Interim Results

Smith (DS) PLC 10 December 2003 10 December 2003 DS Smith Plc - 2003/04 Interim Results DS Smith Plc (LSE:SMDS), the international packaging manufacturer and office products wholesaler, announces its results for the six months to 31 October 2003. HIGHLIGHTS Financial • Turnover: £744.7m (first half 2002/03: £741.1m) • Profit before tax and amortisation of intangibles: £39.3m (£44.8m) • Return on average capital employed: 11.0% (12.7%) • Earnings per share before amortisation of intangibles: 8.8p (10.1p) • Cash inflow before dividends and acquisitions: £17.0m (inflow of £18.3m) • Gearing: 44.2% (47.5%) • Results after amortisation of intangibles: profit before tax £38.0m (£43.9m); earnings per share 8.4p (9.8p) Operations • A robust performance given the cyclical downturn in the paper market • Further progress in Corrugated Packaging • Spicers' profit improvement continues Commenting on the half year results, Chairman, Antony Hichens said: 'Market conditions remained difficult in the first half and, as expected, margins in our Paper business were significantly affected by the continuing cyclical downturn in the paper market. We produced a robust result across the Group and our focus on raising operational performance was reflected in further profit improvements in Corrugated Packaging and at Spicers. 'Although sales volumes are increasing in some areas of the Group, pricing remains under pressure. We are working on further ways to enhance our market positions and drive efficiencies. For the full year we anticipate delivering results broadly in line with expectations.' Enquiries DS Smith Plc 020 7932 5000 Tony Thorne, Group Chief Executive Gavin Morris, Group Finance Director Peter Aubusson, Group Communications Manager Financial Dynamics 020 7269 7291 Richard Mountain/Robert Gurner OVERVIEW Market conditions remained difficult in the first half and, as expected, margins in our Paper business were significantly affected by the continuing cyclical downturn in the paper market. We produced a robust result across the Group and our focus on raising operational performance was reflected in further profit improvements in Corrugated Packaging and at Spicers. Group turnover for the half year to 31 October 2003 was slightly ahead at £744.7 million (first half 2002/03: £741.1 million). Operating profit before amortisation of intangibles was £43.5 million (£48.6 million) and the operating margin was 5.8% (6.6%). Return on average capital employed for the six months was 11.0% (12.7%). Profit before tax and amortisation of intangibles was £39.3 million (£44.8 million) and earnings per share before amortisation of intangibles were 8.8 pence (10.1 pence). There was a cash inflow before dividends and acquisitions of £17.0 million (£18.3 million). Net borrowings were £215.8 million at the end of first half 2003/04 (£217.9 million) resulting in lower gearing of 44.2% (47.5%). Interest cover before amortisation of intangibles remained strong at 8.1 times. INTERIM DIVIDEND The Board announces an unchanged interim dividend of 2.8 pence per share which will be paid on 9 March 2004 to ordinary shareholders on the register at the close of business on 6 February 2004. OPERATING REVIEW Packaging Total sales were £484.0 million (£475.2 million) and operating profit before amortisation of intangibles was £35.2 million (£39.2 million). Operating margin was 7.3% (8.2%) and return on average capital employed was 10.7% (12.6%). Paper and Corrugated Packaging Sales in the Paper and Corrugated Packaging segment were £376.4 million (£377.2 million). Operating profit before amortisation of intangibles was £27.7 million (£31.6 million) with lower profits in Paper being partly offset by higher profits in Corrugated Packaging. Operating margin was 7.4% (8.4%) while return on average capital employed was 10.7% (12.6%). Paper During the first half of the financial year there was pressure on the price of corrugated case materials (CCM) in both our UK and French paper operations. Margins were further squeezed by the fluctuating cost of our principal raw material, recovered paper and, specific to the UK, lower demand for Packaging Recovery Notes (PRNs). Government recycling targets have a large influence on demand for PRNs and the recently announced future targets are expected to lead to some firming of the market during 2004. Our UK paper business, St Regis, increased its production volumes through raised efficiency, which enabled it to maintain its substantial share of the domestic market and increase its