Interim Results
Smith(David S)(Holdings) PLC
6 December 2000
6 December 2000
GROUP MAKES GOOD PROGRESS IN FIRST HALF
Interim Results for the Half Year to 28 October 2000
* Results reflect strong paper markets and robust sales growth in office
products
* Group turnover up 16% to £689.2m (£594.2m)
* Operating profit before goodwill amortisation up 59% to £45.0m (£28.3m)
and operating margins increase to 6.5% (4.8%)
* Profit before tax, exceptional items and goodwill amortisation advances
66% to £39.4m (£23.7m)
* Earnings per share rose to 8.5p (5.1p)
* Interim dividend increased to 2.8p (2.7p)
* Management succession in place
Commenting on the results and future prospects Antony Hichens, Chairman, said:
'We are pleased with the good progress made in the first half. Our packaging
and paper businesses have benefited from strong paper markets and the office
products wholesaling division has produced good sales growth.
'We enter the second half of the year encouraged by the progress we have made,
particularly as a result of our cost reduction and efficiency improvement
programmes. We recognise that the recent reduction in international waste
paper prices may impact papermaking margins. Nevertheless, we believe that the
Group will produce a satisfactory outcome for the year as a whole'.
Enquiries:
David S. Smith (Holdings) PLC 020 7932 5000
David Buttfield, Finance Director
Paul Froud, Group Communications Manager
Financial Dynamics 020 7831 3113
Richard Mountain
INTERIM REPORT
HIGHLIGHTS
The Group made good progress in all areas during the first half of the
financial year. The packaging and paper business was bolstered by strong paper
markets while the office products business benefited from robust sales growth
in the wholesaling division.
Group turnover for the half year to 28 October 2000 increased by 16.0% to £
689.2 million from £594.2 million in the same period last year. Operating
profit before goodwill amortisation increased by 59% to £45.0 million from £
28.3 million and Group operating margins rose to 6.5% from 4.8%.
Profit before tax, exceptional items and goodwill amortisation was £39.4
million, up from £23.7 million for the same period last year. The underlying
effective tax rate was unchanged at 30%.
Earnings per share before exceptional items and goodwill amortisation were
8.5p compared with 5.1p for the first half of last year.
Exceptional items in the period amounted to a loss of £2.2 million, mainly
comprising closure costs at the Bracknell corrugated box plant.
Net borrowings rose to £200.6 million from £185.0 million at this time last
year. Gearing increased slightly to 40.0% from 38.5% and interest cover
increased to 8.2 times from 6.3 times.
Working capital was higher than usual due to the timing of the half year end.
Expenditure on acquisitions in the first half amounted to £12.5 million
including acquired debt. Capital expenditure totalled £23.9 million compared
to £15.9 million for the same period last year.
Interim Dividend
The Board announces an increase in the interim dividend to 2.8p from 2.7p last
year. The interim dividend will be paid on 14 March 2001 to ordinary
shareholders on the register at the close of business on 19 January 2001.
PACKAGING
Total sales for the packaging businesses increased by 18.8% to £434.6 million.
Operating profit before goodwill amortisation improved by 70.3% to £34.4
million and operating margins rose to 7.9% from 5.5% for the same period last
year. The return on capital employed increased to 12.3% from 7.7%.
Corrugated and Paper
The corrugated and paper segment of Packaging increased sales by £52.0 million
to £358.4 million. Operating profit before goodwill amortisation advanced to £
29.9 million from £16.0 million and operating margins rose to 8.3% from 5.2%.
The European market for corrugated packaging was very strong earlier in the
year with growth of 4% for the first nine months of the calendar year. The
growth rate has now slowed to approximately 1% for the third calendar quarter
reflecting both slower economic growth in Europe and the strong quarter last
year; the UK market has been notably weaker than the rest of Europe during the
year. Growth in Europe in the final quarter of the year will look weak as it
is comparable with a period last year that included the pre-millennium stock
build.
European waste paper prices reduced during the summer after strong rises
earlier in the year. Corrugated case material (CCM) price increases were
implemented during the first half of the calendar year and corrugated box
plants, particularly in continental Europe, have had reasonable success in
raising their prices to recover these cost increases. Margins at box plants,
however, remain low.
