DS Smith plc (LON:SMDS) has announced its 2022/23 half year results.
| 6 months to 31 October 2022Continuing operations | Change(reported) | Change(constant currency) | |
| Revenue | £4,299m | +28% | +26% |
| Adjusted operating profit(1) | £418m | +51% | +49% |
| Profit before tax | £315m | +80% | +79% |
| Adjusted basic EPS(1) | 20.9p | +53% | +49% |
| Statutory basic EPS | 16.9p | +72% | +71% |
| Dividend per share | 6.0p | +25% | NA |
| Return on sales (RoS)(2) | 9.7% | +150bps | +150bps |
| ROACE(3) | 13.2% | +380bps | +400bps |
| Net debt / EBITDA(6) | 1.0x | – | – |
See notes to financial table below
Miles Roberts, Group Chief Executive, commented:
“The performance during this six month period has been strong, benefiting from our constant focus on our customers’ evolving needs during this time of significant economic volatility. This has enabled us to achieve continued market share gains, an increase in profitability and improvements in our key financial performance ratios. We are particularly pleased with the performance of the Southern Europe region that continues to deliver major benefits from the acquisition of Europac in 2019.
The macro-economic outlook for the rest of the financial year remains challenging. However, we have an excellent customer base, efficient high quality assets, dedicated colleagues and a strong balance sheet allowing continued organic investment to support our customers. These benefits, combined with current momentum in the business, mean we now expect FY23 performance to be ahead of previous expectations with H2 being consistent with H1.”
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 £62 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 = 3%. Source: Eurostat (16 Nov 2022) 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.
Operating Review
Strong customer focus driving profit growth
In a very challenging macro-economic environment, our comprehensive geographic footprint, security of supply and high service levels have enabled us to achieve ongoing market share gains and strong profit growth. However, the overall market was worse than we originally expected, leading to a decline in our volumes of 3 per cent4. The volume reduction reflected very strong comparatives, a weaker than expected industrial sector and economic challenges particularly in the UK and Germany. Looking ahead, while the challenges remain ongoing, we still expect an improved volume performance in the second half of the year compared to the first half.
For the six month period, revenue grew to £4,299 million, up 26 per cent on a constant currency basis and 28 per cent on a reported basis with a small decline in box volumes (£64 million) more than offset by higher selling prices (£950 million) across the Group. £655 million of this increase was due to higher packaging prices with the remainder of £295 million due to increases in price of external sales of paper, recycling material and energy. These increases reflect the lag in recovery of the significant increases in input costs during 2021 and 2022. Overall pricing more than offset reduced external paper volumes sold as we utilised more of our own manufactured paper.
Input costs were significantly impacted by inflationary price rises, supply chain issues and general availability which led to an increase in costs of £779 million versus the comparable period with rises in raw materials costs of £370 million, energy costs of £158 million and other costs, including labour and distribution, of £251 million. Our excellent procurement and risk management function ensured that our production was unaffected, with the impact of rising energy costs being mitigated by OUR three-year rolling energy hedging programme and a price benefit on external electricity sales.
Group return on sales grew during the year to 9.7 per cent (2021/22: 8.2 per cent), reflecting the increase in profitability and despite the dilutive impact of the inflationary environment. We expect to be within the target range of 10-12 per cent by the year end.
Basic earnings per share from continuing operations grew 71 per cent on a constant currency basis to 16.9 pence. Adjusted basic earnings grew by 49 per cent on a constant currency basis to 20.9 pence per share, reflecting the growth in profitability.
Return on average capital employed significantly increased by 400 bps to 13.2 per cent, principally reflecting the growth in adjusted operating profit for the prior 12 months, and well within our medium-term target range of 12-15 per cent. The Group’s strong performance supports our confidence in continuing to meet this medium-term target.
