After what have been a solid few years for Spicers, news this week that the wholesaler has seen a significant drop in operating profit in the last year came as somewhat of a surprise.
In a trading update of its preliminary results announcement for the year to 30 April 2006, released on Tuesday, DS Smith announced that the full-year operating profit for its Spicers division will be around £9 million ($16 million) down from its £21.5 million reported for 2004/2005.
Spokesman for DS Smith Peter Aubusson told OPI+: "This year’s low profit came as a surprise to us after a solid year last year. Spicers has had three to four years of very good progression and we thought that the division would continue to progress this year."
In a statement, DS Smith blamed the profit fall on factors in the UK, Spicers’ largest market, such as price pressure, which got worse throughout the year; sales margin erosion that was higher than previously anticipated; and higher costs which have been incurred to overcome service shortcomings.
"The UK market is very competitive at the moment with customers looking for keen prices," said Aubusson. Another factor that has negatively impacted Spicers, he added, is the rapid growth in EOS in the market – product lines that result in smaller margins for the wholesaler.
While the same issues are also impacting business in Spicers’ European markets, Aubusson claimed conditions were not as tough as in the currently ultra-competitive UK market and business on the continent has been steadily improving. "Our business in Europe is progressing as expected," he said. "France, our largest market outside the UK, is doing well as expected, the German business made further progress, Italy is going well since we opened there a year or so ago, and the Timmermans acquisition in Benelux has been very successful."
Another issue for DS Smith as a whole in the last year was a rise in energy costs from £64 million in 2003/04 to £96 million in 2005/06, which largely affected the group’s paper and consolidated packaging business. But although pre-exceptional profit before tax for the year will come in somewhat low, the group stated that pre-exceptional earnings per share for the full year are anticipated to be in line with previous expectations due to a lower than expected tax charge. Cash flow for the full year is expected to be "satisfactory".
In light of the sustained high energy costs, which are expected to continue, DS Smith stated that it has accelerated its programme to "streamline the portfolio and exit businesses with no prospect of turnaround". It added: "We anticipate that the actions we are taking will allow the group to perform more strongly in 2006/07."
Despite Spicers’ shortcomings, Aubusson told OPI+ that he was confident the wholesaler is in good hands under new CEO Rob Vale, who came on board in February. "At the moment Rob is looking at costs within the whole business and what needs to be done to strengthen UK sales and operations," he said. "We expect Spicers to continue to profit next year as Rob implements improvements. We have great expectations for his new ideas."