26 June 2014

DS Smith Plc - 2013/14 FULL YEAR RESULTS

Delivering sustainable results

12 months to 30 April	2014 £m	2013(1) £m	Change
Revenue	4,035	3,669	+10%
Adjusted operating profit(2)	307	249	+23%
Profit before tax	167	82	+104%
EPS(2)	21.4p	17.1p	+25%
Dividend per share	10.0p	8.0p	+25%
Return on sales(5)	7.6%	6.8%	+80bps
ROACE(6)	13.0%	12.2%	+80bps

These results include a 12 month contribution following the acquisition of SCA Packaging on 1 July 2012 compared to the comparative period where 10 months' contribution was included. See notes to the financial tables, below.

 

Highlights

·     Strong growth in profits, returns and dividends

·     Organic corrugated packaging volume growth of +2.2% driving market outperformance, led by good growth in areas of focus

·     Return on sales progression of 80bps to 7.6% despite input cost pressures

·     Synergy benefits from SCA Packaging acquisition fully on track

·     Continued delivery of our medium-term targets

·     Investment to support further growth and efficiency

 "This is a strong set of results achieved despite economic conditions across Europe remaining challenging. We have achieved our synergy targets for the year and delivered good growth in profits, returns and dividends.

At the heart of our performance is an unrelenting focus on the customer. Our strengthened customer proposition and an ability to deliver across the whole customer supply cycle has led to increased market share across our regions.

The current year has started well and is in line with our expectations. While we are planning for a difficult consumer economic environment to remain, our focus on delivery, capital discipline and continued investment in the business provides us with confidence in the sustainability of our business model. Looking ahead we remain excited about further growth opportunities for the Group."

Miles Roberts, Group Chief Executive

 

Continued delivery in line with medium-term targets

Medium-term targets	Delivery in 2013/14
Organic volume growth(3) at least GDP(4)+1%	2.2%
Return on sales(5) 7% - 9%	7.6%, +80 bps(1)
ROACE(6) 12% - 15%	13.0%, +80 bps(1)
Net Debt / EBITDA(7) ≤2.0x	1.96x
Operating cash flow/ operating profit(8)  > 120%	120%

See notes to the financial tables, below

Enquiries

DS Smith Plc                                                            +44 (0)20 7756 1800

Hugo Fisher, Group Communications Director

Rachel Stevens, Investor Relations Manager

 

Bell Pottinger                                                           +44 (0)20 7861 3800

John Sunnucks                                                         +44 (0)20 7861 3932

Ben Woodford                                                          +44 (0)20 7861 3917

Presentation and dial-in details

A presentation to investors and analysts will be held at 9:30am today at Holborn Bars 138-142 Holborn, London, EC1N 2NQ. Dial-in access for the presentation is available per the details below. The slides accompanying the presentation will be available on our website shortly before 09:30. Dial-in participants will have the opportunity to participate in the Q&A.

+44 (0)20 3003 2666 (standard access) or 0808 109 0700 (UK Toll Free) Password: DS Smith.

A replay of the event is available for seven days, on +44 (0) 20 8196 1998, PIN 8890992. An audio file and transcript will also be available on www.dssmith.com/investors/results-and-presentations.

Notes to the financial tables

(1)        Prior period figures are restated for IAS 19 (revised 2011)

(2)        Continuing operations, before exceptional items and amortisation

(3)        Corrugated box volumes, adjusted for the number of working days

(4)        GDP growth (year-on-year) for the countries in which DS Smith operates, weighted by our sales by country, for the period April 2013 - March 2014= 0.9%. Source: Eurostat (14/5/14)

(5)        Earnings from continuing operations before interest, tax, amortisation and exceptional items as a percentage of revenue

(6)        Earnings from continuing operations before interest, tax, amortisation and exceptional items as a percentage of the average monthly capital employed over the previous 12 month period. Average capital employed includes property, plant and equipment, intangible assets (including goodwill), working capital, provisions, capital debtors/creditors and assets/liabilities held for sale

(7)        EBITDA being earnings from continuing operations before interest, tax, exceptional items, depreciation and amortisation

