29th Jun 2006 07:02
Smith (DS) PLC29 June 2006 29 June 2006 DS SMITH PLC - 2005/06 PRELIMINARY RESULTS DS Smith Plc, the international packaging manufacturer and office productswholesaler, announces its results for the year ended 30 April 2006. Financial Summary 2005/06 2004/05Revenue £1,652.7m £1,624.9mAdjusted profit before tax(1) £53.4m £73.9mProfit before tax(2) £11.0m £64.3mAdjusted earnings per share(1) 10.0p 14.4pEarnings per share(2) 1.1p 12.2pFree cash inflow before dividends and net acquisitions £63.2m £55.8mGearing(3) 43.9% 50.7%Total dividend per share 8.4p 8.4p (1) before exceptional items of £42.4m (2004/05: £9.6m); (2) after exceptional items of £42.4m (2004/05: £9.6m);(3) after restatement for the adoption of IAS 39 as at 1 May 2005 Operational Summary • Group results affected by: - £23m increase in energy costs - Stronger competition in UK Office Products Wholesaling - £42.4m exceptional charge, mainly arising from restructuring actions • Strategic actions taken to improve performance: - Achieved £14.5m of synergy benefits in UK Corrugated Packaging - Closed uneconomic paper capacity - Sold two non-core businesses - Grew sales of plasterboard liner strongly - Expanded our Corrugated Packaging operations in eastern Europe - Further developed Office Products Wholesaling in continental Europe • We increased paper and corrugated packaging prices in the second half of the year Commenting on the results, Chairman, Antony Hichens said: "As indicated at the time of our trading update in April, the Group's resultswere significantly affected by the further rise in energy costs and strongercompetition in the UK office products wholesaling market. However, ourstrategic actions have strengthened the Group: we closed uneconomic capacity;sold two non-core businesses; improved our product mix; and further developedour presence in continental Europe. "We are achieving box price increases, but so far they have been insufficient torecover fully the input cost rises incurred through the supply chain. Based oncurrent forward energy market prices, we anticipate the increase in ourunderlying energy costs in 2006/07 will be somewhat higher than the £10 millionthat we indicated at the time of our trading update in April. In OfficeProducts Wholesaling, we expect our actions to result in improved performance inthe second half of the 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 Walker 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 Group's website(www.dssmith.uk.com) at 9.30am and an audio recording of the briefing will beavailable on the website by approximately 1.00pm BST. CHAIRMAN'S STATEMENT The Group's results in 2005/06 were significantly affected by the further risein energy costs. Additionally, stronger competition in the UK office productswholesaling market eroded sales margins in our Spicers Office ProductsWholesaling UK business. However, the strategic actions we have taken to reducethe Group's reliance on commodity corrugated case materials (CCM) and to growour business base outside the UK have strengthened DS Smith. In the UK, weachieved the anticipated synergy benefits from our 2004 corrugated packagingacquisition, grew sales of plasterboard liner strongly, closed two uneconomicpaper production operations and sold two non-core, loss-making businesses. Onthe continent, we expanded further both our eastern European corrugatedpackaging and Spicers businesses. Our actions to improve short-term performance have included cost cutting and, inthe second half of the financial year, raising paper and corrugated packagingprices after an extended period of price decline; these price rises did notbenefit the 2005/06 result significantly. The Group's adjusted profit before tax was £53.4 million (2004/05: £73.9million) and adjusted earnings per share were 10.0 pence (2004/05: 14.4 pence).Cash flow, before dividends and acquisitions, was £63.2 million (2004/05: £55.8million). Actions to restructure our UK operations and streamline the portfolio accountedfor the majority of the exceptional charge in 2005/06 of £42.4 million (2004/05:£9.6 million); the balance included the impairment of an investment in anindependent UK packaging business. The Board is proposing a final dividend of 5.8 pence which, together with theinterim dividend of 2.6 pence, maintains the total dividend for the year at 8.4pence. During the year, we further strengthened the Group's management with theappointments of Huub van Beijeren as Chief Operating Officer, Packaging and RobVale as Chief Executive, Spicers. Both these senior executives bring valuableexperience and expertise to the Group's operations. As we announced in March, I will be retiring from the Board at the end of 2006,having reached the age of 70. During my seven years as Chairman, we haveimproved the operational performance of many of our businesses while pursuingour strategy to change the shape of the Group. We have expanded our downstreamPackaging activities through several major developments. In CorrugatedPackaging, we have grown profits, substantially through acquisition, and we havealso significantly raised the profits from our continental European operations.In Plastic Packaging, we have built an international position in liquidpackaging and dispensing. These moves have reduced the Group's reliance on thecyclical Paper business where we have also enhanced our product mix,particularly through the development of our plasterboard liner business. InOffice Products Wholesaling, we have established a significant presence forSpicers in continental Europe. These achievements are the result of thecontinued hard work and enthusiasm of our people, often in the face of difficultmarket conditions. I thank them for their determination and the improvementsthey have made within their businesses. I am handing over the role of Chairman to Peter Johnson with effect from 1January 2007. Peter has made a major contribution to the Board's deliberationsand decision making as a non-Executive Director. I am confident that he willguide the Group wisely as it continues its development. Jean-Paul Loison willbe retiring from his role as Divisional Chief Executive of DS Smith Kaysersbergand stepping down from the Board at the end of September 2006. I thank him, onbehalf of the Board, for his major contribution to the development of ourcontinental European paper and corrugated packaging business for which he hashad responsibility for many years. Outlook We are achieving box price increases, but so far they have been insufficient torecover fully the input cost rises incurred through the supply chain. Based oncurrent forward energy market prices, we anticipate the increase in ourunderlying energy costs in 2006/07 to be somewhat higher than the £10 millionthat we indicated at the time of our trading update in April. In OfficeProducts Wholesaling, we expect our actions to result in improved performance inthe second half of the year. CHIEF EXECUTIVE'S REVIEW Overview In 2005/06, the trading environment for the Group as a whole was extremelychallenging; the impact of this varied across our business segments. Adjustedoperating profit in UK Paper and Corrugated Packaging, where increased energycosts of approximately £18 million were incurred, was down by £11.1 million onthe prior year. Although underlying performance in this segment has improved,we must now recover a greater proportion of the increase in energy costs for usto earn acceptable returns. Continental European Corrugated Packaging produceda good result: profits were broadly unchanged from the previous year, despitehigher energy costs, and we continued our growth in eastern Europe. In PlasticPackaging, our profits started to fall away some 18 months ago. Our resultswere down £2.1 million in 2005/06 but the segment exited the year on a muchimproved trend. Spicers' results were £8.9 million down on the previous year.Its continental operations performed well, turning in higher profits comparedwith the previous year, but the UK business saw a dramatic drop in profits, theresult of both a substantial reduction in sales margins, in the face of strongercompetition, and an increase in costs. Cash performance across the Group wasgood, highlighting the strong attention our managers give to cash management. Energy costs continue to have a profound impact on the Group. They haveincreased from £64 million in 2003/04 to £95 million in 2005/06, despite ourconsumption in 2005/06 being 6% less than in the previous year. Based onforward energy market prices, we now expect the increase in our underlyingenergy costs in 2006/07 to be somewhat higher than the £10 million that weindicated at the time of our trading update in April. We are benefiting fromearlier investments made in on-site combined heat and power generation plants atour two largest paper mills and in a waste-to-energy plant at our biggest mill. It is our smaller mills that have been most severely affected by the steep risein costs. Our purchasing teams in the UK and France are hedging part of theirforward energy requirements, but the rise in energy prices has been sosubstantial and sustained that we have only been able to mitigate a smallproportion of the increase. Our business plans are based on the assumption thatenergy prices