JEFFERSON Smurfit Corporation (J.S. Corp) expects to see a continued slide in profits this "year following the decline in the second quarter.
The latest results showing a drop in pre-tax profit from $106 million (£66 million) in the second quarter of 1995 to $44 million in the second quarter of 1996 are broadly in line with expectations.
Chief executive offered Mr James Terrill, wins that the unfavourable price trend of the past six months will continue to have a negative impact on earnings in the second half.
He sees some favourable signs, noting that in June there was a sharp upturn in industry backlogs of folding boxboard. In addition, the June container shipments have been the strongest in the past 18 months, indicating a more favourable balance between supply and demand in the second half.
However, NCB analyst, Mr John Conroy, has noted that, while demand was improving, it would not feed through in terms of higher profits until 1997 at the earliest, because of the time lag between demand and prices.
Furthermore there continues to be over capacity in the industry. Jefferson Smurfit Group finance director, Mr Ray Curran, stressed that the demand side was not a problem, noting that volume sale of boxes was up by 7 per cent.
The group, he added, hoped to see the excess capacity absorbed soon.
NCB has predicted net income of between $112 million and $115 million for the whole of 1996. This compares with $247 million in 1995.
The latest results show a drop in earnings per share from 60 cents to 24 cents (this falls to 20 cents after an extraordinary charge because of an early debt repayment). This is somewhat better than some brokers' forecasts of 21 cents to 22 cents. Investors "will take some comfort from the slightly better results", said Mr Conroy.
J.S. Corp created a product liability reserve of $25 million in the fourth quarter of 1995. This is in respect of a non core products line which had some defects and for which the company is now compensating its customers.
Sales fell from $1.08 billion to $844 million in the second quarter of 1996. Mr Terrill attributes the decline mainly to a significant drop in prices for packaging materials, in particular containers and container board.
Mr Conroy noted that the average price of corrugated boxes was $734 a ton in the second quarter compared with a peak of $875. NCB is looking for a further contraction to between $715 and $720 in the third quarter and for the price to then bottom out.
The latest results were also affected by a curtailed output for three weeks in its newsprint mills in a stock reduction programme. This is estimated to have cut earnings per share by seven cents.
J.S. Corp, however, was able to partly offset the impact of lower prices by lower fibre costs (reflected in the reduction in the cost of goods sold from $855 million to $689 million), strong profitability in specialties and newsprint, and an $ 11 million reduction in interest costs.
While conceding that it has been a difficult quarter for the container business, most of the group's other business "posted profits that equalled or exceeded year ago levels", says Mr Terrill.
J.S. Corp managed to reduce its debt mountain still further by $29 million, bringing the debt reduction to $ 172 million this year. It has repaid $450 million of debt in the last 18 months.
The outstanding debt now amounts to $2 billion. The group, has a negative net worth but Mr Curran stressed that this is because it cannot revalue its assets under US law and that J.S. Corp has an equity value of $1.25 billion.
Even with the sharply reduced profits in the second quarter, interest payments are still covered almost twice by available profits. However, because of reducing profits in the second six months, J.S. Corp, which is 46.5 per cent controlled by the Jefferson Smurfit Group, is unlikely to reduce debt much further in the second half.
