8 December 2016

DS Smith Plc - 2016/17 HALF YEAR RESULTS

Consistent delivery from strong business model

6 months to 31 October 2016		Change (reported)	Change  (constant currency)
Revenue	£2,357m	+21%	+7%
Adjusted operating profit(1)	£226m	+23%	+9%
Profit before tax	£146m	+60%	+32%
Adjusted EPS(1)	16.4p	+21%	+9%
Interim dividend per share	4.6p	+15%	NA
Return on sales(4)	9.6%	+20bps	+10bps
ROACE(5)	15.1%	+10bps	+10bps

 

Highlights

·     Organic volume growth of 2.9%

o  All regions in growth

o  Continued growth of pan-European FMCG and e-commerce customers

·     Delivering against all financial KPIs

o  Return on sales⁽⁴⁾ increase of 10bps to 9.6%

o  ROACE⁽⁵⁾ improvement of 10bps to 15.1%

o  Net debt / EBITDA⁽⁶⁾ 1.9x

·     Strong profit growth

o  Adjusted operating profit +9%

o  Profit before tax +32%

·     Strengthening the business portfolio

o  Expanding pan-European point of sale and display capability

§ Acquired and integrated businesses in the UK and Denmark

§ Opened new plant in Erlensee, Germany

§ Acquisition of P&I, a specialist corrugated display business in Portugal

o  Completion of acquisition of Gopaca, corrugated packaging, in Portugal

o  Proposed acquisition of Parish Manufacturing Inc., a US bag-in-box plastics business

 

"This half year has been another period of consistent delivery across the whole business. Volumes have grown as our high quality, innovative service has continued to delight our customers, particularly those who require a pan-European approach. This, combined with strong results from businesses acquired last year, the benefit of our global procurement platform, and the continued roll-out of performance packaging, has resulted in another period where we have delivered against all our financial KPIs. The business has continued to demonstrate momentum and has performed well despite the challenging market, which is a demonstration of the strength of our business model. Accordingly, the Board remains confident about the outlook for the business and has increased the dividend by 15%." Miles Roberts, Group Chief Executive

 

 

 

Sustainable delivery against medium term targets

Medium term targets	Delivery in H1 2016/17(8)
Organic volume growth(2) ≥GDP(3)+1%	+2.9%
Return on sales(4) 8% - 10%	9.6%
ROACE(5) 12% - 15%	15.1%
Net debt / EBITDA(6) ≤2.0x	1.9x
Operating cash flow/ operating profit(7)  ≥100%	129%

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 Director

 

Bell Pottinger                                               

John Sunnucks                                                                +44 (0)20 3772 2549

Ben Woodford                                                                 +44 (0)20 3772 2566

 

Presentation and dial-in details

A presentation to investors and analysts will be held at 9:30am today at Allen & Overy, One Bishops Square, London E1 6AD. Dial-in access for the presentation is available with details as follows: +44 (0) 20 3003 2666 (standard access) or 0808 109 0700 (UK Toll Free) Password: DS Smith. The slides accompanying the presentation will be available on our website shortly before the start of the presentation. Dial-in participants will have the opportunity to participate in the Q&A. A replay is available for 7 days on +44 (0) 20 8196 1998, PIN 9248659#.

 

Notes to the financial tables

(1)        Before exceptional items and amortisation of intangible assets

(2)        Corrugated box volumes, adjusted for working days, on a like-for-like basis

(3)        GDP growth (year-on-year) for the countries in which DS Smith operates, weighted by our sales by country for the HY 2016/17 = 1.8%. Source: Eurostat (15 Nov 2016)

(4)        Operating profit before exceptional items and amortisation of intangible assets as a percentage of revenue

(5)        Operating profit before exceptional items and amortisation of intangible assets 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

(6)        Net debt over operating profit before depreciation, exceptional items and amortisation of intangible assets, calculated in accordance with banking covenants

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

(8)        Organic growth, cash conversion and return on sales given for the 6 months to 31 October 2016, ROACE and net debt / EBITDA given for the 12 months to 31 October 2016

(9)        Note 15 explains the use of non-GAAP performance measures.  Reported results are presented under the Condensed Consolidated Income Statement and reconciliations to adjusted results are presented on the face of the Condensed Consolidated Income Statement, in note 2, note 7, and note 15. 

