Tight rein on finances as group seeks £150m cash flow

Cost reductions, lower capital spending and the disposal of non-core assets are the main items on the agenda of the Jefferson Smurfit Group as it targets a cash flow of £150 million this year.

In the Irish market Smurfit Finance has been put on the market. Chief financial officer, Mr Gary McGann carefully defined core assets as those which have the ability to perform profitably and to be significant players in their markets. When this second criteria is applied, it makes little sense for the group to retain the small ticket leasing operation which has an asset base of £130 million since the sale of its stake in Smurfit Paribas.

In 1998, free cash flow fell to £100 million from £120 million mainly reflecting a rise in capital expenditure to £172 million from £138 million. Free cash flow is made up of cash from operations and disposals as well as reducing working capital requirements and capital expenditure.

This year capital spending on fixed assets will be scaled back significantly, more non-core assets will be sold and the 1997-1999 £100 million cost reduction target will be reached or surpassed. The cash released could be used to pay down debt or for suitable acquisitions. Germany is one market where the group would like to strengthen its position.

The new cash flow target will mean a drive to raise profits. But operationally 1999 is likely to be a tough year. Markets in Europe are weak while those in Latin America are depressed. The picture in the US is brighter with some strengthening in product prices and demand. The recovery is still in its early stages though the underlying economic indicators are strong.

Higher US prices should eventually result in stronger European prices but it could be closer to the end of the year before any impact is felt in Europe and Latin America is expected to remain weak.

In the US, product price rises in March are holding and further price rises are now being anticipated. Consolidation in the sector has helped to address structural supply problems. There now appears to be some realisation in the industry of the importance of avoiding the stock build-ups which depressed prices in previous recovery periods. Discipline among suppliers will be crucial to maintaining price increases.

With the group and other companies taking production downtime, Smurfit is forecasting a net capacity loss in the US this year which should help sustain product price rises. Overall it expects stable global capacity growth of around 1.4 per cent this year.

This year will be a transition period for Smurfit following strategic moves in 1998. These included the SmurfitStone merger in the US and the increase in the group's stake in the Austrian group Nettingsdorfer from 28 per cent to 75 per cent at a cost of £59 million plus debt of £103 million.

The Smurfit-Stone merger is aimed at accelerating consolidation and capacity control in the US paper and packaging sector that is so important to achieving product price increases, and at achieving the scale that will allow sharp reductions in production costs. The merged company, in which the group has a 34 per cent stake, is the largest paper-based packaging operation in the US. Nettingsdorfer gives Smurfit indirect access to the potentially strong growth markets of Eastern Europe.

Overall Smurfit faces another difficult year. Shareholders looking for a return to the 1998 high share price of €4.48 will need to be patient.