will remain at higher than historical levels. Consequently, inour energy-intensive paper business we are concentrating investment where wehave competitive energy costs and exiting those units where energy costs cannotbe recovered in their product markets. In view of the challenging trading environment we have put a lot of emphasis onraising short-term performance, principally through a drive on cost recovery,through increasing prices and raising productivity. While we concentrated onaccelerating our profit improvement efforts, we continued with our strategy tostrengthen the Group. We sold two non-core businesses: the John Dickinsonoffice products manufacturing business and the plastic film laminationoperation, BSK. We closed loss-making paper capacity that could not becompetitive in the long-term and also exited some small loss-making corrugatedpackaging operations. In the UK, we captured the expected benefits from ourmajor corrugated packaging acquisition in 2004 and expanded plasterboard linerpaper sales substantially. We grew our continental European corrugatedpackaging business and opened a new corrugating plant in Poland. We finishedthe year with a much stronger order book in Plastic Packaging, thanks to anumber of product development initiatives. In Spicers, we grew our start-upbusinesses in Spain and Italy strongly and acquired Timmermans, the leadingoffice products wholesaler in the Benelux region. These moves, which strengthenour business base, should all contribute to the Group's performance goingforward. Paper and Corrugated Packaging During most of calendar year 2005, the paper industry suffered from weak demand,overcapacity - particularly in corrugated case material (CCM), high waste paperprices and greatly increased energy costs. As a result of the overcapacity,selling prices of CCM and corrugated packaging (boxes) fell significantly over alarge part of the year. This downward pricing trend, coupled with rising inputcosts, led to industry profits being hit hard. The severe industry conditionsapplied right across Europe but were worst in the UK, where demand wasparticularly weak and both the energy cost rises and the energy price spikeswere higher than on the continent; the latter were most marked during the 2005/06 winter months. Our response to these external pressures has been to concentrate on supportingour stronger businesses, pushing for price increases, improving the product mixand cutting costs. In the UK, we achieved the expected £14.5 million ofsynergies following the restructuring we initiated after our 2004 corrugatedpackaging acquisition. We now have a more competitive conventional corrugatedplant network and are concentrating on running it hard. In our UK Paperbusiness, our CCM raw material supply position was helped by the previousexpansion in 2004 of our Severnside Recycling operations, and we furtherenriched the product mix by growing sales of plasterboard liner. We are seekingto mitigate the effect of the sustained high energy costs as far as possiblethrough a broad programme of actions, but the prospect of energy cost levelscontinuing to be higher than historical levels has led us to close papercapacity at two of our most energy-intensive mills. On the continent, ourresults benefited from our concentration on higher added-value products. Ourspeciality paper mill in France had a good year, benefiting from recentinvestment, and our expanded operations in Poland showed good sales and profitgrowth. In the Ukraine, our associate business had another good year and we aresupporting its expansion plans. The business environment improved during the second half of our financial year;better growth on the continent, the impact of CCM capacity closures and thesustained cost pressure within the industry, led to CCM price rises duringwinter 2005/06. In DS Smith, we achieved CCM price increases of approximately20%. The Group is broadly balanced between the quantity of CCM produced and thequantity of CCM used in our box converting operations; therefore, we need thesehigher CCM prices to be passed through to our external customers by means ofhigher box prices if the Group is to derive any benefit. We are achieving boxprice increases, but they are coming through slower than we had anticipated andat a level that does not fully recover the input cost increases; this will haveto be addressed in 2006/07. Our programme of actions to raise returns in our UK Paper and CorrugatedPackaging operations is being led by Huub van Beijeren, whom we appointed asChief Operating Officer, Packaging in May 2006. Huub has held a number ofsenior management positions in manufacturing industry, most recently as a MainBoard Director of British Vita Plc. In continental Europe, Jean Lienhardt,currently Finance Director of DS Smith Kaysersberg, will take over as ChiefExecutive of that division following the planned retirement of Jean-Paul Loisonat the end of September 2006. Jean has been a key member of the team which hasgrown the sales and profits of our continental corrugated packaging business inrecent years. Plastic Packaging The Group has built good market positions in its two principal sectors of liquidpackaging and dispensing and returnable transit packaging (RTP). Profits inboth sectors were eroded during the second half of 2004/05 and in the first halfof 2005/06 by a combination of increased competition and sharply higher polymercosts; the latter we were unable to pass on in full to our customers. We havefurther focused the division by selling one of its smaller businesses, BSK, andare currently concentrating on rebuilding profits in both sectors towards thelevels we achieved previously. In liquid packaging and dispensing, we havestrengthened our product development and sales functions and are winning newbusiness both in Europe and the USA. In RTP, we are rebuilding sales volumes.We have a number of promising new product developments and are extending intoeastern Europe, where we are growing sales in tandem with our CorrugatedPackaging operations in that region. Our immediate objective is to maintain theimproving profit trend established in the second half of 2005/06. Office Products Wholesaling The deterioration in Spicers' result was all in the UK. We made good progresson the continent: we moved into the Benelux region through acquisition and ourexisting businesses in France, Germany, Spain and Italy performed in line withour plans. Profits at Spicers UK were markedly down as a result of both asevere reduction in sales margin, in the face of tough competition, and highercosts. The fall in margin was the result of a number of factors. Selling priceswere under pressure from general price deflation in the office products market. In addition, the competitive environment in the wholesaling sector hasintensified, which has resulted in lower prices and led to higher levels ofretrospective rebates being paid to customers. Higher costs were incurred inovercoming service shortcomings at a limited number of our UK distributioncentres. Some of these factors were apparent in the first half of the year butthe extent of the increased customer rebates did not become fully apparent untilclose to the year-end; the higher costs were very much weighted towards thefinal months of our financial year. We are giving significant attention togetting the Spicers UK business back to healthy profitability. Despite the poorUK performance and the fact that two of the continental businesses are still ina development phase, Spicers as a whole generated a good cash flow and itsreturn on capital employed exceeded the Group's cost of capital. In February 2006, we appointed Rob Vale as Chief Executive, Spicers, followingthe retirement of his predecessor. Rob, who has extensive experience in officeproducts, has carried out a comprehensive review of the Spicers business. Inthe UK, he has made a number of management changes, strengthened the sales andoperations functions, tightened the financial disciplines and accelerated theprogramme to reduce the cost base. We are confident that in the coming year wecan start to rebuild profits in the UK and continue progress on the continent. Strategy Our objective is to generate value for shareholders through operationalimprovement and the development of an enhanced business mix; reducing theGroup's reliance on commodity CCM and expanding outside the UK. In thenear-term, strong emphasis will be given to raising returns in both our UK Paperand Corrugated Packaging business and Spicers UK. In UK Paper and Corrugated Packaging, our goal is to improve rapidly the returnsfrom our substantial existing market position. The priorities for achievingthis are: recovery of the input cost rises; structural cost reduction;productivity improvement; and targeting growth sectors of the market. We willfocus our investment on: Severnside Recycling; those paper mills which webelieve can be long-term competitive at the likely future level of energy costs;our network of conventional box plants; and a selected number of specialitybusinesses. Our objective in Continental European Corrugated Packaging is to build on ourcurrent good returns and growth rates. We will continue our targeted approach,concentrating on selected markets and higher added-value product