Packaging specialist DS Smith warned yesterday that higher energy and raw material costs were likely to intensify after unveiling a 17 per cent hike in annual profits.
DS Smith - the largest maker of envelopes, books and pads in the UK - said savings from recent acquisitions were threatened by a fuel bill that was likely to be at least 14 per cent higher this year at around £83 million.
Its division making paper and cardboard boxes, which accounts for 62 per cent of its operating profits, would come under the greatest pressure because it incurs approximately three-quarters of all energy and fuel costs.
Although some of the impact of rising energy prices had been parried by its decision to buy electricity in advance, DS Smith said this relief would only last until October.
Chairman Antony Hichens said: "Since April, future energy costs look like being even higher than previously anticipated."
Nevertheless the firm produced better-than-expected underlying profits of £76.1 million from a restated £64.8 million, on revenues up 9.2 per cent to £1.62 billion.
There was a small uplift in the total dividend to 8.4p.
London-based DS Smith makes corrugated and plastic packaging, primarily from recycled waste, for firms such as Unilever, Mondi, Nestle and Belgian brewer InBev.
It also wholesales office products to dealers. The group has office and manufacturing sites across the UK and overseas and employs 12,000 people worldwide.
Its profits performance was led by its corrugated packaging division, its Spicer office products wholesaling business and the acquisition of Birmingham-based Linpac Containers last year.
DS Smith created the UK's largest cardboard box maker through the £170 million purchase of Linpac Containers, which supplies manufacturers of drinks and cosmetics with boxes as well as making polystyrene packaging for hamburger chains.
Chief executive Tony Thorne said the operational and strategic progress made over recent years provided "a sound base from which to tackle the current tough trading environment and the uncertainty as to the future level of increase in energy costs".
In addition to the pressure from higher energy bills, DS Smith took a charge of £11.7 million in respect of its pensions fund last year and said rising polymer prices had cost it £7 million.
The group raised the prices of plastic packaging last year but was unable to recover all of the increase in polymer costs, while customers also put off orders in the hope that the price hikes would be temporary.
Sales in the liquid packaging and dispensing business were affected by lower demand from the carbonated soft drinks sector in the United States. In its paper division, DS Smith said demand was slightly stronger than a year ago.
Despite the distraction of a competition inquiry into the deal for Linpac Containers lasting five months, the group said its corrugated packaging business in the UK performed well.
The UK accounts for approximately ten per cent of a European market for corrugated packaging estimated to be around 17 billion euros (£11.4 billion).