exports, assisted by the euro strengthening against sterling. Towards the end of the first half we experienced increased energy and starch prices, and further adverse movements in recovered paper prices. These factors combined are contributing to continuing uncertainty in the outlook for CCM margins in the second half of the year. A new warehouse at Kemsley mill, which will reduce the use of third party warehousing, has been commissioned. The Severnside collection and recycling operation continued to develop its collection infrastructure with the acquisition of a depot in Hull in May 2003. Corrugated Packaging Weak economic conditions, particularly in manufacturing, resulted in overall demand for corrugated board in our major markets remaining soft, with demand falling in the first nine months of calendar year 2003 by 1.2% in the UK and 1.6% in Europe as a whole*. Demand growth was stronger in Italy, Poland and Turkey. Despite some price pressure, profit in our Corrugated Packaging operations continued to advance through targeting higher added value or growing market segments and through cost control. In the UK, our sheet feeding operations suffered from heavy price pressure, although our recently acquired speciality sheet feeding plant performed well. Results from the conventional corrugated plants were mixed but the speciality, heavy duty and sheet plant segments made encouraging progress. A small acquisition of the northern UK corrugated businesses of Macfarlane Group Plc was completed on 3 November. The French corrugated operations performed well through developing their business in higher added value products and good cost management. The Italian business maintained its growth, supported by the recent investment in its new lightweight corrugated factory, while in Poland, our developing positions in speciality products contributed to higher sales and profits. The Turkish business has made significant progress towards profitability through increased sales and cost reduction. Plastic Packaging DS Smith Plastics' turnover increased by 10% to £107.6 million. Operating profit before amortisation of intangibles was marginally lower at £7.5 million (£7.6 million) and operating margin was 7.0% (7.8%). Return on average capital employed was 10.5% (12.5%). We made sales and profit progress in our two principal business sectors, liquid packaging and dispensing and returnable transit packaging, but the division's overall performance was held back by the results at two small operations. The first of these, our specialist coating business, suffered a reduction in exports to Asia and the Middle East during the first half of the financial year; these sales have begun to recover in recent months. The second is a new business, StePac, in which we have been investing and which specialises in modified atmosphere packaging for preserving the quality of fresh fruit and vegetables in transit. In liquid packaging and dispensing, sales growth was maintained and profits were slightly ahead. There was some softening of markets due to economic conditions, which particularly affected sales of higher margin products including detergent taps in the USA. Sales and profits in industrial returnable transit packaging advanced well assisted by continued growth and good cost management in extruded products. The injection moulded crate business benefited from strong demand from the brewing sector, driven by product innovation and new environmental regulations in Germany. Office Products Total Office Products sales were £260.7 million (£265.9 million) while operating profit before amortisation of intangibles was £8.3 million (£9.4 million). Operating margin was 3.2% (3.5%) and return on average capital employed was 12.6% (12.8%). The office products market across Europe remains weak due to the effects of the economic slow-down on office activity; sales volumes continue to fall and customers are buying lower specification products than previously. Office Products Wholesaling Spicers' sales increased slightly to £244.4 million (£243.0 million) and operating profit before amortisation of intangibles advanced from £6.8 million to £7.2 million. Operating margin moved ahead from 2.8% to 2.9% and return on average capital employed progressed from 10.6% to 12.2%. This result was achieved through the programme of operational initiatives commenced in early 2002. In the UK, Spicers continued to make progress through sales initiatives, further reductions in operating costs and maintaining high service levels. The French business, which