VPK Packaging's H1 net income up 54.9% year-over-year to €12.6M on 18.5% increase in net sales to €357.4M; results driven by increase in volumes, higher product prices, yet offset by rising raw material costs

EREMBODEGEM AALST, Belgium , August 31, 2011 (press release) – --Sales increase by 18.5% driven by increased volumes and price levels
--Sales margin remains under pressure because of further increased input costs
--Operating cash flow (EBITDA) rises by 11.2%
--Debt ratio (NFD/EBITDA) maintained (1,3x) despite further increase of working capital requirement.

Main events and transactions

The first half-year was mainly characterized by a further increase of the main input costs, i.e. old paper, starch and energy. These rises came on top of the increases already recorded in 2010. In May, the old paper price reached levels of 180 EUR/ton. On average, the old paper price was 31% higher over the first half-year than the average over FY2010. The rise of starch even amounted to 77% over the same period. The starch price of the last quarter of 2010 was maintained at a high level.

The paper prices consequently continued to rise. The increase of the packaging prices was also started, however with a usual time lag of 3 to 6 months. Due to the continuous increases of the raw materials and paper prices, and the time lag effect on the packaging prices, the sales margins were further under pressure. Only recently, during the past summer months we observed a stabilization of the raw materials and paper prices. In the coming months, the packaging prices will have to be further increased in order to recover the sales margins.

The further increase of the volumes as well as the higher price levels of both raw materials and finished products entailed a further increase of the working capital requirement. During the first half-year working capital rose by 18.3 million EUR.

The net financial debt increased by 10.0 million EUR. However, the debt ratio (NFD/EBITDA) is maintained at a healthy level of 1.3x.

The effect of these important events and transactions on the condensed financial statements is described below.


3.1. Consolidation scope

During the first half-year there are no changes in consolidation scope.

3.2. Income statement Consolidated sales per end of June 2011 amounted to 357.4 million EUR compared to 301.7 million EUR over the first half-year of the past year. This represents an increase of 18.5%.

The gross margin decreased from 53.9% over the first half-year in 2010 to 49.2% over the past half-year. Given the ongoing rise of the paper prices, and because of the normal time span necessary to translate paper price increases into an adequate rise of packaging prices, the gross margin remained under pressure and further declined.

The personnel costs excluding provisions for redundancies increased from 67.3 million EUR to 70.1 million EUR (+4,3%). The pension plans in the UK are still in wind-up. While in the first half of the past year a related additional provision had to be created for an amount of 2.2 million EUR, no additional provisions had to be accounted for in the course of the first half-year of this year.

Depreciation amounted to 15.2 million EUR and consequently remained at a level comparable to that of the previous year.

The operational cash flow (EBITDA) amounts to 33.4 million EUR per end of June 2011 compared to 30.1 million EUR over the same period of last year. This represents an increase of 11.2%. Profitability amounted to 9.3% (vs. 9.9% HY1’10). The operating result (EBIT) amounted to 17.1 million EUR compared to 13.6 million EUR the previous year.

Over the first half-year the net financial charges amounted to 1.4 million EUR. The net interest charges amounted to 1.6 million EUR compared to 1.1 million EUR the previous year. In anticipation of increasing interest rates, an additional IRS (Interest Rate Swap) was concluded for an amount of 20 million EUR, covering the interest rate for this amount over the years 2014, 2015 en 2016. Together with the previously concluded interest swaps (See Annual report 2010 page 111) the interest rate risk has been covered to a large extent, till 2015 included. Over the first half-year a valuation gain of 0.2 million EUR was recorded, following the revaluation of these financial derivatives at fair value. Moreover, the financial result comprises an exchange rate gain of 0.2 million EUR. This concerns the exchange rate result, mainly following the financing in foreign currency (mainly GBP, PLN and RON) of the subsidiaries through the central financing company of the group i.e. VPK Services GCV. The exchange rate loss of 1.2 million EUR recorded in other comprehensive income, relates to the exchange rate loss on the permanent investment in GBP for the financing of the UK entities (Rigid).

