largely complete. As the Group has adopted FRS 17 for pensionaccounting in 2004/05 and, with it, has anticipated its pensions accountingunder IFRS (as FRS 17 is consistent with the Group's planned adoption of IAS 19,which governs pensions accounting under IFRS), it is expected that thetransition to IFRS will not otherwise have a significant effect on the profitand loss account or shareholders' funds in the future. A reconciliation of theUK GAAP 2004/05 results to IFRS will be provided in the autumn in advance ofannouncing the Group's Interim Results. Pensions Accounting - Adoption of FRS 17 DS Smith previously reported under the SSAP 24 pensions accounting standard.Following the 2004 triennial valuation of the UK defined benefit pension schemeand in anticipation of the introduction of IFRS for 2005/06, the Group hasadopted FRS 17 "Retirement benefits" for financial year 2004/05. This changehas had a profound effect on the Group's reported results. Under FRS 17 a charge of £12.8 million (2003/04 restated: £13.4 million) hasbeen made against operating profit for the 'service cost' that results fromemployees accruing additional pension during the year. This charge shouldremain relatively stable over time. FRS 17 also requires the inclusion in the profit and loss account, beneathoperating profit, of the net return on the scheme's own assets and liabilitiesas 'other finance income or expense'. This item is the difference between theexpected return on a scheme's assets and the interest cost on the liabilitiesand can be volatile, since it is affected by external factors such as expectedasset returns and interest rates, and whether there is a surplus or deficit inthe scheme. In 2004/05, the Group recorded net other finance income of £1.1million, whereas in 2003/04 there was net other finance expense of £3.2 million;the year-on-year difference of £4.3 million was principally due to a loweropening scheme deficit and higher investment returns in 2004/05. Finally, under FRS 17 the Group is required to recognise the after-tax deficitof its pension scheme in the balance sheet as a reduction in net assets. Thisresults in greater balance sheet volatility: the after-tax deficit was £80.3million at 30 April 2005, £54.7 million at 30 April 2004 and £93.8 million at 30April 2003. The funding position of the scheme, being the difference betweenthe scheme's assets and liabilities, is reflected in the deficit, and issensitive to stock market conditions and actuarial assumptions. The value ofthe scheme's assets depends primarily on the level of stock markets andinvestment returns. The amount of the liabilities depends on a number ofactuarial assumptions, including discount and inflation rates, future salary andpension increases and mortality. The presence of a pension scheme liability orasset on the balance sheet brings greater volatility to the Group's gearing andnet assets per share. OPERATING REVIEW In anticipation of the UK legislation requiring changes to the content ofcompanies' Operating and Financial Reviews to be published from April 2006onwards, we have increased the detail provided on our markets in this review. Paper and Corrugated Packaging 2005 2004 restated(2) Turnover £896.9m £748.9mAdjusted(1) operating profit £52.3m £41.4mAdjusted(1) return on sales 5.8% 5.5%Adjusted(1) return on average capital employed 7.9% 8.0% (1) before exceptional items and amortisation of intangibles (2) restated for the changes in accounting policy resulting from the adoption of FRS 17 "Retirement benefits" and UITF Abstract 38 "Accounting for ESOP trusts"; the 2004 adjusted operating profit reported previously under the SSAP 24 accounting standard was £50.5 million The adjusted operating profit of £52.3 million (2003/04 restated: £41.4million), which includes a pension charge of £9.1 million (2003/04 restated:£9.1 million), advanced due to a strong performance from the existing CorrugatedPackaging operations, a full year £14.9 million contribution (2003/04: £1.2million from six weeks of DS Smith ownership) from Linpac Containers and synergybenefits of £6.1 million, which, combined, more than offset a significantreduction in profits from Paper. Market Overview The European market for corrugated packaging is estimated to be approximately€17 billion, equivalent to 20 million tonnes or 38 billion square metres(3).Within this, the UK market is estimated to be approximately 10% of the totalEuropean market. Demand for corrugated packaging is principally influenced byoverall economic activity and manufacturing