segments. Wewill maintain the competitiveness of our operations in France and Italy whileseeking further development opportunities in higher-growth markets. In Plastic Packaging, our aim is to improve significantly the profitability ofour two principal businesses, particularly through new product development andincreased productivity. In liquid packaging and dispensing, we will build onour established international position through developing new outlets. Inindustrial RTP, we will continue to focus on the European market, seekingparticularly to extend our business in central and eastern Europe. Our goal in Office Products Wholesaling is to establish the Spicers' businessmodel profitably across the major markets of western Europe. An immediatepriority is to raise profits in the important UK business. This will includerestructuring the cost base. On the continent we will maintain thecompetitiveness of our major established positions in France and Benelux andcontinue to drive up the results of our developing businesses in Germany, Spainand Italy. We operate in markets that are expected to remain relatively tough. However, Iam confident that the actions we have already taken and the strategy that we arepursuing will enable the Group to make satisfactory returns and to grow. FINANCIAL REVIEW Trading Results The major drivers of the 2005/06 results were the substantial increases inenergy costs of circa £23 million, incurred principally in the Paper andCorrugated segments, stronger competition in the UK business of the OfficeProducts Wholesaling segment and higher polymer costs and increased competitionin the Plastic Packaging segment. Revenue for the financial year ended 30 April 2006 increased by 1.7% over theprior year; it was 2.7% higher in the first half of the year and 0.8% higher inthe second half compared to the same periods in 2004/05. Excluding the effectsof the acquisition of Timmermans and the disposals of John Dickinson and BSK,turnover was up 3.7%. If in addition, one excludes the effect of movements inforeign exchange rates, turnover was up 3.1% on 2004/05. Adjusted Group operating profit (excluding exceptional items) in 2005/06 was£60.4 million (2004/05: £82.6 million). The reduction in adjusted Groupoperating profit resulted from decreases in UK Paper and Corrugated Packaging of£11.1 million, in Plastic Packaging of £2.1 million and in Office ProductsWholesaling of £8.9m. Performance in Continental European Corrugated Packagingwas broadly flat (down £0.1 million). Group adjusted operating profit in thefirst half of the year was £33.2 million (2004/05 H1: £42.6 million) and in thesecond half was £27.2 million (2004/05 H1: £40.0 million). Adjusted full yearoperating profit from UK operations fell by £26.4 million to £18.4 million,principally due to lower profits in UK Paper and Corrugated Packaging and the UKbusiness within Office Products Wholesaling. Adjusted operating profits fromnon-UK operations were up £4.2 million, reflecting the stronger continentalEuropean performance of Office Products Wholesaling, including the acquiredbusiness in the Benelux region, and a different geographical mix of profitswithin Plastic Packaging. The Group's adjusted return on sales was 3.7% (2004/05: 5.1%). The Group incurred exceptional charges of £42.4 million during the year (2004/05: net exceptional charges of £9.6 million). These arose on the closure ofloss-making paper capacity and related restructuring in UK Paper and CorrugatedPackaging (£28.9 million), the disposals of the Office Products Manufacturingbusiness (£1.7 million) and a business in the Plastic Packaging segment (£2.6million), and an impairment charge against an investment in an independent UKpackaging business (£9.2 million). Operating profit after exceptional items was£18.0 million (2004/05: £71.9 million). The Group's adjusted return on capital employed (which is defined as theannualised adjusted operating profit divided by the average month-end capitalemployed) decreased from 8.7% in 2004/05 to 6.5% in 2005/06. This return isunacceptable as it is below the Group's estimated pre-tax cost of capital ofcirca 9%. The decline in the Group's return on capital employed reflects lowerreturns in 2005/06 across all the Group's segments, either as a result of thelower operating profits described above or, in the case of Continental EuropeanCorrugated Packaging, an increase in the capital employed following substantialinvestment in 2005/06, notably in a new Polish corrugated plant, the full-yearbenefits of which are not yet reflected in the result. Net interest expense decreased from £13.2 million in 2004/05 to £12.3 million in2005/06, mainly reflecting lower euro interest rates on broadly similar averagenet debt. Employment benefit finance income was £1.2 million (2004/05: £1.1million). The Group included £4.1 million as the Group's share of associated undertakings'after-tax profit, up from the adjusted share of after-tax profits of £3.4million in 2004/05. This increase related mainly to the Group's share ofoperating profit from OJSC Rubezhansk, the Group's 39%-owned paper and packagingcompany in the Ukraine. Adjusted profit before tax was £53.4 million (2004/05: £73.9 million). Profitbefore tax after exceptional items was £11.0 million (2004/05: £64.3 million). The Group's effective tax rate, excluding exceptional items and associates, at27%, was slightly higher than last year's rate of 25%, both years' ratesbenefiting from prior year items following the resolution of historical taxuncertainties. Excluding the effect of any prior year items, the effective taxrate is expected to be slightly higher than the UK statutory rate in the comingyear. Adjusted basic earnings per share were 10.0p (2004/05: 14.4p). Basic earningsper share were 1.1p (2004/05: 12.2p). Dividend The proposed final dividend is maintained at 5.8p (2004/05: 5.8p). The totaldividend for the year is 8.4p (2004/05: 8.4p). Dividend cover beforeexceptional items was 1.2 times in 2005/06 (2004/05: 1.7 times). Dividend coverafter exceptional items was 0.1 times (2004/05: 1.5 times). Cash Flow Cash generated from operations was £138.2 million (2004/05: £139.7 million).This reflects the lower adjusted operating profit, higher payments in respect ofexceptional items, a significant inflow from working capital and an increase inpension payments. There were cash outflows in respect of exceptional items of£4.6 million (including cash outflows related to exceptional charges made in2004/05), compared with £2.5 million in 2004/05. There was a strong focus onworking capital management which resulted in a cash inflow of £27.4 million. Inrespect of pension payments, the Group agreed with the trustees to increase itsannual contributions into the UK Group Pension scheme from £10.0 million in 2004/05 to £14.0 million in 2005/06, which is reflected in the higher pension cashcontributions; contributions by the Group to the UK scheme will remain at thislevel in 2006/07. Purchase of fixed assets was £62.7 million; the £9.1millionincrease from 2004/05 reflects the investment in the new corrugated packagingfacility in Poland and the investment within St Regis to support growth inplasterboard liner production in the UK. Tax payments were £13.5 million (2004/05: £23.7 million) as a result of thelower adjusted trading profit described above and the 2005/06 exceptionalcharges, a substantial proportion of which gave rise to current tax deductions. Free cash flow, before acquisitions, disposals and dividends, was £63.2 million(2004/05: £55.8 million). Cash dividend cover, defined as free cash flowdivided by dividends paid/declared for the year, was 1.9 times, up from 1.7times in 2004/05. The net cash outflow on acquisitions and disposals of £0.3 million (2004/05:£11.7 million outflow) reflected disposal proceeds of £11.0 million, primarilyon the sales of John Dickinson and BSK, offset by the £10.5 million paid on theacquisition of the Benelux office products wholesaling business, Timmermans NV.The amount in 2004/05 was primarily the consideration and costs for theacquisition of BPB Recycling. Financial Position Shareholders' funds totalled £532.1 million at 30 April 2006, up from £511.5million at 30 April 2005. Net assets per share were 138.5p (2004/05: 133.6p).The profit attributable to the shareholders of DS Smith Plc was £4.2 million anddividends of £32.6 million were charged to reserves during the year. (Thesedividends were the 2004/05 final dividend and the 2005/06 interim dividend,since under IFRS the current year proposed dividend is not accrued in theyear-end balance sheet.) In addition, after-tax actuarial gains of £37.9million on the Group's defined benefit pension schemes were credited to reservesthrough the statement of recognised income and expense, as explained furtherbelow. Other items recognised directly in equity, related to foreign currencydifferences and hedge accounting, totalled £9.9 million. The Group's closing net debt was £237.8 million, £25.0 million lower than at thestart of the year, after adjusting for the adoption of IAS 39. Gearing was 43.9% (2004/05: 50.7%, after adjusting for IAS 39); the decreasereflected the improvement in borrowings from the net cash inflow for the yearand the increase in shareholders' funds from the