9 December 2021

DS Smith Plc - 2021/22 HALF YEAR RESULTS

Strong H1 results underpinning momentum

Miles Roberts, Group Chief Executive, said:

"We are continuing to benefit from a very dynamic market with demand for packaging for different retail solutions evolving rapidly and COP26 intensifying the desire for sustainable packaging solutions for the circular economy. Our leadership in these areas has contributed to record volumes with particularly strong growth in the US and Southern Europe regions, where we have invested recently, as well as with our multi-national FMCG customers.

In a challenging operating environment, I am pleased to see good progress. Our supply chains have remained secure and the significant increases in input costs have been mitigated by effective hedging of energy cost, our long term supplier agreements and raising packaging prices. Combined with strong volume growth this has significantly increased our profit with continuing good progress recovering from the impacts of Covid-19. Strong cash generation has returned our financial leverage to within our medium-term target. 

We have built a business to benefit from the significant structural growth drivers within fibre based corrugated packaging. These benefits, combined with our scale, geographic footprint, sustainability and innovation focus, position us very well for continued volume and market share growth. Together with pricing momentum, this underpins our confidence to deliver a significant improvement in profitability during the second half of this year in line with our expectations and towards our medium-term targets."

Highlights

·    Record corrugated box volume growth of 9.4% vs H1 2020/21; 8.8%⁽²⁾ LTM

·    Strong pricing mitigating significant input cost pressures

·    Good US momentum; +64% adjusted operating profit growth

·    Good free cash flow of £188m driving leverage to 1.9x net debt/EBITDA

·    Continued leadership in the circular economy and sustainability

·    Investing for growth with innovation and increasing packaging capacity

o  2 new state of the art facilities on track

·    Positive outlook for continued growth over remainder of the financial year

Enquiries

DS Smith Plc                                                                             +44 (0)20 7756 1800

Investors

Hugo Fisher, Group Investor Relations Director

Anjali Kotak, Investor Relations Director

Media

Greg Dawson, Corporate Affairs Director

Brunswick                                                                     +44 (0)20 7404 5959

Dan Roberts

Sophia Lazarus

Presentation and dial-in details

There will be a webcast audio presentation at 9:00am with the slides of the half year results, followed by a live Q&A.

To access the webcast, please register here. A copy of the slides presented will also be available on the Group's website, https://www.dssmith.com/investors/results-and-presentations shortly before the start of the presentation.

If you would like to ask a question at the end of the webcast, then you will need to dial into the associated conference call using the following details. Please dial in 15 minutes before the start of the webcast to allow for registration.

Standard International Access: +44 (0) 33 0551 0200
UK Toll Free: 0808 109 0700
Password: DS Smith

An audio file and transcript will also be available on https://www.dssmith.com/investors/results-and-presentations

Unless otherwise stated, all commentary and comparable analysis in the overview and operating review relates to the continuing operations of the Group, on a constant currency basis.

Summary

Strong organic growth

The period has seen sustained strong demand with organic corrugated box volumes growing by 9.4 per cent vs HY 2020/21 and 8.8 per cent over the last 12 months, reflecting continued growth in the resilient FMCG sector, which represents over 80 per cent of our volume, together with a recovery in the industrial sector. In a challenging supply chain environment, our large scale, security of supply and high service levels have driven ongoing gains with large multinational customers. Regionally, we have grown in all areas, with the US and Southern Europe performing especially well.

For the first 6 months, revenues grew strongly by 22 per cent, driven by packaging volume growth and higher selling prices across the Group. External paper and recycling revenues increased as higher pricing more than offset reduced volumes sold externally as we utilised a greater proportion of our paper production internally to satisfy the growth in our packaging volumes.

Raw material, energy and transportation input costs all rose significantly over the comparative period. However, these were mitigated by effective supplier arrangements, long term hedging positions and rising packaging selling prices.

Volume growth combined with increased packaging selling prices, partly offset by the increased input costs resulted in adjusted operating profit growing by 26 per cent to £276 million. The US performed well with profits up 64 per cent to £36 million. Corrugated box volume growth contributed £52 million, with higher box pricing of £432 million offsetting input cost increases of £427 million. Group return on sales grew to 8.2 per cent (2020/21: 8.0 per cent) reflecting the growth in profitability offsetting the dilutive effect of higher cost and selling prices. The momentum in the business gives confidence in an acceleration of margin growth to our medium-term target of 10-12 per cent.

