DS SMITH PLC - 2015/16 HALF YEAR RESULTS

3 December 2015

DS Smith Plc - 2015/16 HALF YEAR RESULTS

Good momentum driving growth and returns

6 months to 31 October 2015		Change (reported)	Change  (constant currency)
Revenue	£1,953m	(1)%	+6%
Adjusted operating profit(1)	£184m	+5%	+12%
Profit before tax	£91m	(26)%	(20)%
Adjusted EPS(1)	13.5p	+5%	+13%
Interim dividend per share	4.0p	+8%	NA
Return on sales(4)	9.4%	+50bps	+50bps
ROACE(5)	15.0%	+120bps	+110bps

 

Highlights

·     Continued success with customers driving organic volume growth of 3.1%

·     Delivering against recently upgraded financial KPIs

o  Return on sales⁽⁴⁾ increase of 50bps to 9.4%

o  ROACE⁽⁵⁾ improvement of 110bps to 15.0%

o  Net debt / EBITDA⁽⁶⁾ 1.9x

·     Ongoing enhancement of our asset portfolio

o  Acquisitions totalling around €500m, performing well

o  Very positive customer reaction to enlarged European presence

o  Agreement to acquire high quality corrugated business in Turkey

 

"We are pleased with performance in the first half of this financial year. We have continued to grow volumes in excess of the market and GDP, with our value-added offering again driving progress in margins and returns.

In addition to the strong organic profit performance, we have been very active in delivering on our portfolio improvement strategy over the period, with three acquisitions completed. These businesses are integrating well with synergies ahead of our initial expectations and we are seeing a step-up in their volume performance, driven by the positive reaction to our broad customer offering. The agreement to acquire a specialist producer of high quality corrugated packaging and display in Turkey is another good step in this strategy.

Our outlook remains positive as the business continues to grow, despite the ongoing challenging economic environment in some markets. The progress we have made over the period, combined with the opportunities available for further growth, gives the Board confidence in the prospects for the business, in line with the Group's medium-term financial targets." Miles Roberts, Group Chief Executive

Sustainable delivery against medium term targets

Medium term targets	Delivery in H1 2015/16(8)
Organic volume growth(2) at least GDP(3)+1%	+3.1%
Return on sales(4) 8% - 10%	9.4%
ROACE(5) 12% - 15%	15.0%
Net Debt / EBITDA(6) ≤2.0x	1.9x
Operating cash flow/ operating profit(7)  ≥100%	126%

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                                               

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 5263816#.

Notes to the financial tables

(1)        Before exceptional items and amortisation of intangible assets

(2)        Corrugated box volumes, adjusted for working days

(3)        GDP growth (year-on-year) for the countries in which DS Smith operates, weighted by our sales by country for the FY 2014/15 = 1.8%. Source: Eurostat (13 Nov 2015)

(4)        Earnings before interest, tax, amortisation and exceptional items as a percentage of revenue

(5)        Earnings 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

(6)        Net debt over earnings before interest, tax, depreciation and amortisation, calculated in accordance with banking covenants

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

(8)        Organic growth, cash conversion and return on sales for the 6 months to 31 October 2015, ROACE and net debt / EBITDA given for the 12 months to 31 October 2015

 

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 six months to 31 October 2015 DS Smith has continued to drive growth, returns and cash, growing ahead of the corrugated market and integrating new businesses into our pan-European operation. Corrugated box volumes have grown at 3.1%, ahead of our target of GDP+1% and the corrugated market. At the same time, return on sales has increased by 50 basis points to 9.4%, demonstrating progress in our recently upward revised target of 8 - 10%. Return on average capital employed (ROACE) improved by a further 110 basis points, to 15.0%, at the top of our target range. These financial results are a consequence of our focus on building a high quality, pan-European business that demonstrates the benefits of packaging solutions that improve our customers' sales and reduce their supply chain costs wherever they are in Europe.

