28th Jun 2007 07:02
Smith (DS) PLC28 June 2007 28 June 2007 DS SMITH PLC - 2006/07 PRELIMINARY RESULTS DS Smith Plc, the international packaging manufacturer and office productswholesaler, announces its results for the year ended 30 April 2007. Financial Summary 2006/07 2005/06Revenue £1,766.1m £1,652.7mAdjusted profit before tax(1) £74.6m £53.4mProfit before tax £78.5m £11.0mAdjusted earnings per share(1) 13.1p 10.0pEarnings per share 15.6p 1.1pFree cash inflow before dividends and net acquisitions(2) £84.0m £63.2mGearing 32.0% 43.9%Total dividend per share 8.6p 8.4p (1) before net exceptional income of £3.9m (2005/06: exceptional charge £42.4m) (2) including the net cash consideration of £29.6m for the sale of the Taplowsite Highlights • Good organic growth achieved across our businesses • Results benefited from our previous restructuring actions • Spicers UK turnaround programme now underway • Continuing price increases in Paper and Corrugated Packaging to recover the higher input costs • Strong cash flow boosted by the sale of the Taplow site Commenting on the results, Chairman, Peter Johnson said: "In 2006/07, the Group benefited from both a better pricing environment in thepaper and corrugated packaging market and the actions taken to improve theunderlying business base. These actions have enhanced the Group's business mix,increased operational efficiency and lowered operating costs. There was animproving trend in the Group's results through the second half of the financialyear and profit for the full year was well ahead of the 2005/06 result. Giventhese positive developments and the Group's potential to build on itsstrengthened position, the Board is proposing an increased final dividend." Tony Thorne, Group Chief Executive said: "Our priorities are to continue to drive for recovery of the high input costswithin our Packaging businesses and to raise profits at Spicers, particularly inthe UK. Entering 2007/08, the business is performing well and I am confidentthat the Group will make good progress this year." EnquiriesDS Smith Plc 020 7932 5000Tony Thorne, Group Chief ExecutiveGavin Morris, Group Finance DirectorPeter Aubusson, Group Communications Manager Financial Dynamics 020 7269 7121Richard Mountain/Susanne Yule A briefing for analysts and investors will take place today at 9.30am BST atFinancial Dynamics, Holborn Gate, 28 Southampton Buildings, London WC2A 1PB.This briefing may be heard live by dialing in on: +44 (0)1452 569 393. Thepresentation slides used at this briefing will be posted on the Group's website(www.dssmith.uk.com) at 9.30am and an audio recording of the briefing will beavailable on the website from approximately 1.00pm BST today. CHIEF EXECUTIVE'S REVIEW The Group achieved a marked improvement in its profits in 2006/07. Although theresults throughout the financial year were held back by high input costs inPackaging and lower profits in our UK Office Products Wholesaling business, webenefited from actions taken to strengthen the Group and from an easing of therecent harsh trading environment in Paper and Corrugated Packaging. StrongEuropean packaging demand combined with a tightened supply position forcorrugated case material (CCM) created a firmer pricing environment in both CCMand corrugated boxes. In this changed situation, our drive to raise sellingprices so as to recover the previous substantial increases in our input costs ofenergy and waste paper became increasingly successful. Additionally, our goodmarket positions allowed us to grow our sales volumes strongly in many sectorsof our business. The positive trend in the Group's performance was reflected in the results forthe two halves of the financial year. While in the first half of 2006/07adjusted operating profit was 8% lower than in the same period of the previousyear, in the second half of the year it was 74% higher than in the previoussecond half; for 2006/07 as a whole it was 29% up on 2005/06 at £77.7 million. UK Paper and Corrugated Packaging The most significant segmental profit improvement was achieved in UK Paper andCorrugated Packaging, where adjusted operating profit for the full yearincreased by £16.0 million to £36.5 million. This advance was the result of acombination of the extensive actions we have taken to raise efficiency, as wellas the improved pricing in both paper and corrugated packaging and strong growthin corrugated packaging. The programme to improve the cost competitiveness of our business and to enhancethe product mix was continued during 2006/07. In our UK paper business, weclosed Taplow Mill, which was loss-making and was not likely to be competitiveover the longer-term, and we sold the Taplow site for a net cash considerationof £29.6 million. We continued the development of sales of plasterboard liner,supported by an extensive capital expenditure programme to upgrade existingmachines. Our Severnside Recycling business strengthened its capability tosupply the waste paper raw material for our own mills and to generate otherrevenue from its waste collection infrastructure and expertise. In our UKcorrugated packaging business, we are seeing the benefit of our actions toestablish a more competitive conventional box plant network and a strong groupof speciality corrugated businesses. The significant attention we have given tosupporting our customers in the trend to retail-ready packaging and promotionalpackaging has contributed to our growth in corrugated box sales in these sectorsof the market. The considerable CCM and corrugated products price increases achieved during2006/07 enabled us to recover a substantial proportion of the additionalapproximately £19 million of input cost increases incurred during the year andthe earlier margin erosion we experienced during the previous financial year. The programme to raise returns in the UK Paper and Corrugated Packaging segmentwill remain a focus for attention in the coming year. Continental European Corrugated Packaging Revenue advanced strongly in Continental European Corrugated Packaging. However,operating profit in this segment, which is a substantial net buyer of paper, waslower at £18.2 million (2005/06: £20.1 million) as a result of the higher costsof CCM which it was not able fully to recover through increased prices duringthe financial year. We gained market share in all our major markets and grewsales particularly strongly in Italy, Poland and Turkey. Our corrugated boxbusinesses continued to benefit from concentrating on higher added-valueproducts, while our speciality paper mill in France had another good year,exploiting its increased capacity as a result of recent investment. Our Ukrainian associate business continued to make good profits and we aresupporting its investment programme which is designed to meet the growth inmarket demand and to broaden its product range. Box price increases were slower to take effect on the continent but have startedto come through strongly since the autumn of 2006. These increases have not beensufficient, however, to recover the previous increases in our input costs andthe pressure on margins is being compounded by further rises in CCM and energycosts in 2007/08. In the current financial year we will continue our strongefforts to achieve the necessary cost recovery. Plastic Packaging Plastic Packaging achieved a healthy advance in adjusted operating profit to£10.2 million (2005/06: £7.2 million). A further increase in energy, polymer andfilm costs of around £5 million during the financial year was almost entirelyrecovered through higher selling prices and a better sales mix. The result alsobenefited from a 4.9% underlying advance in revenue, excluding the plasticcoating and laminating business which was sold in December 2005. The Group has developed good market positions in its two principal sectors ofreturnable transit packaging (RTP) and liquid packaging and dispensing. In RTP,beverage crate sales were particularly strong in the early months of thefinancial year but then slowed as a number of large contracts came to an end.The extruded products businesses benefited from our previous actions