7 December 2023

DS Smith Plc - 2023/24 HALF YEAR RESULTS -

ROBUST PERFORMANCE IN CHALLENGING ENVIRONMENT; on track for fy24

 

6 months to 31 October 2023 Continuing operations		Change (reported)	Change (constant currency)
Revenue	£3,513m	(18%)	(18%)
Adjusted operating profit(1)	£365m	(13%)	(12%)
Profit before tax	£268m	(15%)	(15%)
Adjusted basic EPS(1)	17.7p	(15%)	(15%)
Statutory basic EPS	14.8p	(12%)	(12%)
Dividend per share	6.0p	-	-
Return on sales (RoS)(2)	10.4%	+70bps	+70bps
ROACE(3)	12.8%	(40bps)	(30bps)
Net debt / EBITDA(6)	1.7x	-	-

See notes to financial table below

 

 

·    Robust adjusted operating profit of £365m (£418m H1 FY22/23) in challenging environment

·    Decline in like for like box volumes of 4.7% in H1, with sequential quarter-on-quarter improvement and H2 expected to show continued positive momentum

·    Pricing has been resilient, underpinned by strong customer relationships, innovation and high service levels, with downward pressure offset by lower input costs and productivity initiatives

·    Strong financial position: 1.7x net debt/EBITDA (FY22/23: 1.3x)

·    Continued capital and operational investment to support our customers and improve productivity and environmental efficiency

·    Full year trading in line with management expectations

 

 

Miles Roberts, Group Chief Executive, commented:

"I am pleased with the performance for the first half of the year. Our focus on value-added packaging solutions to predominantly FMCG customers, together with the benefit from our self-help productivity initiatives and flexible supply chain has driven a robust profit performance. Our Q2 volume performance was improved versus Q1 and we expect this trend to continue with H2 volumes stronger than H1, sequentially and on a like for like basis, as we continue to win market share.

 

While we anticipate markets to remain challenging, we remain focused on our customers and our costs and expect to deliver full year results in line with management expectations. Looking forward we remain confident in our business model and our capital and operational investment programmes which drive innovation, growth, improving productivity and environmental efficiency."

 

 

 

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

Simon Sporborg

Dan Roberts

                  

 

 

There will be a webcast audio presentation at 9:00am with the slides of the half year results, followed by a Q&A, given by Miles Roberts, Group Chief Executive and Richard Pike, Group Finance Director.

 

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

 

The webcast will be available to review:

https://www.dssmith.com/investors/results-and-presentations

 

Notes to the financial tables

 

Note 14 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 3, note 7, and note 14.

(1)  Operating profit (adjusted EBITA) is before adjusting items (as set out in note 3) and amortisation of £51 million.

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

(3)  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.

(4)  Corrugated box volumes on a 6 months basis (based on area (m2) of corrugated box sold), adjusted for working days, on an organic basis.

(5)  GDP growth for rolling 6 months (year-on-year) for the countries in which DS Smith operates, weighted by our sales by country = 0.7%. Source: Eurostat (14 Nov 2023) and ONS

(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 14 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.

 

 

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.

Operating Review

 

Robust profit performance

The macro-economic environment has remained challenging with overall market demand continuing to be weak, leading to a decline in like for like box volumes of 4.7 per cent compared to H1 FY22/23. Encouragingly, with destocking amongst our customers now largely over, we are seeing signs of volume improvement, with the second quarter performance being better than the first, albeit remaining below the comparable prior period.

 

The largest decline in volume was in Northern Europe, which includes the UK and Germany, where we have a greater weighting to industrial and e-commerce customers, respectively. Eastern Europe was relatively resilient, with our North American division delivering volume growth for the period.

 

For the six month period, revenue declined to £3,513 million, down 18 per cent on a constant currency and reported basis driven by declines in box volumes (£142 million) and lower selling prices (£615 million) across the Group. Packaging prices were down £273 million, approximately 9 per cent, with the balance reflecting lower external paper, recyclate and energy sales. Packaging prices have been more resilient than expected reflecting our strong customer relationships, ongoing innovation and continued focus on high service levels.

 

The impact of box and other volume declines led to a £39 million reduction in adjusted operating profit. The decline in sales price was almost completely offset by a reduction in raw material costs and cost mitigation actions, which led to an overall decrease in costs, excluding the impact of volume declines, of £602 million versus the comparable period with a reduction in raw materials costs of £360 million and cost mitigation initiatives and reduced other costs totalling £242 million.

 

Group return on sales grew during the year to 10.4 per cent (2022/23: 9.7 per cent), reflecting robust profitability despite the impact of volumes and price declines.

 

Basic earnings per share from continuing operations fell 12 per cent on a constant currency basis to 14.8 pence. Adjusted basic earnings fell by 15 per cent on a constant currency basis to 17.7 pence per share.

