18th Apr 2006 07:01
Smith (DS) PLC18 April 2006 18 April 2006 DS SMITH PLC PRE-CLOSE TRADING UPDATE DS Smith Plc, the international packaging manufacturer and office productswholesaler, today issues the following trading update ahead of its preliminaryresults announcement for the year to 30 April 2006, which will be made on 29June 2006. These will be the first full year results to be produced underInternational Financial Reporting Standards. Group Result for 2005/06 As indicated at the interim results in December 2005, trading conditions duringthe second half of the financial year have continued to be challenging. InPackaging, we are succeeding in raising prices, we have achieved the expectedsynergies in our enlarged UK Corrugated Packaging business and our ContinentalEuropean Corrugated Packaging business has performed well; however, thesebenefits have been more than offset by the extraordinarily high energy costs.In Office Products, we have experienced a sharp reduction in profitability,principally due to the effect of lower sales margins at Spicers UK, which hasonly partly been mitigated by improved results in continental Europe. We now anticipate that our pre-exceptional profit before tax for the full year2005/06 will be somewhat below our expectations at the time of our interimresults, although pre-exceptional earnings per share for the full year areanticipated to be in line with our previous expectations due to the tax chargebeing lower than expected. We anticipate that cash flow for the full year willbe satisfactory and the interest charge will be slightly lower than expected. In light of the sustained high energy costs, we have accelerated our programmeto streamline the portfolio and exit businesses with no prospect of turnaround.This programme will result in significant exceptional charges to the profit andloss account in 2005/06. Energy costs Results in the second half of the financial year have been substantiallyaffected by sharply higher energy costs, particularly during the winter. TheGroup's energy costs for the financial year 2005/06 are expected to beapproximately £23 million higher than in 2004/05; this increase is at the upperend of the range anticipated in December. Looking ahead, gas prices for 2006/07 are currently above the level of pricesduring 2005/06. The Group's electricity costs in 2006/07 are expected to behigher than in 2005/06 as a result of the expiry, in October 2005, of itsprevious fixed-price UK electricity contract. As a result, we expect underlyingenergy costs in 2006/07 to be at least £10 million higher than in 2005/06. UK Paper and Corrugated Packaging The effects of the higher energy costs have been most evident in the UK Paperand Corrugated segment and significant action, including the closure ofcapacity, has been taken to mitigate these costs. Our Paper business isbenefiting from increased sales of higher added-value plasterboard liner. Theslowdown in UK retail sales has affected demand for our corrugated packaging(boxes) and we have experienced some disruption at a number of our largerplants, as a result of the restructuring of our facilities to reduce costs. The net cost of the Group's key raw material for paper production, waste paper,is continuing to increase as a result of rising demand from Asia and the fallingvalue of packaging recovery notes. We raised prices of the main grades ofcorrugated case materials (CCM) by approximately 20% during the second half ofthe financial year. Given the Group's vertical integration, it is importantthat these higher CCM prices are now passed on through higher box prices. Weare now increasing box prices, which had been falling consistently. As thesebox price increases are taking place late in our financial year, they will haveonly a small effect on the 2005/06 profits. Results in UK Paper and Corrugated Packaging for the second half of thefinancial year are anticipated to be slightly lower than previously expected.The price increases will benefit results in 2006/07 but the effect they willhave on net margins is uncertain, particularly given the likely higher energyand net raw material costs. Continental European Corrugated Packaging The overall performance of this segment has been encouraging. Total demand inFrance and Italy remained patchy but the continental European market as a wholebenefited from the improving economic conditions and continuing strong growth inEastern Europe. Although margins in the corrugated packaging businesses havebeen affected by higher CCM and energy costs, we have benefited from salesgrowth, particularly in the Polish business, and cost reduction. Our associatebusiness in the Ukraine has continued to perform well. The French solid boardpaper business has achieved good results despite pressure on its prices andhigher energy costs. Box price increases are being implemented in all continental markets but, again,these will have only a small effect on results in 2005/06, which are likely tobe around those of 2004/05. Looking forward, we anticipate being able torecover a substantial proportion of