 

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.

Overview

In the half year to 31 October 2016, DS Smith has delivered another consistent performance, growing strongly, further improving our return on sales and delivering a return on capital ahead of our target range. Organic corrugated box volumes have grown at 2.9%, ahead of our target of GDP+1%. Volume growth was particularly good among our pan-European customers, driven by strong growth within our e-commerce and FMCG categories. Return on sales has again increased period-on-period by 10 basis points to 9.6%, moving towards the top of our target range of 8 - 10%. This performance is reflective of the strength of our business model irrespective of wider market volatility. Return on average capital employed has improved by 10 basis points compared to the prior year to 15.1%, despite the initial dilutive effect of some of the recently acquired businesses. Net debt / EBITDA at the period end was 1.9x and operating cash flow conversion was very strong at 129% of operating profit, both fulfilling our financial KPIs. These results underline the resilience of the business and the success of our continued focus on performance packaging with our pan-European customers.

We believe that display and point of sale packaging is a growth market, as traditional advertising becomes less important and, instead, purchasing decisions are made in-store, and we are therefore investing in this area. In the period we acquired two businesses, both specialising in point of sale and display packaging, Creo in the UK (completed June 2016) and Deku-Pack in Denmark (completed in September 2016). Subsequently, we have completed our acquisition of Gopaca, a corrugated packaging business in Portugal, and P&I Display, a specialist display business, also in Portugal (November 2016). The acquisitions of Creo, Deku-Pack and P&I Display are part of our strategy to deliver high quality point of sale packaging solutions to our customers, which is also the focus of the new site in Erlensee, Germany, which was formally opened on 17 November 2016. We have also announced the proposed acquisition of Parish Manufacturing Inc. ("Parish"), a USA manufacturer and supplier of bag-in-box systems, located in Indianapolis, Indiana. The aggregate consideration for the five transactions is approximately £75 million. For all the businesses acquired, we have been delighted with the reaction from employees and customers and are already seeing the benefits of combining their expertise in the point-of-sale field with the DS Smith pan-European platform.  

For the half year period, revenues increased on a constant currency basis by 7%, principally reflecting the contribution from acquired businesses and volume growth in corrugated boxes and other categories such as plastics. The contribution from acquired businesses is net of the impact of the closure of the Wansbrough paper mill in the second half of 2015/16. Organic growth represented 3% overall, driven by continued strong volume growth in corrugated box and other categories, with a slight offset from sales price and mix.

Adjusted operating profit was up £18 million on a constant currency basis, or 9%, reflecting strong organic growth which accounted for 6% of the 9% growth. Profits were principally driven by the volume growth in all our businesses. Sales price and mix fell slightly due to lower paper pricing, while the business broadly offset the adverse impact to input costs from rising old corrugated card ("OCC") prices post the EU referendum. As a business, the majority of the corrugated packaging that DS Smith manufactures is sold in the country in which it is made, and there is limited cross-channel trade. As such, with the exception of the increase in OCC prices, themselves influenced by the devaluation of sterling following the EU referendum, the impact of the EU referendum on DS Smith has been largely restricted to the translational impact on our non-sterling profits and debt.

We continue to remain heavily focused on cash and ROACE, delivering 15.1% ROACE, in excess of our target range, despite the initial dilutive impact from businesses acquired recently. Net debt has increased by £56 million to £1,155 million, due to the impact of currency translation of £127 million, partially offset by free cash flow and other expenditure. Underlying cash flow from the business was good, with a further working capital inflow of £35 million. Cash spent on acquisitions completed during the period was £37 million. The currency translation impact is a result of our policy to broadly match our debt to the currencies in which our cash flow is generated. Net debt / EBITDA has reduced from 2.0x at 30 April 2016 to 1.9x at 31 October 2016.