reduction in the net pensiondeficit. Adjusted interest cover was 4.9 times, compared with 6.3 times lastyear, the lower cover reflecting the lower adjusted operating profit. The ratioof net debt to EBITDA (before exceptional items) was 1.9 times (2004/05: 1.7times). Energy Costs The Group's result in 2005/06 was significantly affected by a further rise inenergy costs, particularly during the winter period, even though the Groupreduced its consumption by 6%; the cost increase had a particularly markedeffect on our UK Paper operations which incur over three-quarters of the Group'senergy and fuel costs. The Group's total costs for gas, electricity and dieselfuel increased from circa £73 million in 2004/05 to circa £95 million in 2005/06. This equates to an increase of circa £23 million, after adjusting fordisposals, and was principally due to a 76% year-on-year rise in the UK averagemarket price of gas, which we had partially hedged, and the expiry in October2005 of the Group's favourable previous fixed-price UK electricity contract. Anew floating-rate electricity contract, including flexible hedging arrangements,replaced the previous contract, reflecting the increase in the market price forelectricity which was up 71% in the year. The Group is managing its energy costs through a five point strategy: • Maximising in-house energy generation from our combined heat and power(CHP) plants in the UK and France and a UK waste-to-energy plant, thereby takingadvantage of the greater efficiency of the CHP process and benefiting fromlong-term energy supply contracts. • Focusing our operational development and investment on our mostenergy-efficient plants while withdrawing from the least energy-efficientoperations, such as Sudbrook Mill, the closure of which took place in April2006. • Reducing our energy usage across the Group through energy-savingprojects, including investment in more energy-efficient boilers and electroniccontrols for heating and lighting systems. The Group's sites consumed 6% lessenergy in 2005/06 compared with 2004/05. • Developing further our centralised energy purchasing operations in the UKand France. This approach enables us to obtain economies of scale in buying andto apply high levels of expertise, including using the application of theincreasingly sophisticated price-hedging methods that are available. • Monitoring regulatory developments in the energy market and collaboratingwith other heavy energy users in the paper and other industry sectors toinfluence government on energy policy and the operation of the energy markets. Despite these actions, based on current forward energy market prices we expectthe increase in our underlying energy costs in 2006/07 to be somewhat higherthan the £10 million that we indicated at the time of our trading update inApril. Pensions The Group operates two defined benefit pension schemes in the UK and has somesmall, overseas arrangements. The aggregate gross assets of the schemes at 30April 2006 were £706.1 million and the gross liabilities at 30 April 2006,calculated under IAS 19, were £756.4 million, resulting in the recognition of agross balance sheet deficit of £50.3 million (30 April 2005: £114.8 million); anet £35.3 million (30 April 2005: £80.3 million) after the establishment of adeferred tax asset of £15.0 million (30 April 2005: £34.5 million). In order to control the future costs and financial obligations of these schemes,the Group's UK defined benefit pension schemes were closed to new members. Thecontributions collected from members have been increased during 2005/06 and willfurther increase during 2006/07. The lower service cost in 2005/06, £11.4million compared with £12.8 million in 2004/05, reflects these higher membercontributions. The Group also agreed to increase its contributions to the mainUK scheme, from £10 million in 2004/05 to £14 million from 2005/06. The nexttriennial valuation of the scheme is to be carried out as at 30 April 2007. The balance sheet funding position of the schemes is sensitive to marketconditions, in particular the level of stock markets and bond yields, andactuarial assumptions, including the assumed longevity of scheme members. Thebalance sheet valuation of the schemes' obligations, under IAS 19, is generallymore conservative than the valuations carried out by the trustees' actuary,since the balance sheet valuation discounts the future liabilities of theschemes at a bond rate which takes no account of the expected long-termout-performance of the schemes' investment in equities over gilts; the trustees'actuary's valuations take some of this out-performance into account. The balance sheet deficit (before related deferred tax) decreased from £114.8million at 30 April 2005 to £50.3 million at 30 April 2006. The decrease of£64.5 million included net actuarial gains of £54.4 million; the actual returnon assets was higher than the expected return, but this was offset by anincrease in the schemes' liabilities that resulted from a reduction in thediscount rate used to value the liabilities, from 5.3% at 30 April 2005 to 5.1%at 30 April 2006. 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 The European market for corrugated packaging is estimated to be approximately€16 billion, equivalent to approximately 21 million tonnes or 39 billion squaremetres1, of which the UK market is estimated to be approximately 10%. Demandfor corrugated packaging is principally influenced by overall economic activityand manufacturing output. In the calendar year 2005, the European market by weight for corrugated boardgrew by 0.9%2. In western Europe the market grew by 0.3% while growth ineastern and central Europe continued to be much stronger at 5.8%. In DS Smith'sprincipal markets, demand by weight fell by 1.9% in the UK, while in France andItaly it was flat (0.3% and nil growth, respectively), and in Poland and Turkeyit grew strongly (by 9.3% and 7.6%, respectively). The continuing trend towardsthe use of more lighter-weight packaging, for cost and environmental reasons,meant that demand by area declined by 1.5% in the UK while it rose by 1.3% inEurope as a whole. The European market strengthened in the course of calendaryear 2005 and has remained relatively buoyant in the early months of 2006,especially in Germany. 1 Source: European Federation of Corrugated Board Manufacturers/DS Smith estimates 2 Source: European Federation of Corrugated Board Manufacturers 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 account for approximately two thirds of the corrugated market, hasbeen relatively strong due to the resilience of this economic sector. Othercurrent growth segments are the home delivery of products from internetpurchases, and retail-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, with a typical operational radius ofapproximately 150 miles, owing to moderately high transport costs for what is alow-density product and the service requirements of customers. There has been downward pressure on selling prices in recent years. Pricing andmargins in corrugated packaging are strongly influenced by pricing developmentson corrugated case materials (CCM), the paper used as the principal component inmanufacturing corrugated packaging and typically accounting for around 50% ofthe cost of a box. CCM prices have been falling as a result of overcapacity,although in late 2005 this began to reverse as demand improved and CCM capacitywas closed. The overall fall in CCM prices, compounded by the cost-downrequirements of our customers, many of which supply retailers, has putsignificant pressure on prices. Whereas boxes are generally sold locally, CCM is sold on a pan-European basisand pricing is therefore affected by European supply and demand factors. Thetotal demand for CCM in western Europe is circa 20 million tonnes, with anadditional approximately 3 million tonnes of demand in eastern Europe (notincluding Russia). The market for CCM in Europe is dependent upon Europeandemand for corrugated packaging as imports and exports of unfilled boxes arenegligible. Demand for CCM in Europe as a whole has grown at approximately 1.5%per annum over the last five years, while the UK market, of approximately 2million tonnes, has been static or declining in recent years and is now some 3%smaller than five years ago. Approximately 75% of the market is waste-based orrecycled CCM, with the balance principally comprising kraftliner, made fromvirgin wood pulp. During the first half of 2005/06, low growth in corrugated packaging demand andexcess CCM manufacturing capacity resulted in CCM prices declining. In early2005, four new continental European CCM machines, with an aggregate capacity ofapproximately 1.3 million tonnes were commissioned. This new capacity, whichwas concentrated on lighter-weight papers, resulted in a severe destabilisationof selling prices throughout the European market. Since the autumn of 2005, thepace of removal of older CCM capacity from the market has increased withannouncements of capacity closures from most of the larger producers as well assome from smaller independent companies. It is estimated that approximately 2.3million tonnes of older capacity has been closed, or has been announced forclosure, since the start of 2004. One further CCM machine was commissioned