Arjo shares hit by profit gloom

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The Independent Online

Shares in Arjo Wiggins Appleton paper group slumped 11.5p to 194.5p yesterday after the company issued a profits warning and announced pounds 100m of provisions relating to the rationalisation of its European paper manufacturing operations.

The company blamed the cuts on the cycles in the paper industry, which has seen explosive growth followed by rapid de-stocking by customers as fears of further paper price rises recede.

With no improvement in market conditions expected, Arjo has warned that pre-tax profits for the current year will be "materially lower" than the previous year's pounds 217m.

Analysts are forecasting underlying profits of pounds 185m. However, this is before the pounds 100m of provisions and write-offs relating to the group's European operations.

Arjo plans to cut back production levels at its European factories due to a sharp fall in sales volumes. This will result in some short-term working and lay-offs.

Redundancies are expected, though the company declined to say whether the cuts would lead to any large-scale job losses. Andrew Shaw, director, said: "We don't want to go into details. There are a number of options open to us and we will have to talk to all the various parties and unions concerned." The company employs about 10,000 in Europe.

The company said the de-stocking had caused third-quarter sales volumes to fall by about 5 per cent and that margins had been squeezed. Mr Shaw said that he expected margins to improve once the current spate of destocking was over. "It can't go on for ever."

However, the company added that the downturn was a temporary blip rather than a full-scale recession. In September, Arjo warned that it was finding it harder to pass on rising pulp prices to customers even though it announced a 29 per cent increase in profits for the six months to June.

Arjo's strategy has been to reduce its exposure to the industry's notorious cyles by moving out of pulp and low-grade paper production and into "added- value" products such as coated paper. It has extended merchanting businesses through acquisitions while the Spanish pulp operations have been sold.