tostrengthen the sales function and improve the sales mix. We have developedseveral encouraging new product opportunities and are growing sales in easternEurope in partnership with our Corrugated Packaging operations in that region. The liquid packaging and dispensing sector benefited from a higher-margin salesmix, sales growth as a result of its strengthened product range and improvedoperating efficiency. We are consulting with our employees about the proposedrestructuring of our European liquid packaging and dispensing operations. Our Plastic Packaging segment is expected to continue to show steady progress. Office Products Wholesaling Adjusted operating profit was marginally higher at £12.8 million (2005/06: £12.6million). The profitability of the UK business declined, in line withexpectations, but this was more than offset by the growth in profits from thecontinental European businesses. Revenue in Spicers UK, which represents 50% of Spicers' total revenue, grew butthe impact of strong competition on pricing and higher operating costs resultedin a significant drop in profits. Our priority for 2006/07 was to strengthen theUK management team and make good progress on implementing a comprehensiveprogramme to rebuild Spicers UK's profits over a three-year period. The newmanagement team has taken decisive action and there is good momentum behind arange of improvement initiatives, principally aimed at enhancing the sales mix,raising service levels and lowering costs. The UK distribution network has beenstreamlined further through the closure in early June 2007 of the Park Royaldistribution depot in London. We are seeing the initial evidence of improvedperformance arising from this ongoing turnaround programme and furtherconsiderable benefits are expected over the next two years. On the continent, the well-established French and Benelux businesses maintainedtheir strong performance and further confirmed the considerable potential forSpicers' business model across Europe. The businesses in Germany, Spain andItaly, which are each at a different stage in their development, all made goodprogress. The Spanish business opened its new distribution centre near to Madridin October 2006 which gives it better national coverage. The objectives within Spicers are to rebuild profitability in Spicers UK andcontinue the development of our existing continental European network. Our People Our employees have made a very significant contribution to the recentimprovement in the Group's results. I am grateful for their considerable skilland enthusiasm as we have looked to drive up our results. I thank them for theirhard work, commitment and support. Strategy In recent years, we have significantly changed the balance of the Group'sbusiness. We have developed our Paper and Corrugated Packaging and PlasticPackaging businesses in higher added-value and faster-growing product and marketsectors and grown the Office Products Wholesaling business in continentalEurope. At the same time, we have sold several peripheral activities and closedparts of our Paper business that were not likely to be viable in thelonger-term. These moves have strengthened DS Smith and provided a good basefrom which we can develop the Group further. Adjusted return on average capital employed improved to 8.7% in 2006/07 (2005/06: 6.5%) but this remains below our return target, which is to exceed theGroup's weighted average pre-tax cost of capital of circa 10% over the businesscycle. We are determined to achieve our targeted returns. This will be done bycontinuing to focus on raising operational performance, exiting operations thatwill not deliver adequate returns and concentrating capital in those parts ofthe business which offer the best opportunities for profit growth. Given ourrange of businesses and our strong market positions, we are confident that therewill be many opportunities for organic development of the Group. We also expectthat there will be further restructuring in the European paper and corrugatedpackaging industry and that this may present opportunities for furtherdevelopment through acquisitions. In UK Paper and Corrugated Packaging, our objectives are to improve further thereturns from our substantial UK market positions and to sustain these betterreturns over the business cycle. The priorities for achieving this are: acontinued drive to recover the current high input costs; further cost reduction;and targeting growth sectors of the market. Investment will be concentrated on:expanding Severnside Recycling; increasing the efficiency and enhancing theproduct mix of our paper and conventional corrugated box businesses; anddeveloping a selected number of our specialist corrugated packaging businesses. Our goal in Continental European Corrugated Packaging is to sustain and build onour existing solid returns and good growth rates. We will continue our targetedapproach, concentrating on selected markets and higher added-value productsegments. In the short-term a priority is to recover the recent and prospectiverises in input costs. Investment will be concentrated on maintaining thecompetitiveness of our existing operations and their expansion, through organicdevelopment and bolt-on acquisitions. In Plastic Packaging, our aim is to grow the profits of our two principalbusinesses. We have an established international position in liquid packagingand dispensing; our priorities in this business are to increase ourcompetitiveness through structural cost reduction and to expand sales throughnew product development and penetration into new markets. In returnable transitpackaging, we will continue to focus on the European market but use our enhanceddevelopment capability to grow in new markets, particularly in central andeastern Europe. We will continue to make bolt-on acquisitions where thesesupport either a product range or market extension. Our goal in Office Products Wholesaling is to establish the Spicers businessmodel profitably across the major markets of western Europe. An immediatepriority is to restore profits in the important UK business through improvingthe sales mix, raising service levels and lowering costs. On the continent wewill maintain the competitiveness of our major established positions in Franceand the Benelux region and continue to grow the returns from our developingbusinesses in Germany, Spain and Italy. Outlook Our priorities are to continue to drive for recovery of the high input costswithin our Packaging businesses and to raise profits at Spicers, particularly inthe UK. Entering 2007/08, the business is performing well and I am confidentthat the Group will make good progress this year. FINANCIAL REVIEW Trading Results Revenue for the financial year ended 30 April 2007 increased by 6.9% over theprior year; it was 5.7% higher in the first half of the year and 8.0% higher inthe second half. Excluding the effects of the acquisition of Timmermans withinOffice Products Wholesaling and the closures of the Sudbrook and Taplow millswithin UK Paper and Corrugated (and the previous disposals of John Dickinson andthe BSK plastic coating and laminating business), revenue was up 9.9%. If, inaddition, the effect of movements in foreign exchange rates is excluded, revenuewas up 10.8% on 2005/06 (up 8.7% in the first half of the year and up 12.9% inthe second half). Adjusted Group operating profit (excluding exceptional items) in 2006/07 was£77.7million (2005/06: £60.4 million). The increase in adjusted Group operatingprofit resulted from rises in UK Paper and Corrugated Packaging of £16.0million, in Plastic Packaging of £3.0 million and £0.2 million in OfficeProducts Wholesaling, while Continental European Corrugated Packaging fell £1.9million. Group adjusted operating profit in the first half of the year was£30.4million (2005/06 H1: £33.2 million) and in the second half was £47.3million (2005/06 H2: £ 27.2 million). Adjusted full year operating profit fromUK operations increased by £10.2million to £28.6million, principally due tohigher profits in UK Paper and Corrugated Packaging, offset by a slump in theprofits in the UK business within