David S Smith Packaging
Industry data for the UK for the first nine months of the calendar year
reveals a fall in demand for corrugated board of 3.7%. David S Smith Packaging
has seen its overall growth fall back in line with the industry with
significant progress only being made in the conventional corrugated
operations. The UK market remains extremely competitive creating a difficult
environment in which to fully recover the CCM cost increases from earlier in
the year. In addition, the time lag in achieving selling price increases
weighed on operating margins during the first half.
The strength of sterling has been an additional problem for the Tri-Wall heavy
duty business and the decorative operations have also come under pressure.
Despite falls in volume, both sectors have recovered CCM cost increases. The
Abbey sheet feeding business has also been adversely affected by the weak
market, but selling price increases have been successfully implemented.
The loss-making Bracknell corrugated box plant was shut in June with much of
the work from this plant successfully absorbed by other Group operations.
The management of the division has been re-organised with Bob McLellan,
previously Managing Director of the Group's Abbey Corrugated operation,
appointed as Chief Executive. Other management changes are taking place to
further strengthen the team. Management efforts are concentrating on improving
the division's operating efficiencies and lowering its cost base.
Kaysersberg Packaging
Kaysersberg Packaging, the Group's continental European corrugated and paper
division, has experienced strong sales growth for the first half of the year
with turnover up by 33%. Operating margins are significantly improved as paper
price increases have been fully recovered by most corrugated box plants and
the Polish operation has returned to profit as a result of the recent
investment programme and improved operational efficiencies.
The French and German corrugated markets remained buoyant with growth of 5%
and 6% respectively for the first three quarters of the calendar year although
the rate of growth is now slowing. Kaysersberg's corrugated board operations
grew in line with the market and the paperboard mills also benefited from
increased demand with improved sales and operating margins.
Our Italian corrugated operation, Toscana Ondulati, has again performed well
with sales growing by 45%. Our Turkish operation, Copikas, has also grown
sales but has struggled to fully recover increased raw material costs;
significant productivity gains are being achieved in this operation.
St Regis Paper
St Regis has made a strong start to the year. CCM selling price increases were
successfully implemented. Operational efficiencies continue to be achieved at
all mills with Kemsley again performing particularly well. Strong economic
growth in continental Europe led to reduced CCM imports into the UK despite
the weakness of the euro. Recent energy cost rises will impact the second
half.
The specialist mills continue to experience poor market conditions compounded
by pricing pressure from continental European competitors. Coreboard sales,
however, remain strong albeit at unsatisfactory price levels and the
development of plasterboard liner is progressing in difficult markets.
Severnside, the division's waste paper collection business, has benefited from
the rise in demand for waste paper and increased price levels from earlier
this year. The UK packaging waste regulations have again been reviewed by the
Government and targets for recycling and recovery of packaging waste in 2001
have been substantially increased. As a result the value of Packaging Recovery
Notes (PRNs) will increase which should encourage greater collection and
recycling of paper packaging. The division is well placed to contribute to
this effort to expand the recovery of packaging waste.
Plastics and Logistics
Turnover in the plastics and logistics businesses increased by 28.5% to £76.2
million from £59.3 million in the first half of last year. Operating profit
before goodwill amortisation rose 7.1% to £4.5 million compared with £4.2
million and operating margins reduced to 5.9% from 7.1%.
The division made a positive start to the year with good sales growth.
Operating margins reduced due to rising costs, particularly for polymers, the
continued weakness of the euro and start up costs associated with projects.
The acquisition of Rapak, a US bag-in-box packaging systems supplier, was
completed in August and its integration into the division is going as planned.
The transit packaging businesses have performed well and the DW Plastics crate
production operation has successfully started in the Dominican Republic. The
Kaysersberg extruded plastic sheet business has grown strongly in the period
despite difficulties in securing some polymer supplies. The flexibles and
dispensing businesses have also made a good start to the year, benefiting from
the strong demand for press taps. The logistics operations have suffered lower
demand than expected and delays in starting new projects whilst still
incurring related development costs.
OFFICE PRODUCTS
Turnover in the office products business increased by 11.4% to £254.6 million
from £228.5 million in the first half of last year. Operating profit rose to £
10.6 million from £8.1 million and operating margins advanced to 4.2% from
3.5%. Return on capital employed increased to 13.3% from 11.1%.