inearly 2006, but no other significant capacity additions are expected in westernEurope before the end of 2007. The squeeze on CCM producers' margins from depressed selling prices wasexacerbated during 2005 by the sharp increases in energy costs. Against abackground of slightly stronger growth in demand for CCM across Europe and theremoval of some capacity, CCM producers increased prices by approximately 20%between November 2005 and March 2006 to recover some of the margin decline. Inresponse to this, box producers also increased prices in early 2006. To date,anecdotal evidence suggests that the rise in box prices across the industry iswell short of that required to recover the paper and energy cost increases. The pressure on CCM margins has been exacerbated by the relatively high cost ofwaste paper, the principal raw material for recycled CCM. Waste paper is aglobally traded commodity; its continuing high level of demand from Asia iscontributing to a modest continuing increase and short-term spikes in its pricein Europe. In the UK, the net cost of our raw material is also affected by theprice of Packaging Recovery Notes (PRNs), which are issued as evidence thatpackaging has been reprocessed, in compliance with the UK Packaging WasteRegulations. As a reprocessor of waste paper, we receive revenue from the saleof PRNs to packaging waste compliance schemes and companies in the packagingsupply chain that have an obligation under the Regulations to ensure thatsufficient quantities of packaging are being recycled. We can set this PRNrevenue against the cost of purchasing waste paper and investment in our wastecollection and recycling operations. Paper PRNs were in relatively plentifulsupply during 2005, mainly due to the sharply increased quantities of wastepackaging being exported for recycling. Consequently, the price of paper PRNsremained relatively low during 2005 and has softened further in calendar year2006 to date. UK Paper and Corrugated Packaging 2005/06 2004/05Revenue - £m 649.6 631.2Adjusted operating profit* - £m 20.5 31.6Adjusted EBITDA* - £m 55.1 67.3Adjusted return on sales* - % 3.2% 5.0%Adjusted EBITDA margin* - % 8.5% 10.7%Adjusted return on average capital employed* - % 4.0% 6.0% * before exceptional items of £28.9 million (2004/05: £4.9 million) 2005/06 Performance Our actions over the last two years to enlarge our Corrugated Packaging businessand to enrich our product mix in Paper have strengthened the UK Paper andCorrugated Packaging segment. However, the benefits of these actions were morethan offset by lower selling prices during much of the year and a circa £18million increase in energy costs. Revenue increased by 2.9% to £649.6 million as a result of increased sales ofhigher added-value products from Kemsley, our principal paper mill, and growthin Severnside Recycling's external sales. Despite the achievement of theexpected synergies of £14.5 million (2004/05: £6.1 million), resulting from theintegration benefits of our 2004 corrugated packaging acquisition, adjustedoperating profit was lower at £20.5 million (2004/05: £31.6 million). DS Smith Packaging, our UK Corrugated Packaging business, was affected by theweak demand for boxes in the UK and some disruption to its operations as aresult of the integration process which required the closure of two largefacilities and the subsequent transfer of production to other plants to reducecosts. In the second half of the financial year, margins were squeezed byincreased CCM costs. At the conventional plants, sales were lower and marginswere affected by substantial price pressure. The speciality sector, whichconcentrates on higher added-value products, performed well, benefitingparticularly from our businesses' design and printing capabilities. TheTri-Wall heavy-duty business, which sells predominantly to the industrialmanufacturing sector of the economy, had a difficult year. Market conditionsfor our sheet feeding operations, which supply corrugated sheet board, wereespecially competitive due to industry over-supply. At our UK paper business, St Regis, profits remained depressed due to acombination of a further squeeze on margins from substantial increases in energycosts and depressed selling prices for our main product, CCM, the latter duringthe first half of the financial year. We partly mitigated the impact of theseexternal factors by increased production and a better sales mix at thedivision's largest mill at Kemsley. This improvement came from our drive toincrease sales of plasterboard liner resulted in the sales volume of thisproduct increasing to a run-rate of approximately 160,000 tonnes per annum inApril 2006 from approximately 95,000 tonnes per annum in April 2005. Thecapital expenditure programme to upgrade existing machines at the Kemsley andWansbrough mills, in order to satisfy the plasterboard liner requirements ofBPB, is proceeding as planned. This investment will also enhance the quality ofother products produced at these mills. The Kemsley mill benefited from its advantageous energy supply position as aresult of previous investment in on-site combined heat and power andwaste-to-energy plants. The five smaller mills experienced a further sharpincrease in energy costs. This particularly affected results at the Sudbrook,Wansbrough and Taplow mills, all of which were in loss. Hollins mill, whichspecialises in white top testliner, raised its output and enhanced the qualityof one of its key products. Higher Kings mill continued to focus on highermargin, speciality, non-packaging papers. Sudbrook mill, which was St Regis'most energy-intensive production unit, was closed in March 2006 to staunchlosses, as part of the Group's strategy to concentrate on mills with a long-termfuture. The closure of the smaller of the two paper machines at Wansbrough millis expected early in the 2006/07 financial year. These capacity closurescontributed £28.9 million to the overall exceptional charge of £42.4 million inthe profit and loss account in 2005/06. Following these closures, Kemsley millnow accounts for over 60% of the division's paper production; it ranks in theupper quartile of European mills in terms of cost-competitiveness. Sales and profits at our UK waste collection business, Severnside Recycling,advanced, principally as a result of the enlargement of its network ofcollection depots during the previous financial year. The price of waste paperremained high relative to the selling price of recycled paper with continuedstrong export demand. In addition to meeting the requirements of St Regis'mills for waste paper, Severnside increased its exports of waste paper and grewfurther its facilities management business where it manages customers' entirewaste recycling and disposal needs. We raised prices of the main grades of CCM by approximately 20% during thesecond half of the financial year in order to recover some of the previousmargin erosion. Towards the end of the financial year, we increased box prices,which had been falling consistently until that point. Given that the Group'sCCM production and usage are broadly in balance overall, higher CCM prices needto be passed on to our external customers through higher box prices in order tobenefit the overall result. As the box price increase took place late in ourfinancial year, these box price rises had only a small effect on the 2005/06profits. The box price increases should benefit results in 2006/07 but the neteffect they have on profits across the UK businesses will depend heavily on howinput costs develop. We currently expect to incur a further increase in energyand fuel costs in our ongoing operations in this segment in 2006/07. Inaddition, the net cost of waste paper is continuing to increase as a result ofrising demand from Asia and the falling value of PRNs. Continental European Corrugated Packaging 2005/06 2004/05Revenue - £m 276.6 265.7Operating profit - £m 20.1 20.2EBITDA - £m 33.6 33.6Return on sales - % 7.3% 7.6%EBITDA margin - % 12.1% 12.6%Return on average capital employed - % 12.4% 13.7% 2005/06 Performance Despite the tough trading conditions, DS Smith Kaysersberg performed well thanksto our targeted market positions, good management of product mix and growth ineastern Europe. Revenue increased by 4.1% to £276.6 million, principally as a result of stronggrowth in Poland and increased sales of solid board in France. Despite anincrease in energy costs of circa £3 million and sharply increased CCM costsduring the second half of the financial year, adjusted operating profit was flatat £20.1 million (2004/05: £20.2 million). Sales and profits at the French paper mills grew following investment at themain Kaysersberg mill in 2005 which increased production capacity and reducedcosts, thereby raising productivity. This mill, which has reduced its emissionsof carbon dioxide through investment in a combined heat and power plant, alsobenefited from the sale of excess carbon credits under the EU Emissions TradingScheme. The French Corrugated Packaging operations increased their market sharebut were affected by the pressure on box prices during much of the financialyear. Despite highly competitive trading conditions in its local market, ourItalian business performed satisfactorily and maintained its strong positions