20th Apr 2005 07:00
Smith (DS) PLC20 April 2005 20 April 2005 DS SMITH PLC PRE-CLOSE TRADING UPDATE AND EARLY ADOPTION OF FRS 17 DS Smith Plc (LSE:SMDS), the international packaging manufacturer and officeproducts wholesaler, is releasing the following trading update prior to its yearend on 30 April 2005. Since our interim results in December, the Group's underlying trading has beenin line with our expectations at that time. Following completion of thetriennial valuation of the UK pension scheme, a number of changes have been madein relation to the scheme and the Board has decided to adopt FRS17 for thecurrent financial year; the adoption of FRS 17 will result in profit before tax,amortisation of intangibles and exceptional items being approximately £5.5million higher than previously expected. Review of trading In the second half of the year we have made progress in UK Corrugated Packagingdue to improved results in our existing UK business and the benefits from theacquisition of Linpac Containers. Our continental European corrugatedoperations and the Spicers Office Products Wholesaling business have alsocontinued to perform well. As indicated previously, the Group's overall resulthas been affected by highly competitive trading conditions and increased energycosts in Paper, a sharp rise in polymer costs in Plastic Packaging, togetherwith a significant charge in respect of the UK pension scheme for the first timefor many years. Paper and Corrugated Packaging Our UK Paper business has continued to experience a severe squeeze on itsmargins in corrugated case material (CCM). This has been driven by acombination of depressed prices resulting from excess CCM capacity in Europe,markedly higher energy costs and the rising cost of its feedstock, recoveredpaper. We increased CCM prices in mid March to recover some of the costincreases. Given the late stage in our financial year, this increase will notyield a significant benefit to the 2004/05 results. In March, we entered into along-term agreement with BPB plc for the supply of plasterboard liner paper,consistent with our drive to increase sales of higher added-value products. The UK Corrugated Packaging operations have maintained their progress andintegration of the Linpac Containers business is advancing well; we remainconfident of generating the expected synergies over the timescale indicated inDecember and, as previously indicated, we anticipate incurring exceptionalrestructuring charges of approximately £6 million in this financial year. Inwestern continental Europe, trading conditions for the paper and corrugatedoperations remain challenging but our businesses in Poland and Turkey and ourassociate in the Ukraine have continued to make good progress. Plastic Packaging Results in Plastic Packaging have been adversely affected in the second half ofthe year by the sharp rise in polymer prices which are now some 35-40% higherthan at the start of this financial year for our main polymer types. Althoughwe have raised our selling prices several times during the year, it has not beenpossible to recover these cost increases in full. The cumulative effect of thisunder-recovery on the division's result for the year is expected to beapproximately £2.5 million. The high polymer prices have also resulted inreduced demand from some customers deferring orders; this has mainly affectedreturnable transit packaging where sales have also been affected by a slowdownin new crate contracts after several years of strong growth. Liquid packagingand dispensing has performed steadily, benefiting especially from improvedresults in the tap business following last year's programme to strengthen salesand reduce costs. Our actions have resulted in some improvement in the combined result of thethree smaller speciality businesses. However, the Group has decided to take anexceptional impairment charge, in the current year, of approximately £5.8million against the goodwill of the packaging management business, acquired in1998; this business is trading at around breakeven and generating cash. Office Products Spicers has continued to perform in line with its objectives. The UK businesshas maintained its sales growth and good financial performance in the secondhalf of the year, while the French business continues to perform well despite achallenging market environment. Spicers Germany is expected to be in profit forthe current financial year. The Spanish business continues to grow well, andinitial sales in Italy, following our start-up last November, remainencouraging. The John Dickinson manufacturing business continues to be affectedby difficult trading conditions. Refinancing Following on from the $200 million US private placement completed in August2004, the Group has signed a new £250 million 5-year committed banking facility.This will replace existing