Smurfit interim results at top end of expectations

Stronger demand in most of its markets together with product price increases and cost efficiencies helped the Jefferson Smurfit Group to produce first half results at the top end of market expectations.

Profit before tax and exceptional items increased to €186 million (£146 million) for the six months to end June, up from €33 million in the previous corresponding period.

But Smurfit shares, which had gained three cents on the announcement, closed seven cents down at €2.15 as the market remained sceptical about the likelihood of a sustained recovery in the US paper market.

Group chief operations officer Mr Gary McGann said the latest figures reflected good growth in demand in Europe, recovery in Latin American markets and an improved performance in the US against relatively soft market conditions. Looking forward, he said Smurfit expected to maintain the recovery by continuing to focus on cost efficiencies against a background of improving market demand, stable product prices and reducing industry inventories or stocks.

Mr McGann said he was comfortable with analysts' estimates of full year earnings per share of 23 to 24 cents for the current year and 37 cents in 2001. But he said the industry had "more work to do" to get price increases through to the box sector and with the cost increases in waste prices, it was under pressure to recover prices on boxes to maintain margins.

In a statement, group chairman Mr Michael Smurfit said: "We believe that the greatest period of risk may now have expired for North American containerboard products . . . For just the third time in over 20 years, product prices in the North American market have exceeded total production costs by more than 15 per cent for a period of more than six months.

While Europe and Latin America performed well, Mr McGann said that demand in the US market has been "soft", though he added there were some "possible signs" of demand improvement. But he said the industry had made considerable progress on its costs and on output discipline.

Supply-side management will remain an important issue if prices are to be sustained, he said. The group's US 29.5 per cent associate Smurfit-Stone Container Corporation, which is now profitable after a restructuring and asset sales, recently announced the closure of its sixth mill since the Smurfit-Stone merger in 1998 to control supply levels. And ongoing cost management will be important to ensure that the group's "delivered costs" are at the lowest possible level.

"The cost side is critical in this industry. When you factor in inflation, the true graph on prices is moving downwards, therefore to sustain margins we need to have cost-cutting programmes in every country," Mr McGann said.

The group sees opportunities to reduce costs in its Europe division through the continuation of the plan which removed costs of £125 million (€159 million) over the last three years. "We anticipate we could do the same again over the next three years through closing plants, clustering plants to reduce overheads, standardising grades and mill systems and using our buying power more expansively."

On acquisitions, the group is examining a number of possible "bolt-on" opportunities in Latin America and at opportunities in Europe.

"We will look at all opportunities where the price is right and where it is geographically logical - where it would give us entry into new target markets or increase our scale in a market or where it would add higher margin products," he said.

Asked about the poor performance of the share price, Mr McGann said "our view is that we have to continue to deliver profits and predictability. We have taken action to deliver strong sustainable earnings and feel there is potential for a re-rating".

Smurfit shares have underperformed the market by 33 per cent in the year to date.