inthe pizza box and ceramics market sectors. Our Polish business grew both its sales and profits strongly. Its newgreen-field factory at Kutno, west of Warsaw, opened in November 2005 andcomplements the existing plant at Kielce. This Polish business primarilysupplies the rapidly expanding, fast-moving consumer goods (FMCG) sector inPoland. Profits advanced well at our small converting business in the CzechRepublic. In Turkey, where our business broke through into profit in 2004/05,we continued to focus on growing sales in higher margin industrial marketsectors. OJSC Rubezhansk Paper and Packaging Mill in the Ukraine, in which wehold a 39% stake and the results of which are reported under associates,continued to perform well. We implemented box price increases in all continental markets in our efforts topass on the higher CCM costs but, as in the UK, this had little effect onresults in 2005/06. In 2006/07, we anticipate being able to recover asubstantial proportion of the increased CCM and energy costs. Plastic Packaging 2005/06 2004/05Revenue - £m 202.4 195.9Adjusted operating profit* - £m 7.2 9.3Adjusted EBITDA* - £m 19.3 20.6Adjusted return on sales* - % 3.6% 4.7%Adjusted EBITDA margin* - % 9.5% 10.5%Adjusted return on average capital employed* - % 5.6% 6.6% * before exceptional items of £2.6 million (2004/05: £ 5.8 million) Market Overview The global market for liquid packaging and dispensing products is estimated tobe approximately $750 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). There is modest volume growth in North America andEurope but value growth is lower due to price competition. The market inAsia-Pacific is at an early stage of development and growing rapidly. Themarket for dispensing products (principally taps), other than for bag-in-boxsystems, is fragmented across a wide range of uses. DS Smith is a majorsupplier to the wine and liquid detergent sector; the latter has grown stronglyin recent years in the USA and is now starting to develop in Europe. The European market for returnable transit packaging (RTP), which is estimatedto be approximately €1.4 billion, is fragmented into many sub-sectors. Theoverall market has experienced steady growth in recent years, due to theincreased requirement for the use of multi-trip, reusable packaging on cost andenvironmental grounds. However, during 2005/06 it is believed that there wasrelatively little growth in the European RTP market, principally as a result ofthe higher polymer costs. RTP products are used most within the retail,automotive, electronics and beverage sectors. Demand is heavily influenced byindustry sector activity levels and, as RTP is often a capital purchase drivenby particular projects, annual demand can be of an uneven nature. 2005/06 Performance Results at DS Smith Plastics were affected by the high level of polymer pricesand a more competitive trading environment in both of our major sectors, liquidpackaging and dispensing, and RTP. Our actions to raise prices, strengthen oursales and product development capability and increase productivity resulted inan improving trend of profit in the second half of the financial year. Revenue increased by 3.3% to £202.4 million but adjusted operating profit waslower at £7.2 million (2004/05: £9.3 million). First half adjusted operatingprofit was £2.0 million (H1 2004/05: £6.2 million) while that in the second halfimproved to £5.2 million (H2 2004/05: £3.1 million). This result was adverselyaffected by polymer and energy costs combined being circa £7 million higherduring 2005/06 than in the previous financial year. We endeavoured to pass onthese higher costs by raising our selling prices but in some cases this led to aloss of business and where we did achieve increases these were insufficient torestore margins to acceptable levels. The cumulative effect of this input costunder-recovery was approximately £3 million during 2005/06, largely concentratedin our RTP business. In liquid packaging and dispensing, sales were flat and profits weresignificantly lower. Our US operations performed satisfactorily on the back ofgood product development while sales of dispensing products remained strong. Incontrast, we faced increased competition in Europe, particularly in highermargin products, although in the second half of the financial year resultsstarted to benefit from earlier restructuring action, our increased emphasis onnew product development and growth in higher margin sectors. Sales of RTP for 2005/06 as a whole were significantly higher than in theprevious year despite being slow during the first half of the year. Marginswere squeezed by the under-recovery of the higher polymer prices and, in theextruded sheet sector, by industry capacity increases at a time of weakerdemand. Results improved in the second half of the financial year with theachievement of some price increases and a sharp revival in the volume of cratesales. The extruded product businesses continued to experience difficulttrading but benefited, in the second half of the year, from action taken tostrengthen its sales function. We are expanding our capability to supply ineastern Europe from the Group's plant in the Czech Republic, in response toincreased sourcing of RTP products in that region by some customers. The aggregate result of the smaller speciality businesses improvedsignificantly. The packaging management business moved from break-even intoprofit following good sales growth, while sales at StePac, which specialises inmodified atmosphere packaging, grew strongly. The small, non-core plasticcoating and laminating business, BSK, was sold in December 2005, resulting in aloss on sale of £2.6 million. Looking forward, a key issue in Plastic Packaging is the outlook for polymerprices and the extent to which we can recover the higher costs and furtherrebuild margins. We expect the improving trend within this segment to continuein 2006/07. Office Products Wholesaling 2005/06 2004/05Revenue - £m 518.7 499.7Operating profit - £m 12.6 21.5EBITDA - £m 19.2 28.5Return on sales - % 2.4% 4.3%EBITDA margin - % 3.7% 5.7%Return on average capital employed - % 9.9% 18.1% Market Overview The office products markets of the UK, France and Germany, in which Spicerscurrently has over 90% of its sales, are estimated to be worth approximately €9billion, €8 billion and €11 billion, respectively, at trade prices. In 2005,these markets were estimated to have been broadly flat overall, with thetraditional stationery sector declining and electronic office supplies (EOS)growing at up to 10% per annum3. The volume of products bought by officescontinues to increase but the value of the market is being held back by pricedeflation caused by intense competition between suppliers and the trend forconsumers to buy lower-specification or own-branded products. EOS, which is agrowing sector of the market, accounts for approximately 50% of the total officeproducts market; it is especially price-competitive on the high-volume EOSproducts. 3 Source: DS Smith estimates based on national data The relative shares of the various supply channels to the end-user market differby country. However, in the countries in which Spicers operates, the sector thatSpicers principally supplies, that of office products dealers, accounts, onaverage, for approximately 35% of the total office products market. The shareof the market held by dealers has been relatively stable in recent years.Office products dealers primarily sell to smaller and medium-sized offices,generally offer a high standard of service to their customers, and source mostof their products either from wholesalers or direct from manufacturers. 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 markets competition from other national wholesalers is limited, butthere are significant numbers of regional and local wholesalers. The Europeanscale of Spicers' business assists it in offering a broad range of products atcompetitive prices relative to those of many of its smaller wholesalingcompetitors. Spicers' commitment to supplying only the trade and not, as someof its competitors do, supplying end-users, gives it a competitive advantage.Spicers competes indirectly with a number of other distribution channels. Themost significant of these, contract stationers, accounts for approximately 15%of the total market; they generally sell to larger offices and offer a smallerrange of products than dealers. The principal other competitor channels tomarket are: mail order, office superstores, other retailers and manufacturersselling direct to offices. 