was affected by the more recent downturn in its market, has cut costs and increased sales activity to stimulate demand. In Germany, customer confidence in our service capability is resulting in a good rate of sales growth although results have been affected by a limited number of bad debts; the business is making encouraging progress towards profitability. The Spanish operation, launched in April 2002, is achieving sales growth ahead of expectations. Preparation continues for entering the Italian market during 2004/05. Office Products Manufacturing John Dickinson's sales were £24.4 million (£32.2 million) and operating profit was £1.1 million (£2.6 million); the previous year's result included sales of £4.4 million and operating profit of £0.5 million from the Spicer Hallfield business which was sold in February 2003. Operating margin was 4.5% (8.1%) and return on average capital employed was 15.1% (28.1%). Trading conditions were difficult in both branded products and envelopes with the latter business being additionally affected by continued intense competition from continental Europe. This is being addressed through sales and marketing initiatives and further cost reduction in both business areas. BOARD APPOINTMENTS With effect from 9 December 2003, the Board has been further strengthened by the appointment of two additional Directors. Jean-Paul Loison is appointed as an Executive Director of the Company and brings to the Board his extensive international expertise in the packaging industry. Jean-Paul, aged 61, is currently Divisional Chief Executive of the Kaysersberg Packaging division of DS Smith Plc with responsibility for the Group's continental European Paper and Corrugated Packaging operations. He joined Kaysersberg Packaging S.A. in 1970 and held various senior management positions before becoming Divisional Chief Executive in 1993 following its acquisition by DS Smith in the previous year. Christopher J Bunker is appointed as a Non-executive Director of the Company. Christopher, aged 56, is currently Finance Director of the Water Division of RWE AG and was previously Group Finance Director of Thames Water Plc. Prior to that he was Group Finance Director of Tarmac Plc, Commercial Director of GKN Aerospace and Defence and Finance Director of Westland Group Plc. He is currently a Non-executive Director of John Mowlem Plc and Baltimore Technologies Plc. Christopher's breadth of financial experience in public companies will be a valuable addition to the Board. OUTLOOK Although sales volumes are increasing in some areas of the Group, pricing remains under pressure. We are working on further ways to enhance our market positions and drive efficiencies. For the full year we anticipate delivering results broadly in line with expectations. Group Profit and Loss Account Half year to Half year to Year to 31 October 31 October 30 April 2003 2002 2003 (unaudited) (unaudited) Note £m £m £m Turnover 2 744.7 741.1 1,479.0 Operating profit Before exceptional items and amortisation of intangibles 2 43.5 48.6 88.0 Amortisation of intangibles (1.5) (1.1) (2.6) Group operating profit 42.0 47.5 85.4 Share of profits of associated undertakings Before amortisation of intangibles 1.3 1.6 2.6 Amortisation of intangibles 0.2 0.2 0.4 1.5 1.8 3.0 Total operating profit 43.5 49.3 88.4 Exceptional loss on sale of businesses - - (8.5) Profit on ordinary activities before 43.5 49.3 79.9 interest Net interest payable and other similar (5.5) (5.4) (10.9) items Profit on ordinary activities before taxation Before exceptional items and amortisation of intangibles 39.3 44.8 79.7 Exceptional loss on sale of businesses 3 - - (8.5) Amortisation of intangibles (1.3) (0.9) (2.2) 38.0 43.9 69.0 Tax on profit on ordinary activities 4 (10.6) (12.1) (21.6) Profit on ordinary activities after 27.4 31.8 47.4 taxation (0.4) (0.4) (0.3) Minority interests - equity Profit for the financial period 27.0 31.4 47.1 Dividends (9.0) (9.0) (28.2) Retained profit for the financial period 18.0 22.4 18.9 Earnings per share: Basic 5 8.4p 9.8p 14.7p Diluted 5 8.4p 9.8p 14.6p Adjusted 5 8.8p 10.1p 18.0p Dividends per share 2.8p 2.8p 8.8p The Group's results shown above are derived from continuing operations. There were no material acquisitions or discontinued operations in the previous year or the current half year. Group Statement of Total Recognised Gains and Losses Half year to Half year to Year to 31 October 31 October 30 April 2003 2002 2003 (unaudited) (unaudited) £m £m £m Profit for the financial period 27.0 31.4 47.1 Exchange