Interim Management Statement

RNS Number : 4147N
Smith (DS) PLC
17 February 2009



DS Smith Plc, the international packagingsupplierand office products wholesaler,todaypublishesits Interim Management Statement in respect of the periodsince1November2008.


In thethirdquarter of financial year 2008/09,the Group'soverall trading performancehas beenbroadlyin line withmanagement's expectationsas describedat the time of theHalf-YearResults inDecember. Thefundamentalissues are thecontinuingvolatility andfurther weakening ofdemandinalmost all our markets.

In December, we announced that we were implementing anaction programmefocused on cost reduction and cash generation. This programme, which wasexpectedto havean annualcashbenefit of£12 to 15 million, with an up-front cash cost of a similar amount, has been broadened. The programmewill nowdeliver an annual cash benefit ofcirca £25 million, the majority of which will come through during financial year 2009/10. Thisextendedprogramme will havean up-frontcashcostin the first half of calendar year 2009of circa £23million, which will be recognised as an exceptional item.

The Group's cash generation has remained strong, assisted by further reductions inworking capital.Given the current environment,we aremonitoringcloselycredit risk acrossourcustomer base, within which no single customer represents more than 2% oftheCompany'srevenue. At the end of first half 2008/09, we had net debt of £262 million, of which £216million was held in euros as a hedge against the Group's euro denominated assets. Recent currency movements have resulted in an increase inthevalue of the Group's debt.Save for this effect of currency movements,there has been no significant change to the financial position of the Group since the publication of the results for the six months to 31 October 2008.At that time we advised that we hadrenewedtheGroup'sborrowing facilities. The weighted averagematurityof the Group's facilitiesisnowfour years andfourmonths.


Looking forward, there is a greater uncertainty over the level of demand across our markets and ongoing concerns with regard to paper prices. We are taking further steps to underpin the Group's results and will continue our focus on cash generation. We are confident that the Group's strong market positions will enable it to maintain a robust performance through the remainder of the financial year.

Operating Review -Packaging

Paper and corrugated packaging market

Provisionalindustrystatisticsindicate that European corrugated packaging (box)demandincalendar year2008was circa3% lower than in 2007 and that inthefourth quarterit wasdown byover 5%, highlighting a slow-down which has continued in the early weeks of 2009. This reduction in demand should be seen in the context that the largestannualfallin the last 20 yearswascirca2% in the early 1990s. Demand for thefast-moving consumer goods (FMCG)sectorhas been stronger than themarket as a whole,whilethe consumer durables andindustrial sectors, in particularautomotive and chemicals,havebeenmuch weaker. Corrugated case material (CCM) demand has reflected thedecline inbox demand; a consequence of this has been thatEuropean industryCCMstockshave remainedhigh. Demand for high-quality lightweight CCM continues to be strong and limited by available supply.

The lower box demandandhigh industry CCM stocks have contributed tofurther reductions inCCM prices in continentalEurope, which are now substantiallylowerthan at their peak in late 2007. CCM prices in theUK, which had previously beensupportedbytheweakness of sterling,havecome downduring thelastthree months.Box pricesin theUKhaveremainedfirmto date,while on the continent they havesoftened, particularly where they aredirectlylinked to the price of CCM.

DS Smith-Paper and Corrugated Packaging

Against thedifficult market environment, theperformanceof the Group'sPaper and Corrugated Packagingbusinesshas been reinforced by ourstrongUKmarket positions in waste paper collection, recycled paper and boxes, our focused continental European positions principally in box conversion, and our overall concentration in boxes for the FMCG sector of the market which accounts for circa 65% of our box sales.

UKPaper and Corrugated Packaging

Compared withthelast financial year, results inthissegmenthave beensignificantlyaffected bya combination ofreduced sales volumes,in both boxes and paper,andlowerCCM prices. Wehave takenfurther downtime in paper production to reducestocksandin our box businessweare adjustingproduction to thechanginglevel of demand.