In the period we acquired three businesses; Duropack (completed 31 May 2015), Lantero (completed 31 July 2015) and Cartonpack (completed 13 October 2015), for an aggregate consideration of around €500 million. These acquisitions substantially expand our position in the fast growing south eastern Europe region, in Iberia - one of the largest markets in Europe, and most recently in Greece, where there is good customer demand for our high quality packaging. As a result of these acquisitions our market share for corrugated packaging across Europe as a whole now stands at around 16%. Performance in the acquired businesses has been good, with expected synergies ahead of our initial assessment, as previously announced in our trading update in September.

Since the period end, we have entered into an agreement to acquire Milas Ambalaj, a high quality producer of specialist corrugated packaging and displays in Turkey. The business is focused on international FMCG customers, and is well positioned for the large Istanbul market as well as European export. The business has revenue of c. $25 million and c. 240 employees. Completion, which is subject to customary conditions, is expected by the end of our financial year 2015/16. 

For the half-year period, reported revenues increased on a constant currency basis by 6%, principally reflecting good corrugated box volume growth ahead of our targets and the benefit of acquired businesses. These factors are impacted by the disposal of the StePac business and a reduction in sales to third parties of unconverted corrugated sheet and paper volumes, as we continue to focus on higher value-added revenues from our converting facilities and increase the level of integration between our paper and packaging operations. 

Adjusted operating profit was up £20 million, or 12%, on a constant currency basis, reflecting both our good organic growth and the contribution from acquired businesses. The rise in input costs in the summer is being recovered as expected.

We have continued to focus on cash and return on capital, demonstrated by a further significant improvement in our ROACE, now at 15.0%. We have continued with our working capital initiatives with a further inflow of £32 million in the period. Net debt stands at £906 million, with the benefit from strong operating cashflow of £187 million offset principally by expenditure on acquisitions of £253 million and the associated acquired debt of £105 million. Net debt benefitted from net proceeds of £24 million from the disposal of the StePac business and surplus property assets. 

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 2015	Half year ended  31 October 2014	Change
Revenue	£444m	£465m	(5)%
Operating profit*	£47m	£46m	2%
Return on sales*	10.6%	9.9%	+70bps

*Adjusted, before amortisation and exceptional items

 

In the UK revenues decreased 5% to £444 million (H1 2014/15: £465 million) while adjusted operating profit has improved 2% to £47 million (H1 2014/15: £46 million). Corrugated box volumes in the period, whilst positive, reflect a competitive consumer and retailer market. The UK market is a leading adopter of innovation and our business has been at the forefront of this, particularly in the area of high quality digital printing. Our ability to generate meaningful value added products is reflected in higher adjusted operating profit and a 70 bps improvement in operating margin. Revenues declined in line with greater integration of our paper mill in Kemsley and lower external sales of recyclate from our recycling business, as we have focused more on higher quality old corrugated containers ("OCC").

Western Europe

	Half year ended  31 October 2015	Half year ended  31 October 2014	Change - reported	Change - constant currency
Revenue	£489m	£481m	2%	12%
Operating profit*	£36m	£37m	(3)%	6%
Return on sales*	7.4%	7.7%	-30bps	-40bps

*Adjusted, before amortisation and exceptional items

 

In Western Europe organic corrugated box volumes in the period were good, reflecting a solid performance in France and strong growth in the newly acquired Iberian businesses with customers switching to our new offer, resulting in a turn-around in the market share growth of the acquired business. Revenue increased by 12% driven by the acquired businesses. Adjusted operating profit grew by 6%, reflecting both organic and inorganic growth. Margin reduced by 40 basis points reflecting both the new acquisitions and continuation of the challenging consumer and retailer environment.

DCH and Northern Europe

	Half year ended  31 October 2015	Half year ended  31 October 2014	Change - reported	Change - constant currency
Revenue	£412m	£486m	(15)%	(7)%
Operating profit*	£44m	£48m	(8)%	-
Return on sales*	10.7%	10.0%	+70bps	+80bps

*Adjusted, before amortisation and exceptional items

 

DCH and Northern Europe has seen positive volume growth in Germany and Switzerland, counterbalanced by difficult conditions in northern Europe as the impact of the Russian trade sanctions are felt, resulting in broadly flat volume for the region over the period. In a competitive market, we have continued our focus on pan-European customers and are building on our strengths in the point of sale and display business.