Office Products Wholesaling. Adjustedoperating profits from non-UK operations were up £7.1 million, reflecting thestronger continental European performance of Office Products Wholesaling,including the acquired business in the Benelux region, and a differentgeographical mix of profits within Plastic Packaging. The Group's adjustedreturn on sales was 4.4% (2005/06: 3.7%). The Group recorded net exceptional income before tax of £3.9 million during theyear (2005/06: net exceptional charges of £42.4 million). This net exceptionalincome arose from a profit of £20.5 million on the sale of the Taplow paper millsite and a negative goodwill credit related to an increase in our ownership ofour associate, Rubezhansk, of £2.0 million, offset by costs on the closure ofloss-making paper capacity, and related restructuring, in UK Paper andCorrugated Packaging (£13.8million), the proposed restructuring of our Europeanliquid packaging and dispensing operations within Plastic Packaging(£1.9million) and the restructuring of the UK operations of Office ProductsWholesaling (£2.9 million). Operating profit after exceptional items was £79.6million (2005/06: £18.0 million). The Group's adjusted return on capital employed (which is defined as adjustedoperating profit divided by the average capital employed) increased from 6.5% in2005/06 to 8.7% in 2006/07. Interest, Tax and Earnings per Share Net interest expense increased from £12.3 million in 2005/06 to £15.0 million in2006/07, mainly reflecting higher euro interest rates on slightly lower averagenet debt. Employment benefit net finance income was £8.0 million (2005/06: £1.2million), reflecting the lower opening deficit on the defined benefit schemes. The Group included £3.9 million as the Group's adjusted share of associatedundertakings' after-tax profits, down from £4.1 million in 2005/06. Within thisamount, £3.6 million (2005/06: £3.3 million) related to the Group's share of theafter-tax operating profit of Rubezhansk, the Group's associate paper andpackaging company in Ukraine (in which the Group's ownership increased from38.8% to 49.6% towards the end of 2006/07); the decline in the associates'profit is due to the Group's lower share of the profits from its Japanesepackaging associate, following the reduction in its stake from 14.8% to 6.3%during 2006/07. Adjusted profit before tax was £74.6 million (2005/06: £53.4 million). Profitbefore tax after exceptional items was £78.5 million (2005/06: £11.0 million). The Group's effective tax rate, excluding exceptional items and associates, at32%, was higher than last year's rate of 27%, the 2005/06 rate benefiting fromprior year items following the resolution of historical tax uncertainties.Excluding the effect of any prior year items, the effective tax rate is expectedto be slightly higher than the UK statutory rate in the coming year, largelybecause of higher overseas tax rates. Adjusted basic earnings per share were 13.1p (2005/06: 10.0p). Basic earningsper share were 15.6p (2005/06: 1.1p). Dividend The proposed final dividend is increased to 6.0p (2005/06: 5.8p). The totaldividend for the year is 8.6p (2005/06: 8.4p). Dividend cover before exceptionalitems was 1.5 times in 2006/07 (2005/06: 1.2 times). Dividend cover afterexceptional items was 1.8 times (2005/06: 0.1 times). Cash Flow Cash generated from operations was £128.0 million (2005/06: £138.2 million).This reflects the higher adjusted operating profit, offset by the exceptionalcash restructuring costs and a reduced inflow from working capital. The cashoutflow in respect of exceptional restructuring costs of £7.2 million (includingcash outflows related to exceptional charges made in 2005/06), compared with acash outflow from restructuring costs of £4.6 million in 2005/06. This was morethan offset by the £29.6 million of net exceptional cash realised on the sale ofthe Taplow site, included within sales of assets. There was a strong focus onworking capital management which resulted in a cash inflow of £8.5 million. Inrespect of pension payments, the agreed annual contributions into the UK GroupPension scheme were £14.0 million in 2006/07 (2005/06: £14.0 million). Capitalexpenditure payments were £55.8 million, the most significant investment beingwithin St Regis to support growth in plasterboard liner production in the UK,down from £62.7m in 2005/06, which included the cost of our new corrugated plantin Poland and the first phase of the St Regis plasterboard liner investment. Theproceeds from the sales of assets include £29.6m (after disposal costs) from thesale of the Taplow mill site. The interest paid increased in line with theincome statement charge. Tax payments were £15.1 million (2006/07: £13.5 million) as the effect of thehigher adjusted trading profit described above was partially offset by the taxdeductions from the exceptional restructuring charges (the exceptional gainbeing relieved by previously unrecognised tax losses). Free cash flow, before acquisitions, disposals and dividends (but including theproceeds from the disposal of the Taplow site), was £84.0 million (2005/06:£63.2 million). Cash dividend cover, defined as free cash flow divided bydividends paid/declared for the year, was 2.5 times, up from 1.9 times in 2005/06. The net cash inflow on acquisitions and disposals was £0.2 million (2005/06:£0.5 million inflow). Financial Position Shareholders' funds totalled £569.4 million at 30 April 2007, up from £532.1million at 30 April 2006. Net assets per share were 144.9p (2005/06: 138.5p).The profit attributable to the shareholders of DS Smith Plc was £60.6 millionand dividends of £32.7 million were paid to reserves during the year. Inaddition, after-tax actuarial gains of £11.9 million on the Group's definedbenefit pension schemes were credited to reserves through the statement ofrecognised income and expense, as explained further below. Other itemsrecognised directly in equity, relating to the issue of new share capital,foreign currency differences, hedge accounting, and share-based payment expense(all with associated tax), totalled £2.5 million. The Group's closing net debt was £181.2 million, £56.6 million lower than at thestart of the year, reflecting the net cash inflow during the year of £55.2million and non-cash movements, principally exchange differences and relatedfair-value movements, of £1.4 million. Gearing was 32.0 % (2005/06: 43.9%); the decrease reflected the improvement inborrowings from the net cash inflow for the year and the increase inshareholders' funds from the profit for the year and the reduction in the netpension deficit. Adjusted interest cover was 5.2 times, compared with 4.9 timeslast year, the higher cover reflecting the higher adjusted operating profitpartially offset by the increased interest charge. The ratio of net debt toEBITDA (before exceptional items) was 1.3 times (2005/06: 1.9 times). Energy Costs The high level of energy costs continued to be a significant factor for theGroup in 2006/07. The Group's total costs for gas, electricity and diesel fueldecreased from circa £95 million in 2005/06 to circa £88 million in 2006/07;after adjusting for the effects of the closures of two paper mills, thisrepresents an underlying increase of circa £6 million. Although market energyprices in the UK eased to some extent during the year, the benefits of this weremore than offset by the expiry in October 2005 of the Group's previousfavourable fixed-price UK electricity contract and the effects of lagged priceincreases resulting from the supply contracts for some of our operations. Approximately 40% of the Group's energy costs, principally related to ourlargest energy-consuming facilities, are incurred under supply contracts inwhich our energy costs tend to lag the trends in market prices. The remainder ofour energy costs relate to fuel which is purchased on the open market, for whichwe use price-hedging techniques, as appropriate, to limit pricing volatility. Pensions The Group operates one defined benefit pension scheme in the UK and has somesmall, overseas arrangements. The aggregate gross assets of the schemes at 30April 2007 