Operating review

Unless otherwise stated, all commentary and comparable analysis in the operating review is based on constant currency performance.

UK

	Half year ended  31 October 2016	Half year ended  31 October 2015	Change
Revenue	£466m	£444m	5%
Operating profit*	£45m	£47m	(4%)
Return on sales*	9.7%	10.6%	(90bps)

*Adjusted, before amortisation and exceptional items

 

In the UK revenues increased 5% to £466 million (H1 2015/16: £444 million) while adjusted operating profit has decreased 4% to £45 million (H1 2015/16: £47 million). Corrugated box volumes in the period were very strong reflecting continued success with pan-European FMCG and e-commerce customers, which is a reflection of the investment we have made in the region in prior periods. The business also benefited from a good performance from TRM, acquired in May 2016. Profitability and margin in the region have been impacted by the rise in sterling-denominated OCC prices following the EU referendum which, given the mix of business, were partially offset by other mitigating actions. Despite these headwinds, the adjusted return on sales of 9.7% in the period remains above the Group average and near the top end of our target range, reflecting the quality of our innovation and customer relationships in the region.

Western Europe

	Half year ended  31 October 2016	Half year ended  31 October 2015	Change - reported	Change - constant currency
Revenue	£626m	£489m	28%	10%
Operating profit*	£56m	£36m	56%	33%
Return on sales*	8.9%	7.4%	+150bps	+150bps

*Adjusted, before amortisation and exceptional items

 

In Western Europe organic corrugated box volumes in the period were good, reflecting a particularly strong performance in the Iberian businesses, where the recent acquisitions have been fully integrated and the benefits from the combined businesses are being realised. Revenue increased by 10% driven both by the acquired businesses and underlying volume growth. Adjusted operating profit grew by 33%, principally reflecting profit improvement measures initiated in prior periods and a contribution from acquisitions. This translated to an adjusted return on sales improvement of 150 basis points.

DCH and Northern Europe

	Half year ended  31 October 2016	Half year ended  31 October 2015	Change - reported	Change - constant currency
Revenue	£490m	£412m	+19%	+2%
Operating profit*	£45m	£44m	+2%	(13%)
Return on sales*	9.2%	10.7%	(150bps)	(160bps)

*Adjusted, before amortisation and exceptional items

 

DCH and Northern Europe has seen positive volume growth across the region, with good growth in Northern Europe, more than counterbalancing slower market conditions in Germany and Switzerland. While the business has focused on improving customer mix and on delivering performance packaging, the overall adjusted return on sales for the region has been impacted by the higher proportion of paper manufacturing. In November, we opened a major new site in Erlensee, near Frankfurt, which specialises in high quality display and point of sale packaging, and will be a major hub for our activities in this specialist market in continental Europe.

Central Europe and Italy

	Half year ended  31 October 2016	Half year ended  31 October 2015	Change - reported	Change - constant currency
Revenue	£614m	£471m	+30%	+12%
Operating profit*	£62m	£42m	+48%	+24%
Return on sales*	10.1%	8.9%	+120bps	+90bps

*Adjusted, before amortisation and exceptional items

 

Organic corrugated box volumes in central and eastern Europe have grown ahead of the Group average, reflecting a very good performance from all segments of this attractive market, where we have a leading position. Our corrugated box volumes in Italy have also continued to grow very well. Revenues increased by 12%, reflecting the volume growth and the contribution of an incremental one month of the Duropack business. The Duropack business is now fully integrated with the existing operations and synergy delivery is fully on track. Adjusted operating profit increased 24%, reflecting both organic growth and the results of the acquired business. Adjusted return on sales has, therefore, improved by 90bps to 10.1%.