(8)        Free cash flow before tax, net interest, growth capital expenditure, pension payments and exceptional cash flows as a percentage of earnings before interest, tax, amortisation and exceptional items

 

 

Overview

The financial year 2013/14 has been a year in which DS Smith has delivered on its targets, with strong growth in profits, returns and dividends. Integration of the business acquired from SCA, in the first full year of ownership, is now well established and we continue to be extremely excited by the opportunities for the combined business. We have delivered on our synergy targets for the year and on our broader key performance indicators, which apply to the whole business. We have gained market share, further improved our health and safety performance and continued to reduce our environmental impact.  We are investing further in the business, to underpin future growth.

In 2013/14 the Group's corrugated box volumes grew 2.2 per cent, ahead of the corrugated packaging market and ahead of our target of volume growth of GDP +1 per cent. Volume growth has been particularly strong in our Central Europe and Italy region, benefiting from new customer wins and expanded service to existing customers, in fast-moving consumer goods (FMCG), online retail and the automotive sectors. Our DACH and Northern Europe region has also shown strong growth as we have been able to offer customers a wider geographic reach, with volume growth across a range of sectors.

All numbers within this review are based on continuing operations before amortisation and exceptional items, unless otherwise stated.  Comparatives have been restated for the impact of IAS 19 Employee Benefits (revised 2011).

Revenues grew by 10 per cent, due to organic growth and the contribution from the legacy SCA Packaging business for a full 12 months in this year versus 10 months in the prior year. Operating profit increased 23 per cent to £307 million (2012/13: £249 million), including the benefit of €40 million of cost synergies, which we have delivered as expected. A further €40 million benefit is expected from synergies in 2014/15, as previously announced, completing the overall three year cost synergy programme. Earnings per share increased 25 per cent to 21.4 pence (2012/13: 17.1 pence), building on the substantial growth of the prior two years of 37 per cent and of 29 per cent.

These results have been achieved despite economic conditions across Europe remaining challenging, with the significant pressure on household budgets impacting the entire supply chain. Paper costs comprise approximately half the total cost of corrugated packaging, and paper prices have increased substantially over the period, requiring us to recover those costs from our customers. Our focus on innovation and, in particular, performance packaging, has put us in a good position to help mitigate the impact for our customers, delivering packaging solutions with the performance qualities that they need, while using smart design to reduce the cost of materials used. 

Sustainability is at the heart of our business model, meaning that not only is our product fully recyclable, but that our financial performance is equally sustainable. During the year we have taken action to make the business more efficient and able to take advantage of a range of commercial opportunities that are now open to our pan-European business. We expect the benefits of this work to underpin future growth.

Delivering on our key performance indicators

Our performance this year has delivered progress on our key performance indicators. As set out above, corrugated box volumes grew by 2.2 per cent. This exceeded our target of GDP+1 per cent, with year-on-year GDP growth, weighted by our sales in the markets in which we operate, estimated at 0.9 per cent (Source: Eurostat). DS Smith has been gaining market share across our regions, where the overall corrugated packaging market has shown volume growth of 1.2 per cent (Source: FEFCO, April 2013 - March 2014).  These gains have been driven by the success of our commercial offering, in particular our ability to serve customers across Europe and to offer high standards of service, quality and innovation.

In the year 2013/14, we owned SCA Packaging for a full 12 months compared to 10 months in the prior year. The improvements made in our key performance indicators this year has therefore been achieved despite owning SCA Packaging for an additional two months compared to the prior period. This would have had an underlying negative impact, given the relatively poor historic performance of SCA Packaging compared to DS Smith.

Return on sales has increased by 80 basis points to 7.6 per cent (2012/13: 6.8 per cent), within our target range of 7 to 9 per cent, reflecting the improvement in profitability driven by our strong focus on costs and the on-going delivery of planned synergies. This margin increase has been achieved despite the substantial short-term headwind on operating profit presented by the continued lack of growth in European consumer spending and a significant increase in input costs due to rising paper prices which, as expected, have been partially recovered in the financial year.