Strong cash generation and investing for growth
Cash generation remains strong, with £494 million of free cash flow8 compared to £188 million in the comparative period, principally driven by the enhanced profitability and a working capital inflow. The working capital inflow of £138 million benefitted from £197 million in respect of margin calls made in both this year and last year to manage our energy hedging position. These margin calls will reverse in part in the second half of the year. The underlying working capital outflow was reflective of higher sales prices and inventory costs. Our net debt has reduced to £1,147 million at 31 October 2022 from £1,484 million at 30 April 2022 and the net debt/EBITDA ratio has significantly improved to 1.0 times from 1.6 times at 30 April 2022, within our medium-term target of at or below 2.0 times.
As described in our results to 30 April 2022, we have continued to invest in our business with net capital expenditure up 30 per cent in the first half of the year to £162 million, including a number of ongoing customer led projects in relation to energy efficiency and packaging capacity. Our expectation for full year capital expenditure remains unchanged as previously guided at £500 million.
Leading the way in 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. Momentum in plastic replacement continues and we have replaced 520 million units of plastic in since 2020.
We continue to make progress against our sustainability targets including improvements in both carbon emissions and water use and we are delighted that this has been recognised with further improvements in our rating by a number of external indices including S&P Global and Sustainalytics and through our continuing top ratings at MSCI and Ecovadis.
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 6.0 pence per share, an increase of 25 per cent and consistent with our policy of 2.0-2.5 times dividend cover over the medium term.
Progress against medium-term targets
| Medium-term targetsContinuing operations | Delivery in H1 2022/23 |
| Organic volume growth(4) ≥GDP(5)+1%, being 4% | (3%) |
| Return on sales(2) 10% – 12% | 9.7% |
| ROACE(3) 12% – 15% | 13.2% |
| Net debt / EBITDA(6) ≤2.0x | 1.0x |
| Cash conversion(7,8) ≥100% | 160% |
See notes to the financial tables above
Outlook
The macro-economic outlook for the rest of the financial year remains challenging. However, we have an excellent customer base, efficient high quality assets, dedicated colleagues and a strong balance sheet allowing continued organic investment to support our customers. These benefits, combined with current momentum in the business, mean we now expect FY23 performance to be ahead of previous expectations with H2 being consistent with H1.
Operating Review
Northern Europe
| Half year ended 31 October 2022 | Half year ended 31 October 2021 | Change – reported | Change – constant currency | |
| Revenue | £1,624m | £1,331m | 22% | 22% |
| Adjusted operating profit* | £85m | £87m | (2%) | (1%) |
| Return on sales(2) | 5.2% | 6.5% | (130bps) | (130bps) |
*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 with UK and Germany showing higher levels of decline due to overall economic conditions, including some customers limiting production to reduce energy usage and very strong growth in the comparative period.
Revenues increased by 22 per cent in the region due to a combination of the increases in box prices in packaging and an increase in sales price for externally sold paper and volumes of recycled fibre. Adjusted operating profit declined slightly reflecting greater increases in input costs than experienced in other regions. This impact is expected to be reversed through additional price recovery in the second half.
Southern Europe
| Half year ended 31 October 2022 | Half year ended 31 October 2021 | Change – reported | Change – constant currency | |
| Revenue | £1,672m | £1,234m | 35% | 35% |
| Adjusted operating profit* | £252m | £122m | 107% | 107% |
| Return on sales(2) | 15.1% | 9.9% | 520bps | 520bps |
* Operating profit before amortisation and adjusting items (refer to note 3 of the financial statements)
Southern Europe saw a slight decline in box volumes with France weaker than Iberia and Italy reflecting comparative performances in the prior period and excellent customer traction.
Revenue grew by 35 per cent, due to the impact of increases in both packaging and paper pricing. Adjusted operating profit grew by over 100 per cent compared to the prior period, due to a very positive performance from the former Europac business acquired in 2019 as well as the drop through of price increases in packaging. Accordingly, return on sales for the region grew to the highest within the Group.