The income taxes amounted to 3.1 million EUR, representing an actual taxation of 19.6%.

3.3. Balance sheet

Balance sheet total amounted to 550.4 million EUR compared to 532.8 million EUR per end of 2010. The solvency ratio amounts to 54.8% compared to 56.4% at the end of 2010.
Equity further grew to 301.5 million EUR compared to 300.5 million EUR per end of 2010. Next to the growth from the realized net result of 12.6 million EUR, there was a decrease of the unrealized results of 1.5 million EUR following the exchange rate difference on the net investment in the Rigid (UK) subsidiaries, and a change of -0.3 million EUR of translation differences. On the other hand, 3.3 million EUR of treasury shares were purchased and 6.8 million EUR of dividends and distributions were paid (after deduction of the dividends on treasury shares of 0.6 million EUR).

Notwithstanding the increase of the net financial debt (NFD) of 74.1 million EUR per end of 2010 to 81.5 million EUR per end of June, the debt ratio (NFD/EBITDA) decreased from 1.3 per end of 2010 to 1.2 per end of June. The significant increase of the working capital requirements (+18.3 million EUR), is explained by the increased volumes and the increased price level. This is reflected in the increase of the respective balance sheet items stocks, trade receivables and trade debts.

The long-term obligations in respect of pensions and similar commitments amounted to 17.0 million EUR compared to 17.4 million EUR per end of 2010.

The tangible assets decreased for an amount of 7.9 million EUR to 307.5 million EUR, explained by the increased depreciation compared to the amount invested. 8.0 million EUR were invested, whereas depreciation amounted to 14.4 million EUR.

4. Review on the key activities


In the paper segment total operating income, including internal sales, rose from 68.9 million EUR to 90.3 million EUR, an increase of 31.1%. Sales to external customers amounted to 26.5 million EUR. The rate of integration consequently amounted to 70.6% (69.6% in 2010). The rise in sales from paper is mainly due to the higher sales prices. Sustained by the further rise of the costs of the important raw materials, the paper price recorded an increase of 70 EUR/ton in comparison with the end of 2010.

The operational cash flow (EBITDA) generated by the paper segment amounts to 12.3 million EUR, compared to 6.8 million EUR during the first half-year of 2010.

Corrugated board

The consolidated operating income of the corrugated board segment increased by 20.1% from 217.3 million EUR per end of June 2010 to 260.9 million EUR per end of June 2011. Partially, this increase is due to volume growth, and partially to higher packaging prices.
The operational cash flow (EBITDA) of the corrugated board segment amounts to 13.6 million EUR, compared to 14.0 million EUR during the first half-year of 2010.

Specialties (solid board, cores and edge protectors)

The consolidated operating income of the specialties segment further grew to a level of 71.9 million EUR over the first 6 months of this year. This represents an increase of 10.4%. This increase mainly relates to higher sales prices.

The operational cash flow (EBITDA) of the corrugated board segment amounts to 2.6 million EUR, compared to 4.0 million EUR during the first half-year of 2010.

5. Outlook

The following statements are related to the future and the final results can differ substantially.

The general uncertainty with regard to the global financial and economic situation and the volatility in the financial markets make it difficult to formulate any outlook. VPK Packaging Group NV remains cautious with regard to its daily and strategic management. For the second half-year the focus remains the recovery of the packaging prices, backed on the increased input costs.

6. Business profile

VPK Packaging Group NV, listed on Euronext Brussels, is a vertically integrated Belgian packaging group disposing of 46 companies spread across 12 European countries, employing 3,200 people. VPK Packaging Group NV is a service-driven organisation, paying a great deal of attention to the specific needs of its clients under the brand name VPK Packaging Solutions®, next to its attention paid for the products.

Industry Intelligence Editor's Note: In an omitted table, VPK Packaging recorded H1 2010 net income of €8.1 million.

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