differences on foreign currency net investments (4.9) (2.5) 7.3 Total recognised gains and losses relating to the financial period 22.1 28.9 54.4 Group Reconciliation of Movements in Shareholders' Funds Half year to Half year to Year to 31 October 31 October 30 April 2003 2002 2003 (unaudited) (unaudited) £m £m £m Profit for the financial period 27.0 31.4 47.1 Dividends (9.0) (9.0) (28.2) Retained profit for the financial period 18.0 22.4 18.9 Exchange differences on foreign currency net investments (4.9) (2.5) 7.3 Goodwill previously written off - - 7.4 New share capital issued 1.7 - 0.4 Increase in shareholders' funds 14.8 19.9 34.0 Opening shareholders' funds 472.9 438.9 438.9 Closing shareholders' funds 487.7 458.8 472.9 The difference between reported and historical cost profits for the periods reported above is not material. Group Balance Sheet As at As at As at 31 October 31 October 30 April 2003 2002 2003 (unaudited) (unaudited) £m £m £m Fixed assets Intangible assets 51.7 47.5 49.0 Tangible assets 541.9 546.7 560.9 Investments 29.5 28.5 29.0 623.1 622.7 638.9 Current assets Stocks 145.2 148.5 155.2 Debtors 346.3 336.3 334.3 Short term investments 25.2 11.7 26.7 Cash at bank and in hand 52.2 45.8 27.7 568.9 542.3 543.9 Creditors: amounts falling due within one year Trade and other creditors (313.9) (336.1) (355.9) Borrowings (24.3) (24.0) (142.7) Net current assets 230.7 182.2 45.3 Total assets less current liabilities 853.8 804.9 684.2 Creditors: amounts falling due after more than one year Borrowings (268.9) (251.4) (114.0) Other (4.4) (1.9) (2.7) Provisions for liabilities and charges (87.0) (86.0) (87.9) 493.5 465.6 479.6 Minority interests - equity (5.8) (6.8) (6.7) Net assets 487.7 458.8 472.9 Capital and reserves Called up share capital 32.3 32.1 32.2 Share premium account 190.5 188.7 188.9 Revaluation reserve 8.8 8.9 8.8 Profit and loss account 256.1 229.1 243.0 Shareholders' funds - equity 487.7 458.8 472.9 Gearing (net debt expressed as a percentage of shareholders' funds) 44.2% 47.5% 42.8% Group Cash Flow Statement Half year to Half year to Year to 31 October 31 October 30 April 2003 2002 2003 (unaudited) (unaudited) Note £m £m £m Net cash inflow from operating activities 6 59.7 64.7 142.0 Returns on investments and servicing of (5.6) (5.6) (7.5) finance (11.5) (7.2) (15.1) Taxation Capital expenditure and investments Purchase of tangible fixed assets (27.5) (34.2) (63.4) Sale of tangible fixed assets 1.5 1.4 4.2 Purchase of holding company shares (1.0) (0.9) (0.8) Purchase of fixed asset investments - (0.1) (0.1) Sale of fixed asset investments 1.4 0.2 0.6 Net cash outflow from capital expenditure and investments (25.6) (33.6) (59.5) Cash inflow before dividends and acquisitions 17.0 18.3 59.9 Acquisitions and disposals (14.8) (17.3) (16.1) Equity dividends paid (19.2) (19.1) (28.2) Net cash (outflow)/inflow before use of liquid resources and financing (17.0) (18.1) 15.6 Management of liquid resources 0.2 4.6 (8.4) Issue of ordinary shares 1.7 - 0.3 Financing - net increase/(decrease) in debt 74.6 44.0 (29.9) Increase/(decrease) in cash in the period 59.5 30.5 (22.4) Reconciliation of net cash flow to movement in net debt Increase/(decrease) in cash in the period 59.5 30.5 (22.4) (Increase)/decrease in debt financing (74.6) (44.0) 29.9 (Decrease)/increase in liquid resources (0.2) (4.6) 8.4 Increase in net debt resulting from cash (15.3) (18.1) 15.9 flows - (2.0) (2.0) Net debt acquired with subsidiary undertakings 1.8 (1.9) (20.3) Exchange differences Increase in net debt in the period (13.5) (22.0) (6.4) Opening net debt (202.3) (195.9) (195.9) Closing net debt (215.8) (217.9) (202.3) Notes to the Accounts 1 Basis of preparation The interim financial information, which is unaudited, has been prepared using the same policies as those adopted in the accounts for the financial year ended 30 April 2003. Those accounts have been reported on by the company's auditors and delivered to the Registrar of Companies. The report of the auditors was unqualified and did not contain an adverse statement under section 237(2) or (3) of the Companies Act 1985. 