shorter-dated and more expensive facilities,thereby extending the average maturity of the Group's debt to 6.9 years, andreducing its cost. International Financial Reporting Standards (IFRS) As stated previously, the Group's conversion programme to IFRS is progressingsatisfactorily with no problematical issues identified to date. Areconciliation of the UK GAAP 2004/05 results to IFRS will be provided after thepublication of the 2004/05 preliminary results. Pension Scheme Following the triennial valuation of DS Smith's UK defined benefit pensionscheme, as at 5 April 2004, the Group has introduced a number of changes, whichhave been accepted by the scheme's Trustee Board and scheme members. From 1 May2005 the scheme will be closed to new employees, who will be offered a newdefined contribution scheme. The Group, as previously indicated, will raise itscash contributions to the defined benefit scheme from £10 million a year to £14million a year. At the same time, scheme members will either increase theircontributions to the scheme, phased over two years, or retain their existingcontribution level, while reducing the rate at which their pension benefitsbuild up for future service. DS Smith has previously reported under the SSAP 24 pensions accounting standard.Following the 2004 triennial valuation, and in anticipation of theintroduction of IFRS for financial year 2005/06, DS Smith will adopt FRS 17 forthe financial year 2004/05. The FRS 17 accounting treatment being adopted isconsistent with that which the Group will adopt under IAS 19, in effect bringingforward the most material aspect of the introduction of IFRS for DS Smith andaiding comparison between financial years. The comparative FRS 17 figures for2003/04, which will be used to restate last financial year's results, weredetailed in Note 6 to the 2003/04 accounts. Under FRS 17, the anticipated charge to the 2004/05 profit and loss account forthe pension scheme is £10.5 million; the previously estimated charge under SSAP24 was £16 million. The FRS 17 deficit on the UK defined benefit pension schemeas at 30 April 2004, of £78.1 million (£54.6 million after deferred tax), willbe recognised as a liability in the opening Group balance sheet and the previousSSAP 24 pension prepayment, of £15.1 million (£10.6 million after deferred tax),will be written off. As a result, DS Smith Plc Group's consolidatedshareholders' funds as at 30 April 2004 of £562.0 million will be reduced by£65.2 million. Further details of the effect of the adoption of FRS 17 are setout below in an appendix. Outlook In common with many other companies, we shall be entering 2005/06 with energyand raw material costs at a considerably higher level than at the outset of 2004/05. We are responding to this through further cost reduction and we are alsolooking to offset these additional costs through price increases. Despite thesecost pressures, we expect the synergies arising from the Linpac Containersacquisition, and a further advance at Spicers, to enable us to make someunderlying progress in the coming financial year. The 2005/06 result will alsoreflect the adoption of IFRS which will include the accounting changes relatingto pensions referred to above. DS Smith's Preliminary results for the year to 30 April 2005 will be announcedon 30 June 2005. 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/Robert Gurner 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: UKparticipants - 0845 634 0047; International participants - +44 20 7154 2638. Arecording of this conference call will be available for one week fromapproximately 1.00pm BST today. The dial-in numbers for the recording are: UKcallers - 020 7769 6425; International callers - +44 20 7769 6425 (Security code514719#) Appendix Effect of Adopting FRS 17 on the Profit and Loss Account Restated Anticipated 2003/04 2004/05 £m £mPension charge against operating profit:Paper and Corrugated Packaging (9.1) (8.3)Plastic Packaging (1.2) (1.0)Office Products Wholesaling (2.0) (1.8)Office Products Manufacturing (1.1) (1.0) (13.4) (12.1) Other finance (cost)/income (3.2) 1.6 Total FRS 17 charge (16.6) (10.5) As previously reported, the Profit and Loss Account charges under SSAP 24 were: 2003/04: nil 2004/05: expected to be approximately £16 million Effect of Adopting FRS 17 on the Group Balance Sheet £m Consolidated shareholders' funds, 30 April 2004, as previously stated 562.0 Reversal of SSAP 24 prepayments and liabilities- write off balance sheet prepayment (15.1)- write back deferred tax credit associated with prepayment 4.5Effect of adoption of FRS 17:- include net liabilities of pension scheme (78.1)- include deferred tax asset associated with pension scheme liabilities 23.5 Consolidated shareholders' funds, 30 April 2004, restated for FRS 17 496.8 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Smith (DS)