David S Smith's profits are bad news for jobs

THE STRENGTH of sterling and a slump in the packaging market saw shares in David S Smith plunge by more than 7 per cent yesterday, as the paper and packaging company predicted job cuts and falling profits.

Peter Williams, the chief executive, said: "The state of packaging and paper markets has led to profitability that is below our expectations, and a disappointing share price."

Reporting a 29 per cent fall in half-year pre-tax profits to pounds 20.7m, Mr Williams added: "With France off the boil, and Germany going the same way, we cannot be optimistic about trading in the short term."

Mr Williams warned that job losses "under a worst-case scenario" could reach 950 across the UK, with the closure of the Aspley plant already under way. The company also announced that it had "entered into discussions" over the possible sale of Spicer, its robust office supply division. If the sale is agreed, the company will either make an acquisition or return cash to shareholders.

David S Smith slid from a 12- month high of 252p in May to yesterday's close of 98p, as sterling strength eroded the competitiveness of UK exporters, traditionally Smith's biggest customers. The company estimates that it loses pounds 1m in profit for every 1 pfennig that sterling gains against the mark.

One analyst described his meeting with the company as "one of the most bearish I've been to in 10 years", adding that the packaging industry was "going south fast". Slashing his full-year profit forecasts by 10m to 35m, he said that the packaging industry suffered from its massive fixed costs, leaving companies exposed to the slightest downturns in sales volumes.