Return on average capital employed has improved by 80 basis points to 13.0 per cent (2012/13: 12.2 per cent), within our medium-term target range of 12 to 15 per cent and well above our cost of capital of c. 9.5 per cent. The improvement is driven by our improved profitability and continual focus on capital allocation within the business, including working capital, which has again shown further improvement this year. Return on average capital employed is our primary financial measure of success, with all senior management having part of their remuneration package linked to this measure.

Net debt / EBITDA (calculated in accordance with our banking covenant requirements) was 1.96x (2012/13: 1.97x), in line with our target of a ratio of 2.0x or below.

During the year the Group generated free cash flow of £140 million (2012/13: £270 million). Our underlying cash flow remains strong with further good management of working capital, following the exceptional performance in the prior year. Cash conversion was 120 per cent, in line with our target.

The Group has a target for customer service of 97 per cent on-time, in-full deliveries. In the year we achieved 93.1 per cent, which was adversely impacted by the inclusion of a full 12 month contribution from SCA Packaging. At the same time, our quality measure (defects parts per million) has improved by 19 per cent. These measures are critical to us as they reflect our commitment to be a trusted business partner and are part of our overall vision to deliver high standards of service, quality and innovation in packaging solutions for our customers. Our service levels remain a strategic priority and a clear area of differentiation in a very fragmented market.

DS Smith is committed to providing all employees with a safe and productive working environment. We are pleased to report a further substantial improvement in our safety record, with our accident frequency rate reduced a further 22 per cent from 6.2 to 4.8. This reflects the on-going commitment to best practice in health and safety, which is supported by investment. Our target is for zero accidents, which we are proud to report that 70 per cent of sites achieved this year. We continue to strive to achieve zero accidents for the Group as a whole.

DS Smith is part of the sustainable economy, with our principal product of corrugated packaging fully recyclable, from recycled material. Our Recycling business works uniquely with customers across Europe to improve their recycling operations and overall environmental performance. During 2013/14 we have implemented significant new systems to track our own environmental performance. We are pleased to say that we estimate that our CO₂ emissions, relative to production, have reduced a further 5 per cent, meaning that we are well on target to achieve our 2010 commitment to a 20 per cent reduction by 2020.  

Investing in the business

Alongside on-going delivery of operating performance, we continue to invest in the business. Net capital expenditure of £156 million has been spent in the year, of which 74 per cent has been spent within the corrugated packaging side of the business, reflecting a wide range of opportunities for growth in this business. When considering growth capital expenditure and restructuring expenditure, our primary measures of return are cash payback, and a return on capital well in excess of the Group target. Specific returns are varied according to the risk profile of the investment.

We have now owned the SCA Packaging business for about two years and the integration programmes are now business as usual. We continually seek to optimise the business for both future growth and competitiveness. As a result, a number of restructuring exercises are taking place across the business. We are implementing this investment which, combined with our targeted capital expenditure programme, is designed to optimise our footprint, drive greater efficiency and further improve our customer offering. The total cost of these investments is expected to be approximately £60 million, of which £29 million has been incurred in 2013/14. The benefits from the investment will be progressively realised, substantially from 2015/16 and underpin our confidence in our financial performance and supports our future growth expectations.

Growth capital expenditure in 2014/15 is focused on our market leading display packaging business, particularly in Germany, where our pan-European customers both demand and reward innovation. We continue to invest in digital printing to offer high quality packaging that helps our customers to differentiate their products and explore further developments in shelf ready packaging. 

Foreign exchange translation

Approximately 65 per cent of the Group's EBITA is earned in euros. The results for the year 2014/15 will be influenced by foreign exchange translation, where the euro is currently weaker than the average rate over 2013/14 of 1.19. A change of 1c impacts EBITA by approximately £1.6 million and profit before tax by approximately £1.2 million.

Outlook

The current year has started well and is in line with our expectations. While we expect a difficult consumer economic environment to remain, our focus on delivery, capital discipline and continued investment in the business provides us with confidence in the sustainability of our business model. Looking ahead we remain excited about further growth opportunities for the Group.