were £737.9 million and the gross liabilities at 30 April 2007,calculated under IAS 19, were £756.5 million, resulting in the recognition of agross balance sheet deficit of £18.6 million (30 April 2006: £50.3 million), anet deficit of £13.0 million (30 April 2006: £35.3 million) after theestablishment of a deferred tax asset of £5.6 million (30 April 2006: £15.0million). In order to control the future costs and financial obligations of these schemes,the Group's UK defined benefit pension scheme is closed to new members. Thecontributions collected from members have been increased during 2006/07. Thelower current service cost in 2006/07, £9.4 million compared with £11.1 millionin 2005/06, reflects these higher member contributions and the reduction in thenumber of active scheme members following the closure or disposal of facilities.The Group's agreed annual cash contributions to the main UK scheme were £14.0million (2005/06: £14.0 million). The next triennial valuation of the scheme isto be carried out as at 30 April 2007. The balance sheet deficit (before a related deferred tax asset) decreased from£50.3 million at 30 April 2006 to £18.6 million at 30 April 2007. The decreaseof £31.7 million included net actuarial gains of £17.0 million, principallybecause the scheme's liabilities decreased as a result of the increase in thediscount rate used to value the liabilities, from 5.1% at 30 April 2006 to 5.4%at 30 April 2007. No changes were made during the year to the assumptions madein respect of the longevity of scheme members. OPERATING REVIEW Paper and Corrugated Packaging Market Overview In the calendar year 2006, the European market by weight for corrugatedpackaging grew by 3.1% (2005: 0.9%)1. In western Europe the market grew by 2.5%(2005: 0.3%) while growth in eastern and central Europe continued to be muchstronger at 7.7% (2005: 5.8%). DS Smith's principal markets are the UK, wheredemand by weight was flat (2005: a fall of 1.9%), France and Italy, where itgrew moderately by 0.9% and 2.2%, respectively (2005: 0.3% and nil), and Polandand Turkey, where it grew more strongly, by 4.7% and 14.3%, respectively (2005:9.3% and 7.6%). The stronger demand in the total European market in 2006 wassignificantly influenced by Germany, the largest national market, where demandgrew by 4.8% (2005: 3.1%). Indicators of demand in the early months of 2007suggest that growth is at similar levels to those of 2006. A major feature of the corrugated packaging market during the last two years hasbeen the increasing demand for retail-ready packaging (RRP) which can be readilyconverted from its initial role as a protective transit pack into its secondrole as a box or tray that can be placed on display in the retail store. Theincreased proportion of these higher added-value boxes, often requiringmulti-passes within the production process, has absorbed some of the excesscapacity across the corrugated industry. The combination of stronger demand and the closure of over 1.5 million tonnes ofolder corrugated case material (CCM) capacity in Europe during 2005 and 2006,resulted in a significant change in the European industry's supply and demandbalance during 2006. Since November 2005 selling prices of CCM have beenincreased on several occasions in order to recover the severe margin erosionthat had occurred as a result of industry over-capacity and the sharp rise inenergy costs. In June 2007 CCM prices are on average circa 45%2 higher than inthe autumn of 2005. In response to this, box producers have increased pricesseveral times to recover the higher CCM costs. Box price increases were slowerto take effect in continental Europe as the impact of energy cost increases onthe supply chain occurred later and with less severity than in the UK. However,the upward pressure on CCM and box prices from energy cost increases hascontinued through into the spring of 2007 in many continental countries. Todate, anecdotal evidence suggests that the rises in box prices achieved acrossthe European industry have not yet been sufficient to recover all of the paperand energy cost increases. 1 Source: European Federation of Corrugated Board Manufacturers 2 Source: RISI industry price data for the UK and France The pressure on CCM producers to increase selling prices has been intensified bythe relatively high cost of waste paper, the principal raw material for recycledCCM. Waste paper is a globally traded commodity; the continuing high level ofdemand for it from Asia, where there has recently been substantial investment inrecycled paper manufacturing, is contributing to European prices remaining firmand being subject to short-term, demand-driven spikes. Waste paper prices wererelatively stable during 2006 but rose by approximately 20% in March 2007. Inthe UK, the net cost of our raw material is also affected by the price ofPackaging Recovery Notes (PRNs), which are issued as evidence that packaging hasbeen reprocessed, in compliance with the UK Packaging Waste Regulations. Theprice of paper PRNs fell steadily through 2006 to a current very low level,raising the net cost of our waste paper. Looking ahead, no significant CCM capacity additions are expected in westernEurope during 2007 or 2008 but new capacity is expected to come on stream from2009. If the CCM market continues to grow by over 2% per annum, demand for CCMwill have increased by at least 1.5 million tonnes between 2006 and 2009. UK Paper and Corrugated Packaging 2006/07 2005/06Revenue - £m 687.1 649.6Adjusted operating profit - £m* 36.5 20.5Adjusted EBITDA - £m* 68.0 55.1Key performance indicators:Revenue growth - % 5.8% 2.9%Adjusted return on sales - %* 5.3% 3.2%Adjusted EBITDA margin - %* 9.9% 8.5%Adjusted return on average capital employed - %* 7.6% 4.0% * before an exceptional credit of £6.7 million (2005/06: exceptional charge£28.9 million) 2006/07 Performance Results in UK Paper and Corrugated Packaging benefited from a combination of theimproved pricing environment in the European paper and corrugated packagingmarket and the actions we have taken over the last three years to strengthen ourbusinesses in this segment. The strong advance in adjusted operating profit wasachieved despite a circa £19 million increase in the segment's input costs forenergy and net waste paper. Revenue advanced by 5.8% to £687.1 million as a result of higher sales inCorrugated Packaging, raised selling prices for both Paper and CorrugatedPackaging and increased external sales of waste paper and services by SevernsideRecycling. On a like-for-like basis, excluding the two paper mills that wereclosed during calendar year 2006, revenue increased by 13.0%. Adjusted operatingprofit was markedly higher at £36.5 million (2005/06: £20.5 million). Against a background of stronger European demand for CCM and corrugated boxes,and tighter European supply of CCM, we significantly raised our prices of CCMand boxes over the course of the financial year in order to recover the higherinput costs. These increases, in conjunction with those achieved in the secondhalf of the prior year, are enabling us to recover a substantial proportion ofthe margin erosion experienced as a result of the higher input costs and thefall in prices that took place over the previous two years. The box priceincrease programme is being maintained so as to recover more fully the mostrecent increases in CCM costs. DS Smith Packaging, our UK Corrugated Packaging business, achieved strong salesvolume, partly as a result of its focus on meeting the increased demand forretail-ready packaging. Throughout the financial year, margins were underpressure from the rises in CCM costs. Our network of conventional plantsbenefited from better productivity while the speciality sector, whichconcentrates on higher added-value products, performed well despite its higherinput costs. Sales of heavy-duty packaging, which is predominantly used by theindustrial manufacturing sector, held up well given the continued pressure onits customer base. Our sheet feeding operations, which supply corrugated sheet,performed well, particularly as a result of strong sales of lighter-weight