Smurfit Kappa, Europe’s leading supplier of paper-based packaging, has scrapped its dividend and launched a tender offer to buy back €100m (£87.5m) of senior debt after slipping into a fourth-quarter loss.
Gary McGann, chief executive, said that the company would extend its cost-cutting programme in 2009 as he predicted a decline in sales volumes across its operations in Europe and Latin America.
Mr McGann said that the company, which ended the year with net debt of €3.2bn compared with €3.4bn, remained within its banking covenants. “In the current market place, it’s hard to reconcile dividends with deleveraging,” he said.
With the bulk of Smurfit Kappa’s facilities maturing from the end of 2012, Mr McGann said that he expected shareholder support on passing on the dividend and instead using positive cash flow to whittle down debt.
The €100m tender offer for senior debt, currently trading below par, should prove attractive to some debt holders seeking liquidity, he said.
Revenues fell 3 per cent to €7.1bn over the year as Smurfit Kappa attempted to protect margins. Though revenues fell 10 per cent in the fourth quarter, Mr McGann expected a more limited decline in revenues during 2009 as the group’s 60 per cent exposure to food and beverages provided some resilience.
The company made a pre-tax loss of €11.5m for the full year, compared with a profit of €169m in 2007, after a sharp dip in fourth-quarter trading that saw it generate a pre-tax loss of €218m after it absorbed goodwill writedowns. Ahead of exceptional items of €242m, quarterly profits were €24m (€88m).
Smurfit Kappa shares rose 2.5 cents to close at €1.71.
Smurfit’s belt-tightening measures follow a decline in fourth-quarter performance by most of its peers. The poor global conditions facing the industry were illustrated last month by former US corporate cousin Smurfit-Stone moving into Chapter 11 bankruptcy protection under $5.6bn (£3.8bn) of debt. Smurfit Kappa shareholders may have to grin and bear it through a protracted dividend suspension. But targeting debt reduction would appear a sensible if temporarily painful strategy for equity holders seeking long-term pay-back on shares.