output. In the calendar year 2004, the European market by weight for corrugated boardgrew by 2.2%, compared with 1.3% in 2003(4). In western Europe the market grewby 1.1% (2003: 0.3%) while growth in eastern and central Europe continued to bemuch stronger at 12.8% (2003: 10.9%). In DS Smith's principal markets, demandfell slightly in the UK and France, by 0.1% and 0.4%, respectively, while Italywas 1.2% ahead and Poland and Turkey grew strongly by 16.6% and 14.2%,respectively. The ongoing trend towards the use of lighter-weight packaging forcost and environmental reasons, resulted in demand, when measured by area, beingup 1.7% in the UK and up 1.6% in western Europe as a whole. The market softenedas 2004 progressed and has subsequently weakened further in the early months of2005; offtake in all the leading western European countries is reported to bedown year-on-year in the first quarter of calendar year 2005. Within the total European market, the growth rates of different segments varyconsiderably. Corrugated packaging usage in some industrial manufacturingsectors of western Europe has tended to decline as a result of the transfer ofmanufacturing to lower cost countries, while usage for fast-moving consumergoods, which accounts for at least 55% of the corrugated market, has beenrelatively strong due to the continuing growth of this economic sector. Othercurrent growth segments are the home delivery of products from internetpurchases, and shelf-ready packaging which can be used as both transit anddisplay packaging. Supply of corrugated board and boxes is generally relativelylocal to the point of production due to moderately high transport costs for alow density product and the service requirements of customers. Downward pressure on selling prices is an ongoing feature of the corrugatedpackaging market due to the purchasing power of retailers and direct customers.In addition, pricing and margins in corrugated packaging are strongly influencedby pricing developments on CCM, the paper used as the principal component inmanufacturing corrugated packaging, which typically accounts for approximately50% of the cost of a box. Within the total estimated European market for CCM of circa 20 million tonnes,approximately 75% is recycled paper. European CCM producers sell their productthroughout Europe, so demand and pricing for CCM is heavily influenced by demandfor corrugated packaging and the CCM supply position in Europe as a whole.During 2003 and 2004, low growth in corrugated packaging and some excess CCMmanufacturing capacity resulted in CCM prices being depressed. This situationhas been exacerbated in early 2005 by the commissioning of four new continentalEuropean CCM machines, with an aggregate capacity of approximately 1.2 milliontonnes. Although this new capacity, which is concentrated on lighter-weightpapers, has been partly offset by the removal of an estimated 0.6 million tonnesof older capacity since the start of 2004, it has resulted in a continueddestabilisation of selling prices throughout the European market. In the nexttwo years, the level of capacity additions is expected to be much lower than inthe last two years. However, the outlook for CCM prices in the coming year willdepend upon future market growth across Europe and the extent to whichuneconomic capacity is rationalised further. The squeeze on paper producers' margins from depressed selling prices has beenexacerbated by increased energy costs and by the relatively high cost ofrecovered paper, the principal raw material for recycled CCM. The continuinghigh level of demand for recovered paper in Asia, some of which is beingsupplied from Europe, is contributing to a modest secular increase andshort-term fluctuations in the price of recovered paper in Europe. In the UK,the net cost of our raw material is also affected by the price of PackagingRecovery Notes (PRNs), which are issued as evidence that packaging has beenreprocessed in compliance with the UK Packaging Waste Regulations and for whichwe receive revenue to set against the cost of recovered paper. The price ofpaper PRNs remained relatively low during 2004 but has firmed in calendar year2005 to date. 2004/05 Performance - UK In the UK, the Group benefited from a substantial increase in contribution fromCorrugated Packaging, which more than offset the reduced contribution fromPaper. DS Smith Packaging, our UK Corrugated Packaging business, produced a good resultdespite flat demand, due to higher profits from DS Smith's existing operations,the £14.9 million (2003/04: £1.2 million) first full year's profit contributionfrom the former Linpac Containers business and £6.1 million of initial synergybenefits from the integration of the two businesses. Prices were increasedearly in the financial year to recover some of the higher input costs but marketpressure resulted in some erosion in the second half of the financial year. Our drive to raise efficiency lifted profitability across our conventionalcorrugated network. Our speciality and heavy duty segments, which concentrateon higher added-value products, advanced further, particularly due to betterreturns from several plants in which we have invested recently. Our sheetfeeding operations, which supply corrugated sheet board, benefited from raisedservice levels in a market which continued to be highly competitive and affectedby industry over-supply. The referral of the Linpac Containers acquisition to the Competition Commissionmeant that we could not begin the process of generating the expected synergiesuntil the second half of the financial year. Following the Commission'sconclusion in October 2004 that the acquisition would not lead to a substantiallessening of competition in the market, we rapidly began implementation of anextensive integration programme. The headquarters were merged, two factorieswere closed with a high proportion of the business being successfullytransferred to other plants, and two plants are now being operated in tandem,thereby reducing costs. A new, combined raw materials procurement function isproducing the envisaged benefits in paper sourcing. Despite the delay inbeginning the integration process, we are confident of generating the expectedpre-tax synergies of £14.5 million per annum, identified at the time of theacquisition; £6.1 million has been achieved to date and we anticipate generatingat least 75% of the £14.5 million in 2005/06, with the balance being generatedin 2006/07. Exceptional restructuring charges of £4.9 million were incurred in2004/05 with a cash cost of approximately £2.5 million. At our UK paper business, St Regis, profits were again significantly lower thanin the previous year due to continuing depressed prices for our main product,CCM, and margins were squeezed further by substantial increases in gas costs andthe relatively high cost of our raw material, recovered paper. The impact ofthese external factors was partly mitigated by improvements in productivity andoutput volume, favourable sales mix, and improved raw material and energy usage.The Kemsley paper mill, which accounts for over 50% of St Regis's paperproduction, achieved another year of record total output and production peremployee, due to its ongoing programme of process optimisation. Wansbrough andHollins mills increased their output through increased efficiency and operatingrates respectively; both mills benefited from an improved sales mix as a resultof the Linpac Containers acquisition. In March 2005 we made a major advance in our drive to increase sales of higheradded-value product by entering into a long-term agreement with BPB plc for thesupply of plasterboard liner paper. St Regis has been developing its sales ofthis product in recent years and, under this agreement, will raise sales to BPBplc to 100,000 tonnes per annum. In order to satisfy this supply agreement, StRegis will undertake a £30 million capital expenditure programme to upgradeexisting machines at its Kemsley and Wansbrough mills over the next two years.This programme will also enhance the quality of St Regis' CCM and coreboard,used for manufacturing tubes. St Regis raised its CCM prices in March 2005, seeking to recover part of the gasand recovered paper cost increases, but this had no significant effect on the2004/05 result. The extent to which this will benefit the Group's overallresult in 2005/06 depends upon developments in prices throughout the corrugatedpackaging supply chain during the year; currently paper pricing across Europeremains weak. The results of St Regis' subsidiary, Severnside Recycling, were affected byincreased competition for recovered paper with strong export demand leading toSevernside having to pay a higher price to source its recovered paper. Itfurther enlarged its recovered paper collection operations with the acquisition,in August 2004, of the five collection depots of BPB Recycling; thissubstantially increased Severnside's ability to meet St Regis' recovered paperrequirement from its own collection infrastructure. Severnside also increasedits trading in recycled materials and grew its business in managing customers'entire waste recycling and disposal needs through facilities management. 