 

Operating review

The divisional results set out below include a full 12 month contribution from the SCA Packaging business versus 10 months in the comparative prior period. The revenue and operating profit uplift from this acquisition effect is most pronounced in DACH and Northern Europe, where DS Smith previously had relatively little operational presence, and also in Western Europe and in Central Europe and Italy where the acquired business has materially expanded our presence in these regions.

 

UK

	Year ended  30 April 2014	Year ended  30 April 2013 (restated)**
Revenue	£929m	£961m
Operating profit*	£64m	£46m
Return on sales*	6.9%	4.8%

*before amortisation and exceptional items

**prior year restated for the impact of IAS 19 (Revised)

 

The UK has seen good volume growth, broadly consistent with that of the Group as a whole, as the corrugated packaging business has led the move to performance-driven specification. The business has succeeded in generating increased sales by offering innovative corrugated packaging solutions for products previously packaged in other materials. We have also gained sales through our retail-ready packaging focus, designed to drive more sales for both the FMCG customer and the retailer. At the same time, the packaging business has worked consistently to recover rising input costs driven by paper prices. Revenues, which have fallen by 3 per cent, have been impacted by the sale of non-core businesses. Profitability has improved due to the benefit of cost synergies, and an improved performance from the Kemsley mill in Kent. Here management has benefited from applying best practice from mills acquired from SCA, resulting in a significant improvement in efficiency and profitability at this site. The Recycling business has continued to grow in line with our strategy to expand our service offering to more European customers, with additional business won in France, Germany and Poland. At the same time, we have rationalised our recycling depot network in the UK from 23 to 13, benefiting from the sites acquired with the SCA Packaging acquisition and resulting in a better geographic spread across the UK.

Western Europe

	Year ended  30 April 2014	Year ended  30 April 2013 (restated)**
Revenue	£1,017m	£966m
Operating profit*	£67m	£73m
Return on sales*	6.6%	7.6%

*before amortisation and exceptional items

**prior year restated for the impact of IAS 19 (Revised)

 

Revenue has increased 5 per cent, reflecting the additional two month contribution from the acquired business and a slight benefit from foreign exchange translation. Market conditions in this region have been very challenging with volume growth lower than the Group average. Operating profit has fallen 8 per cent and return on sales has decreased 100 basis points, reflecting the difficult economic and trading conditions in the region. The region has benefited from the combined business being able to offer a wider product range to its customers.

DACH and Northern Europe

	Year ended  30 April 2014	Year ended  30 April 2013 (restated)**
Revenue	£1,029m	£836m
Operating profit*	£96m	£63m
Return on sales*	9.3%	7.5%

*before amortisation and exceptional items

**prior year restated for the impact of IAS 19 (Revised)

 

DACH and Northern Europe, which is a region that DS Smith's corrugated business did not operate in prior to acquiring the SCA Packaging business, has grown revenue 23 per cent and operating profit by 52 per cent, with the growth driven by the full 12 month contribution from the acquired business and organic growth. The growth in margin of 180 basis points principally reflects the benefit of synergies being realised, together with the organic growth within the region and the strong paper pricing benefiting the two mills. Volumes have been strong as a result of a good performance, particularly in Germany. DS Smith was the clear innovation leader in the region, winning six Design Awards, two World Star awards, two German Packaging Prizes, one Superstar and one Popai Award. DS Smith Germany also won the Nestlé Supplier Award in Gold for outstanding customer service, out of 16,000 suppliers.

Central Europe and Italy

	Year ended  30 April 2014	Year ended  30 April 2013 (restated)**
Revenue	£739m	£601m
Operating profit*	£53m	£41m
Return on sales*	7.2%	6.8%

*before amortisation and exceptional items

**prior year restated for the impact of IAS 19 (Revised)

 

Revenue and operating profit have increased by 23 per cent and 29 per cent respectively, reflecting the full 12 month contribution from the acquired business and organic growth. As described in the financial review, towards the end of the financial year, the power plant adjacent to the paper mill in Italy was acquired. Volumes in the corrugated packaging business have been excellent, driven by Central Europe, substantially above the Group average. This reflects the benefit of developing sales with existing strategic FMCG and industrial customers and new large and medium size accounts, with a large part of this growth supported by our strength in innovation as well as our enhanced footprint.