Central Europe and Italy

	Half year ended  31 October 2015	Half year ended  31 October 2014	Change - reported	Change - constant currency
Revenue	£471m	£379m	24%	37%
Operating profit*	£42m	£32m	31%	50%
Return on sales*	8.9%	8.4%	+50bps	+70bps

*Adjusted, before amortisation and exceptional items

 

Organic corrugated box volumes in central and eastern Europe have grown strongly compared to the Group average, reflecting very good performance from both the existing and acquired business in an attractive market where we now have a leading position. Our corrugated box volumes in Italy have also continued to grow well, particularly with our pan-European customers. Revenues increase by 37%, reflecting very good organic growth and the contribution for five months of the Duropack businesses. Adjusted operating profit increased 50% reflecting both organic growth and the results of the acquired business.

Plastics

	Half year ended  31 October 2015	Half year ended  31 October 2014	Change - reported	Change - constant currency
Revenue	£137m	£160m	(14)%	(11)%
Operating profit*	£15m	£13m	15%	25%
Return on sales*	10.9%	7.8%	+310bps	+310bps

*Adjusted, before amortisation and exceptional items

 

Plastics has seen revenue reduce by 11%, principally due to the impact of the disposal of our StePac business in May 2015, while operating profit grew 25% as the benefits of the restructuring undertaken over the past two years in our European Flexible packaging operations performed to our investment case.

Acquisitions and disposals in the period

Our vision five years ago was to become the leader in recycled packaging for consumer goods. In order to achieve this, we needed to win market share and expand into new markets. In the current period we have completed another three acquisitions, extending our presence in corrugated packaging in Iberia (included in our Western Europe region), and in south eastern Europe (included in our Central Europe and Italy region). This has substantially extended our pan-European reach in a number of important and growing regions. The opportunity to build on this leadership position over the next five years is clear and we are extremely focused on taking it. At the same time, we have also continued to review our portfolio, in particular our exposure to manufacturing paper. To this extent, we went through a consultation process in relation to a small paper mill in the UK, which has resulted in the decision to close the mill at the end of this year. This will further reduce our level of testliner production.

On 18 May 2015 we sold StePac, a modified atmosphere packaging business that had been part of our Plastics business, for US$31 million (£20 million). This business was outside our core strategy and a greater value was obtained through sale than would have been achieved by retaining it.

On 31 May 2015 we acquired Duropack, the leading corrugated packaging business in the south eastern Europe region with 14 corrugated packaging sites across nine countries.

On 31 July 2015 we acquired Grupo Lantero, a Spanish corrugated packaging business with eight corrugated sites, substantially expanding our presence in the Iberia region.

On 13 October 2015 we acquired Cartonpack, the corrugated packaging assets of Cukurova, in Greece.

Outlook

The outlook remains positive as the business continues to grow, despite the ongoing challenging economic environment in some of our markets. The progress we have made over the year, combined with the opportunities available for further growth, gives the Board confidence in the prospects for the business, in line with the Group's medium term financial targets. 

Financial Review

Group revenue for the half-year to 31 October 2015 declined 1% to £1,953 million (H1 2014/15: £1,971 million), reflecting a substantial adverse currency translation effect (£128 million). On a constant currency basis, revenue increased by 6% with the net effect of acquisitions and disposals versus the prior period being £101 million. The remaining increase of £9 million represents organic growth, comprised of organic corrugated box volume growth and an increase from sales price and mix. This is partially offset by a reduction in external sales in recycling and an increase in integration between our paper and packaging operations.