Eastern Europe
| Half year ended 31 October 2022 | Half year ended 31 October 2021 | Change – reported | Change – constant currency | |
| Revenue | £648m | £523m | 24% | 27% |
| Adjusted operating profit* | £38m | £31m | 23% | 27% |
| Return on sales(2) | 5.9% | 5.9% | – | – |
* Operating profit before amortisation and adjusting items (refer to note 3 of the financial statements)
Organic corrugated box volumes in Eastern Europe declined less than the Group average, reflecting the relative economic stability in the region.
Revenues grew 27 per cent, principally reflecting increases in pricing and adjusted operating profit also grew 27 per cent, reflecting the recovery of higher paper prices through increased packaging pricing after the usual lag.
North America
Packaging volumes in the region declined slightly, reflecting the overall economic environment and labour shortages which temporarily restricted our production capacity.
Revenues increased by 11 per cent, principally reflecting the increases in paper and packaging prices.
Financial Review
2022/23 half year results
Prior year comparatives within the following commentary relate to the continuing operations of the Group.
Revenue increased by 28% on a reported basis and 26% on a constant currency basis to £4,299 million for the half year ended 31 October 2022 (H1 2021/22: £3,362 million), driven by higher average selling prices reflecting recovery of paper and other input costs. Box volumes declined by 3% over the period versus the previous year, reflective of the strong sales volumes experienced in H1 2021/22 and the volatile economic environment in the current year.
Operating profit of £349 million increased by 69% versus the prior year, 68% on a constant currency basis (H1 2021/22: £207 million), and adjusted operating profit increased to £418 million, a 51% and 49% increase on a reported and constant currency basis (H1 2021/22: £276 million). On a constant currency basis, the effect of an increase in the average sales price and mix (£950 million) more than offset lower volumes (£33 million) and the significant rises in input, distribution, energy and other costs of (£779 million). The costs continue to be actively managed, with the impact of rising energy costs mitigated by the Group’s three year rolling hedging programme. Labour costs increased, reflecting inflationary pay rises.
Amortisation of £62 million is lower than the prior half year on both a reported (H1 2021/22: £69 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 £154 million, £7 million higher on a reported basis and £5 million on a constant currency basis (H1 2021/22: £147 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 £494 million (H1 2021/22: £188 million). The improvement in adjusted operating profit was offset by increased capital expenditure and higher taxes paid. Underlying working capital was an outflow of £59 million which was more than offset by £197 million of margin received from energy hedges. The underlying working capital outflow was due to the effect of box price rises on receivables and paper prices on the value of inventory. The reported working capital cash flow was in total an inflow of £138 million. Factored receivables reduced from the previous year end to £380 million (30 April 2022: £381 million).
The Group’s net debt position improved by £337 million to £1,147 million compared to the prior year end (30 April 2022: £1,484 million; 31 October 2021: £1,640 million). Net debt was impacted principally by free cash flow for the period of £494 million and dividend payments of £66 million. Foreign exchange and fair value movements were a negative £95 million.
Net capital expenditure was higher than in the previous half year at £162 million (H1 2021/22: £125 million) driven by investment in growth. The greenfield Packaging plants in Italy and Poland are now both fully operational.
At 30 April 2022, the Group’s net debt position had benefitted from £109 million of margin calls related to energy and carbon hedges unwinding in 2022/23. In the current period, as energy prices continued to rise, further margin calls were made to continue to manage counterparty risk. These calls amounted to £267 million cash received whilst £70 million of the position as at 30 April 2022 reversed resulting in a net benefit to working capital in the half year of £197 million. There was no impact on income from these margin calls.
Return on average capital employed (ROACE) increased by 380 basis points to 13.2%, which is within the Group’s target rate of 12% to 15%. The Group’s strong performance supports our confidence in continuing to meet this medium-term target.
