Pedestrian results from 'comfortable' Smurfit

Paper and packaging markets remain "challenging" but the Jefferson Smurfit Group is "reasonably comfortable" it can meet full year earnings per share forecasts of 15.7 cents to 16.7 cents, according to chief operating officer Mr Gary McGann.

Reporting interim figures in line with expectations, Mr McGann said there was no sign of a recovery in US markets while demand growth in Europe continued to slow in line with general economic conditions and paper prices were under pressure. The group will continue to restrict supply in all its markets to protect prices, he said, adding that price declines cost the group three to four times the cost of this.

Full year forecasts from analysts imply sharply slower growth in the current half. With a first half earnings per share of 9.1 cents the group is now expected to generate e.p.s of just 6.6 cents to 7.6 cents in the current half, well down on the 16.5 cents earned in the second half of 2000. The US is expected to remain difficult while the compensating strong growth in European demand which boosted the first half outcome will disappear.

Smurfit reported flat pre-tax profits at €175 million for the six months to end June with turnover and profit growth in Europe and Latin America offsetting a sharp decline in the US. But earnings per share were up 10 per cent to 9.1 cents helped by a lower effective tax charge (down from 39 per cent to 35 per cent). Shareholders will get a 5 per cent increase in interim dividends to 2.625 cents per share.

Smurfit shares which have risen from their low for the year of €1.82 (on March 15th) dropped back two cents to €2.43 after the results announcement before recovering to close unchanged at €2.45.

Commenting on the recent rise in the group share price, Mr McGann said the shares were still trading below net asset value but had benefited from investors "buying into a potential upside because our grades are early cycle indicators" and from a recognition that they were undervalued.

A geographical breakdown shows operating profits from the US down 38 per cent to €173 million, mainly on weak results from Smurfit Stone. The US provided just 34 per cent of group first half profits down from 54 per cent. Operating profits in Europe were up 44 per cent while profits from Latin America were up 20 per cent when the effect of currency translation is excluded.

In difficult markets Smurfit's strategy is based on restricting supply, restraining capital expenditure, maintaining a geographic spread of operations and reducing operating costs. "Our strategy is to produce to meet and not exceed demand and we will take downtime when needed," Mr McGann said. Its 2001 capital expenditure target is 80 per cent of its depreciation stream. The strategy includes the disposal of non-core assets and exiting "consistently unprofitable inefficient operations which are a cash drain". Mr McGann declined to disclose the operations concerned "in a drip fashion".

In Europe inventories were high but stabilising, capacity is growing and paper prices are under pressure, he said. Capacity growth in Europe is a concern in current market conditions but is "equally capable of resolution", he said. In the US the group sees no signs of recovery in demand but is confident the industry will be maintained.