andspeciality board. Our sheet plant business, which converts corrugated board intoboxes, was affected by us having to close a plant after a major customertransferred its production to eastern Europe. At our UK paper business, St Regis, revenue was flat as the benefits of thehigher selling prices for paper and the increased revenue at SevernsideRecycling were offset by lower paper sales volume as a result of the closures ofSudbrook Mill in March 2006 and Taplow Mill in October 2006. Margins improvedsignificantly as a result of the plant closures and the actions taken toincrease selling prices and enrich the business mix. The capital expenditure programme to upgrade existing machines at the Kemsleyand Wansbrough mills, in order to enhance the quality of plasterboard liner andother products produced at these mills, is well-advanced and is expected to becompleted by the end of 2007. Kemsley Mill, which now accounts for approximately65% of St Regis' ongoing paper production, made good progress despite someplanned loss of production during the upgrading of one of its three machines.The mill continues to benefit from the previous investment in its combined heatand power plant and waste-to-energy plant but its energy costs rose as a resultof the lagged pricing arrangements in the energy supply contracts for theseplants. Hollins Mill benefited from healthy demand for its principal product,white top testliner, and the action taken to raise its product quality.Increased output, as a result of our recent investment, contributed to animproved result at Wansbrough Mill. The previously announced closure of PM1, thesmaller of the two paper machines, at Wansbrough Mill, which was planned to takeplace at the end of June 2006, was re-considered following the closure inmid-June 2006 of another UK paper producer. In view of the consequentimprovement in the market environment for envelope and imitation kraft papergrades, products PM1 is well suited to producing, it was decided to continueoperating PM1 to satisfy the increased demand for these speciality grades.Higher Kings Mill, which focuses on higher margin, speciality, non-packagingpapers, grew its sales volume, raised its prices and improved its profitability. Taplow Mill, which made losses in 2005/06, was closed at the end of October 2006because it was not likely to be an economic proposition over the longer-term,even under a more benign market and energy environment. The Taplow site was soldto a commercial property developer for a net cash consideration of £29.6million, resulting in a net gain, after the costs of closure of the mill'soperations and related restructuring, of £6.7 million. Our UK waste collection business, Severnside Recycling, which we enlargedthrough acquisition in 2004, sourced a greater volume of material and made goodprogress. In addition to meeting the requirements of St Regis' mills for wastepaper, Severnside exported an increased quantity of waste paper for recycling incontinental Europe and Asia. It also grew its added-value services, includingits facilities management business which manages customers' entire wasterecycling and disposal needs. In 2007/08, we will look to build on the progress made in 2006/07. This will bethrough continuing our efforts to recover the higher input costs through priceincreases, growing sales in the higher value-added sectors and raising theefficiency of our operations. Continental European Corrugated Packaging 2006/07 2005/06Revenue - £m 308.0 276.6Operating profit - £m 18.2 20.1EBITDA - £m 31.5 33.6Key performance indicators:Revenue growth - % 11.4% 4.1%Return on sales - % 5.9% 7.3%EBITDA margin - % 10.2% 12.1%Return on average capital employed - % 11.1% 12.4% 2006/07 Performance DS Smith Kaysersberg grew its revenue by 11.4% to £308.0 million through strongadvances in sales volume and higher selling prices. This segment, which is asubstantial net buyer of paper, was affected by higher input costs of CCM andenergy which it was not able fully to recover through increased box pricesduring the financial year. Operating profit was lower at £18.2 million (2005/06:£20.1 million). We implemented a box price increase programme across our continental Europeanmarkets with the aim of recovering the higher input costs. The considerableincrease in prices we have achieved has recovered part of the additional costsof energy and CCM which we have incurred and the price increase programme iscontinuing. Our French paper business, which focuses on providing a high level of customerservice in speciality markets, had another good year despite increases in itsenergy and waste paper costs. We increased production and sales, assisted by theprevious investment which enlarged the capacity at the main Kaysersberg Mill. Strong sales volumes and higher selling prices enabled our corrugated packagingbusinesses partially to offset the effects of higher bought-in paper and energycosts. The French business increased its market share and raised productivity,while in Italy we also gained share in this highly competitive market. OurPolish business, which we are developing through substantial investment,maintained its high growth-rate despite some slow-down in the market as a whole.It is benefiting from its highly-competitive Kutno factory, opened in autumn2005, which supplies the rapidly expanding FMCG sector in Poland. Our smallconverting business in the Czech Republic, which principally supplies heavy-dutypackaging to the automotive industry, performed well. We have recently created asimilar operation in Slovakia and have opened a marketing unit in Lithuania. Ourbusiness in Turkey continues to develop its sales, principally in specialityproducts and industrial market sectors although profits are being affected bythe slow progress in passing on the higher CCM costs. We are investing in thisbusiness to enable it to meet the considerable potential demand in Turkey. Weincreased our stake in our Ukrainian associate business, Rubezhansk, which isreported under associates, taking our holding to 49.6%. This business continuedto perform well and is investing further to broaden its product range and meetthe burgeoning demand in its region. Our priorities in this sector in 2007/08 are to continue our price increaseprogramme to recover the higher input costs and to grow further our market sharein higher added-value sectors. Plastic Packaging 2006/07 2005/06Revenue - £m 201.8 202.4Adjusted operating profit - £m* 10.2 7.2Adjusted EBITDA - £m* 21.9 19.3Key performance indicators:Revenue growth - % (0.3)% 3.3%Adjusted return on sales - %* 5.1% 3.6%Adjusted EBITDA margin - %* 10.9% 9.5%Adjusted return on average capital employed - %* 8.3% 5.6% * before exceptional charges of £1.9 million (2005/06: £2.6 million) Market Overview Returnable transit packaging (RTP) products are mostly used within the retail,automotive, electronics and beverage sectors. Demand is heavily influenced byindustry sector activity levels. As RTP is often a capital purchase for ourcustomers, being driven by particular projects, and raw materials represent ahigh proportion of the cost, annual demand can be of an uneven nature. TheEuropean market for RTP, which is estimated to be approximately €1.5 billion, isfragmented into many product sub-sectors and has a large number of suppliers. Inwestern Europe, market growth is estimated to be approximately 2-3% per annum;the trend towards the use of multi-trip, reusable packaging on cost andenvironmental grounds has been slower over the last two years than waspreviously the case. The slow-down in demand has been partly as a result of thehigher polymer costs and partly due to the relocation of some major customersectors, such as the automotive and electronics industries, to eastern Europe,where RTP market growth is estimated to be approximately 15% per annum. The global market for liquid packaging and dispensing products is estimated tobe approximately £400 million. The principal uses of bag-in-box packaging arefor wine, agricultural produce (such as fruit juice and dairy products) and foodservice applications such as carbonated soft-drink concentrate (for the hoteland restaurant industries). Volume growth in the North American and Europeanmarkets is estimated to be approximately 5% per annum while the market inAsia-Pacific is at an early stage of development and growing rapidly. The marketfor dispensing products (principally taps), other than for bag-in-box systems,is fragmented across a wide range of applications. DS Smith is a major supplierto the wine and liquid detergent sector; the latter has grown strongly in recentyears in the USA and is now starting to develop in Europe. 