 

 

Plastics

	Half year ended  31 October 2016	Half year ended  31 October 2015	Change - reported	Change - constant currency
Revenue	£161m	£137m	+18%	+4%
Operating profit*	£18m	£15m	+20%	+6%
Return on sales*	11.2%	10.9%	+30bps	+20bps

*Adjusted, before amortisation and exceptional items

 

Plastics has seen revenue grow by 4%, driven by organic growth in the business, particularly in rigid crates, which is predominantly in Europe. Adjusted operating profit grew 6% as the benefits of the restructuring undertaken over the past two years in our European Flexible packaging operations performed to our investment case, in addition to more efficient procurement of materials.

Investing in the business

Our vision is to be the leading supplier of sustainable packaging solutions. We continue to expand our geographic reach and our expertise in fast-growing areas of the market. We have recently completed the acquisitions of Gopaca and P&I Display in Iberia. We have also extended our expertise in the growing area of display packaging, with the purchase of two businesses, Creo, in the UK, and Deku-Pack, in Denmark. These acquisitions, combined with our existing capability and the new site in Erlensee, Germany, has substantially enhanced our offering in this attractive category. We also continue to invest in our fast-growing e-commerce and digital printing businesses. 

Our Plastics business has had another period of record success and we are investing further in this, and announce today the proposed acquisition of Parish, a USA manufacturer and supplier of bag-in-box systems.

Outlook

The outlook remains positive as we continue to expand and strengthen our market position particularly in the fast-growing e-commerce and attractive point of sale and display categories. The business has continued to demonstrate momentum and has performed well despite the challenging market, which is a demonstration of the strength of our business model. Accordingly, the Board remains confident about the outlook for the business. 

Financial Review

Group revenue for the half year to 31 October 2016 increased by 21% to £2,357 million (H1 2015/16: £1,953 million), reflecting organic growth, a substantial positive currency translation effect (£243 million) as well as a significant contribution from acquired businesses. On a constant currency basis, revenue increased by 7% with the net effect of acquisitions and disposals being £102 million. The remaining increase of £59 million represents organic growth, comprising organic corrugated box volume growth and growth in other volumes such as plastics. Sales price and mix were slightly negative.

Adjusted operating profit increased 23% to £226 million (H1 2015/16: £184 million), with a £24 million benefit due to currency translation. On a constant currency basis, adjusted operating profit growth was 9%, benefitting from organic growth (£12 million) and the net contribution from acquisitions and disposals (£6 million). Organic growth was driven by increased corrugated box volumes and growth in plastics.

Input costs were slightly higher period-on-period reflecting an increase in headline fibre costs, mitigated by the success of the ongoing performance packaging initiatives, favourable energy pricing, energy saving initiatives and efficiency improvements from capital investments made in prior periods. Whilst this impact was most significant in the UK, it has had an effect across the whole of Europe.

Free cash flow (being EBITDA plus the cash flow effect of working capital, pension payments, capital expenditure (net of proceeds), tax and interest) was £182 million (H1 2015/16: £143 million), driven by EBITDA of £300 million and a further positive contribution from working capital of £35 million, offset by capital expenditure, tax and interest payments. The comparative period benefitted from the proceeds of the disposal of Stepac and £2 million higher profits from surplus property asset sales.

Net capital expenditure was £84 million in the period (H1 2015/16: £74 million) with a total of c. £220 million expected to be spent in the full financial year. The full year increase compared to previous guidance is driven by current foreign exchange assumptions.

Amortisation for the period was £30 million (H1 2015/16: £24 million), with a similar charge expected in the second half of the year. Depreciation for the period was £74 million (H1 2015/16: £60 million), with the charge for the full financial year expected to be c. £160 million. 