Adjusted operating profit increased 5% to £184 million (H1 2014/15: £176 million). On a constant currency basis, growth was 12%. Translation of our mainly euro based earnings into sterling continues to have an impact on our results, reducing operating profit by £12 million. This foreign exchange translation effect was outweighed by the net benefit from organic growth (£11 million) and from acquisitions and disposals (£9 million). Organic growth was driven by the increase in corrugated box volumes, partially offset by the net negative impact of increased input costs, which were largely recovered in the period.

Free cash flow (being EBITDA plus the cash flow effect of working capital, pension payments, capital expenditure (net of proceeds), tax and interest) was £143 million (H1 2014/15: £151 million), driven by EBITDA of £244 million and a further positive contribution from working capital, offset by capital expenditure, tax and interest.

Net capital expenditure was £74 million in the period (H1 2014/15: £63 million) with a total of c. £170 million expected to be spent in the full financial year, as previously indicated.

Amortisation for the period was £24 million (H1 2014/15: £23 million), with a similar charge expected in the second half of the year. Depreciation for the period was £60 million (H1 2014/15: £57 million), with the charge for the full financial year expected to be c. £126 million. 

Return on average capital employed of 15.0% for the 12 month period to 31 October 2015 (12 months to 31 October 2014: 13.8%) represents a 110 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.

Exceptional costs of £48 million in the period were incurred. The charge principally comprised a £20 million non-cash impairment charge and a £9 million cash cost relating to the decision to close the Wansbrough paper mill, following consultation which concluded in October 2015. The remainder of the exceptional charge relates to restructuring in the UK and DCH and Northern Europe, as previously announced, netted with gains on the sale of StePac. Total exceptional costs for the year are expected to be circa £77 million, comprising c. £30 million in relation to Wansbrough (of which £20 million is non-cash) and £47 million in relation to restructuring and the acquisition of Lantero, as previously announced. 

Net interest expense was £18 million (H1 2014/15: £17 million), reflecting the increase in debt over the period due to consideration paid for acquisitions and the existing debt of the businesses acquired. The charge for the second half is expected to be materially higher with the full effect of financing the new acquisitions. 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.

Tax on profits has been charged at a rate on continuing operations before amortisation and exceptional items of 22.2% (H1 2014/15: 22.8%), similar to the full year 2014/15.

Profit after tax for continuing operations after exceptional items was £71 million (H1 2014/15: £95 million).

Earnings per share for continuing operations before amortisation and exceptional items increased 5% to 13.5 pence (H1 2014/15: 12.9 pence) or 13% on a constant currency basis, reflecting the growth in operating profit and reduction in tax rate. Total earnings per share was 7.6 pence (H1 2014/15: 10.2 pence).

Foreign exchange translation

Approximately 63% of the Group's EBITA is earned in euros. The results for the full year 2015/16 will be influenced by foreign exchange translation, where the euro is currently weaker than the average rate over the full year 2014/15 of 1.2895. A change of 1c impacts full year EBITA by approximately £1.8 million and PBT by approximately £1.1 million.

Financial position

Net debt at 31 October 2015 was £906 million (30 April 2015: £651 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, net of business disposals during the period, was £233 million and borrowings of £105 million were also assumed. The Group maintains tight capital discipline, and constant attention to working capital where a further reduction has been achieved, bringing average working capital as a percentage of sales down to 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 recommends an interim dividend for this half year of 4.0 pence per share (H1 2014/15: 3.7 pence per share). This represents an increase of 8%, demonstrating the confidence of the Board in the outlook for the Group. The dividend will be paid on 3 May 2016 to ordinary shareholders on the register at the close of business on 1 April 2016.

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 39 to 43 of the 2015 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 risks;

·     Integration risks;

·     Acquisition strategy risks;

·     Capital market and liquidity risks;

·     Eurozone macro-economic and deflationary risks;

·     Market consolidation risks;

·     Legal, regulatory and governance risks;

·     Security of supply risks; and

·     Sustainability risks.

 

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 2015 there was significant headroom on the Group's committed debt facilities of c. £609 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

 

2 December 2015