2006/07 Performance Revenue at DS Smith Plastics was broadly flat but on an underlying basis,excluding the BSK plastic coating and laminating business which was sold inDecember 2005, it increased by 4.9% to £201.8 million as a result of our actionsto strengthen our sales and product development capability and to raise prices.Adjusted operating profit advanced by 41.7% to £10.2 million with good progressin both RTP and liquid packaging and dispensing. This result was achieveddespite energy, polymer and film costs being approximately £5 million higherthan in the previous year; almost all of this was recovered during the yearthrough higher prices and a better sales mix. Revenue in RTP, which accounted for 46% of the segment revenue, advanced by5.2%. Beverage crate sales were particularly strong in the first half of thefinancial year due to the fulfilment of a number of large contracts in thatperiod. The extruded product businesses grew their sales well and achieved aricher sales mix, benefiting from our actions to strengthen and to co-ordinatebetter the sales and product development functions on a pan-European basis. Weare expanding our capability to supply RTP in eastern Europe from an existingplant in the Czech Republic and a new one in Slovakia, in response to increasedsourcing of RTP products in that region by some customers, particularly in theautomotive sector. In liquid packaging and dispensing, which accounted for 45% of the segmentrevenue, we increased revenue by 2.7%. Our US operations grew sales in newmarket sectors through innovative product development. In Europe, we benefitedfrom a higher margin sales mix, sales growth as a result of a strengthenedproduct range, and improved operating performance following the restructuringundertaken in 2005/06. In April 2007 we established a small joint venture inBulgaria to increase our sales of wine bags into the rapidly growing easternEuropean market. We are consulting with our employees about the proposedrestructuring of our European liquid packaging and dispensing operations. Our small packaging management business was adversely affected during much of2006/07 by competitive pressure and the contraction of a major customer'soperations; nevertheless, the business remained in profit and is now benefitingfrom restructuring action taken in the UK and some new business which has beensubsequently won. Our Israel-based development business, StePac, whichspecialises in modified atmosphere packaging, achieved record sales and movedinto profit for the first time. Although present indications are that in 2007/08 this segment is likely to facehigher energy costs in its continental operations and further increases inpolymer costs, our objective is to achieve steady progress in the year ahead. Office Products Wholesaling 2006/07 2005/06Revenue - £m 569.2 518.7Adjusted operating profit - £m* 12.8 12.6Adjusted EBITDA - £m* 19.2 19.2Key performance indicators:Revenue growth - % 9.7% 3.8%Adjusted return on sales - %* 2.2% 2.4%Adjusted EBITDA margin - %* 3.4% 3.7%Adjusted return on average capital employed - %* 9.8% 9.9% * before exceptional charges of £2.9 million (2005/06: nil) Market Overview The office products markets of the UK, France and Germany, in which Spicerscurrently has approximately 85% of its sales, are estimated to be worthapproximately €7 billion, €6 billion and €8 billion, respectively, atmanufacturers' selling prices. Recent annual growth in these markets isestimated to have been low or flat overall, with the traditional stationerysector being flat or in decline and the electronic office supplies (EOS) sectorshowing strong growth3. The volume of products bought by offices continues toincrease, but the value of the market is being held back by price deflationcaused by intense competition between suppliers and the trend for consumers tobuy lower-specification or own-branded products. EOS, which is a growing sectorof the market, accounts for approximately 50% of the total office productsmarket; it is especially price-competitive on the high-volume EOS products. The relative shares of the various supply channels to the end-user market differby country. However, in the countries in which Spicers operates, the channelthat Spicers principally supplies - that of office products dealers or resellers- accounts, on average, for approximately 35% of the total office productsmarket. The share of the market held by dealers has been relatively stable inrecent years. Office products dealers primarily sell to smaller and medium-sizedoffices, generally offer a high standard of service to their customers, andsource most of their products either from wholesalers or direct frommanufacturers. Wholesalers, on average, account for approximately 10% of the total market. Thedirect wholesaling competition that Spicers faces varies by country. In the UKthere is one other significant national wholesaler of office products. In mostcontinental European markets competition from other national wholesalers islimited, but there are significant numbers of regional and local wholesalers.The European scale of Spicers' business assists it in offering a broad range ofproducts at competitive prices relative to those of many of its smallerwholesaling competitors. Spicers' commitment to supplying only the trade, andnot, as some of its competitors do, supplying end-users, gives it a competitiveadvantage. Spicers competes indirectly with a number of other distributionchannels. The most significant of these, contract stationers, accounts for10-15% of the total market; they generally sell to larger offices and offer asmaller range of products than is stocked by Spicers. The other principalcompetitor channels to market are: mail order, office superstores, otherretailers and manufacturers selling direct to offices. 3 Source: DS Smith estimates based on national data 2006/07 Performance Spicers' revenue advanced by 9.7% to £569.2 million, both as a result of a fullyear's contribution from Timmermans, the Benelux business acquired in October2005, and strong growth in Spain and Italy. Significantly higher profit from thecontinental European businesses was largely offset by a substantial decline inprofit in the UK but overall there was a slight increase in adjusted operatingprofit to £12.8 million (2005/06: £12.6 million). Although Spicers UK continued to be significantly affected throughout the yearby competitive pressure, its performance towards the end of the second halfreflected some initial benefits from the steps we have taken to date, as part ofour three-year plan to restore UK profits. The business ended the year with anencouraging sales trend while service levels at the important dealerdistribution centre improved significantly. The substantially strengthened UKmanagement team is vigorously implementing a programme of actions aimed atimproving the sales mix, raising service levels and lowering costs. The regionaldistribution centre (RDC) network has been further consolidated with the closurein early June 2007 of the Park Royal RDC in London. We expect the benefits ofthese actions to be increasingly evident through the 2007/08 financial year. In 2006/07, Spicers made further advances in developing its business andprofitability in continental Europe. Spicers France continued to gain marketshare and grew its profit, particularly as a result of the further expansion ofits own branded dealer groups, Plein Ciel and Calipage. In January 2007, a newcentral distribution centre was commissioned at Chateauroux, in centralFrance, to support sales growth and