Plastics

	Year ended  30 April 2014	Year ended  30 April 2013  (restated)**
Revenue	£321m	£305m
Operating profit*	£27m	£26m
Return on sales*	8.4%	8.5%

*before amortisation and exceptional items

**prior year restated for the impact of IAS 19 (Revised)

 

Plastics has delivered revenue growth of 5 per cent and operating profit growth of 4 per cent, resulting in a modest reduction in operating margin of 10 basis points.

The Plastics business comprises two elements, flexible packaging and dispensing (FP&D) and returnable transit packaging (RTP). The FP&D business in the US has had a very good year, delivering good profit growth as the business has seen continued success of its Trutap product and of tea-urn liners. In the European FP&D business, it has been a year of investment, with a substantial reorganisation in our European operations. Manufacturing has been transferred to eastern Europe, to sites with greater efficiency and with scope for increased production and which are closer to the customers they serve. There has been disruption to the business during this transfer, which is on track to be substantially completed by December, and this has limited the growth from this business during the year.

The RTP business, which is based in Europe, has had a very strong year, driven by the improvement in the market for transit packaging for automotive parts and also plastic board for display. In our crates business, we have won a significant contract in eastern Europe with a major brewer, driven by our "soft touch" crate design, which incorporates the strength of rigid plastic with a softer polymer in the handle and the scope for high quality printing onto the crate. This makes the crate usable both in the supply chain and also in the retail store. The crate is then re-used multiple times and, at the end of its useful life, can be recycled. The plastic is ground up by a specialist mobile unit that DS Smith provides, and the material then returned to our site for re-use. We have invested in additional capacity behind this business in order to fulfil existing demand for these products.

Financial review

 

Trading results

All numbers within this review are based on continuing operations before amortisation and exceptional items, unless otherwise stated.  Comparatives have been restated for the impact of IAS 19 Employee Benefits (revised 2011).

Revenue of £4,035 million represents an increase of 10 per cent (2012/13: £3,669 million).

The growth in revenue includes the effect of a full year of SCA Packaging (compared to ten months in 2012/13) and was underpinned by corrugated box volume growth across Europe of 2.2 per cent. Plastics delivered revenue growth of 5 per centwhilst implementing a significant programme of restructuring.

Adjusted operating profit rose by 23 per cent to £307 million (2012/13: £249 million). The improvement in profit reflects the additional two months of SCA Packaging, together with synergy benefits of £33 million (€40 million) arising from the integration.

In the prior year, the Group's measures of return on sales and return on average capital employed were both negatively impacted by the acquisition of SCA Packaging, but have seen improvements in the current year as the benefits of the combined businesses flow through. Return on sales of 7.6 per cent is back within the range of 7-9 per cent, whilst return on average capital employed of 13.0 per cent in 2013/14 strengthened within the range of 12-15 per cent and is significantly above the Group's cost of capital.

Exceptional items

Exceptional items before tax and share of results of associates were £38 million (2012/13: £79 million). The major exceptional costs associated with the SCA Packaging integration programme have now been incurred. The total costs of the programme are in line with original estimates of £100 million with £42 million in 2013/14. The business is now operating as a pan-European supplier with consistent messaging and common customer interfaces which creates an excellent platform for growth. Having successfully completed the business integration, the business is now focusing on the next stage of the process which is to rationalise the asset footprint and ensure the cost base is fit for the future. The Plastics business in Europe commenced an ambitious restructuring plan involving a detailed analysis of both its cost base and future opportunities. This review resulted in the closure of a number of sites in the more established parts of Europe and investment in new facilities in higher growth markets in eastern Europe and an optimisation of the remaining asset base. This methodology has also been applied to Recycling and Packaging divisions and further investments are planned for 2014/15. The exceptional charge for 2013/14 for this rationalisation programme was £29 million and there are plans for a similar level of investment in 2014/15.

