Half Yearly Results

7 December 2011


Continued strong momentum in financial performance and delivery of operational and strategic objectives

"In 2010 we set out in detail our plans to realise our ambition of becoming the leading European supplier of recycled packaging for consumer goods in Europe. We are pleased with our achievements to date, we see significant opportunities to continue to develop the business, and these strong half year results are another positive step forward for DS Smith."

Financial highlights

Half-year ended 31 October

Continuing operations




Underlying change(2)






Adjusted operating profit(3)





Return on sales(3)





Profit before tax





Cash flow from operating activities





Adjusted EPS(3)





Interim dividend per share





Return on average capital employed(4)





(1) Restated following the announcement of the sale of the Office Products Wholesaling business and subsequent classification as a discontinued operation

(2) Excluding the effect of acquisitions and foreign exchange movements

(3) Before amortisation and exceptional items

(4) Adjusted operating profit as a percentage of average monthly capital employed for the 12 months to 31 October

· Adjusted operating profit rise of 41% including a strong performance from all divisions:

o UK Packaging +25%

o Continental European Corrugated Packaging +99%, underlying +23%

o Plastic Packaging +11%

Delivering on our strategy - actions taken

We have made significant steps towards refocusing our business on recycled packaging and improving the efficiency of the Group:

· Spicers disposal by 31 December 2011

· Exit of two paper mills on track (output total c. 130kt per annum)

· Successful Otor integration - return on investment of 14.8% in last 12 months of ownership

· Continued good progress on operational and capital efficiency savings

Delivery on our strategy - financial impact

Our results give us confidence that our medium term targets are achievable:


Delivery in H1 2011/12 (continuing operations)

Organic volume growth of 3% or more

(GDP+ growth)

3% in corrugated packaging

Return on sales(1) of 7% - 9%

+ 80bps to 7.6%

Return on average capital employed(1)

12% - 15%

12.9%, + 300bps period-on-period(3)

Net debt / EBITDA less than 2.0x


Operating cash flow(2) / operating profit >120%


(1) Before amortisation and exceptional items

(2) Free cash flow before tax, net interest and growth capital expenditure

(3) For the 12 months to 31 October 2011 and the 12 months to 31 October 2010

Miles Roberts, Group Chief Executive, said

"I am pleased with the improved performance of every division over the past six months, which has seen the Group deliver a return on sales within the target range. We have again delivered a return on capital which is comfortably above our cost of capital and have remained focused on recovering the year-on-year increases in input costs through pricing.

We have made considerable strategic progress, with the announced disposal of Spicers and the exit of two paper mills on track, leaving the group focused on its recycled packaging businesses. The integration of Otor shows how our customers are keen to develop their businesses with us as we expand DS Smith's geographic footprint in Europe. We have a strong balance sheet with only a limited Group profit exposure to paper, and will evaluate opportunities to pursue acquisitions within a fragmented packaging sector that can meet our medium term objectives.

We remain confident in the trading outlook for the remainder of this financial year, due to our resilient, growing customer base, despite the uncertain macro-economic environment. The actions that we are taking to develop the packaging business and to drive efficiency improvements, will position the Group well in the more challenging trading environment. Our continuing investment in the packaging business underpins our confidence that the Group will continue to develop positively in the medium term."


DS Smith Plc

+44 (0)1628 583 400

Miles Roberts, Group Chief Executive


Steve Dryden, Group Finance Director


Rachel Stevens, Head of Investor Relations





+44 (0)20 7353 4200

John Sunnucks


David Allchurch


James Macey White


Dial-in details

There will be a presentation for investors and analysts today at 09:30 GMT at JPMorgan Cazenove, 20 Moorgate, London EC2R 6DA. There is a listen-only dial-in facility on +44 (0)20 7162 0125, reference 908140. The slides (containing supplementary information) will be available on our website shortly before the presentation begins.

A play-back facility will be available until 14 December 2011. The dial-in number is 020 7031 4064, passcode 908140.

A transcript of the presentation and of the Q&A will be available on our web-site within two working days of the presentation.

Next dates

Q3 IMS Thursday 8 March 2012


In the six months to 31 October 2011 DS Smith has continued to grow corrugated packaging volumes and gain market share while also expanding margins, as our mix of business changes in favour of higher value-added products, plus the benefits of efficiency savings and operational gearing come through. This mix change has been achieved both with the integration of Otor, which is included in these results for the full six month period, and in the UK where the business is seeing the benefits of its focus on customer needs and the service, quality and innovation we can bring to them.

Financial Results

Group revenue from continuing operations for the half-year to 31 October 2011 is up 26% to £1,034.5 million (H1 2010/11: £822.2 million), with that increase being partly driven by the inclusion of Otor for the full six month period compared to the prior year, when it was consolidated for only two months, following its acquisition on 1 September 2010. Excluding the impact of acquisitions and currency, revenue from continuing operations grew 11%. This reflects growing volumes and the period-on-period impact of input cost recovery.

Adjusted operating profit from continuing operations is up 41% to £78.3 million (H1 2010/11: £55.5 million). £10.0 million of this increase is the inclusion of Otor for a full six months of the period. Excluding the impact of acquisitions and currency, operating profit from continuing operations grew 22%. Return on sales from continuing operations increased by 80 basis points to 7.6% (H1 2010/11: 6.8%). The strong increase in profits from the underlying business is driven by success in recovering rising input costs, margin expansion from cost efficiencies and operational leverage.