Wholesaling
Spicers' sales were £228.7 million for the half year, an increase of 15.2% on
the same period last year. Operating profit rose to £10.3 million from £9.1
million although operating margins dropped slightly to 4.5% compared with
4.6%.
Sales rose strongly in all regions. The UK and Ireland operations increased
sales by 11.6% with growth in both electronic office supplies (EOS) and
traditional office products. EOS accounted for an increased proportion of the
sales mix which, along with higher operating costs arising from restructuring
and servicing difficulties, contributed to the slight reduction in operating
margins.
The new northern England Regional Distribution Centre (RDC) at Heywood was
opened during the summer and has replaced the Manchester and Leeds warehouses.
The Dublin warehouse, which has been at full stretch for some while, will be
replaced by a new, enlarged RDC which will open early in the new year and will
provide improved service to the Irish market.
Spicers France has again performed well, recording sales growth of 29% year on
year for the first half and gaining market share. Traditional office products
have grown alongside EOS to help improve operating margins.
In Germany, Spicers has made good progress with sales up 80% over the same
period last year. Operating performance has improved and the business is now
capacity constrained until the new Nuremburg RDC becomes operational in late
spring 2001.
Oscarnet, the division's e-commerce module, has recently been extended to
France and Germany. Uptake by dealer customers has been positive with over 80
dealers in Germany and 60 in France already signed up to the system. Spicers
has now purchased the exclusive rights to use and develop the software system
in the office products market.
Work is well advanced on establishing a wholesaling operation in Spain and a
Managing Director has been appointed for this business.
Manufacturing
John Dickinson Stationery has continued to make slow but steady progress.
Although sales fell by 7.3% to £35.8 million from £38.6 million for the same
period last year, operating profit of £0.3 million compares favourably to a
loss of £1.0 million while operating margins improved from a negative 2.6% to
a positive 0.8%.
The UK market remains very competitive due to the high level of imported
products. Further consolidation in the envelope market has taken place during
the period and several small manufacturers have closed. Against this
background, operational performance in John Dickinson Stationery is gradually
improving and the overall business continues on an upward trend. The John
Dickinson Ledbury business and Spicer Hallfield have again performed
creditably, with higher operating profits than last year.
People
As announced at the AGM in September there are a number of changes to senior
management and the Board. Tony Thorne joins the Group in January 2001 as Chief
Operating Officer, reporting to Peter Williams. It is anticipated that Tony
will take over as Group Chief Executive early in the next financial year at
which point Peter will become Deputy Chairman. Tony brings a wealth of
international business experience having previously worked for Shell and
latterly as President of SCA Packaging's Corrugated Business Division.
Michael Pragnell stepped down as a non-executive Director at the AGM due to
increased external responsibilities. Since then the Board has been
strengthened by the appointment, effective from 5 December 2000, of Bob
Beeston as a non-executive Director. Bob is Chief Executive of FKI plc and a
former non-executive Director of Arjo Wiggins Appleton plc.
Stuart Russell will take early retirement at the end of the financial year and
we thank him for his valuable contribution to the Group's success over the
past 12 years. Carolyn Cattermole has joined the Group as Company Secretary
having previously held that position at Courtaulds Textiles plc.
As mentioned previously Bob McLellan has been appointed as Chief Executive of
the David S Smith Packaging Division, and Don Coates, formerly Managing
Director of the Group's conventional corrugated box plants, has been appointed
as Chief Executive of St Regis Paper.
With the appointments made over the last year we believe we have in place a
strong management team, largely promoted from within, that will drive the
Group forward.
Outlook
The Group has had a good first half with progress in all divisions and despite
further strengthening of sterling against the euro. We enter the second half
encouraged by the progress we have made, particularly as a result of our cost
reduction and efficiency improvement programmes. We recognise that recent
reductions in international waste paper prices may impact papermaking margins.
The Board nevertheless believes that the Group will produce a satisfactory
outcome for the year as a whole.