2004/05 Performance - Continental Europe Our continental European division, DS Smith Kaysersberg, performed well andreported a small increase in profits despite difficult conditions in many of itsmarkets; it benefited from strong progress in the Polish and Turkish businesses. The French paper mills, which principally manufacture solid board, increasedtheir productivity and sales volume following an investment programme, butmargins were squeezed, despite improved productivity, by weak market conditions,lower selling prices and higher energy costs. Results at the French CorrugatedPackaging operations were lower due to a decline in the French market andintense price pressure from customers. In Italy, we increased sales volume andmarket share in a difficult market, assisted by good productivity levels fromour well-invested factories. However, profits were affected by lower sellingprices due to competitor activity. Output and profits at the Polish business advanced strongly, in line with ourplan to build sales at our existing factory ahead of the opening of our newgreen-field factory at Kutno, west of Warsaw, in autumn 2005. In Turkey, ourprogramme of action over the last two years to raise operational performance andincrease market share, enabled the business to record a further increase insales and to move into profit for the year. Our associate operation in theUkraine, OJSC Rubezhansk Paper and Packaging Mill, continued to perform well,benefiting from the recent major programme of investment. Plastic Packaging 2005 2004 restated(2)Turnover £195.9m £208.7mAdjusted(1) operating profit £9.9m £14.0mAdjusted(1) return on sales 5.1% 6.7%Adjusted(1) return on average capital employed 7.1% 10.0% (1) before exceptional items and amortisation of intangibles (2) restated for the changes in accounting policy resulting from the adoption of FRS 17 "Retirement benefits" and UITF Abstract 38 "Accounting for ESOP trusts"; the 2004 adjusted operating profit reported previously under the SSAP 24 accounting standard was £15.2 million DS Smith Plastics' adjusted operating profit of £9.9 million (2003/04 restated:£14.0 million), which included a pension charge of £1.0 million (2003/04: £1.2million), was adversely affected by lower sales, particularly in RTP, and in thesecond half of the financial year by the under-recovery of polymer costsfollowing their sharp rise. Market Overview The bag-in-box market worldwide is estimated to be worth over $500 million andhas been growing at over 5% per annum by volume(5). The principal uses ofbag-in-box packaging are for wine and carbonated soft drink concentrate butthere is growing usage in other sectors such as the dairy industry, edible oils,fruit juices and chemicals. In the USA, where usage is principally in thecarbonated soft drink concentrate industry, the market is estimated to be staticin volume while in Europe, where usage is primarily in the wine industry, themarket is estimated to be growing at over 10% per annum by volume. Prices inboth the USA and Europe are under increasing pressure as the market matures.Usage is at an early stage of development and growing rapidly in Asia. Themarket for taps, other than for bag-in-box systems, is fragmented across a widerange of uses; a major sector supplied by DS Smith, principally in the USA, isliquid detergent, which is estimated to be growing strongly. The European market for RTP is fragmented into many sub-sectors but has in totalgrown steadily in recent years, due to the increased requirement for multi-trip,reusable packaging on cost and environmental grounds for some uses. This marketis heavily influenced by industry sector activity levels and, as RTP is often acapital purchase driven by particular projects, annual demand can be of anuneven nature. 