2005/06 Performance Despite continued progress at our continental European businesses, Spicers'result was substantially affected by a sharp decline in the profitability in itsUK business, largely from the erosion of its sales margin in the face ofstronger competition. Spicers' cash flow remained strong. Spicers' revenue advanced by 3.8% to £518.7 million, the growth coming almostentirely from the contribution of Timmermans, the Benelux business acquired inOctober 2005. The fall in profit in the UK more than offset better profits fromcontinental Europe and resulted in the adjusted operating profit being lower at£12.6 million (2004/05: £21.5 million). Spicers UK's sales were flat but its profit was sharply lower. This reflectedgeneral market price deflation, a significantly reduced sales margin fromincreased competitive pressure, and higher costs incurred to overcome serviceshortcomings. In response to increased competitor activity, Spicers UK'sselling prices were eroded and customer rebates were increased significantly.The substantial deterioration in margins in Spicers UK, particularly from higherlevels of customer retrospective rebates, only became fully apparent late in thefinancial year. This highlighted management process and control issues inSpicers UK which were addressed in that business unit through senior managementchanges and a review and reinforcement of control processes. The managingdirector and finance director of Spicers UK have left the business and actionhas been taken to strengthen the UK sales and operations functions. We are alsoaccelerating the programme to reduce our structural cost base in the UK. In 2005/06, Spicers made further major advances in rolling out its businessmodel in continental Europe. Spicers France continued to perform well andprofits advanced strongly. A new central distribution centre at Chateauroux, incentral France, has been commissioned early in 2006/07. Spicers Germanyconsolidated its profitable position by concentrating its business on highermargin sectors of the market. The Spanish business continued to grow stronglyand achieved a profit for the year through substantially higher sales at bettermargins. A new distribution centre near to Madrid is due to open in autumn 2006which will extend our sales coverage across central and southern Spain. SpicersItaly, which was launched in the autumn of 2004, continued its encouragingbuild-up of sales. On 1 October 2005, we further extended Spicers' salescoverage in continental Europe through the acquisition of Timmermans NV, theleading office products wholesaler in the Benelux region; Timmermans hasperformed in line with our expectations. Consolidated Income StatementFor the year ended 30 April 2006 Before Exceptional After Before Exceptional After exceptional items (note exceptional exceptional items (note exceptional items 2) items items 2) items 2006 2006 2006 2005 2005 2005 Note £m £m £m £m £m £m Revenue 1 1,652.7 - 1,652.7 1,624.9 - 1,624.9 Operating profit 1 60.4 (42.4) 18.0 82.6 (10.7) 71.9 Finance income 2.3 - 2.3 4.7 - 4.7Finance costs (14.6) - (14.6) (17.9) - (17.9)Employment benefit finance income 1.2 - 1.2 1.1 - 1.1Net financing costs (11.1) - (11.1) (12.1) - (12.1) Profit after financing costs 49.3 (42.4) 6.9 70.5 (10.7) 59.8 Share of profit of associates 4.1 - 4.1 3.4 1.1 4.5Profit before income tax 53.4 (42.4) 11.0 73.9 (9.6) 64.3 Income tax (expense) / credit 3 (13.4) 7.7 (5.7) (17.6) 1.4 (16.2) Profit for the financial year 40.0 (34.7) 5.3 56.3 (8.2) 48.1 Profit for the financial yearattributable to:DS Smith Plc equity shareholders 38.9 (34.7) 4.2 55.3 (8.2) 47.1Minority interest 1.1 - 1.1 1.0 - 1.0 Basic earnings per share (pence) 4 10.0p 1.1p 14.4p 12.2pDiluted earnings per share (pence) 4 10.0p 1.1p 14.3p 12.1p Dividend per share - interim, paid (pence) 5 2.6p 2.6p - final, proposed (pence) 5 5.8p 5.8p 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 Annual Report and statements for the year ended 30 April 2006 will be posted to shareholders in July 2006. d) Subject to approval of shareholders at the Annual General Meeting to be held on 6 September 2006, the final dividend of 5.8p will be paid on 19 September 2006 to ordinary shareholders on the register on 18 August 2006. e) The 2005/06 and 2004/05 results in this preliminary statement do not constitute the statutory accounts of DS Smith Plc within the meaning of section 240 of the Companies Act 1985. The 2005/06 results and 2004/05 comparatives have been extracted from the 2005/06 statutory accounts, which have been prepared under International Financial Reporting Standards as adopted by the EU (IFRS) and which contained an unqualified audit report with no adverse statement under Section 237 (2) or (3) of the Companies Act 1985. The 2004/05 statutory accounts, which were prepared under UK generally accepted accounting principles (UK GAAP), have been reported on by the Group's auditors and filed with the Registrar of Companies. f) Items are presented as 'exceptional' in the accounts where they are significant items of financial performance that the directors consider should be separately disclosed, to assist in the understanding of the trading and financial results achieved by the Group (see note 2). Consolidated Statement of Recognised Income and ExpenseFor the year ended 30 April 2006 2006 2005 £m £mActuarial gains/(losses) on defined benefit pension schemes 54.4 (31.2)Movements on deferred tax relating to actuarial (gains)/losses (16.5) 9.5Currency translation differences, net of tax 9.7 (0.3)Changes in the fair value of cash flow hedges, net of tax 0.2Net income / (expense) recognised directly in equity 47.8 (22.0)Profit for the financial period 5.3 48.1Total recognised income and expense attributable to the equity shareholders 53.1 26.1and minority interests relating to the financial year Changes in accounting policy - adoption of IAS 32 & 39 from 1 May 2005 (1.5)Total recognised income and expense since the last financial statements 51.6 Total recognised income and expense relating to the financial yearattributable to:DS Smith Plc equity shareholders 52.0 25.1Minority interest 1.1 1.0 Consolidated Balance SheetAs at 30 April 2006 2006 2005 £m £mAssetsNon-current assetsIntangible assets 195.4 190.9Property, plant and equipment 536.1 559.3Investments in associates 29.2 22.1Other investments 0.5 10.1Deferred tax assets 24.0 35.6Other receivables 2.5 1.0Derivative financial instruments 1.4Total non-current assets 789.1 819.0 Current assetsInventories 163.3 161.7Other investments 0.1 -Income tax receivable 4.8 1.0Trade and other receivables 347.2 358.4Cash and cash equivalents 60.4 58.8Derivative financial instruments 3.7Total current assets 579.5 579.9Total assets 1,368.6 1,398.9 LiabilitiesNon-current liabilitiesInterest-bearing loans and borrowings (264.9) (294.1)Post-retirement benefits (50.3) (114.8)Other creditors (3.6) (2.4)Provisions (2.8) (7.2)Deferred tax liabilities (76.3) (78.7)Derivative financial instruments (25.0)Total non-current liabilities (422.9) (497.2) Current liabilitiesBank overdrafts (1.5) (17.6)Interest-bearing loans and borrowings (7.7) (7.8)Trade and other payables (355.3) (335.5)Income tax liabilities (21.0) (18.7)Provisions (16.7) (2.3)Derivative financial instruments (2.0)Total current liabilities (404.2) (381.9)Total liabilities (827.1) (879.1) Net assets 541.5 519.8 EquityIssued capital 39.1 38.9Share premium 259.4 257.0Reserves 233.6 215.6DS Smith Plc shareholders' equity 532.1 511.5Minority interest 9.4 8.3Total equity 541.5 519.8 Consolidated Statement of Cash FlowsFor the year ended 30 April 2006 2006 2005 Note £m £mOperating ActivitiesCash generated from operations 6 138.2 139.7Interest received 0.8 4.7Interest paid (12.8) (18.0)Income tax paid (13.5) (23.7)Net cash flows from operating activities 112.7 102.7 Investing ActivitiesAcquisition of subsidiary businesses, net of cash acquired (10.5) (11.7)Divestment of subsidiary businesses, net of cash disposed of 11.0 -Capital expenditure (62.7) (53.6)Proceeds from sale of assets 9.7 5.2Proceeds from sale of associate and other non-current investments 3.5 1.5Cash flows from investing activities (49.0) (58.6) Financing ActivitiesProceeds from issue of share capital 2.6 2.6Purchase of own shares - (2.1)Repayments of borrowings (17.2) (3.7)Repayment of finance leases obligations (0.9) (0.9)Dividends paid (32.6) (31.6)Cash flows from financing activities (48.1) (35.7) Net increase in cash and cash equivalents 15.6 8.4Cash and cash equivalents at 1 May 2005 41.2 31.1Exchange gains on cash and cash equivalents 2.1 1.7Cash and cash equivalents at 30 April 2006 58.9 41.2 Notes to the Financial Statements 1. Segment Reporting Primary reporting format - business segments UK Paper Continental Plastic Office Other(3) Total Group and European Packaging Products £m Corrugated Corrugated £m Wholesaling £m Packaging Packaging £m £mYear ended 30 April 2006 £m External revenue 649.6 276.6 202.4 518.7 5.4 1,652.7 Operating profit before exceptional 20.5 20.1 7.2 12.6 - 60.4itemsExceptional 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) Year ended 30 April 2005 External revenue 631.2 265.7 195.9 499.7 32.4 1,624.9 Operating profit before exceptional 31.6 20.2 9.3 21.5 - 82.6itemsExceptional items (4.9) - (5.8) - - (10.7)Segment result 26.7 20.2 3.5 21.5 - 71.9 Other segment items:Adjusted return on sales - %(1) 5.0% 7.6% 4.7% 4.3% - 5.1%Adjusted EBITDA - £m(1) 67.3 33.6 20.6 28.5 1.2 151.2Adjusted EBITDA margin - %(1) 10.7% 12.6% 10.5% 5.7% 3.7% 9.3%Year-end capital employed - £m 508.3 149.6 132.2 126.2 12.6 928.9Average capital employed - £m(2) 528.3 147.1 140.5 119.0 14.1 949.0Adjusted Return on average capital 6.0% 13.7% 6.6% 18.1% - 8.7%employed - %(1),(2) Secondary reporting format -geographical segments TurnoverYear ended 30 April 2006 2005 £m £mUK 957.6 970.7Western Continental Europe 570.5 543.3Eastern Continental Europe 74.5 64.9Rest of World 50.1 46.0Total 1,652.7 1,624.9 1. Before exceptional items (see note 2) 2. The return on average capital employed is defined as operating profit beforeexceptional items divided by average capital employed; average capital employedis the average monthly capital employed 3. Other represents the activity of the former Office Products Manufacturingsegment and, in 2005/06, the loss on the disposal of that business and theimpairment 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. 