The recently acquiredNew Thames Mill at Kemsleyhasbeen successfullymodifiedandstartedproductionof high-quality lightweight CCMon schedule,on 12 January. This isthe only facility in theUKcapable of supplyingsignificantvolumeforthis segment of the market,which we expect to continue to grow over the longer-term. It alsostrengthens further the Group'ssubstantialrecycling capability.

Continental EuropeanCorrugated Packaging

Thissegment, which is a net buyer of CCM,hascontinued to performwelldespite thereduced demand;itsreportedresultshave additionallybenefitedfrom the strength of the euro. Although sales of heavy-duty boxes to the automotive and other industrial sectors were severely affected by lower demand,our businesses inFrance,ItalyandPolandbenefited from their focus on products for the FMCG sector.

Plastic Packaging

Demand is weakening across our markets. Theliquid packaging and dispensingbusiness has maintained its improved performance. Thereturnable transit packagingbusinesscontinues to beparticularly affected by sharply reduced sales to the automotive and construction sectors and the deferral of orders for beverage crates; the effect of this is being partly mitigated by polymer prices, which have fallen sharply.

Operating Review-Office Products Wholesaling

The slow-down inthe European markethascontinued,particularlyaffectingtraditional office products. Spicershas maintained strongsalesgrowththroughfurther expansion inelectronic office supplies,continued good performance in Germany and Italy,andamarket share gain in France. Combined,thesefactors have more than offset the decline in traditional products. TheUKbusiness continues to be affected by pressure on margins as a result of its changing product mixand the highly competitivetradingenvironment.Results for the continental businesses have benefited from the effects of currency translation.


Our Ukrainian associate, Rubezhansk, is trading profitably(before interest expense and foreign exchange losses)and generating cash. This isdespitethedifficultiesin the local economy. In December, we reported thatRubezhansk'sresultswerebeingaffected by an exchange losson aUS$87 millionloan,as a result of the devaluation of the Ukrainian Hryvnia against the US dollar.This loan was taken outinNovember2007toincreaseRubezhansk'scapacity and develop a capability to produce plasterboard liner. DS Smith's share of the effect of the exchange movement on the loanwillbe accounted for in the Group's Income Statement. Rubezhanskiscurrently reviewing,with their banks,the termsofthisloan.

Although there is no recourse on the loan to DS Smith, the outcome of this review mayaffecttheGroup'sIncome Statementin one of two ways. If theterms of theloanareresolvedsatisfactorilyprior to the publication of DS Smith's 2008/09 results, the Group would expect, based on current trendsandforeign exchange rates, to report aloss of circa £4 millionafter the exchange loss. Thiswould beDS Smith'sshare ofRubezhansk'stotalafter taxloss.

Ifa satisfactory resolution is not completed by that time it will be necessary to make a judgement as regards the carrying value of this asset in the Group's Balance Sheet. This may result in a non-cash, exceptional charge of up to £33 million, being the full impairmentofthe value of the Group's investment in Rubezhansk. The net cash invested by DS Smith in Rubezhansk is £7 million, which is included in the abovefigure. If the issue of the loan is resolved satisfactorily at a later date, the Group would reconsider the carrying value of the asset. The Group remains positive aboutRubezhansk'sstrongmarket position and capability.

The Groupplans to announce itsresultsfortheyearto30April2009on25 June2009.


DS Smith Plc 020 7932 5000

Tony Thorne, Group Chief Executive

Steve Dryden, Group Finance Director

Financial Dynamics020 7269 7140

Andrew Dowler

A conference call for analysts and investors, hosted byTony ThorneandSteve Dryden, will take place today,17February, at9.00amGMT. The dial-in numbers are:

UKparticipants: 0208817 9301or 0845 634 0041

International participants: +44 208817 9301 or +353 1 436 4265

A recording of this conference call will be available by telephone fromtwohoursafter the call has ended until23.59GMTon24/2/09. The dial-in numbers for this recording are:

UKcallers: 0207769 6425

International callers: +44 207769 6425

Replay security code: 1570265#

A recording of the call will also be available through the Investor Relations section of our

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