TOUGH times require tough actions. After a 52 per cent drop in 1996 profits and with a difficult year in prospect, the Jefferson Smurfit Group is restricting capital spending, strengthening cost controls and limiting capacity growth.
These are the prime requirements for increasing profits in markets where prices are weak, according to the group's chairman, Dr Michael Smurfit.
Despite good demand for products in improving world economies, paper and packaging groups have been unable to achieve any increases in their product prices in 1996. This was because they produced too much.
Buoyed by signs of recovering demand in the last quarter of 1996, the companies increased their operating levels and did not take their traditional downtime in December and January. The result was excess supply and a build up of stocks.
Pricing is a crucial issue for the Smurfit Group. Profits are driven by pricing levels. Every $50 increase in the price of board means an extra 7p in earnings per share, according to finance director Mr Ray Curran. But in the vital US market current high stocks will have to be run-off before any price increase can be achieved.
There is some evidence that companies are now restricting production but analysts estimate that the run-off of stocks will not be completed before the early to mid summer. Summer is usually a period of low demand, so any price increase is unlikely to be achieved before the autumn. Prices increases may come earlier in Europe.
In 1996 Smurfit reduced costs by £24 million. The objective is to reduce costs by £35 million this year. "Cost take out" - a group term - includes increasing productivity and cutting jobs (employment fell by 280 in 1996). The aim is permanent cost savings.
Capital spending, which was is £134 million in 1996, is being restricting to 75 per cent of depreciation this year, while the market outlook remains unclear. Tight working capital management in 1996 resulted in low inventories which cut the working capital requirement for the year by £67 million
Smurfit will continue to look for suitable acquisitions - mainly corrugated conversion plants in Europe and opportunities in Central and Latin America and eastern Europe where economic growth and lower inflation are expected to result in improve contribution to the group.
But no major moves are expected in 1997 as long as the future of the Morgan Stanley shareholding in Jefferson Smurfit Corporation remains an issue. The group will want to maintain its financial flexibility to move on the Morgan Stanley stake when the time is right.