to improve further customer service. TheBenelux business, Timmermans, continued to perform well; its increased focus ondeveloping its business in The Netherlands contributed to good sales growth.Spicers Germany advanced, partly as a result of new marketing initiatives whichenabled it to grow sales with its target dealer customer base. The Spanishbusiness saw excellent sales growth; it consolidated its profitable positionand, in October 2006, opened its new distribution centre near Madrid; this hasextended our distribution coverage across central and southern Spain. SpicersItaly, which has been in operation for two and a half years, continued tobroaden its customer base and build its sales rapidly. It recently concluded animportant supply agreement with Italy's leading franchised stationery storeoperator. In 2007/08, we will focus on rebuilding Spicers' profit performance in the UKand further developing our continental businesses. Consolidated Income StatementFor the year ended 30 April 2007 Before Exceptional After Before Exceptional After items exceptional items exceptional exceptional items exceptional items (note 2) (note 2) items items 2007 2007 2007 2006 2006 2006 Note £m £m £m £m £m £m Revenue 1 1,766.1 - 1,766.1 1,652.7 - 1,652.7 Operating profit 1 77.7 1.9 79.6 60.4 (42.4) 18.0 Finance income 1.7 - 1.7 2.3 - 2.3Finance costs (16.7) - (16.7) (14.6) - (14.6)Employment benefit net finance income 8.0 - 8.0 1.2 - 1.2Net financing costs (7.0) - (7.0) (11.1) - (11.1) Profit after financing costs 70.7 1.9 72.6 49.3 (42.4) 6.9 Share of profit of associates 3.9 2.0 5.9 4.1 - 4.1Profit before income tax 74.6 3.9 78.5 53.4 (42.4) 11.0 Income tax (expense) / credit 3 (22.8) 5.6 (17.2) (13.4) 7.7 (5.7) Profit for the financial year 51.8 9.5 61.3 40.0 (34.7) 5.3 Profit for the financial yearattributable to:DS Smith Plc equity shareholders 51.1 9.5 60.6 38.9 (34.7) 4.2Minority interest 0.7 - 0.7 1.1 - 1.1 Basic earnings per share (pence) 4 13.1p 15.6p 10.0p 1.1pDiluted earnings per share (pence) 4 13.0p 15.4p 10.0p 1.1p Dividend per share- interim, paid (pence) 5 2.6p 2.6p- final, proposed (pence) 5 6.0p 5.8p Notes: (a) The Group's results shown above are derived from continuingoperations. (b) The difference between the reported and historical cost profitsfor each of the years reported above is not material. (c) The Annual Report and statements for the year ended 30 April 2007 willbe posted to shareholders in July 2007. Statutory accounts for the year ended 30April 2006 have been delivered to the Registrar of companies. (d) Subject to approval of shareholders at the Annual General Meeting tobe held on 5 September 2007, the final dividend of 6.0p will be paid on 18September 2007 to ordinary shareholders on the register on 17 August 2007. (e) The 2006/07 and 2005/06 results in this preliminary statement donot constitute the statutory accounts of DS Smith Plc within the meaning ofsection 240 of the Companies Act 1985. The 2006/07 results and 2005/06comparatives have been extracted from the 2006/07 statutory accounts, which havebeen prepared under International Financial Reporting Standards as adopted bythe EU (IFRS) and which contained an unqualified audit report with no adversestatement under Section 237 (2) or (3) of the Companies Act 1985. (f) Whilst the financial information included in the preliminaryannouncement has been prepared in accordance with IFRS, this announcement doesnot itself contain sufficient information to comply with all the disclosurerequirements of IFRS. (g) Items are presented as 'exceptional' in the accounts where theyare significant items of financial performance that the directors considershould be separately disclosed, to assist in the understanding of the tradingand financial results achieved by the Group (see note 2). Consolidated Statement of Recognised Income and ExpenseFor the year ended 30 April 2007 2007 2006 £m £mActuarial gains on defined benefit pension schemes 17.0 54.4Movements on deferred tax relating to actuarial gains (5.1) (16.5)Currency translation differences, including tax (6.7) 9.7Changes in the fair value of cash flow hedges, including tax (1.2) 0.2Net income recognised directly in equity 4.0 47.8Profit for the financial period 61.3 5.3Total recognised income and expense attributable to equity shareholders andminority interest relating to the financial year 65.3 53.1 Total recognised income and expense relating to the financial yearattributable to:DS Smith Plc equity shareholders 64.7 52.0Minority interest 0.6 1.1 Consolidated Balance SheetAs at 30 April 2007 2007 2006 £m £mAssetsNon-current assetsIntangible assets 192.9 195.4Property, plant and equipment 517.1 536.1Investments in associates 30.5 29.2Other investments 0.5 0.5Deferred tax assets 21.4 24.0Other receivables 2.4 2.5Derivative financial instruments 0.2 1.4Total non-current assets 765.0 789.1 Current assetsInventories 160.5 163.3Other investments 0.1 0.1Income tax receivable 0.9 4.8Trade and other receivables 350.2 347.2Cash and cash equivalents 92.4 60.4Derivative financial instruments 0.7 3.7Total current assets 604.8 579.5Total assets 1,369.8 1,368.6 LiabilitiesNon-current liabilitiesInterest-bearing loans and borrowings (230.9) (264.9)Post-retirement benefits (18.6) (50.3)Other payables (5.1) (3.6)Provisions (8.9) (2.8)Deferred tax liabilities (81.4) (76.3)Derivative financial instruments (31.7) (25.0)Total non-current liabilities (376.6) (422.9) Current liabilitiesBank overdrafts (10.8) (1.5)Interest-bearing loans and borrowings (1.6) (7.7)Trade and other payables (384.8) (355.3)Income tax liabilities (16.6) (21.0)Provisions (10.6) (16.7)Derivative financial instruments (1.7) (2.0)Total current liabilities (426.1) (404.2)Total liabilities (802.7) (827.1) Net assets 567.1 541.5 EquityIssued capital 39.3 39.1Share premium 262.9 259.4Reserves 267.2 233.6DS Smith Plc shareholders' equity 569.4 532.1Minority interest (2.3) 9.4Total equity 567.1 541.5 Consolidated Statement of Cash FlowsFor the year ended 30 April 2007 2007 2006 Note £m £mOperating Activities Cash generated from operations 6 128.0 138.2Interest received 2.8 0.8Interest paid (16.9) (12.8)Tax paid (15.1) (13.5)Cash flows from operating activities 98.8 112.7 Investing ActivitiesAcquisition of subsidiary businesses and joint ventures, net of cash and (0.8) (10.5)cash equivalents acquiredDisposal of subsidiary businesses, net of cash and cash equivalents 1.0 11.0disposed ofCapital expenditure payments (55.8) (62.7)Proceeds from the sale of assets 39.2 9.7Proceeds from the sale of associates, net of additions of £0.5m (2006: 1.8 3.5nil)Cash flows from investing activities (14.6) (49.0) Financing ActivitiesProceeds from issue of share capital 3.7 2.6Repayment of borrowings (28.7) (17.2)Repayment of finance lease obligations (2.5) (0.9)Dividends paid (32.7) (32.6)Cash flows from financing activities (60.2) (48.1) Increase in cash and cash equivalents 24.0 15.6Net cash and cash equivalents at 1 May 2006 58.9 41.2Exchange (losses)/gains on cash and cash equivalents (1.3) 2.1Net cash and cash equivalents at 30 April 2007 81.6 58.9 Notes to the Financial Statements 1. Segment Reporting Primary reporting format - business segments UK Paper Continental Plastic Office Other3 Total And European Packaging Products £m GroupYear ended 30 April 2007 Corrugated Corrugated £m Wholesaling £m Packaging Packaging £m £m £m External revenue 687.1 308.0 201.8 569.2 - 1,766.1 Adjusted operating profit(1) 36.5 18.2 10.2 12.8 - 77.7Exceptional items 6.7 - (1.9) (2.9) - 1.9Segment result 43.2 18.2 8.3 9.9 - 79.6 Other segment items:Adjusted return on sales - %(1) 5.3% 5.9% 5.1% 2.2% - 4.4%Adjusted EBITDA - £m(1) 68.0 31.5 21.9 19.2 - 140.6Adjusted EBITDA margin - %(1) 9.9% 10.2% 10.9% 3.4% - 8.0%Year-end capital employed - £m 444.6 146.4 110.9 115.4 - 817.3Average capital employed - £m(2) 478.4 164.4 122.2 130.0 - 895.0Adjusted return on average capital 7.6% 11.1% 8.3% 9.8% - 8.7%employed - %(1),(2) Year ended 30 April 2006 External revenue 649.6 276.6 202.4 518.7 5.4 1,652.7 Adjusted operating profit(1) 20.5 20.1 7.2 12.6 - 60.4Exceptional items (28.9) - (2.6) - (10.9) (42.4)Segment result (8.4) 20.1 4.6 12.6 (10.9) 18.0 Other segment items:Adjusted return on sales - %(1) 3.2% 7.3% 3.6% 2.4% - 3.7%Adjusted EBITDA - £m(1) 55.1 33.6 19.3 19.2 0.4 127.6Adjusted EBITDA margin - %(1) 8.5% 12.1% 9.5% 3.7% 7.4% 7.7%Year-end capital employed - £m 471.4 162.0 109.9 122.8 - 866.1Average capital employed - £m(2) 509.3 162.3 129.3 127.0 2.1 930.0Adjusted return on average capital 4.0% 12.4% 5.6% 9.9% - 6.5%employed - %(1),(2) Secondary reporting format -geographical segments TurnoverYear ended 30 April 2007 2006 £m £mUK 999.7 957.6Western Continental Europe 632.8 570.5Eastern Continental Europe 82.5 74.5Rest of World 51.1 50.1Total 1,766.1 1,652.7 1. Before exceptional items (see note 2) 2. The return on average capital employed is defined as operating profitbefore exceptional items divided by average capital employed; average capitalemployed is the average monthly capital employed 3. Other in 2005/06 represents the activity of the former Office ProductsManufacturing segment, the loss on the disposal of that business and theimpairment of an investment described in note 2 below 2. Exceptional items Items are presented as 'exceptional' in the accounts where they are significantitems of financial performance that the Directors consider should be separatelydisclosed, to assist in the understanding of the trading and financial resultsachieved by the Group. Exceptional items 2007 2006 £m £mRestructuring costs UK Paper and Corrugated Packaging (13.8) (28.9) Plastic Packaging (1.9) - Office Products Wholesaling (2.9) -Total restructuring costs (18.6) (28.9)Gain on sale of Taplow Mill 20.5 -Loss on disposal of businesses - (4.3)Impairment charge - (9.2)Total exceptional items recognised in operating profit 1.9 (42.4)Negative goodwill recognised in associate accounting 2.0 -Total exceptional items 3.9 (42.4) The restructuring costs relate to the following. The UK Paper and Corrugated Packaging restructuring costs in the year to 30April 2007 of £13.8m related to the closure of paper-making operations at TaplowMill and related restructurings. The UK Paper and Corrugated Packagingrestructuring costs in 2005/06 related to the closure of a paper mill (£20.3m),the planned closure of a paper machine at another mill (£5.0m), and otherrestructuring costs (£3.6m). The Plastic Packaging restructuring costs in the year to 30 April 2007 relate tothe proposed restructuring of our European liquid packaging and dispensingoperations. The Office Products Wholesaling restructuring costs in the year to 30 April 2007relate to the closure of a regional distribution centre within the UK operationsand related restructuring. The gain of £20.5m arising on the sale of the Taplow site, in the UK Paper andCorrugated Packaging segment, resulted from the sale of the site for netproceeds of £29.6m. The negative goodwill credit recognised in associate accounting of £2.0m arosein respect of an increase in the Group's investment in Rubezhansk. The loss on disposal of businesses in 2005/06 arose on the disposal of theOffice Products Manufacturing business (loss of £1.7m) and a business in thePlastic Packaging segment (loss of £2.6m). The impairment charge in 2005/06 related to an investment in the debt securitiesof an independent UK packaging business. 3. Income tax expense Income tax expense recognised in the income statement 2007 2006 £m £mCurrent tax (expense)/creditCurrent year (17.2) (13.5)Over-provided in prior years 2.3 1.9 (14.9) (11.6)Deferred tax (expense)/creditOrigination and reversal of temporary differences 0.9 6.2Under-provided in prior years (3.2) (0.3) (2.3) 5.9Total income tax expense in income statement (17.2) (5.7) The reconciliation of the actual tax charge to that at the domestic corporationtax rate is as follows: 2007 2006 £m £mProfit before tax 78.5 11.0Less: share of profit of associates (5.9) (4.1)Profit before tax and share of profit of associates 72.6 6.9 Income tax calculated using the domestic corporation tax rate of 30% (21.8) (2.1)Effect of tax rates in foreign jurisdictions (1.2) (1.5)Non-deductible expenses (0.9) (5.6)Recognition of previously unrecognised tax losses 6.7 1.9Adjustment in respect of prior years (0.9) 1.6Other 0.9 -Income tax expense (17.2) (5.7) 4. Earnings per share Basic earnings per share The calculation of basic earnings per share at 30 April 2007 is based on the netprofit attributable to ordinary shareholders of £60.6m (2006: £4.2m) and theweighted average number of ordinary shares outstanding during the year ended 30April 2007 of 389.5m (2006: 387.2m). The number of shares excludes the weightedaverage number of the Company's own shares held as treasury shares during theyear of 2.2m (2006: 2.5m). 2007 2006Net profit attributable to ordinary shareholders (£m) £60.6m £4.2mWeighted average number of ordinary shares at 30 April (millions) 389.5m 387.2mBasic earnings per share (pence per share) 15.6p 1.1p Diluted earnings per share The calculation of diluted earnings per share at 30 April 2007 is based on netprofit attributable to ordinary shareholders of £60.6m (2006: £4.2m) and theweighted average number of ordinary shares outstanding during the year ended 30April 2007, as adjusted for potentially issuable ordinary shares, of 392.9m(2006: 388.8m), calculated as follows: 2007 2006 £m £mNet profit attributable to ordinary shareholders 60.6 4.2 In millions of sharesWeighted average number of ordinary shares at 30 April 389.5 387.2Potentially dilutive shares issuable under share-based payment 3.4 1.6arrangementsWeighted average number of ordinary shares (diluted) at 30 April 392.9 388.8Diluted earnings per share (pence per share) 15.4p 1.1p Adjusted earnings per share The Directors believe that the presentation of an adjusted earnings per shareamount, being the basic earnings per share adjusted for exceptional items, helpsto explain the underlying performance of the Group. A reconciliation of basicto adjusted earnings per share is as follows: 2007 2006 £m Pence per £m Pence per share share Basic earnings 60.6 15.6p 4.2 1.1p(Deduct)/add-back exceptional items after tax (9.5) (2.5)p 34.7 8.9pAdjusted earnings 51.1 13.1p 38.9 10.0p 5. Dividends Dividends proposed and paid by the Group are as follows: 2007 2006 Pence per £m Pence per £m share share Interim dividend paid 2.6p 10.2 2.6p 10.1Final dividend proposed 6.0p 23.5 5.8p 22.5 8.6p 33.7 8.4p 32.6 2007 2006 £m £mPaid during the year 32.7 32.6 A final dividend in respect of 2006/07 of 6.0 pence per share (£23.5m) has beenproposed by the Directors after the balance sheet date. 6. Cash generated from operations 2007 2007 2006 2006 £m £m £m £mProfit for the financial year 61.3 5.3Adjustments for:Exceptional items - non-cash amounts (11.1) 37.8Depreciation and amortisation 62.9 67.2Profit on sale of non-current assets (6.6) (7.1)Share of profit of associates (3.9) (4.1)Employment benefit net finance income (8.0) (1.2)Share-based payment expense 1.0 0.1Finance income (1.7) (2.3)Finance costs 16.7 14.6Income tax expense 17.2 5.7 66.5 110.7Changes in:Inventories (1.9) (4.2)Trade and other receivables (11.5) 13.1Trade and other payables 21.9 18.5Provisions and employee benefits (8.3) (5.2) 0.2 22.2Cash generated from operations 128.0 138.2 7. Reconciliation of net cash flow to movements in net debt 2007 2006 £m £mOperating profit before exceptional items 77.7 60.4Depreciation and amortisation 62.9 67.2Adjusted EBITDA 140.6 127.6Working capital movement 8.5 27.4Exceptional cash costs (7.2) (4.6)Other (13.9) (12.2)Cash generated from operations 128.0 138.2Capital expenditure payments (55.8) (62.7)Proceeds from sales of assets and investments 41.0 13.2Tax paid (15.1) (13.5)Interest paid (14.1) (12.0)Free cash flow before net (acquisitions)/disposals and dividends 84.0 63.2Dividends (32.7) (32.6)Net (acquisitions)/disposals of subsidiaries 0.2 0.5Net cash flow 51.5 31.1Proceeds from the issue of share capital 3.7 2.6Net debt acquired - (2.6)Non-cash movements 1.4 (6.1)Net debt movement 56.6 25.0Opening net debt (237.8) (262.8)Closing net debt (181.2) (237.8) This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Smith (DS)