2004/05 Performance In liquid packaging and dispensing, the bag-in box business was affected bylower demand from the US carbonated soft drinks sector, increased competitoractivity in the European wine market and a change in mix towards lowervalue-added bags. The tap business produced an improved result, followingaction in 2003/04 to reduce costs and strengthen sales and product development. The RTP business was affected by a slowdown in new crate contracts, principallyfrom the brewing industry, after especially strong demand in 2003/04. Marginsin the extruded sheet sector were additionally squeezed due to industry capacityincreases at a time of weaker demand and increased sourcing of packaging fromeastern Europe as some customers move their operations to that region. The division's overall result was adversely affected in the second half of theyear by the sharp rise in polymer prices which ended the financial year some35-40% higher than at the start of 2004/05 for our main polymer types. Althoughwe raised our selling prices several times during the year it was not alwayspossible to recover these cost increases in full. The cumulative effect of thisinput cost under-recovery was approximately £3 million, largely concentrated inthe RTP business. The high polymer prices also resulted in reduced sales insectors of the market such as crates and pallets, as some customers deferredorders in the expectation that polymer prices would not remain at such highlevels. The combined result of the three smaller speciality businesses was flatyear-on-year, and in one of these,which provides packaging management servicesand was acquired in 1998, the Group took an exceptional impairment charge in2004/05 of £5.8 million against its goodwill; this business is trading at aroundbreakeven and generating cash. Office Products Wholesaling 2005 2004 restated(2)Turnover £499.7m £498.8mAdjusted(1) operating profit £21.7m £19.7mAdjusted(1) return on sales 4.3% 3.9%Adjusted(1) return on average capital employed 18.3% 16.7% (1) before exceptional items and amortisation of intangibles (2) restated for the changes in accounting policy resulting from the adoption of FRS 17 "Retirement benefits" and UITF Abstract 38 "Accounting for ESOP trusts"; the 2004 adjusted operating profit reported previously under the SSAP 24 accounting standard was £21.7 million The adjusted operating profit of £21.7 million (2003/04 restated: £19.7million), which included a pension charge of £1.7 million (2003/04: £2.0million), advanced principally due to the German business moving into profit,which more than offset the increased costs of the newly-launched Italianbusiness. Market Overview Spicers' principal office products wholesaling markets of the UK, France andGermany are estimated to be worth approximately €9.0 billion, €7.7 billion and€11.1 billion, respectively, and in 2004 were estimated to have declined by atleast 2%, with the traditional stationery sector declining at a higher rate thanthis, and electronic office supplies (EOS) growing at up to 10% per annum(6).There was growing evidence during 2004/05 of rising market volumes but pricesremained under pressure. EOS, which now accounts for 40-50% of the total officeproducts market, is particularly price competitive and margins on the highestvolume EOS products continue to be eroded. The value of the overall market isalso being eroded by the trend for consumers to buy lower specification orown-branded products. 2004/05 Performance Spicers' met its key objectives for the year: Spicers Germany moved into profit;sales in the UK grew; the Italian business was successfully launched; theSpanish business made progress towards profitability. The good result for theyear was assisted by total costs being held constant despite the increased costsrequired to establish the Italian business. In the UK, turnover grew slightly in the second quarter of the financial year,being the first quarter in which growth had been recorded for over three years;this trend was maintained through to the financial year-end, despite somerenewed softening of the market in the final quarter. Good service levels weremaintained and a sound financial performance was achieved due to further costreduction and productivity improvements. Profits in Ireland were significantlyaffected by reduced sales and price pressure in an especially weak market; costswere reduced and sales improved towards the end of the financial year. The French business continued to perform well and gained market share in achallenging market environment by supporting its customers with service at arecord high level. Spicers Germany achieved a profit for the year, helped byexiting unprofitable business and reducing costs, while growing sales withindependent dealers. The Spanish business continued to grow sales strongly andreduced its losses; in addition to growing in the Barcelona area adjacent to itsdistribution centre, it has begun to develop the market in the Madrid area.Spicers Italy was launched in November 2004; initial catalogue sales were strongand product sales to date have been encouraging. Office Products Manufacturing 2005 2004 restated(2)Turnover £46.8m £48.0mAdjusted(1) operating profit £nil £0.3mAdjusted(1) return on sales - 0.6%Adjusted(1) return on average capital employed - 2.2% (1) before exceptional items and amortisation of intangibles (2) restated for the changes in accounting policy resulting from the adoption of the FRS 17 "Retirement benefits" and UITF Abstract 38 "Accounting for ESOP trusts"; the 2004 adjusted operating profit reported previously under the SSAP 24 accounting standard was £1.4 million The adjusted breakeven result (2003/04 restated: £0.3 million), which included apension charge of £1.0 million (2003/04: £1.1million), was lower due tosubstantial European industry over-supply in envelopes and the trend towardsown-label product. Strengthened merchandising and new products assistedincreased sales of branded books; costs have been reduced further across thebusiness. John Dickinson's leading brands, product range developments andproductivity initiatives provide a good base for improvement. Group Profit and Loss Account For the year ended 30 April 2005 2005 2004 Before Exceptional exceptional items and Before items and amortisation amortisation Amortisation amortisation of of of of intangibles intangibles intangibles Total intangibles (note 2) Total (restated) (note 2) (restated) Note £m £m £m £m £m £m Turnover 1 1,624.9 - 1,624.9 1,488.5 - 1,488.5Group operating profit 1 83.9 (20.5) 63.4 75.4 (4.0) 71.4Share of operatingprofits of associatedundertakings 4.1 1.5 5.6 3.0 0.4 3.4Total operating profit 88.0 (19.0) 69.0 78.4 (3.6) 74.8Net interest payableand other similaritems (13.0) - (13.0) (10.4) - (10.4)Other finance income/(expense) 1.1 - 1.1 (3.2) - (3.2)Profit on ordinaryactivities beforetaxation 76.1 (19.0) 57.1 64.8 (3.6) 61.2Tax on profit onordinary activities (19.0) 1.4 (17.6) (17.0) - (17.0)Profit on ordinaryactivities aftertaxation 57.1 (17.6) 39.5 47.8 (3.6) 44.2Minority interests -equity (0.6) - (0.6) (0.6) - (0.6)Profit for thefinancial year 56.5 (17.6) 38.9 47.2 (3.6) 43.6Dividends paid andproposed (32.3) - (32.3) (30.6) - (30.6)Retained profit forthe financial year 24.2 (17.6) 6.6 16.6 (3.6) 13.0 Earnings per share: 3Basic 10.1p 12.6pDiluted 10.0p 12.5pAdjusted 14.7p 13.6pDividends per share 4 8.4p 8.2p Notes: (a) The Group's results shown above are derived from continuing operations. (b) The difference between the reported and historical cost profits for each of the years reported above is not material. (c) The 2004/05 exceptional items relate to: restructuring costs of £4.9m related to integrating the operations of Linpac Containers; a £5.8m charge for an impairment against goodwill in a small business in Plastic Packaging; and a credit of £1.1m for the reversal of previous impairment of an associate. Amortisation of intangibles was £9.4m. See also Note 2. (d) The results for 2003/04 have been restated for the changes in accounting policy resulting from the adoption of FRS 17 'Retirement benefits' and UTIF Abstract 38 'Accounting for ESOP trusts'. (e) The Annual Report and statements for the year ended 30 April 2005 will be posted to shareholders in July 2005. (f) Subject to approval of shareholders at the Annual General Meeting to be held on 7 September 2005, the final dividend of 5.8p will be paid on 20th September 2005 to ordinary shareholders on the register on 19th August 2005. (f) The 2004/05 and 2003/04 results in this preliminary statement are not the Group's statutory accounts for these years. The 2004/05 and 2003/04 results have been extracted from statutory accounts which contained unqualified audit reports with no adverse statement under Section 237 (2) or (3) of the Companies Act 1985. The 2003/04 statutory accounts have been filed with the Registrar of Companies. Group Statement of Total Recognised Gains and Losses For the year ended 30 April 2005 2005 2004 (restated) £m £m Profit for the financial year 38.9 43.6Exchange differences on foreign currency net investments (0.3) (7.7)Actuarial (losses)/gains recognised in the pension scheme (31.2) 62.5Movement on deferred tax relating to actuarial (losses)/gains 9.5 (18.8)Total recognised gains and losses relating to the financial year 16.9 79.6Prior year adjustments (67.6)Total recognised gains and losses since last annual report (50.7) Group Reconciliation of Movements in Shareholders' Funds For the year ended 30 April 2005 2005 2004 (restated) £m £mOpening shareholders' funds:As previously stated 562.0 472.9Prior year adjustments (67.6) (99.0)Opening shareholders' funds as restated 494.4 373.9Profit for the financial year 38.9 43.6Related Shares:
Smith (DS)