Basic earnings per share from continuing operations grew 92 per cent on a constant currency basis to 9.8 pence. Adjusted basic earnings per share of 13.7 pence grew by 33 per cent compared to the prior period on a constant currency basis, reflecting the growth in profitability.

Return on average capital employed was up 60 bps to 9.4 per cent, principally reflecting the growth in adjusted operating profit for the prior 12 months. The improving trend in profitability combined with the improving returns from recent acquisitions and investments, gives us confidence in progression to our medium-term ROACE target of 12-15 per cent.

Strong cash generation and investing for growth

Cash generation remains strong, driven by enhanced profitability and good working capital management. The net debt/EBITDA ratio at 31 October 2021 of 1.9 times is in line with our medium-term target of at or lower than 2.0 times. We recently completed the sale of our non-core De Hoop paper mill; the proceeds will contribute towards the investment in our previously announced additional packaging manufacturing sites in Italy and Poland. Progress in construction remains on track with operations due to start in Q4 of this financial year and more than 50 per cent of the capacity for the plants already committed to by customers.

The strength of future demand underpinned by the structural growth drivers and the strength of our customer positions gives us confidence to continue to invest in growing the business. Capex spend remains in line with guidance of £430 million for the full year. We remain extremely focused on capital allocation and where possible recycling capital from disposal of non-core assets into investment in growth assets. All the projects undertaken must have estimated returns on capital in excess of the Group's target ROACE.

Dividend

The Board considers the dividend to be a very important component of shareholder returns. Today, we are announcing an interim dividend for this year of 4.8 pence per share, an increase of 20 per cent and consistent with our policy of 2.0-2.5 times dividend cover.

Sustainability

Sustainability has been at the heart of our business for many years as we have developed and grown into a solely fibre-based corrugated packaging business. We continue to work actively with our customers to help them address their sustainability challenges. Our circular design principles combined with our carbon reduction programme and focus on plastic replacement are allowing us to meet our customers' increasing sustainability requirements. Momentum in plastic replacement is accelerating and we have replaced 118 million units of plastic in H1, more than double the number of units in FY 21.

We continue to make good progress in delivering against our sustainability targets. We have reduced our CO₂ per tonne of production by 23 per cent from 2015 to 2020 and in June 2021 we announced our commitment to a Science Based Carbon CO₂ reduction target of a minimum of 40 per cent per tonne of production from 2019 to 2030 and achieving net zero carbon emissions by 2050.

We are delighted that this progress has been recognised with an improvement in rating by a number of external indices including MSCI ACWI Index, Dow Jones Sustainability Index, Ecovadis, Sustainalytics and CDP.

Progress against medium-term targets

See notes to the financial tables below

Notes to the financial tables

Note 15 explains the use of non-GAAP performance measures. These measures are used both internally and externally to evaluate business performance, as a key constituent of the Group's planning process, they are applied in the Group's financial and debt covenants, as well as establishing the targets against which compensation is determined. Reporting of non-GAAP measures alongside reported measures is considered useful to enable investors to understand how management evaluates performance and value creation internally, enabling them to track the Group's adjusted performance and the key business drivers which underpin it over time. Reported results are presented in the Consolidated Income Statement and reconciliations to adjusted results are presented on the face of the Consolidated Income Statement, in note 2, note 7, and note 15.

(1)        Adjusted operating profit (adjusted EBITA) is before adjusting items (as set out in note 3) and amortisation of £69 million.

(2)        Corrugated box volumes on a rolling 12 months basis (based on area (m2) of corrugated box sold), adjusted for working days, on an organic basis.

(3)        GDP growth for rolling 12 months (year-on-year) for the countries in which DS Smith operates, weighted by our sales by country = 3.3%. Source: Eurostat (16 Nov 2021).

(4)        Operating profit before amortisation and adjusting items as percentage of revenue.

(5)        Operating profit before amortisation and adjusting items as a percentage of the average monthly capital employed over the previous 12 month period. Average capital employed includes property, plant and equipment, right-of-use assets, intangible assets (including goodwill), working capital, provisions, capital debtors/creditors, biological assets and assets/liabilities held for sale.