Return on average capital employed of 15.1% for the 12 month period to 31 October 2016 (12 months to 31 October 2015: 15.0%) represents a 10 bps increase on a constant currency basis. This increase is driven by the significant improvement in profitability and continued better working capital management over the period, in part offset by the initially dilutive impact of recently acquired businesses. Businesses acquired in the prior financial year are now delivering well, as expected.

Exceptional costs of £21 million in the period were incurred (H1 2015/16: £48 million), comprising £9 million relating to acquisitions and their integration and £9 million relating to restructuring initiatives. Total exceptional costs for the year are expected to be circa £50 million, as previously announced. 

Net financing costs were £31 million (H1 2015/16: £21 million), reflecting the increase in debt over the period due to consideration paid for acquisitions and the existing debt of the businesses acquired. The increased charge also reflects the impact of FX translation as approximately 75% of our debt is held and serviced in Euros. The pension interest charge for the period was £3 million, similar to last year and in line with guidance for a charge of £6 million for the full year. The interest charge for the year as a whole is expected to be around £60 million, inclusive of the pension interest charge.

Tax on profits has been charged at a rate on continuing operations before amortisation and exceptional items of 22% (H1 2015/16: 22%), similar to the full year 2015/16.

Profit after tax for continuing operations after exceptional items was £115 million (H1 2015/16: £71 million).

Earnings per share for continuing operations before amortisation and exceptional items increased 21% to 16.4 pence (H1 2015/16: 13.5 pence) or 9% on a constant currency basis, reflecting the growth in operating profit partially offset by the increase in interest costs. Total earnings per share was 12.3 pence (H1 2015/16: 7.6 pence).

Financial position

Net debt at 31 October 2016 was £1,155 million (30 April 2016: £1,099 million), representing 1.9x EBITDA for the prior 12 month period, calculated on the basis of a full year contribution from acquired businesses. Expenditure on business acquisitions was £33 million and borrowings of £4 million were also assumed. The Group maintains tight capital discipline, and constant attention to working capital means that, despite the increase in working capital on a translated basis due to foreign exchange changes, £35 million has been released from working capital in the period on a like-for-like basis, and working capital as a percentage of sales is now 1.7% (H1 2015/16: 1.5%).

Dividend

The Board considers the dividend to be an important component of shareholder returns. In considering dividends the Board will be mindful of the Group's leverage, earnings growth potential and future expansion plans. 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.

The Board declares an interim dividend for this half year of 4.6 pence per share (H1 2015/16: 4.0 pence per share). This represents an increase of 15%, demonstrating the confidence of the Board in the outlook for the Group and the considerable volatility in the sterling exchange rate in the half year. The dividend will be paid on 2 May 2017 to ordinary shareholders on the register at the close of business on 7 April 2017.

Risks and uncertainties

The Board has considered the principal risks and uncertainties affecting the Group in the second half of the year. The principal risks and uncertainties discussed in the Business Review on pages 40 to 47 of the 2016 Annual Report, available on the Group's website at www.dssmith.com, remain relevant.

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

·     Commercial differentiation;

·     Human capital and talent integration;

·     Acquisition strategy;

·     Capital market and liquidity;

·     Eurozone macroeconomic and deflationary;

·     Market consolidation;

·     Governance and compliance;

·     Cyber;

·     Security of supply; and

·     Sustainability.

 

Going concern

The Group's recent trading and forecasts, after taking account of reasonably foreseeable changes in trading performance, shows that the Group is able to operate within its current debt facilities. At 31 October 2016 there was significant headroom on the Group's committed debt facilities of £594 million with the next significant maturity not due until May 2020. As a consequence, the Board believes that the Group is well placed to manage its business risks (as summarised above) successfully despite the uncertainties inherent in the current economic outlook. After making enquiries, the Board has formed a judgement 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 has been prepared in accordance with IAS 34 "Interim Financial Reporting" as adopted by the European Union;

(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 Group Chief Executive

Adrian Marsh Group Finance Director

 

7 December 2016