Group profit and loss account
Half year Half year Year
ended ended ended
28 October 30 October 29 April
2000 1999 2000
(unaudited) (unaudited)
Note £m £m £m
Turnover 2 689.2 594.2 1,217.7
Operating profit
Before goodwill 2 45.0 28.3 67.8
amortisation
Goodwill amortisation (0.4) (0.3) (0.6)
Group operating profit 44.6 28.0 67.2
Share of losses of (0.1) (0.1) (0.2)
associated undertakings
Total operating profit 44.5 27.9 67.0
Exceptional loss on 3 (2.2) (5.3) (6.9)
termination of operations
Profit on ordinary 42.3 22.6 60.1
activities before interest
Interest
Net interest payable (5.5) (4.5) (9.9)
Exceptional charge 4 - - (1.6)
(5.5) (4.5) (11.5)
Profit on ordinary
activities before
taxation
Before exceptional items 39.4 23.7 57.7
and goodwill amortisation
Exceptional items and (2.6) (5.6) (9.1)
goodwill amortisation
36.8 18.1 48.6
Tax on profit on ordinary 5
activities
Tax on profit before (11.8) (7.1) (15.6)
exceptional items
Exceptional 0.7 1.6 5.1
(11.1) (5.5) (10.5)
Profit on ordinary 25.7 12.6 38.1
activities after taxation
Minority interests - (0.4) (0.3) (0.5)
equity
Profit for the period 25.3 12.3 37.6
Dividends (8.9) (8.7) (27.2)
Retained profit for the 16.4 3.6 10.4
period
Earnings per share:
Basic 6 7.9p 3.8p 11.7p
Diluted 6 7.9p 3.8p 11.7p
Adjusted 6 8.5p 5.1p 13.0p
Dividends per share 2.8p 2.7p 8.5p
Group statement of total recognised gains and losses
Half year Half year Year
ended ended Ended
28 October 30 October 29 April
2000 1999 2000
(unaudited) (unaudited)
£m £m £m
Profit for the period 25.3 12.3 37.6
Exchange differences on 2.0 (1.7) (5.5)
foreign currency net
investments
Total recognised gains and 27.3 10.6 32.1
losses
Group reconciliation of movements in shareholders' funds
Half year Half year Year
ended ended ended
28 October 30 October 29 April
2000 1999 2000
(unaudited) (unaudited)
£m £m £m
Profit for the period 25.3 12.3 37.6
Dividends (8.9) (8.7) (27.2)
Retained profit for the 16.4 3.6 10.4
period
Exchange differences on 2.0 (1.7) (5.5)
foreign currency net
investments
New share capital issued - - 0.1
Increase in shareholders' 18.4 1.9 5.0
funds
Opening shareholders' 483.3 478.3 478.3
funds
Closing shareholders' 501.7 480.2 483.3
funds
The difference between reported and historical cost profits for the periods
reported above is not material.
Group balance sheet
At At At
28 October 30 October 29 April
2000 1999 2000
(unaudited) (unaudited)
£m £m £m
Fixed assets 558.9 549.4 546.5
Current assets
Stocks 140.0 124.0 130.1
Debtors 339.8 292.9 296.4
Short term investments 15.7 14.1 4.4
Cash at bank and in hand 11.6 15.2 12.4
507.1 446.2 443.3
Creditors: amounts falling
due within one year (289.6) (263.2) (289.6)
Trade and other creditors (19.6) (79.8) (80.7)
Borrowings
Net current assets 197.9 103.2 73.0
Total assets less current 756.8 652.6 619.5
liabilities
Creditors: amounts falling
due after more than one year (208.3) (134.5) (98.5)
Borrowings (8.1) (1.9) (1.8)
Other (34.3) (31.9) (31.9)
Provisions for liabilities
and charges 506.1 484.3 487.3
Minority interests - equity (4.4) (4.1) (4.0)
Net assets 501.7 480.2 483.3
Capital and reserves 32.1 32.1 32.1
Called up share capital 188.0 187.9 188.0
Share premium account 10.7 10.6 10.7
Revaluation reserve 270.9 249.6 252.5
Profit and loss account
Shareholders' funds - 501.7 480.2 483.3
equity
Gearing (net debt expressed 40.0% 38.5% 33.6%
as a percentage of
shareholders' funds)
Group cash flow statement
Half year Half year Year
ended ended Ended
28 October 30 October 29 April
2000 1999 2000
