Smurfit cancels dividend payout

PACKAGING COMPANY Smurfit Kappa, whose shares have dropped 80 per cent in 12 months, has cancelled its dividend after slipping into the red last year with a pretax loss of €11.49 million.

Citing “extremely difficult” trading conditions in the first quarter this year, chief executive Gary McGann said pre-exceptional earnings before interest tax depreciation and amortisation (EBITDA) for the full year were likely to come in “marginally below” the consensus market forecast of €800 million. This implies a sharp deterioration in the company’s performance this year, as pre-exceptional EBITDA for 2008 came in at €941 million, 12 per cent down on 2007 and slightly below the €945-€950 million range mooted in November.

However, Mr McGann said the company was protected to some extent by its geographic diversity and the fact that 60 per cent of its end markets related to “defensive” food and beverage sectors.

The pretax loss, which reversed a pretax profit of €169.9 million in 2007, came amid weaker demand and higher input costs as a result of sharp economic contraction in Europe and Latin America. The basic loss per share was 22.8 cent, reversing earnings per share of 74.3 cent in 2007.

Shares in Smurfit Kappa gained 1½ cent to close at €1.70½, a level that implies a market capitalisation of €371.73 million.

Its net debt at the end of 2008 was €3.185 billion, 6 per cent less than at the end of 2007. Revenue dropped 3 per cent to €7.06 billion but free cash flow generation rose 51 per cent to €281 million, largely due to lower debt servicing costs.

Mr McGann said the company decided to suspend its dividend – after payment of an interim dividend of 16.05 cent per share in October – to maximise the cash available to pay down its debt. “Future dividend policy will be considered relative to prevailing market conditions and capital structure,” the company said.

A 50 per cent fall in operating profit to €282 million last year from €562 million reflected the impact of an exceptional charge of €257.95 million, which included €171 million in goodwill impairments and more than €86 million in charges associated with the closure of plants in Spain. The impairment followed a test in the fourth quarter of the year, based on “value in use” calculations to estimate the recoverable amounts of the firm’s cash generating units.

He said pressure on profit margins was offset by €75 million in cost savings, with further savings of €75 million forecast for this year and €50 million for 2009. The firm has initiated a buyback of €100 million of its senior debt.

Mr McGann, who resigned from the board of Anglo Irish Bank after its nationalisation last month, declined to comment on the controversies surrounding the bank. On Ryanair’s call for his resignation as chairman of Dublin Airport Authority (DAA) after his departure from Anglo, he said: “I’m appointed by the shareholder. I continue to be chairman of the DAA and life goes on.”

Results

Turnover:€7.06 billion (-3%)

Pretax loss:€11.49 million (pretax profit for 2007: €169.9 million)

EBITDA:Before exceptionals and share-based payments: €941 million (-12 per cent)

Dividend:Suspended

Summary:Almost two years after its return to the stock market, Smurfit Kappa plans to use cash previously earmarked for dividends to reduce debts. In the face of weaker demand as a result of the global economic malaise, the company has put the market on notice that its earnings before interest tax depreciation and amortisation will drop below €800 million this year. The business is tightening its capital programme and cutting costs.