Jefferson Smurfit Group shares moved ahead yesterday despite the announcement of a 51 per cent fall in pre-tax profits to £61.2 million for the six months to end June. The shares opened at 222p and hit 230p before closing 4p stronger at 226p on the back of optimistic comments on the outlook for the paper and packaging sector from the chairman, Dr Michael Smurfit.
He expressed "cautious optimism" about the industry's immediate prospects. Referring to recent increases in the containerboard prices in the US and in Europe, he said: "If discipline can be maintained through a pricing up-cycle, then the recovery that is underway could become a sustainable recovery not seen for many years in this industry." At £61 million, the first-half result was ahead of market expectations. However, profits were still down from £126 million in the first half of 1996. The fall reflected very weak product prices in the paper and packaging sector. The problem was particularly acute in the United States, where overproduction by companies in the sector led to excess supplies, which depressed prices. Profits fell despite rising sales volumes and stable production costs at the group. Earnings per share fell to 4p from 8.2p.
However, reflecting the group's confidence in the outlook for the future, shareholders are to get a 10 per cent increase in their interim dividend to 1.65p per share. The latest results show a 7 per cent fall in group sales to £1.3 billion. Operating costs were 4.7 per cent lower at £1.2 billion. Lower borrowings in Latin America, where interest costs are high, benefited net interest costs, which were down to £25 million from £30 million. Overall, the group subsidiaries generated pre-tax profits of £54.6 million, down from £83 million. Associated companies chipped in £6.6 million, down from £42.7 million, to bring the group pre-tax profit to £61.2 million. The contribution from associates was pulled back by losses of $11 million at Jefferson Smurfit Corporation in the United States.
A geographical breakdown of the outcome shows that the US market was the main problem area though profits fell in all regions. The US operation reported a loss of £9.9 million, down from a profit of £42.2 million, on sales that increased marginally to £92.5 million from £91.7 million. Despite good demand in the market, prices were weak and newsprint, plastics and corrugated products suffered.
In Ireland and Britain, sales were 2.5 per cent lower at £279 million, while profits fell by 14 per cent to £16.1 million. Finance director, Mr Ray Curran said the real fall in sales was higher, but the figures benefited from sterling's strength when British sales were translated into pounds. The profit outcome reflected weak paperboard prices, and, in Britain, weak prices for corrugated cases.
The British market suffered from strong sterling which made imports more attractive, depressed exports and lead to a build-up of stocks. But sterling's strength reduced imports into the Irish market. These markets are expected to remain very competitive and "full year profits will be impacted", Mr Curran said.
In continental Europe, sales were 12 per cent lower at £700 million and profits were down 11 per cent to £58 million. The results were depressed by the translation of weak currencies into a strong pound and by difficult corrugated case markets. Mr Curran said currency translation accounted for over 80 per cent of the fall in sales in these markets - profits were only down by about £1 million in stable currency terms.
The second quarter on the continental markets was better than the first, he said, with good demand and a strong US dollar helping the competitive position of the sector vis-a-vis US imports. Paper and paperboard prices increased from lows reached in the first quarter of 1997 but competition prevented a recovery in corrugated case prices. Markets in Spain and Italy were particularly difficult.
Smurfit's associated companies in Europe produced mixed results. In Spain, Papelera Navarra was affected by the transport strike and lower product prices, while Nettingsdorfer in Austria faced difficult markets. But Munksjo in Sweden, which produces high-value-added products, showed strong profit growth. These associates added £7 million to profits from continental operations, up from £4 million.
In Latin America, sales were 4 per cent higher at £191 million, while profits fell to £22.2 million from £30.1 million. Results from the region were mixed, with markets in Colombia difficult in poor economic conditions. Mexico produced profits growth, while Venezuela produced "an average performance".