(unaudited) (unaudited)
Note £m £m £m
Net cash inflow from 7 19.8 28.6 94.7
operating activities
Returns on investments and (5.9) (5.0) (10.3)
servicing of finance
Taxation 8 7.3 (6.8) (13.6)
Capital expenditure and 10 (27.8) (21.7) (50.2)
financial investment
Acquisitions and disposals (8.3) (10.4) (18.0)
Equity dividends paid (18.6) (17.6) (26.2)
Net cash outflow before (33.5) (32.9) (23.6)
use of liquid resources
and financing
(11.2) 9.9 18.8
Management of liquid
resources
- - 0.1
Financing - issue of
ordinary shares
45.7 23.3 (7.0)
- net increase in debt
Increase/(decrease) in 1.0 0.3 (11.7)
cash in the period
Reconciliation of net cash flow to movement in net debt
(See note 9)
Half year Half year Year
ended ended ended
28 October 30 October 29 April
2000 1999 2000
(unaudited) (unaudited)
£m £m £m
Increase/(decrease) in 1.0 0.3 (11.7)
cash in the period
(Increase)/decrease in (45.7) (23.3) 7.0
debt financing
Increase/(decrease) in 11.2 (9.9) (18.8)
liquid resources
Increase in net debt (33.5) (32.9) (23.5)
resulting from cash flows
Net debt acquired with (4.2) (0.9) (0.9)
subsidiary undertaking
Exchange differences (0.5) 3.1 16.3
Increase in net debt in (38.2) (30.7) (8.1)
the period
Opening net debt (162.4) (154.3) (154.3)
Closing net debt (200.6) (185.0) (162.4)
Notes to the accounts
1 Basis of preparation
The interim financial information has been prepared on the basis of the
accounting policies set out in the Group's 2000 statutory accounts. The half
year figures are unaudited.
The Group's results for the financial year ended 29 April 2000 have been
extracted from the statutory accounts filed with the Registrar of Companies
which contained an unqualified audit report and no adverse statement under
Section 237(2) or (3) of the Companies Act 1985.
2 Analysis of Group turnover, profit and capital employed
Half year Half year Year
ended ended ended
28 October 30 October 29 April
2000 1999 2000
(unaudited) (unaudited)
£m £m £m
Turnover Corrugated 358.4 306.4 620.5
and Paper
Packaging: Plastics and 76.2 59.3 123.1
Logistics
434.6 365.7 743.6
Office Wholesaling 228.7 198.5 419.4
products:
Manufacturing 35.8 38.6 74.5
Intra-segment (9.9) (8.6) (19.8)
sales
254.6 228.5 474.1
689.2 594.2 1,217.7
By origin: United 449.2 401.8 813.7
Kingdom
Rest of World 240.0 192.4 404.0
689.2 594.2 1,217.7
Operating profit (see 29.9 16.0 37.4
below)
Packaging: Corrugated 4.5 4.2 8.2
and Paper
Plastics and 34.4 20.2 45.6
Logistics
Office Wholesaling 10.3 9.1 23.0
products:
Manufacturing 0.3 (1.0) (0.8)
10.6 8.1 22.2
45.0 28.3 67.8
By origin: United 31.7 19.7 47.8
Kingdom
Rest of World 13.3 8.6 20.0
45.0 28.3 67.8
Capital employed (see
below)
Packaging: Corrugated 487.3 472.6 459.4
and Paper
Plastics and 73.4 55.0 59.4
Logistics
560.7 527.6 518.8
Office Wholesaling 123.3 106.5 104.8
products:
Manufacturing 36.4 39.0 36.1
159.7 145.5 140.9
720.4 673.1 659.7
By origin: United 519.9 489.4 484.0
Kingdom
Rest of World 200.5 183.7 175.7
720.4 673.1 659.7
Operating profit is stated before goodwill amortisation.
Capital employed excludes goodwill, fixed asset investments, net borrowings,
deferred consideration due in respect of acquisitions, corporation tax,
dividends payable and minority interests.
3. Exceptional loss on termination of operations
The costs of closure in the period mainly relate to the closure of the
Group's Bracknell corrugated packaging plant. The exceptional loss on
termination of operations in the financial year ended 29 April 2000
relates to the closure of two UK paper mills.
