4 December 2014

DS Smith Plc - 2014/15 HALF YEAR RESULTS

Strong profit growth

Highlights

·     Continued success with customers driving growth

o  Corrugated packaging volume growth of +2.3% - all regions in growth

o  Underlying⁽⁶⁾ revenue growth of 2.0%

·     Strong financial performance in line with our KPI's

o  Return on sales⁽⁴⁾ increase of 130 bps (constant currency) to 8.9%

o  ROACE⁽⁵⁾ improvement of 170 bps to 13.8%

o  Strong cash flow generation

o  Net debt reduced by £133 million to £694 million

·     Active investment and management of business portfolio

o  4 acquisitions and 2 disposals announced or completed

o  Roll-out of design centre network through Europe

"We are pleased with performance in the first half of this financial year. We have continued to make good progress with our customers, benefitting from our differentiated commercial offering, and this has translated into strong financial performance, with a particularly good progression on margins and returns as well as excellent cash flow generation. We continue to actively manage our business portfolio and are excited by the opportunities for the Group.

Our outlook remains positive as the business continues to grow, despite ongoing economic headwinds in many of our markets. The Board expects continued performance in line with the Group's medium term financial targets."

Miles Roberts, Group Chief Executive

Sustained delivery against medium term targets

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 JP Morgan, 60 Victoria Embankment, EC4Y 0JP. 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 4221465.

Notes to the financial tables

(1)        Continuing operations, 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 2013/14 = 1.3%. Source: Eurostat (14 Nov 2014)

(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)        Underlying revenue excludes the effect of FX translation, acquisitions and disposals, and the change in accounting presentation for income from tooling and waste

(7)        EBITDA being earnings before interest, tax, depreciation and amortisation

(8)        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

(9)        Organic growth and return on sales for the 6 months to 31 October 2014. ROACE, net debt / EBITDA and cash conversion given for the 12 months to 31 October 2014

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 2014 DS Smith has continued to deliver sustainable growth in line with our medium term targets. Corrugated box volumes have grown at 2.3%, achieving our target of GDP+1%, with volume growth across all regions. This results from our strong customer partnerships and support for our differentiated offering, driven by our dual focus on product and service innovation and on removing complexity and cost from our customers' supply chains across Europe.

We have had continued success with our commercial offering which helps customers sell more, with less cost and lower risks, by assessing the whole supply cycle. The most notable success has been agreeing a five-year contract with Mondelez, the international snack and confectionery business, for the sole supply of their corrugated packaging in Europe. This agreement demonstrates the strength of our business model where we are able to offer a genuinely pan-European service with consistently high quality and service standards. At the same time, in Northern Europe and the UK, we rolled out a programme for "Performance Packaging", where we work with our customers to agree the necessary performance characteristics of their packaging (such as strength, print quality etc) and contract with them on this basis, rather than purely on the basis of weight. The importance of this approach is that we are able to optimise the amount of fibre used in our packaging, improving efficiency for our customers and ensuring DS Smith is regarded as a genuine business partner. 

For the half-year period, reported revenues reduced primarily due to foreign exchange ("FX") translation, the disposal of the Scandinavian foams business and a minor change in accounting presentation. Excluding these items, underlying revenues increased by 2.0%, with the positive impact of increased volumes in corrugated packaging and plastics partially offset by reduced external revenue from paper and recycling, principally due to improved levels of integration.

Adjusted operating profit was up £26 million, or 17%, on a constant currency basis and operating margin improved by 130 bps, reflecting both organic growth and the ongoing benefit of synergies. With a more stable paper pricing environment for the majority of the reporting period, the net effect of sales price, mix, and overall input costs has been relatively flat. We have delivered the planned €20 million of cost synergies from the SCA Packaging acquisition versus the prior comparative period and are on track to deliver the remaining €20 million over the coming 6 months to complete the programme, as previously announced.

We have maintained our focus on cash and return on capital, reducing our net debt substantially and delivering further significant improvement in our ROACE which now stands at 13.8%. In addition to strong operating cash flow through our focus on working capital and tight capital management, net debt at the half year benefited from FX translation and fair value effects of £28 million and net proceeds of £9 million from the disposal of the Scandinavian foams business less the acquisitions of Kaplast and Italmaceri.

Since the period end, we are pleased to have announced the acquisition of Andopack, a Spanish corrugated packaging business. We have also announced today that we have entered into a letter of intent with a view to acquiring a corrugated packaging business in Turkey and Greece, as set out later in this statement.