Return on sales for the continuing operations is 9.7 per cent, improved 150 basis points against the previous half year of 8.2 per cent and is expected to be at the target range of 10-12 per cent by the year end.
In response to the market turmoil following the UK “mini- budget” in September 2022, the Group made funding support of up to £100 million to the main UK defined benefit pension scheme. This took the form initially of a cash advance in anticipation of potential margin calls and latterly a liquidity facility. The cash advance was fully repaid within days of being made and as at 31 October 2022 the liquidity facility remained in place but was undrawn.
Certain items are presented within the financial statements as adjusting items, in order to assist in understanding the trading results of the Group. Non-cash costs of £7 million (H1 2021/22: £nil) relating to the put option for the final 10% stake in Interstate Resources resulting when the option crystallised on 1 September 2022, have been recognised. There were no new adjusting items and none are anticipated for the full year.
Net financing costs before adjusting items of £35 million (H1 2021/22: £34 million) relate to interest on borrowings and lease liabilities, higher than last year due to the significant rise in interest rates in the period despite lower levels of borrowing.
Income from associates was £1 million, below the previous year (H1 2021/22: £4 million) following the impact of the war in Ukraine on the Group’s Ukrainian associate.
Profit before income tax increased to £315 million (H1 2021/22: £175 million) principally due to higher operating profit)
The rate of tax on adjusted profits before amortisation and adjusting items is 25%, an increase against the previous year’s rate of 24%. The total tax expense is £83 million (H1 2021/22: £40 million.
Profit after tax increased to £232 million (H1 2021/22: £135 million), due to higher operating profit offset by an increase in income tax.
Basic earnings per share before amortisation and adjusting items increased by 49% to 20.9 pence on a constant currency basis (H1 2021/22: 13.7 pence), driven by the improvement in operating profit. Basic unadjusted earnings per share increased to 16.9 pence (H1 2021/22: 9.8 pence).
Financial position
Total shareholder funds increased to £4,590 million (30 April 2022: £4,232 million; 31 October 2021: £3,607 million). The movement is due primarily to profit attributable to shareholders of £232 million (H1 2021/22: £135 million), actuarial losses on employee benefits of £34 million (H1 2021/22: £11 million gain), dividends to shareholders recognised of £206 million (H1 2021/22: £166 million), a net increase in the translation reserve of £129 million (net foreign currency translation gains of £195 million, offset by a £66 million movement in the net investment hedge) and a net movement on derivative hedges of £319 million. The latter is driven by commodity hedging positions which have increased in value as energy prices have risen. The tax charge of total comprehensive income items amounts to £91 million (H1 2021/22: £63 million).
Reported net debt of £1,147 million has decreased from year end (30 April 2022: £1,484 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 1.0 times (30 April 2022: 1.6 times, 31 October 2021: 1.9 times), well within the primary covenant requirements of 3.75 times, owing to an improvement in EBITDA as a result of strong price growth more than recovering rising input costs, together with the strong cash generation reducing our level of net debt.
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 £380 million (30 April 2022: £381 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 2023 to ordinary shareholders on the register at close of business on 16 December 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 52 to 55 of the 2022 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
· Regulation and governance
· Sustainability commitments
· Security of paper/fibre supply
· Packaging capacity limits to growth
· Organisation capability
· Disruptive market players
· Substitution of fibre packaging
· Digital enablement
· Shopping habits
In addition to the risks noted above, the Group actively managed its exposure to energy related costs which have seen upward 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 an inflationary economic environment and the ongoing war in Ukraine. More detail of the assessment performed is included in note 1 to the financial statements.
At 31 October 2022 there was significant headroom on the Group’s committed debt facilities, at a level c.£1.5 billion. The going concern assessment includes the period of 12 months from the date of approval of this interim financial report with the scenarios assessed extending to 30 April 2024. Based on the resilience of the Group’s operations to both Covid-19 and the high-cost environment experienced throughout the last 12 months, 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 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 DS Smith
7 December 2022