 

Return on average capital employed fell slightly to 12.8 per cent, reflecting the movement in adjusted operating profit.

 

 

 

 

Strong financial position

Our balance sheet remains strong with a net debt/EBITDA ratio of 1.7 times, well within our medium-term target of at or below 2.0 times. Net debt was £1,990 million at 31 October 2023 up from £1,636 million at 30 April 2023.

 

As previously announced, free cash flow was impacted in the period by a number of one-off items and led to an outflow of £54 million versus a cash inflow of £494 million in the comparative period. The cash outflow included working capital outflow of £253 million including a net outflow of £79 million in respect of the reversal of prior cash collateralization of energy hedges which we undertook to limit our counterparty exposure. The underlying working capital outflow was also reflective of lower paper and energy prices reducing trade payables, lower box prices reducing trade receivables and lower paper prices reducing inventory. In September we paid the final amount of £103 million for the remaining outstanding shareholding in Interstate Resources, the majority of which we acquired in August 2017.

 

Performance vs. medium-term targets

 

Medium-term targets Continuing operations	Delivery in H1 2023/24
Organic volume growth(4) ≥GDP(5)+1%, being 1.7%	(4.7%)
Return on sales(2) 10% - 12%	10.4%
ROACE(3) 12% - 15%	12.8%
Net debt / EBITDA(6) ≤2.0x	1.7x
Cash conversion(7,8) ≥100%	41%

See notes to the financial tables above

 

Driving growth and productivity

We remain committed to investing in our business to drive higher returns and further efficiencies. As we communicated at the full year results in June 2023 this is focused on:

·    Investing in products and services

·    Investing in our capacity and capabilities

·    Investing in energy and environmental efficiency

 

Net capital expenditure increased 28 per cent in the first half of the year to £208 million and our expectation for full year capital expenditure remains unchanged at £500 million.

 

In addition to a number of ongoing capital projects previously announced, new highlights from within the period include:

 

·    The recent opening of our group-wide innovation hub, R8. This UK-based facility allows us, our customers, and partners to accelerate the research and development of new packaging solutions.

 

 

·    We started construction on a €90 million project, which includes a subsidy of €15 million from the French Government, in a new biomass-from-waste boiler in France. Once complete, it will reduce emissions on site by 99,000 tonnes of CO2 per year and offer returns of greater than 20 per cent.

 

We continue to see attractive returns on capital of between 15 and 20 per cent from the discretionary capital expenditure initiatives. Discretionary expenditure in the previous two financial years, together with the current year, will total c.£500 million with a further c.£300 million expected by the end of our FY26, totalling c.£800 million over the five-year period FY22-FY26.

 

We are also undertaking operational initiatives to drive productivity and efficiency including further procurement savings, improving labour productivity, enhancing our operational equipment effectiveness and driving down waste and overheads.

 

Leading the way in sustainability

Sustainability is central to our circular business model. We continue to work actively with our customers to help them address their sustainability challenges and have launched new innovative solutions to help replace plastic for our customers.

 

Following the refresh of our Now & Next Sustainability Strategy announced over the summer, we continue to drive the strategy into our business, with key projects and initiatives underway to lead the transition to a low carbon circular economy. These include developing our roadmap of decarbonisation projects for our science-based target, supplier engagement programme and human rights due diligence programme.

 

Dividend

The Board considers the dividend to be an important component of shareholder returns. Today, we are announcing an interim dividend for this year of 6.0 pence per share, maintaining our level from last year, despite the reduction in profits and reflecting our robust financial position and confidence in the future performance and opportunities for the business.

 

Outlook

While we anticipate markets to remain challenging, we remain focused on our customers and our costs and expect to deliver full year results in line with management expectations. Over the medium term, the structural growth drivers of plastic replacement and changing retail formats remain strong and we expect market corrugated volumes to return to being in line with GDP growth rates. We remain confident in our business model and our capital and operational investment programmes to drive innovation, growth, improving productivity and environmental efficiency.

 

 

 

 

Operating Review

 

Northern Europe

	Half year ended  31 October 2023	Half year ended  31 October 2022	Change - reported	Change - constant currency
Revenue	£1,348m	£1,624m	(17%)	(17%)
Adjusted operating profit*	£107m	£85m	26%	26%
Return on sales(2)	7.9%	5.2%	270bps	260bps

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

 

In Northern Europe, organic corrugated box volumes across the region declined more than the Group average. This region, which includes Germany and the UK has a greater weighting to industrial and e-commerce customers which have seen the biggest sectoral declines, and the economic environment has been particularly tough.