Following the conclusion of the SCA Packaging completion process in December the Group acquired the Lucca power plant in Italy. This resulted in a detailed balance sheet review and an exceptional credit was released which included amounts for an onerous energy contract in Italy.

Profits on sales of businesses amounted to £4 million and other exceptionals, including employee compensation and pension settlements, offset by the set up costs of the UK shared service program, benefited income by £3 million.

Interest, tax and earnings per share

Net interest expense increased from £37 million in 2012/13 to £41 million in 2013/14, principally due to the interest payable on the financing of the SCA Packaging acquisition. The employment benefit net finance expense was £7 million (2012/13: £7 million). The adoption of the revisions to IAS 19 Employee Benefits increased this cost by £3 million; the prior year has been restated.

Profit before tax (excluding amortisation, exceptional items and share of profit of associates) was £259 million (2012/13: £205 million), an increase of 26 per cent.

The share of the results of equity accounted investments includes an exceptional exchange loss of £3 million on US dollar denominated debt in the Ukrainian associate.

The Group's effective tax rate from continuing operations, excluding amortisation, exceptional items and associates was 23.0 per cent, compared to a rate in the previous year of 23.6 per cent. The reduction in the effective tax rate reflects a further reduction in the UK rate of corporate income tax (2013/14: 22.8 per cent, 2012/13: 23.8 per cent) and changes in the mix of taxable profits and tax rates across the regions in which the enlarged Group holds its subsidiaries and operates its businesses. The exceptional tax credit was £22 million.

Reported profit after tax from continuing operations after amortisation and exceptional items was £144 million (2012/13: £67 million).

Adjusted earnings per share were 21.4 pence (2012/13: 17.1 pence), an increase of 25 per cent. Total earnings per share were 15.0 pence (2012/13: 8.0 pence).

Discontinued operations in the current and prior year represent tax and the final settlement, respectively, in respect of the Office Products Wholesaling Division sold in December 2011.

Dividend

The proposed final dividend is 6.8 pence (2012/13: 5.5 pence), giving a total dividend for the year of 10.0 pence (2012/13: 8.0 pence). Dividend cover before amortisation and exceptional items was 2.1 times in 2013/14 (2012/13: 2.1 times).

Cash flow

Net debt ended the year broadly similar year on year as we sought to balance the use of the free cash that the Group generated between accelerating investment in restructuring within the Group earlier than originally planned, continuing to invest in fixed assets to grow the business, and providing returns to shareholders.

Management of working capital remained a priority, with a further benefit of £3 million being realised in the year. This continued improvement was achieved despite the challenging market conditions, growth in revenues, higher paper prices throughout the year and an exceptional performance in the prior year following the acquisition of SCA Packaging. Cash generated from operations at £394 million was £110 million lower than 2012/13 (£504 million) given the significant one off improvement in working capital the previous year. In total, interest and tax payments were £21 million higher than the prior year. Net capital expenditure was broadly flat to the prior year and was balanced to allow significant investments in growth and efficiency projects, as well as recurring renewal and maintenance.

The cash costs of the integration programme (£43 million) and the restructuring programme (£26 million) are reflected as exceptional cash flows.

Acquisitions and divestments comprise the purchase of the power plant adjacent to the paper mill in Italy, less the receipts from the disposals of non-core businesses.

The dividend payout has doubled year on year to £74 million, reflecting the payment in 2013/14 of the interim and final dividend for 2012/13, versus, in the prior year, the payment in year of the final dividend for 2011/12.

Statement of financial position

Shareholders' funds of £1,131 million at 30 April 2014 have increased from £1,085 million at 30 April 2013, principally due to retained profit for the year. Profit attributable to shareholders (including discontinued operations) was £141 million (2012/13: £74 million) and dividends of £74 million (2012/13: £37 million) were paid during the year. In addition, actuarial gains of £57 million from the Group's employee benefit schemes were credited to reserves. Other items recognised directly in reserves include currency translation losses of £55 million, adverse movements on cash flow hedges of £16 million and the related tax charge of £22 million.