Operating review

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

UK

*Adjusted, before amortisation and exceptional items

In the UK sales decreased 3% to £465 million (H1 2013/14: £481 million) while adjusted operating profit has improved 66% to £46 million (H1 2013/14: £28 million). Corrugated box volumes in the period have been broadly flat, consistent with the overall retailing landscape. The fall in revenues is principally due to lower external revenues from recycling and an improved integration of paper, with revenues from the packaging operations showing modest growth. The improvement in adjusted operating profit and 410 bps improvement in operating margin reflects the significant benefit of the efficiency programme implemented at our Kemsley mill in Kent, along with the success of the packaging business which continues to lead with innovation such as Performance Packaging, and genuine customer insight obtained through our PackRight Centres.

Western Europe

*Adjusted, before amortisation and exceptional items

In Western Europe corrugated box volumes in the period were positive despite the continued economic headwinds with revenue declining mainly as a result of FX. Adjusted operating profit reduced by 11%, as the benefit of synergies were countered by the challenging market environment and a lower level of paper integration than other areas of the Group.

DACH and Northern Europe

*Adjusted, before amortisation and exceptional items

DACH and Northern Europe has delivered a solid performance with volume growth in line with the Group average. Packaging revenues were positive, contributing to flat revenues versus the prior period largely due to greater integration of paper. Adjusted operating profit increased 18%, reflecting the benefit of synergies and a continued focus on costs.

Central Europe and Italy

*Adjusted, before amortisation and exceptional items

The Central Europe and Italy division has seen revenues increase by 10%, reflecting good organic growth and the inclusion of the recycling business, Italmaceri, acquired during the year. Corrugated box volumes in central and eastern Europe have grown strongly compared to the Group average, reflecting very strong growth in a positive market. Our corrugated box volumes in Italy have also grown ahead of our overall corrugated box volume growth. Adjusted operating profit increased 18% reflecting the organic growth, together with improvements in the performance of the paper mill in Italy, where the associated energy plant was bought in 2013/14, and the ongoing benefit of synergies.

Plastics

*Adjusted, before amortisation and exceptional items

Plastics has seen revenue increase by 1%, due to the impact of the disposal of our Cool Logistics business in January 2014 partially offsetting organic growth, with operating profit remaining broadly flat at £13 million. Overall performance in the business has been good with the Flexibles business in North America particularly strong. We continue to add customer demand-driven capacity within the business with a bag-in-box site opened in November 2014 in Illinois and running at over 50% capacity from the outset. As previously described, we are also restructuring our European Flexible packaging operations, with two new sites in Eastern Europe taking the place of two sites in the UK. The profitability of this business has obviously been impacted in the period with the transition; however, with the new plants now running we anticipate a continuous improvement over the next 18 months.

Acquisitions and disposals in the period

Our strategic aim is to grow our corrugated and recycling businesses to meet the requirements of our major customers. We also remain focussed on our overall short paper position whilst investing in our paper mills which produce high quality lightweight papers and reducing further our exposure to those that do not. In the period, we have completed two acquisitions and one disposal. Since the period end, we have announced three further transactions. 

On 10 July 2014 we acquired the 50% that we did not previously own of Italmaceri, a recycling business based in Italy. The Italmaceri business operates in northern Italy with annual volumes of approximately 500k tonnes.

On 31 August 2014 we completed the disposal of the Scandinavian foams business for £23 million, which DS Smith had acquired as part of the SCA Packaging acquisition.

On 9 September 2014 we acquired Kaplast, an injection-moulding  business in Croatia to expand the returnable transit packaging element of our Plastics business.

On 6 November 2014 we acquired a corrugated manufacturing business in Spain, Andopack, for £35 million. The business operates from one well-invested site with substantial opportunity to grow the business by serving our pan-European customer based in this important region.

On 20 November 2014 we received a binding offer for the purchase of a small paper mill in Nantes, France with annual capacity of c. 60k tonnes of testliner. We are currently engaged in works council consultation; until the conclusion of this process there can be no certainty of any transaction proceeding. Any reduction in our paper capacity is consistent with our strategy to reduce the proportion of our net integration of paper manufacture versus the requirements of our corrugated business, and we continue to assess our paper manufacturing footprint.

On 3 December 2014 Kaplamin Ambalaj, in which the Group has a minority interest, was required to announce by the Turkish Stock Exchange that DS Smith and Cukurova have entered into an exclusive letter of intent in relation to the potential acquisition by DS Smith of Cukurova's majority shareholdings in Kaplamin Ambalaj and a wider group of packaging assets in Turkey and Greece in which DS Smith currently has non-controlling interests. These businesses currently have a consolidated annual turnover of approximately €160 million with five plants across western Turkey and three plants in Greece. Discussions are at a preliminary stage and any acquisition remains subject, inter alia, to a number of conditions and satisfactory completion of due diligence. There is therefore no certainty at this stage as to whether agreement will be reached, or as to the timing of any transaction.

