Rising energy costs will hit profits at paper group James Cropper

Cumbria paper manufacturer, James Cropper, warned its profits will be hit this year due to escalating energy costs.

In a trading update this morning, the Kendal company said the progress it reported earlier, with sales growth of more than 30% in the current year to March 26, will be impacted by the rise in wholesale gas prices during its fourth quarter period.

Consequently, the group now expects to report adjusted pre-tax profits for the year of £3.5m, compared with £1.1m the previous year. This latest forecast is down from the £4.9m adjusted pre-tax profits it had expected to report.

However, the group said it expects to achieve a sales record. It said that, while the situation in Ukraine has produced uncertainty concerning its paper division’s input costs in the short term, the long term opportunity for the group remains positive. It is encouraged by its ability to flex pricing to respond to rising costs.

The group said it continues to maintain a strong financial position, with transformation programmes well in advance to move away from natural gas across all its divisions.

It has also recently secured new credit facilities to support investments and other growth programmes. The £4m government-provided COVID-related loan facility, CLBIL, has been repaid in full and undrawn facilities stand comfortably at £20m.

Today’s update revealed that the group’s technical fibre products (TFP) was nominally affected during the prior pandemic year and has demonstrated more than 20% growth this year, which will exceed market expectations. The outlook for TFP, which is not significantly exposed to energy costs, remains strong.

A new production line, commissioned in 2021 and adding 50% production capacity, is now fully operational.

TFP Hydrogen, acquired in January 2021, is performing well compared with expectations. Additional production capacity has been introduced in the US in preparation to support local markets.

Colourform, which had grown by nine per cent during the previous pandemic year, is expected to have further sales growth of 20% this year.

New contracts have been awarded and commercialised in the wine, spirits, and perfume markets, delivering renewable and recyclable packaging to leading global brands such as Ruinart, L’Oréal and Dries Van Noten. The outlook for Colourform, which is not significantly exposed to energy costs, remains unchanged.

The paper division was the most significantly impacted part of the group through the previous pandemic year. Nevertheless, all customers were retained, and demand has quickly returned. With new additional customers and contracts won, sales have grown more than 30% in the year.

However, Russia/Ukraine conflict and the resulting jump in energy costs has significantly affected the division, which is by far the most energy-intensive. The average wholesale gas price has moved from 50p/therm to more than 250p/therm, peaking at 800p/therm in the fourth quarter. This has impacted the recent profitability of the division, but actions have been taken, including the recent price increases, as well as a customer energy surcharge to mitigate the impact moving forward.

Plans to decarbonise the paper division have already been made and the plan is to move away from gas entirely by 2030.