Revenues decreased by 17 per cent in the region due to a combination of the decrease in box volumes, reductions in sales prices for packaging, externally sold paper and volumes of recycled fibre. Adjusted operating profit increased, reflecting resilient pricing, due to a higher proportion of indexed pricing meaning packaging pricing reduced less than input costs with return on sales increasing to 7.9 per cent.

Southern Europe

	Half year ended  31 October 2023	Half year ended  31 October 2022	Change - reported	Change - constant currency
Revenue	£1,298m	£1,672m	(22%)	(23%)
Adjusted operating profit*	£189m	£252m	(25%)	(26%)
Return on sales(2)	14.6%	15.1%	(50bps)	(50bps)

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

 

Southern Europe saw a decline in box volumes approximately in line with the Group average with France weaker than Iberia and Italy, reflecting the weaker overall consumer market in France.

Revenue declined 23 per cent, due to the impact of decreases in both packaging and paper pricing. Adjusted operating profit declined by 26 per cent compared to the prior period, due largely to the decrease in the volume and price of paper sold externally, although margins remained significantly above the Group's target range. In the prior period the region benefited not only from excellent performance in packaging, but also from an exceptional contribution from the kraft paper mill in Viana, Portugal, reflecting strength in both its operations and kraft paper pricing.

Eastern Europe

	Half year ended  31 October 2023	Half year ended  31 October 2022	Change - reported	Change - constant currency
Revenue	£567m	£648m	(13%)	(14%)
Adjusted operating profit*	£38m	£38m	-	-
Return on sales(2)	6.7%	5.9%	80bps	90bps

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

 

Organic corrugated box volumes in Eastern Europe were resilient, declining less than the Group average, with some regions showing volume growth in the period.

Revenues declined 14 per cent, principally reflecting the decrease in packaging prices, while adjusted operating profit was flat for the period with packaging price declines offset by lower raw material costs and efficiency improvements.

North America

Half year ended  31 October 2023 Half year ended  31 October 2022 Change - reported Change - constant currency Revenue £300m £355m (15%) (11%) Adjusted operating profit* £31m £43m (28%) (23%) Return on sales(2) 10.3% 12.1% (180bps) (160bps) *Operating profit before amortisation and adjusting items (refer to note 3 of the financial statements)

Packaging volumes grew during the period, reflecting excellent customer traction and our recent investments in additional capacity. Revenue in the region declined, reflecting pricing reductions in paper and packaging.  

Adjusted operating profit declined by 23 per cent, principally reflecting the decline in paper profitability as the region produces more paper than it currently utilises for our own packaging production and hence retains some exposure to the paper export market. Despite this, return on sales margins remain attractive and the expected continued volume growth will reduce this exposure going forward.

 

 

 

Financial Review

2023/24 half year results

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

Revenue decreased by 18% on both a reported and constant currency basis to £3,513 million for the half year ended 31 October 2023 (H1 2022/23: £4,299 million), driven by lower average selling prices and a 4.7% decline in box volumes over the period versus the previous year, reflecting the current economic environment.

Operating profit of £314 million decreased by 10% versus the prior year on both a reported and constant currency basis (H1 2022/23: £349 million), and adjusted operating profit decreased to £365 million, a 13% decrease on a reported basis and 12% decrease on a constant currency basis (H1 2022/23: £418 million). On a constant currency basis, the effect of the decrease in the average sales price and mix (£615 million) was combined with the lower sales volumes (£39 million) and foreign exchange impact of £1 million, offset by lower input, distribution, energy and other costs, excluding the impact of volume declines, of (£602 million). The costs continue to be actively managed, with energy costs mitigated by the Group's three year rolling hedging programme. Labour costs were in line with the previous year.

Amortisation of £51 million is lower than the prior half year on both a reported (H1 2022/23: £62 million) and constant currency basis, as intangibles recognised on the acquisition of SCA Packaging are now fully amortised.   

After the effects of exchange and disposals in the current and prior periods, depreciation was £157 million, £3 million higher on a reported and constant currency basis (H1 2022/23: £154 million) as a result of increased capital expenditure.

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 an outflow of £54 million (H1 2022/23: inflow of £494 million). The movement was due to lower adjusted operating profit, working capital, increased capital expenditure and higher taxes paid. The underlying working capital outflow of £174 million was due to the effect of lower paper and energy prices on payables along with box price decline effect on receivables and paper prices on the value of inventory. Including the effect of margin calls, the reported working capital cash flow was in total an outflow of £253 million. The net impact on working capital from margin calls was £79 million, with the unwind of margin calls taken in the previous year (£143 million), offset by additional margin calls made in the period (£64 million). There was no impact on income from these margin calls.