the increased CCM and energy costs. Plastic Packaging Our goal is to rebuild profitability in both of the main businesses in PlasticPackaging. In line with our expectations, the segment made some progress duringthe second half of the financial year. In returnable transit packaging, marginscontinue to be affected by the under-recovery of higher polymer costs but saleshave strengthened, on the back of a good order book. In liquid packaging anddispensing, the European business remains under pressure from increasedcompetition but is benefiting from the restructuring undertaken during the firsthalf of the year. Going forward, we expect this improving trend within thePlastic Packaging segment to continue into 2006/07. Office Products Wholesaling It is anticipated that the full year operating profit for Office ProductsWholesaling in 2005/06 will be of the order of £9 million below the £21.5million reported for 2004/05; as detailed below. This primarily reflects issuesin the UK: sales margin erosion higher than previously indicated; and highercosts which have been incurred to overcome service shortcomings. As part of avery recent review of the UK business, we will now recognise an under-accrual ofcustomers' rebates, some other margin adjustments and additional costs, whichtotal approximately £6 million. Our strategy to develop our continental European businesses continues toprogress: Spicers France maintained its good performance; the German businessmade further progress; Spicers Spain is expected to be in profit for the year asa whole; and sales in Italy continued to grow well. The prospects for theTimmermans business in the Benelux region are in line with our expectations whenwe acquired it in October 2005. A new divisional chief executive, with extensive experience in office products,was appointed in February 2006. The Spicers UK managing director has left thebusiness and we are well advanced in strengthening UK sales and operations. Weare also accelerating the programme to reduce our UK structural cost base.These and further initiatives will be targeted at ensuring that Spicers makesgood progress in 2006/07 and establishes a strong base for ongoing profitdevelopment. Restructuring and Exceptional Charges We have taken actions to improve the Group's future prospects throughrestructuring and streamlining the portfolio. We now expect to incur totalexceptional charges in 2005/06 of approximately £43 million detailed below, ofwhich the net cash costs are expected to be approximately £5 million, almost allof which will occur in 2006/07. The total exceptional charges include the following previously announced items: • The losses on the sales of the John Dickinson Office Products Manufacturing business and BSK, one of the smaller Plastic Packaging businesses, amounting in total to £4.5 million. • The exceptional charge of £22 million resulting from the closure of the Sudbrook paper mill. This closure was part of our strategy in Paper to withdraw from unprofitable capacity in order to concentrate on mills with a long-term future, including our principal mill at Kemsley which is ranked in the top quartile of European CCM mills in terms of cost-competitiveness. In this trading update we are advising of further rationalisation steps that arebeing taken: • At the Wansbrough paper mill in Somerset, we are proposing the closure of one of the two paper machines, with a capacity of 35,000 tonnes; this is expected to result in an exceptional charge to the profit and loss account in 2005/06 of approximately £7 million. • A programme of other cost reduction measures is being implemented throughout the UK Paper and Corrugated segment, which is expected to result in an exceptional charge of approximately £3 million in 2005/06. The Group also anticipates taking an impairment charge, in the current year, ofup to £6 million against an investment made in the late 1990s in the debtsecurities of an independent business in the packaging sector, which has alsobeen affected by the difficult trading conditions and the high cost of energy. Group Outlook for 2006/07 Despite an expected further increase in energy costs, we anticipate that theactions we are taking will allow the Group to perform more strongly in 2006/07. Enquiries DS Smith Plc 020 7932 5000Tony Thorne, Group Chief ExecutiveGavin Morris, Group Finance DirectorPeter Aubusson, Group Communications Manager Financial Dynamics 020 7269 7291Richard Mountain/Susanne Walker A conference call for analysts and investors, hosted by Tony Thorne and GavinMorris, will take place today at 9.00am BST. The dial-in numbers are: UK participants - 0845 634 0047 International participants - +44 20 7154 2638 Alternative back-up number - +353 1 436 4259 A recording of this conference call will be available for one week from 11.30amBST today. The dial-in numbers for the recording are: UK callers - 020 7769 6425 International callers - +44 20 7769 6425 Security code for the replay - 652491# This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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