(6)        EBITDA being operating profit before adjusting items, depreciation and amortisation and adjusted for the full year effect of acquisitions and disposals in the period. Net debt is calculated at average exchange rates as opposed to closing rates. Ratio as calculated in accordance with bank covenants. See note 15 on non-GAAP measures for reconciliation. 

(7)        Free cash flow before tax, net interest, growth capital expenditure, pension payments and adjusting cash flows as a percentage of operating profit before amortisation and adjusting items.

(8)        Free cash flow is the net movement on debt before cash outflow for adjusting items, dividends paid, acquisitions and divestment of subsidiary businesses (including borrowings acquired) and proceeds from issue of share capital.

Cautionary statement: This announcement contains certain forward-looking statements with respect to the operations, performance and financial condition of the Group. By their nature, these statements involve uncertainty since future events and circumstances can cause results and developments to differ materially from those anticipated. The forward-looking statements reflect knowledge and information available at the date of preparation of this announcement and DS Smith Plc undertakes no obligation to update these forward-looking statements. Nothing in this statement should be construed as a profit forecast.

Operating Review

Northern Europe

*Operating profit before amortisation and adjusting items (refer to note 3 of the financial statements)

In Northern Europe, organic corrugated box volume growth was strong, with particularly good performances in the Nordics, Benelux and Germany. The UK performance was good against particularly strong comparatives from last year.

Revenues have increased by 20 per cent in the region due to a combination of the increases in corrugated box volumes and pricing and the impact from an increase in sales price for externally sold paper and recycled fibre. Adjusted operating profit grew 30 per cent, reflecting the drop through of packaging volume growth to operating profit, together with increased pricing in packaging, recycling and external paper sales more than offsetting increased input costs, principally OCC.

Southern Europe

* Operating profit before amortisation and adjusting items (refer to note 3 of the financial statements)

Southern Europe saw very strong growth in volumes driven by Iberia in particular, which had been significantly impacted by reduced tourism in summer 2020.

Revenue grew by 27 per cent, due to the impact of higher box volumes and increases in both box and paper pricing. Adjusted operating profit grew by 28 per cent compared to the prior period, with the packaging operations benefitting from the pass through of higher paper prices, together with a very positive impact from paper sold externally.

Eastern Europe

* Operating profit before amortisation and adjusting items (refer to note 3 of the financial statements)

Organic corrugated box volumes in Eastern Europe have grown faster than the Group average, with good volume growth across the region.

Revenues grew 26 per cent, principally reflecting increases in corrugated box volumes and pricing. Adjusted operating profit fell 11 per cent, reflecting the timing lag in the recovery of higher paper prices through increased packaging pricing. The region has the lowest proportion of paper capacity relative to packaging production within the regions in the Group which impacts margin in the short term via the increased paper costs.

North America

Packaging volumes in the region have seen the strongest increases within the Group, reflecting continued excellent customer traction with growth across a number of packaging sites as we manage the ramp-up of the box plant in Indiana. Full utilisation is expected to be completed on plan in the financial year 2022/23.

Revenues increased by 7 per cent, principally reflecting the packaging volume growth and the increase in export paper prices more than offsetting reduced volumes in external paper sales as we utilised, as planned, more of our paper production. Adjusted operating profit grew by 64 per cent, reflecting the benefit of improved volumes across our packaging plants and the improvement in paper and packaging pricing. As a result, return on sales significantly improved to 13.1 per cent.

Outlook

We have built a business to benefit from the significant structural growth drivers within fibre based corrugated packaging. These benefits, combined with our scale, geographic footprint, sustainability and innovation focus, position us very well for continued volume and market share growth. Together with pricing momentum, this underpins our confidence to deliver a significant improvement in profitability during the second half of this year in line with our expectations and towards our medium-term targets.

Financial Review

2021/22 half-year results

Prior year comparatives within the following commentary relate to the continuing operations of the Group.

Revenue increased by 16% on a reported basis and 22% on a constant currency basis to £3,362 million for the half year ended 31 October 2021 (H1 2020/21: £2,889 million), driven by strong demand for packaging in all our markets and higher average selling prices reflecting recovery of paper and other input costs. Box volumes grew by a record 9.4% over the comparative period.