4. Interest
The interest charge for the financial year ended 29 April 2000 includes an
exceptional charge of £1.6m relating to the write off of the whole of the
Group's investment in a Far Eastern packaging company.
5 Tax charge
Tax on profits before exceptional items and goodwill amortisation has been
charged at an effective rate of 30% (half year to 30 October 1999: 30%, year
to 29 April 2000: 27%), being the expected full year effective rate.
The tax charge for the period consists of UK taxation of £7.1m (half year to
30 October 1999: £2.6m, year to 29 April 2000: £5.5m) and overseas taxation of
£4.0m (half year to 30 October 1999: £2.9m, year to 29 April 2000: £5.0m). The
UK tax charge is stated net of a tax credit of £0.7m (half year to 30 October
1999: £1.6m credit, year to 29 April 2000: £2.1m credit) relating to the
exceptional items. The UK tax charge for the financial year ended 29 April
2000 is also stated net of a £3.0m exceptional adjustment in respect of prior
years.
6 Earnings per share
The basic earnings per share have been calculated on the profit for the period
of £25.3m (half year to 30 October 1999: £12.3m, year to 29 April 2000: £
37.6m) and on 320.3m (half year to 30 October 1999: 320.3m, year to 29 April
2000: 320.3m) ordinary shares, being the weighted average in issue and fully
paid during the period.
The adjusted earnings per share excludes the effect of exceptional items and
goodwill amortisation and has been calculated on the adjusted profit for the
period of £27.2m (half year to 30 October 1999: £16.3m, year to 29 April 2000:
£41.6m).
7 Reconciliation of operating profit to net operating cash flow
Half year Half year Year
ended ended ended
28 October 30 October 29 April
2000 1999 2000
(unaudited) (unaudited)
£m £m £m
Operating profit before 45.0 28.3 67.8
goodwill amortisation
Depreciation 28.9 28.3 57.0
Profit on sale of tangible - (0.2) (3.2)
fixed assets
Working capital (51.1) (24.4) (19.7)
Decrease/(increase) in (0.3) 0.9 (0.2)
provisions
Other non cash operating 0.2 0.4 -
items
Cash flow from operating 22.7 33.3 101.7
activities before
exceptional items
Operating cash flow (2.9) (4.7) (7.0)
relating to exceptional
items (see below)
Net cash inflow from 19.8 28.6 94.7
operating activities
The operating cash flows relating to exceptional items comprise the cash costs
of closing operations.
8 Capital expenditure and financial investment
Half year Half year Year
ended ended ended
28 October 30 October 29 April
2000 1999 2000
(unaudited) (unaudited)
£m £m £m
Purchase of tangible (33.4) (22.1) (52.6)
fixed assets
Sale of tangible fixed 5.8 1.1 2.8
assets
Purchase of fixed asset (0.2) (0.7) (0.6)
investments
Sale of fixed asset - - 0.2
investments
(27.8) (21.7) (50.2)
9 Analysis of net debt (unaudited)
At Acquired Cash Exchange At
29 April flow differences 28 October
2000 2000
£m £m £m £m £m
Cash at 12.4 0.5 (1.3) - 11.6
bank and in
hand
Overdrafts (17.7) - 2.3 0.1 (15.3)
(5.3) 0.5 1.0 0.1 (3.7)
Debt due (96.2) (5.1) (105.6) 1.0 (205.9)
after one
year
Debt due (62.6) - 59.7 (1.1) (4.0)
within one
year
Finance (2.7) (0.2) 0.2 - (2.7)
leases
(161.5) (5.3) (45.7) (0.1) (212.6)
Short term 4.4 0.6 11.2 (0.5) 15.7
investments
Total (162.4) (4.2) (33.5) (0.5) (200.6)
10 Acquisition
On 11 August 2000, the Group acquired the entire membership interests of
Packaging Systems, L.L.C., which trades as Rapak, and is a leading supplier of
bag-in-box liquid packaging based in Chicago, USA. The guaranteed
consideration for the acquisition, net of acquired debt of £4.8m, was £12.3m
of which £4.3m is deferred for three years. A further amount of up to US$18m
may become payable after three years dependent on Rapak's profits in this
period.
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