PROFITS will be under pressure at Jefferson Smurfit Corporation in coming months because of falling container prices, according to its president and chief executive officer, Mr James Terrill.
Earnings per share rose by 37 per cent to 48 cents at the US associate of the Jefferson Smurfit Group in the first quarter but the price of corrugated containers continued to fall. In a difficult market the paper and packaging company will "maintain a tight rein on costs and spending", Mr Terrill said.
Given weak markets, JSC plans to borrow $200 million under the banking facilities to off for repayment in 1997 and 1998.
Following the repayment of debt of $143 million in the first quarter, facilitated by a strong cash flow, the latest refinancing is aimed at extending the maturity of company borrowings in difficult market conditions. At the end of March 1996 the company had borrowings of $2,050 million.
The latest refinancing due to be completed by the end of May, is, case move" - in case the downward trend in pricing continues and cash generation is not up to scratch. "It is because we do not take chances on the financial side of the equation," Jefferson Smurfit Group's finance director, Mr Ray Curran, explained. It is a cautious move to improve financial flexibility.
JSC's first quarter results were "a solid start to the year," Mr Curran commented. The results we're ahead of the consensus earnings forecast of 46 cents per share. But Mr Curran agreed that sentiment about the current year is tinged with caution on concerns about demand and pricing levels throughout the sector.
The outlook for JSC and for the group now depends on pricing and demand trends in the US during the remainder of 1996 and into 1997. Trends in Europe feed into other markets because, when US producers have excess capacity, they become aggressive exporters, cutting prices to sell on foreign markets.
Profit forecasts for the group, which owns 46.5 per cent of JSC, have already, been cut to around £250/£265 million for 1996 and £160 million to £220 million for 1997. These figures compare with record profits of £420 million for 1995.
Positive factors for the company include beater stability in demand and pricing of non container products and a sharp fall in the price of the re cycled fibre raw material, Mr Terrill said yesterday. Prices of re cycled fibre peaked in spring 1995 and the fall in prices means lower operating costs at JSC.
First quarter profits after tax increased by 36 per cent to $53 million compared with the first three months of 1995 despite a 7 per cent drop in sales.
Growth in the first quarter 1996 was enhanced by higher packaging prices - and lower waste fibre costs compared with the first quarter of 1995. Packaging prices peaked in the third quarter of 1995 and have been slipping back since - then. But demand for packaging was weaker. Good growth in profits at the newsprint business helped the latest result.
"Earnings will get worse before they get better. They are still on a deteriorating trend. But there are rays of hope in the form of improving demand. While container prices are unlikely to improve before the end of 1996, they may begin to stabilise in the second half," according to analyst with NCB stockbrokers Mr John Conroy.