DS Smith Plc, the international packaging manufacturer and office products wholesaler, said lower selling prices, fluctuations in the cost of recovered paper, higher energy costs and last year's low PRN prices were to blame.
The announcement came as the company published its preliminary results for the year ending April 30, 2004 late last week. DS Smith's paper and corrugated packaging business increased its profits slightly to 748.9 million (747.0 million 2002/03), but operating profit fell from 53.1 million to 50.5 million in 2003/04.
Tony Thorne, group chief executive, blamed sluggish economic conditions in Europe, with demand for corrugated board 0.9% lower in the UK than in 2002/03. He said the first quarter of 2004 had seen a “small amount of growth”, while the company's other major markets have performed at similar levels to 2003.
Despite the low European demand growth and “some existing excess capacity”, Mr Thorne said approximately 600,000 tonnes of new capacity became available within the total market of approximately 20 million tonnes last year. Although this was partly offset by some older capacity being removed, it resulted in a destabilisation of selling prices throughout the European market. Mr Thorne said that no more capacity is expected to come on stream in 2004, but further capacity additions are expected in 2005.
Market share
Recycled paper, has continued to gain market share in the UK market for corrugated case materials against virgin material, while the imported share of the market was unchanged, Mr Thorne said.
Pressure on paper producers' margins was worsened by fluctuations in the cost of recovered paper, the DS Smith group chief executive said, caused largely by Asian demand for recovered paper from Europe.
Mr Thorne also said the net cost of raw material had been hit by the low 2003 prices for packaging waste recovery notes (PRNs), which are issued as evidence that packaging has been reprocessed in compliance with the UK Packaging Waste Regulations. Last year saw lower demand for PRNs than had been hoped for, since the government set recovery targets the same as in 2002.
The group chief executive said there has been some firming of PRN prices in 2004 so far, but prices still remain “well below recent years' average prices”.
Efficiency
Although margins have been tighter, the company said St Regis has increased its production and sales volumes through continuing emphasis on higher efficiency and improved process control.
Sales to the UK market increased slightly, while exports moved ahead more strongly, assisted in the early months of the year by the strengthening of the euro against sterling. Profits were substantially below those of the previous year due to a combination of lower selling prices, the fluctuating cost of recovered paper, higher energy costs and lower PRN prices.
The Kemsley paper mill, which accounts for over 50% of St Regis’ paper production, achieved record output, with machine efficiencies well above the previous year due to continuing process optimisation. A new warehouse was commissioned in autumn 2003, which improved customer service and reduced costs by virtually eliminating the use of third party warehousing. The other paper mills also raised volumes, and record production was achieved at Sudbrook and Taplow.
The Severnside collection and recycling business continued to expand, although results were affected by fluctuations in the price of recovered paper. It invested further in its collection infrastructure, both in terms of equipment and collection depots. It added one new depot during the year and, since the year end, has acquired the five depots of BPB Recycling, subject to approval from the Office of Fair Trading.
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