The Group's net debt position increased by £354 million to £1,990 million compared to the prior year end (30 April 2023: £1,636 million; 31 October 2022: £1,147 million). Net debt was impacted principally by free cash flow for the period of £54 million outflow, dividend payments of £165 million and the payment of the final tranche of the acquisition costs of the North American Interstate business, £103 million. Foreign exchange and fair value movements were a negative impact of £30 million.

Net capital expenditure was higher than in the previous half year at £208 million (H1 2022/23: £162 million) driven by incremental discretionary spend.

Return on average capital employed (ROACE) reduced by 40 basis points to 12.8 per cent against the previous half year.

Return on sales for the continuing operations at 10.4 per cent, improved 70 basis points against the previous half year of 9.7 per cent.

Certain items are presented within the financial statements as adjusting items, in order to assist in understanding the trading results of the Group. There were no costs recognised during the current half year (H1 2022/23: £7 million), with the prior half year costs relating to the put option for the final 10% stake in Interstate Resources when the option crystallised on 1 September 2022.

Net financing costs before adjusting items of £47 million (H1 2022/23: £35 million) relate to interest on borrowings and lease liabilities, higher than last year due to the higher interest rates primarily following the refinancing of the Group's European bonds in the period.

Income from associates was £1 million (H1 2022/23: £1 million).

Profit before income tax decreased to £268 million (H1 2022/23: £315 million) principally due to lower operating profit.

The rate of tax on adjusted profits before amortisation and adjusting items is 24%, lower than the previous year's rate of 25%. The total tax expense is £64 million (H1 2022/23: £83 million).

Profit after tax decreased to £204 million (H1 2022/23: £232 million), due to lower operating profit offset by a reduction in income tax.

Adjusted basic earnings per share before amortisation and adjusting items reduced by 15% to 17.7 pence on a constant currency basis (H1 2022/23: 20.9 pence), driven by the reduction in operating profit. Basic earnings per share decreased to 14.8 pence (H1 2022/23: 16.9 pence).

Financial position

Total shareholder funds decreased to £4,022 million (30 April 2023: £4,084 million; 31 October 2022: £4,590 million). The movement is due primarily to profit attributable to shareholders of £204 million (H1 2022/23: £232 million), actuarial losses on employee benefits of £23 million (H1 2022/23: £34 million), dividends to shareholders recognised of £165 million (H1 2022/23: £206 million), a net decrease in the translation reserve of £12 million (net foreign currency translation losses of £1 million, and a negative £11 million movement in the net investment hedge) and a net negative movement on derivative hedges of £80 million. The latter is driven by commodity hedging positions which have decreased in value as energy prices have fallen. The tax credit of total comprehensive income items amounts to £17 million (H1 2022/23: charge of £91 million).

Reported net debt of £1,990 million has increased from year end (30 April 2023: £1,636 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 covenants, which excludes the effects of IFRS 16 Leases. The ratio has increased to 1.7 times (30 April 2023: 1.3 times, 31 October 2022: 1.0 times), well within the primary covenant requirements of 3.75 times, owing to a reduction in EBITDA as a result of softer demand and a reduction in sales prices partly offset by improved input costs and the impact of cost control measures. In July 2023, the Group successfully issued a €1.5 billion bond split across two tranches (4 & 7 years) under the Group's Green Financing Framework. Alongside this, we bought back almost €300 million of the €750 million bond which is due to mature in 2024.

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 increased marginally to £364 million (30 April 2023: £360 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 6.0 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 31 January 2024 to ordinary shareholders on the register at close of business on 15 December 2023.

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 on pages 42 to 49 of the 2023 Annual Report, available on the Group's website, www.dssmith.com, remain relevant.

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

·    Macroeconomic impacts

·    Paper/fibre price volatility

·    Cyber attacks

·    Shopping habits

·    Regulation and governance

·    Sustainability commitments

·    Organisational capability

·    Packaging capacity fluctuations

·    Disruptive market players

·    Substitution of fibre packaging

·    Security of paper/fibre supply

·    Digital enablement

 

Going Concern

The Board has 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 caused by high inflation and the ongoing war in Ukraine and reactivation of Middle East conflict. More detail of the assessment performed is included in note 1 to the financial statements.

At 31st October 2023 there was significant liquidity headroom, at a level of c.£1.8 billion. The going concern assessment included the period to 30 April 2025 and considerations for the period immediately thereafter. Based on the resilience of the Group's operations to both the high-cost environment experienced throughout the last 24 months, adverse evolution of paper prices and the weak demand experienced during FY23 and FY24, 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 controllable 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 period of the going concern assessment. For this reason, the going concern basis has been adopted in preparing the financial statements.

The financial statements have been prepared on the going concern basis with no material uncertainty identified after a detailed assessment.

 

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                            Richard Pike

Group Chief Executive              Group Finance Director  

 

6 December 2023