Outlook

Our outlook remains positive as the business continues to grow, despite economic headwinds in many of our markets. The Board expects continued performance in line with the Group's medium term financial targets.

Financial Review

Group revenue for the half-year to 31 October 2014 declined 5% to £1,971 million (H1 2013/14: £2,081 million), reflecting a substantial adverse FX translation effect (£114 million); on a constant currency basis, revenue increased by 0.2%. A minor change in accounting presentation in relation to waste and tooling was made, reducing this half-year period versus the comparable period by £25 million, or 1.2%. Revenue versus the prior half-year was also reduced by £10 million by the net effect of acquisitions and disposals. The remaining increase of £39 million, or 2.0% on the prior year comparable figure, represents organic growth, of which the majority relates to additional corrugated box volumes.

Adjusted operating profit increased 10% to £176 million (H1 2012/13: £160 million). On a constant currency basis, growth was 17%. Within organic growth, growth in corrugated box volumes contributed the majority of the c. £12 million to the profit uplift while sales price and input costs broadly offset each other. Cost synergies of €20 million (£16 million) were delivered as planned. The delivery of synergies has continued on schedule with the remaining incremental €20 million expected to be delivered over the next six months to bring the total delivered to €120 million, as previously announced.

Free cash flow (being EBITDA plus the cash flow effect of working capital, pension payments, capital expenditure (net of proceeds), tax and interest) was £151 million (H1 2013/14: £110 million), driven by EBITDA of £233 million and a further positive contribution from working capital, offset by the expected levels of capital expenditure, tax and interest.

Net capital expenditure was £63 million in the period with a total of £150 - 160 million expected to be spent in the full financial year, as previously indicated.

Amortisation for the period was £23 million (H1 2013/14: £25 million), with a similar charge expected in the second half of the year. Depreciation of £57 million is slightly lower than the prior year (H1 2013/14: £61 million), largely due to the impact of foreign exchange. The underlying slight increase in depreciation from new investments has been broadly offset by the finalisation of the SCA fair value and asset life assessment. Depreciation for the full financial year is expected to be in the range of £115 - 120 million.  

Return on average capital employed of 13.8% for the 12 month period to 31 October 2014 (FY to 31 October 2013: 12.1%) represents a 170 bps increase. This increase is driven by the significant improvement in profitability and tight working capital management over the period.

Exceptional costs of £10 million in the period were incurred, principally comprising £4 million in relation to business restructuring and £4 million in relation to the write-off of unamortised finance costs.

Net interest expense was £17 million (H1 2013/14: £21 million), reflecting the benefit of the refinancing undertaken in the period. The charge for the second half of the year is expected to be broadly similar.

Tax on profits has been charged at a rate on continuing operations before amortisation and exceptional items of 22.8% (H1 2013/14: 23.0%).

Profit after tax for continuing operations after exceptional items was £95 million (H1 2013/14: £70 million).

Earnings per share for continuing operations before amortisation and exceptional items increased 15% to 12.9 pence (H1 2013/14: 11.2 pence) or 24% on a constant currency basis, reflecting the significant operating profit growth together with tight management of interest cost.

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 £1.7 million and profit before tax by approximately £1.3 million.

Financial position

Net debt at 31 October 2014 was £694 million (30 April 2014: £827 million), representing 1.6x EBITDA for the prior 12 month period, an improvement of 0.4x since 30 April 2014. This has been achieved through tight capital discipline, and continued focus on working capital where a further reduction has been achieved, bringing average working capital as a percentage of sales down to 3.4%. Net proceeds from business disposals, less acquisitions during the period, was £9 million.

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 3.7 pence per share (H1 2013/14: 3.2 pence per share). This represents an increase of 16% demonstrating our commitment to a progressive dividend and the confidence of the Board in the outlook for the Group. The dividend will be paid on 1 May 2015 to ordinary shareholders on the register at the close of business on 7 April 2015.

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 34 to 37 of the 2014 Annual Report, available on the Group's website at www.dssmith.com, remain relevant.

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

·     Acquisition and market consolidation risks;

·     Capital market and liquidity capacity risks;

·     Integration risks;

·     Security of paper supply risks;

·     Commercial differentiation risks;

·     Legal, regulatory and governance risks; and

·     Sustainable strategy 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 2014 there was significant headroom on the Group's committed debt facilities of c. £670 million with the next significant maturity not due until May 2017. As a consequence, the Directors believe 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 Directors have formed a judgment 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 EU;

(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).

3 December 2014