Operating profit of £207 million increased by 50% versus the prior year, 58% on a constant currency basis (H1 2020/21: £138 million), and adjusted operating profit increased to £276 million, a 20% and 26% increase on a reported and constant currency basis (H1 2020/21: £230 million). On a constant currency basis, the effect of an increase in the average sales price and mix (£432 million) and overall increase in volumes (£52 million) was partially offset by a rise in input costs (£427 million). Significant rises in raw material and net impact of hedged energy costs of £294 million and £73 million (after the price benefit of energy sales), respectively, continue to be actively managed and were largely recovered through increased sales prices. The energy impact was mitigated by the Group's three year rolling hedging programme and the benefits of free allowances under phase 4 of the EU Emissions Trading Scheme. The Group's energy and carbon hedges increased significantly in value during the half and in order to manage our counterparty risk there were margin calls made of c.£85 million all of which relates to derivatives that mature in the current financial year. The cash receipts have been included in the first half cash flow; there was no impact on income from these margin calls.  Labour costs increased marginally, reflecting both the additional volume produced in the period and inflationary pay rises. During the first half year, the Group disposed of its non-core Dutch paper mill operations for a consideration of €44 million, consistent with the previously described short paper strategy. 

Amortisation of £69 million is marginally lower than the prior half year on a reported basis and in line with the prior half year on a constant currency basis (H1 2020/21: £72 million). 

After the effects of exchange and disposals in the current and prior periods, depreciation was £147 million, marginally lower on a constant currency basis and £8 million lower on a reported basis (H1 2020/21: £155 million).

Free cash flow, comprising adjusted operating profit plus depreciation, movements in working capital (in addition to provisions and employee benefits), net capital expenditure, taxes and net interest paid was £188 million (H1 2020/21: £207 million). The improvement in adjusted operating profit and the reduction in capital expenditure was offset by higher taxes paid. Working capital was broadly flat with underlying outflows with debtors impacted by higher selling prices, inventories by higher paper prices and other input costs mitigated by a combination of the impact of higher prices in creditors and the realisation of hedging positions. Factored receivables reduced from the previous year end to £385 million (30 April 2021: £407 million).

The Group's net debt position improved by £155 million to £1,640 million compared to the prior year end (30 April 2021: £1,795 million; 31 October 2020: £2,087 million). Free cash flow for the period of £188 million and the benefit of the sale of the non-core De Hoop paper mill in the Netherlands were reduced by the resumption of dividend payments of £55 million, the settlement of £23 million of payments relating to past acquisitions and £6 million of adjusting items. Foreign exchange and fair value movements were a positive £15 million.

Net capital expenditure was marginally lower than in the previous half year at £125 million (H1 2020/21: £132 million) with higher expenditure expected in the second half relating to the investment in greenfield Packaging operations in Italy and Poland.

Return on average capital employed (ROACE) increased by 60 basis points to 9.4%, which is still below the Group's target rate of 12% to 15%  following the initially dilutive impact of recent acquisitions and the effect on profitability from Covid-19. The Group's momentum supports our confidence in continued progress towards meeting the medium-term target.

Certain items are presented within the financial statements as adjusting items, in order to assist in understanding the trading results of the Group. Costs of £4 million (H1 2020/21: £11 million) relating to restructuring programmes were incurred together with finance costs relating to the unwind of the discount on the Interstate put option (£2 million) (H1 2020/21: £3 million).  These costs are expected to be as previously guided below £10 million for the full year. The disposal of the non-core De Hoop paper mill together with other site disposal costs resulted in a net gain of £4 million.

Net financing costs before adjusting items of £34 million (H1 2020/21: £41 million) primarily relate to interest on borrowings and lease liabilities, lower than last year due to lower levels of borrowings and interest rates in the period.

Profit before income tax increased to £175 million (H1 2020/21: £97 million) due to higher operating profit and a £8 million reduction in net financing costs.

The rate of tax on adjusted profits before amortisation and adjusting items is 24%, an increase from the full year 20/21 rate of 23%.

Profit after tax increased to £135 million (H1 2020/21: £74 million), due to higher operating profit offset by an increase in income tax of £17 million. Income from associates of £4 million is marginally ahead of the comparative period.

Basic earnings per share before amortisation and adjusting items increased by 33% to 13.7 pence on a constant currency basis (H1 2020/21: 10.8 pence), impacted by the improvement in operating profit. Basic unadjusted earnings per share increased to 9.8 pence (H1 2020/21: 5.4 pence).