2 Analysis of Group turnover, profit and capital employed Half year to Half year to Year to 31 October 31 October 30 April 2003 2002 2003 (unaudited) (unaudited) £m £m £m Turnover Packaging: Paper & Corrugated Packaging 376.4 377.2 747.0 Plastic Packaging 107.6 98.0 195.0 484.0 475.2 942.0 Office Wholesaling 244.4 243.0 495.6 Products: Manufacturing 24.4 32.2 59.7 Intra-segment sales (8.1) (9.3) (18.3) 260.7 265.9 537.0 744.7 741.1 1,479.0 By origin: United Kingdom 415.6 440.2 865.5 Rest of World 329.1 300.9 613.5 744.7 741.1 1,479.0 Operating profit (see a) below) Packaging: Paper & Corrugated Packaging 27.7 31.6 53.1 Plastic Packaging 7.5 7.6 14.7 35.2 39.2 67.8 Office Wholesaling 7.2 6.8 16.2 Products: Manufacturing 1.1 2.6 4.0 8.3 9.4 20.2 43.5 48.6 88.0 By origin: United Kingdom 27.6 33.9 59.7 Rest of World 15.9 14.7 28.3 43.5 48.6 88.0 Capital employed (see b) below) Packaging: Paper & Corrugated Packaging 507.5 495.4 500.6 Plastic Packaging 139.3 128.0 136.0 646.8 623.4 636.6 Office Wholesaling 118.3 123.7 122.3 Products: Manufacturing 14.1 18.8 13.8 132.4 142.5 136.1 779.2 765.9 772.7 By origin: United Kingdom 485.3 478.1 456.9 Rest of World 293.9 287.8 315.8 779.2 765.9 772.7 2 Analysis of Group turnover, profit and capital employed Half year to Half year to Year to 31 October 31 October 30 April 2003 2002 2003 (unaudited) (unaudited) Return on Sales Paper & Corrugated Packaging 7.4% 8.4% 7.1% Packaging: Plastic Packaging 7.0% 7.8% 7.5% 7.3% 8.2% 7.2% Office Wholesaling 2.9% 2.8% 3.3% Products: Manufacturing 4.5% 8.1% 6.7% 3.2% 3.5% 3.8% 5.8% 6.6% 5.9% By origin: United Kingdom 6.6% 7.7% 6.9% Rest of World 4.8% 4.9% 4.6% 5.8% 6.6% 5.9% Return on average capital employed (see c) below) 10.7% 12.6% 10.6% Packaging: Paper & Corrugated Packaging 10.5% 12.5% 11.5% Plastic Packaging 10.7% 12.6% 10.7% Office Wholesaling 12.2% 10.6% 12.7% Products: Manufacturing 15.1% 28.1% 23.1% 12.6 % 12.8% 14.0% 11.0% 12.7% 11.3% By origin: United Kingdom 11.4% 14.0% 12.4% Rest of World 10.3% 10.4% 9.7% 11.0% 12.7% 11.3% a) Operating profit is stated before exceptional items and amortisation of intangibles. b) Capital employed excludes fixed asset investments, net borrowings, deferred consideration due in respect of acquisitions, corporation tax, dividends payable and minority interests. c) Return on average capital employed for the half year is calculated as twice the operating profit divided by the average capital employed including the intangible assets on the balance sheet. 3 Exceptional items The loss on sale of businesses last year included £7.4m of goodwill previously written off to reserves. 4 Taxation Tax on profits before exceptional items and amortisation of intangibles has been charged at an effective rate of 27.0% (half year to 31 October 2002: 27.0%; year to 30 April 2003: 27.1%), being the expected full year effective rate. The tax charge for the period consists of UK taxation of £4.2m (half year to 31 October 2002: £5.8m; year to 30 April 2003: £9.0m) and overseas taxation of £6.4m (half year to 31 October 2002: £6.3m; year to 30 April 2003: £12.6m). 5 Earnings per share The basic earnings per share have been calculated on the profit for the period of £27.0m (half year to 31 October 2002: £31.4m; year to 30 April 2003: £47.1m) and on 321.1m (half year to 31 October 2002: 320.3m; year to 30 April 2003: 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 amortisation of intangibles and has been calculated on the adjusted profit for the period of £28.3m (half year to 31 October 2002: £32.3m; year to 30 April 2003: £57.8m). 6 Reconciliation of operating profit to net cash inflow from operating activities Half year to Half year to Year to 31 October 31 October 30 April 2003 2002 2003 (unaudited) (unaudited) £m £m £m Operating profit before exceptional items and amortisation of intangibles 43.5 48.6 88.0 Depreciation 31.7 30.8 62.2 Profit on sale of tangible fixed assets (0.3) - (0.4) Working capital (14.8) (11.8) (6.0) Increase/(decrease) in provisions (0.3) (3.2) (3.3) Other non cash operating items (0.1) 0.3 1.5 Net cash inflow from operating activities 59.7 64.7 142.0 7 Analysis of net debt (unaudited) At Acquired Cash flow Exchange At 30 April differences 31 October 2003 2003 £m £m £m £m £m Cash at bank and in hand 27.7 - 26.0 (1.5) 52.2 Overdrafts (39.8) - 33.5 0.1 (6.2) (12.1) - 59.5 (1.4) 46.0 Debt due after one year (110.1) - (160.0) 4.2 (265.9) Debt due within one year (101.9) - 84.9 0.2 (16.8) Finance leases (4.9) - 0.5 0.1 (4.3) (216.9) - (74.6) 4.5 (287.0) Short term investments 26.7 - (0.2) (1.3) 25.2 Total (202.3) - (15.3) 1.8 (215.8) -------------------------------------------------------------------------------- * Source: European Federation of Corrugated Board Manufacturers This information is provided by RNS The company news service from the London Stock Exchange

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Smith (DS) (SMDS)
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