At 30 April 2014, the Group's net debt was £827 million (2012/13: £817 million). The Group improved its net debt to EBITDA ratio from 1.97 times at 30 April 2013 to 1.96 times at 30 April 2014 and complied with all the covenants in its financing agreements. The Group's financial covenants for the syndicated committed bank facilities specify an EBITDA to net interest payable ratio of not less than 4.5 times, a maximum ratio of net debt to EBITDA of 3.25 times and net assets to exceed £360 million. The covenant calculations exclude from the income statement exceptional items and any interest arising from the defined benefit pension schemes. The calculation of net assets excludes the net asset or liability arising from the defined benefit pension schemes. At 30 April 2014, the Group had substantial headroom under its covenants; the most sensitive covenant is net debt to EBITDA and this had an EBITDA headroom of £171 million.

Subsequent to the year end, we have reached agreement to dispose of our Scandinavian foam business for £24 million, subject to working capital adjustments and competition clearance. No material gain or loss is expected to arise.

Energy costs

Energy continued to be a significant cost for the Group in 2013/14. The Group's total costs for gas, electricity and diesel decreased slightly from £248 million in 2012/13 to £241 million in 2013/14 through a combination of risk management activities and energy efficiency programmes and incentives. The Group manages the risks associated with its purchases of energy through its Energy Procurement Group. By hedging energy costs with suppliers and financial institutions we aim to reduce the volatility of energy costs and to provide the Group with a degree of certainty over future energy costs.

Capital structure and treasury management

The Group funds its operations from the following sources of capital: operating cash flow, borrowings, shareholders' equity and, where appropriate, disposals of non-core businesses. The Group's objective is to achieve a capital structure that results in an appropriate cost of capital whilst providing flexibility in short and medium-term funding so as to accommodate material investments or acquisitions. The Group also aims to maintain a strong balance sheet and to provide continuity of financing by having a range of maturities and borrowings from a variety of sources.

The Group's overall treasury objectives are to ensure sufficient funds are available for the Group to carry out its strategy and to manage certain financial risks to which the Group is exposed.

The Group regularly reviews the level of cash and debt facilities required to fund its activities. At 30 April 2014, the Group's committed borrowing facilities totalled        c. £1.4 billion of which £496 million were undrawn. Total gross borrowings at 30 April 2014 were £882 million. At 30 April 2014, the Group's committed borrowing facilities had a weighted-average maturity of 3.3 years (30 April 2013: 4.4 years).

Since the year end, the Group has refinanced its committed bank borrowing facilities which were put in place to finance the acquisition of SCA Packaging. The increase in the amount of borrowing facilities provides additional headroom to cover the scheduled maturity of private placement debt in August 2014, US$ 105 million (£63 million as at 30 April 2014).

 

Impairment

When applying IAS 36 Impairment of Assets the Group compares the carrying amounts of goodwill and intangible assets with the higher of their net realisable value and their value in use to determine whether an impairment exists. No impairments were identified as a result of the testing.

The net book value of goodwill and other intangibles at 30 April 2014 was £961 million (30 April 2013: £1,044 million).

Pensions

IAS 19 Employee Benefits, requires the Group to make assumptions including, but not limited to, rates of inflation, discount rates and current and future life expectancies.

The Group's principal funded, defined benefit pension scheme is in the UK and is now closed to future accrual. The Group also operates various local post-retirement and other employee benefit arrangements for overseas operations, as well as a small UK unfunded scheme. The aggregate gross assets of the schemes at 30 April 2014 were £908 million and the gross liabilities at 30 April 2014 were £1,059 million, resulting in the recognition of a gross balance sheet deficit of £151 million (30 April 2013: £214 million), a net deficit of £111 million (30 April 2013: £158 million) after a deferred tax asset of £40 million (30 April 2013: £56 million).

The decrease in the gross balance sheet deficit of £63 million is principally attributable to an increase in the discount rate. The main factor behind this increase is the rise in corporate bond yields over the period.