2006 2005 £m £m Loss on disposal of businesses (4.3) -UK Paper and Corrugated Packaging segment restructuring costs (28.9) (4.9)Impairment charges (9.2) (5.8)Reversal of previous impairment of associate - 1.1Total exceptional items (42.4) (9.6) The loss on disposal of businesses arose on the disposal of the Office ProductsManufacturing business (loss of £1.7m) and a business in the Plastic Packagingsegment (loss of £2.6m). The UK Paper and Corrugated Packaging restructuring costs in 2005/06 related tothe closure of a paper mill, £20.3m, the closure of a paper machine at anothermill, £5.0m, and other restructuring costs, £3.6m. The UK Paper and CorrugatedPackaging restructuring costs in 2004/05 related to the restructuring of anacquired business. The impairment charge in 2005/06 related to an investment in the debt securitiesof an independent UK packaging business, the performance of which has beenaffected by the current difficult trading conditions and the high costs ofenergy. The charge in 2004/05 related to the impairment of goodwill in abusiness in the Plastic Packaging segment. The reversal of the previous impairment of associate in 2004/05 related to theGroup's minority investment in a Japanese packaging company. 3. Income tax expense Recognised in the income statement 2006 2005 £m £mCurrent tax expense Current year (13.5) (23.3)Over-provided in prior years 1.9 1.4 (11.6) (21.9)Deferred tax expense Origination and reversal of temporary differences 6.2 1.3Over-provided in prior years (0.3) 4.4 5.9 5.7Total income tax expense in income statement (5.7) (16.2) The reconciliation of the actual tax charge to that at the domestic corporationtax rate is as follows: 2006 2005 £m £mProfit before tax 11.0 64.3 Less: share of profits of associates (4.1) (4.5)Profit before tax and share of profit of associates 6.9 59.8 Income tax calculated using the domestic corporation tax rate of 30% 2.1 17.9Effect of tax rates in foreign jurisdictions 1.5 1.9Non-deductible expenses 5.6 3.1Recognition of previously unrecognised tax losses (1.9) (0.7) Other - (0.2)Adjustment in respect of prior years (1.6) (5.8)Income tax expense 5.7 16.2 4. Earnings per share Basic earnings per share The calculation of basic earnings per share at 30 April 2006 is based on the netprofit attributable to ordinary shareholders of £4.2m (2005: £47.1m) and theweighted average number of ordinary shares outstanding during the year ended 30April 2006 of 387.2m (2005: 385.3m). The number of shares excludes the weightedaverage number of the Company's own shares held as treasury shares during theyear of 2.5m (2005: 2.5m). 2006 2005 £m £mNet profit attributable to ordinary shareholders 4.2 47.1Weighted average number of ordinary shares at 30 April (millions) 387.2 385.3Basic earnings per share (pence per share) 1.1p 12.2p Diluted earnings per share The calculation of diluted earnings per share at 30 April 2006 is based on netprofit attributable to ordinary shareholders of £4.2m (2005: £47.1m) and theweighted average number of ordinary shares outstanding during the year ended 30April 2006, as adjusted for potentially issuable ordinary shares, of 388.8m(2005: 387.3m), calculated as follows: 2006 2005 £m £mNet profit attributable to ordinary shareholders 4.2 47.1 In millions of sharesWeighted average number of ordinary shares at 30 April 387.2 385.3Potentially dilutive shares issuable under share option schemes 0.3 0.5Estimated vesting of Long-Term Incentive Plan shares 1.3 1.5Weighted average number of ordinary shares (diluted) at 30 April 388.8 387.3Diluted earnings per share (pence per share) 1.1p 12.1p 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: 2006 2005 £m Pence per £m Pence per share share Basic earnings 4.2 1.1 47.1 12.2 Add back: exceptional items in operating profit, 34.7 8.9 9.3 2.5after taxDeduct: reversal of impairment of associate - - (1.1) (0.3)Adjusted earnings 38.9 10.0 55.3 14.4 5. Dividends Dividends declared and paid by the Group are as follows: 2006 2005 Pence per £m Pence per £m share share Interim dividend paid 2.6 10.1 2.6 9.9 Final dividend proposed 5.8 22.5 5.8 22.4 8.4 32.6 8.4 32.3 2006 2005 £m £mPaid during the year 32.6 31.6 A final dividend in respect of 2005/06 of 5.8 pence per share (£22.5m) wasproposed by the Directors after the balance sheet date. Under IFRS, thisdividend has not been provided for in the financial statements. Subject to approval of shareholders at the Annual General Meeting to be held on6 September 2006, the final dividend will be paid on 19 September 2006 toshareholders on the register at the close of business on 18 August 2006. 6. Cash generated from operations 2006 2006 2005 2005 £m £m £m £mProfit for the year 5.3 48.1Adjustments for:Exceptional items - non-cash amounts 37.8 7.1Depreciation and amortisation 67.2 68.6Profit on sale of non-current assets (7.1) (1.8)Share of profit of associates (after tax) (4.1) (3.4)Other finance income (1.2) (1.1)Equity settled share-based payment expenses 0.1 1.1Interest income (2.3) (4.7)Interest expense 14.6 17.9Income tax expense 5.7 16.2 110.7 99.9Changes in working capital:- Inventories (4.2) (9.1)- Trade and other receivables 13.1 (9.5)- Trade and other payables 18.5 11.7- Provisions and employee benefits (5.2) (1.4) 22.2 (8.3)Cash generated from operations 138.2 139.7 7. Reconciliation of net cash flow to movements in net debt 2006 2005 £m £mOperating profit before exceptional items 60.4 82.6Depreciation and amortisation 67.2 68.6EBITDA 127.6 151.2Working capital movement 27.4 (6.9)Exceptional cash costs (4.6) (2.5)Other (12.2) (2.1)Cash generated from operations 138.2 139.7Capital expenditure (62.7) (53.6)Proceeds from sales of assets and investments 13.2 6.7Taxation (13.5) (23.7)Interest (12.0) (13.3)Free cash flow before net acquisitions/disposals and dividends 63.2 55.8Dividends (32.6) (31.6)Net (acquisitions)/disposals of subsidiaries 0.5 (11.7)Net cash flow 31.1 12.5Proceeds from issue of share capital 2.6 2.6Net purchase of own shares - (2.1)Borrowings (acquired)/disposed of (2.6) -Non-cash movements (6.1) 1.7Net debt movement 25.0 14.7Opening net debt* (262.8) (275.4)Closing net debt (237.8) (260.7) * Opening net debt at 1 May 2005 has been restated for the effects of theadoption of IAS 39, as explained further in note 9 below. 8. Acquisitions and disposals On 30 September 2005, the Group acquired 100% of the voting share capital ofTimmermans NV, the largest office products wholesaler in the Benelux region ofEurope. The effect of the acquisition on the Group's assets and liabilities wasas follows: Carrying Provisional fair values before values acquisition £m £mIntangible assets - 1.7Property, plant and equipment 0.6 3.4Other working capital items and provisions 7.3 5.2Other interest-bearing loans and borrowings (2.6) (2.6)Net assets acquired 5.3 7.7Goodwill 2.8Consideration 10.5Consideration satisfied by:Cash paid of £11.7m, less cash and cash equivalents acquired of £1.2m 10.5 The fair value adjustments relate to the recognition of intangible assets, thevaluation of land and buildings and the alignment of accounting policies withinworking capital and provisions. The fair value adjustments contain someprovisional amounts; these will be finalised in the accounts to 30 April 2007. The Group paid £11.7m as consideration for the purchase of Timmermans, acquiredcash and cash equivalents of £1.2m and acquired borrowings of £2.6m, as shown inthe table above. Additional consideration, of up to £2.8m, is payable to theprevious owners depending on the performance of the business in future financialperiods. In July 2005, the Group sold its Office Products Manufacturing business, JohnDickinson, for a loss of £1.7m. In December 2005, the Group sold its plasticcoating and laminating business, BSK, in the Plastic Packaging segment for aloss of £2.6m. Total proceeds for the disposals in the year were £11.0m, net ofcash and cash equivalents disposed of. In August 2004, the Group acquired BPB Recycling, a recovered paper collectionbusiness, from BPB Plc for consideration of £9.4m. Negative goodwill of £0.2marose, which was credited to the income statement. 9. Basis of preparation - adoption of IFRS The financial statements for the year to 30 April 2006 have been prepared underInternational Financial Reporting Standards, as adopted for use in the EU(IFRS). The 2004/05 comparative information has been restated from UK GAAPaccordingly, other than for financial instruments, in respect of which the Grouphas chosen to adopt IAS 32 and IAS 39 from 1 May 2005. A comprehensive analysisand explanation of the adjustments made by the Group on the transition to IFRSfrom UK GAAP was first published on 13 October 2005 and a copy of thisannouncement can be found on the Company's website www.dssmith.uk.com/invest-report.asp. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Smith (DS)