Financial position

Total shareholder funds increased to £3,718 million (30 April 2021: £3,533 million; 31 October 2020: £3,483 million). The movement is due to profit attributable to shareholders of £135 million (H1 2020/21: £74 million), actuarial gains on employee benefits of £11 million (H1 2020/21: £16 million loss), the resumption of the dividend programme resulting in £55 million outflow in the current period (H1 2020/21: nil), a net decrease in the translation reserve of £76 million (being primarily net foreign currency translation losses of £110 million, offset by a £41 million movement in the net investment hedge) and a net movement on derivative hedges of £168 million. The latter is driven by commodity hedging positions which have increased in value as energy prices have risen.

Reported net debt of £1,640 million has decreased from year end (30 April 2021: £1,795 million). The Group calculates its net debt to adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) ratio in accordance with the methodology prescribed by its bank and private placement debt covenants, which excludes the effects of IFRS 16 Leases. The ratio has reduced to 1.9 times (30 April 2021: 2.2 times, 31 October 2020 : 2.4 times), well within the primary covenant requirements of 3.75 times, owing mainly to an improvement in EBITDA as a result of strong volume and price growth with improved trading conditions.

The Group continues to sell trade receivables without recourse, a process by which the trade receivable balance sold is de-recognised, with proceeds then presented within operating cash flows. Such arrangements enable the Group to optimise its working capital position and reduces the quantum of early payment discounts given. At constant currency, trade receivables sold under the factoring programme reduced marginally to £385 million (30 April 2021: £407 million).

Dividend

The Board considers the dividend to be an important component of shareholder returns. As first set out in December 2010, our policy is that dividends will be progressive and, in the medium term, dividend cover should be on average 2.0x to 2.5x through the cycle. In considering future dividends the Board will continue to be mindful of the Group's earnings growth potential, future expansion and leverage.

The Board declares an interim dividend of 4.8 pence per share in light of the strong business performance, building on the robust position of the second half of the previous year. The dividend will be paid on 3 May 2022 to ordinary shareholders on the register at close of business on 8 April 2022.

Risks and uncertainties

The Board has reconsidered the principal risks and uncertainties affecting the Group in the second half of the year. The principal risks and uncertainties discussed on pages 47 to 48 of the 2021 Annual Report, available on the Group's website at www.dssmith.com, remain relevant.

In summary, the Group's key risks and uncertainties are:

·    Eurozone and macro-economic impacts

·    Paper/fibre price volatility

·    Cyber attacks

·    Sustainability commitments

·    Regulation and governance

·    Security of paper/fibre supply

·    Packaging capacity limits to growth

·    Organisation capability

·    Substitution of fibre packaging

·    Disruptive market players

·    Digitalisation

·    Shopping habits

In addition to the risks noted above, the Group actively managed its exposure to energy related costs which have seen upwards cost pressure during the first half year.

Going Concern

The Board have reviewed a detailed consideration of going concern, based on the Group's recent trading and forecasts, and including scenario analysis. This takes into account reasonably foreseeable changes in trading performance, including the continued uncertainty of the long-term impacts on the economic landscape presented by a post-Covid-19 environment. More detail of the assessment performed is included in note 1 to the financial statements.

At 31 October 2021 there was significant headroom on the Group's committed debt facilities of c.£1.5 billion. The going concern assessment covered a forecast period of 12 months from the date of this half-yearly financial report. Based on the resilience of the Group's operations to both Covid-19 and the likely response in a post-Covid-19 environment, as well as the current and forecast liquidity available, the Board believes that the Group is well placed to manage its business risks successfully despite the uncertainties inherent in the current economic outlook, and to operate within its current debt facilities.

The Group's current committed bank facility headroom, its forecast liquidity headroom over the going concern period of assessment and potential mitigating activities available to management have been considered by the Directors in forming their view that it is appropriate to conclude that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, the going concern basis has been adopted in preparing the interim financial statements.

Responsibility Statement

We confirm that to the best of our knowledge:

a)  the condensed set of financial statements, prepared in accordance with IAS 34 "Interim Financial Reporting" as adopted for use in the United Kingdom and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority, gives a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole;

b)  the interim management report includes a fair review of the information required by DTR 4.2.7R (indication on important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

c)  the interim management report includes a fair review of the information required by DTR4.2.8R (disclosure of related parties' transactions and changes therein).

Miles Roberts                            Adrian Marsh

Group Chief Executive              Group Finance Director  

8 December 2021