Cash flow from operating activities from continuing operations is 46% ahead of the prior year at £88.2 million (H1 2010/11: £60.3 million), reflecting the increase in operating profits from the business (in part due to the inclusion of Otor) and working capital management. Capital expenditure has been higher in the period, at £42.4 million (H1 2010/11: £16.5 million) reflecting investments in printing and performance paper. The cash cost of interest has increased period-on-period, reflecting the funding cost of the Otor acquisition. Cash tax has increased by £7.0 million to £11.4 million, reflecting both increased profitability and the timing of settlement of certain one-off items.

Return on average capital employed for continuing operations (for the 12 months to 31 October 2011) has increased 300 basis points to 12.9% (12 months to 31 October 2010: 9.9%), due to a mix effect from the Otor acquisition, increased profitability and strong capital discipline.

Exceptional costs of £18.0 million (H1 2010/11: £6.0 million), were principally related to exit costs at Higher Kings Mill (sold 30 September 2011) and Hollins Mill (consultation on closure commenced in June 2011). There is an associated tax credit of £3.3 million and the cash cost of the exceptional items is £4.2 million. This is offset by cash proceeds on the disposal of Higher Kings Mill of £4.6 million.

Net interest expense has increased to £13.0 million (H1 2010/11: £12.0 million) due to an increase in finance costs, driven by the cost of additional debt to fund the Otor acquisition, partially offset by the funding benefit of lower working capital and a lower (non-cash) employment benefit charge of £2.5 million (H1 2010/11: £3.5 million).

Tax on profits has been charged at a rate on continuing operations before exceptional items of 28.3% (H1 2010/11: 27.1%, year to 30 April 2011: 28.2%), in line with our long-term anticipated tax rate.

Profit after tax for continuing operations after exceptional items increased 18% to £28.9 million (H1 2010/11: £24.4 million) while, profit after tax from continuing operations before amortisation and exceptional items, increased 49% to £48.1 million (H1 2010/11: £32.2 million). Earnings per share for continuing operations before amortisation and exceptional items increased 44% to 11.1p (H1 2010/11: 7.7p) reflecting the strong profit growth, offset slightly by the increased average number of shares in issue, due to the equity placing undertaken in July 2010.

The disposal of Spicers is on track with completion expected before 31 December 2011. Accordingly, Spicers is treated as a discontinued item in these financial statements. Discontinued items contributed £9.0 million adjusted operating profit (H1 2010/11: £5.0 million). Profit after tax for discontinued operations was £5.9 million (H1 2010/11: £3.4 million), delivering earnings per share for discontinued operations before amortisation and exceptional items of 1.4p (H1 2010/11: 1.0p).

Financial position

Net debt at 31 October 2011 was £312.9 million (30 April 2011: £351.0 million). The net reduction of £38.1 million is principally due to strong cash flow from operations.

The Group refinanced its medium term borrowings in September 2011 with a new five-year revolving credit facility of £610 million. At 31 October 2011, the Group had borrowing facilities of £970 million with an average maturity of 4.7 years. Net proceeds from the disposal of Spicers, of c. £160 million, are expected to be received before 31 December 2011.


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 2.8 pence per share (H1 2010/11: 2.0p). This represents an increase of 40%, demonstrating our commitment to a progressive dividend and the directors confidence in the outlook for the business.


We remain confident in the trading outlook for the remainder of this financial year, due to our resilient, growing customer base, despite the uncertain macro-economic environment. The actions that we are taking to develop the packaging business and to drive efficiency improvements, will position the Group well in the more challenging trading environment. Our continuing investment in the packaging business underpins our confidence that the Group will continue to develop positively in the medium term.

Operating review

UK Packaging


Half-year ended

31 October 2011

Half-year ended

31 October 2010




Operating profit *



Return on sales *



12 month return on average capital employed *



* Before amortisation and exceptional items




Revenue in this segment was up 14% due to disciplined pricing action to offset period-on-period increases in raw material costs, and some volume growth. The recycling business continues to increase revenues and profits from increased volumes and new business wins, most recently Aldi's UK business. DS Smith Recycling is also now operating in Poland, an important step in establishing recycling operations in that region. The performance of DS Smith Paper has been steady in revenues and profitability, with the market for CCM weakening towards the end of the half-year period. We have continued to gain market share in corrugated packaging in the UK market, as we focus on delivering high standards of service, quality and innovation to our customers. R-Flute® continues to grow ahead of the market, with volumes up 6% on the prior half-year. The UK corrugated packaging operations have continued to see good revenue growth largely as a result of the disciplined recovery of period-on-period input cost rises. We are continuing to invest in additional capacity in the UK, installing additional printing machinery at two sites to develop our capabilities in high quality printed packaging, suitable for our FMCG customers. These investments will be operational in the next financial year.

Profitability for the UK Packaging segment as a whole increased by 25%, benefiting from improved efficiencies in the UK operations and from procurement-led savings, resulting in a 70 basis points increase in return on sales. Return on capital increased due to this improvement in profitability and a disciplined approach to working capital.

Continental European Corrugated Packaging


Half-year ended

31 October 2011

Half-year ended

31 October 2010




Operating profit *



Return on sales *



12 month return on average capital employed *



* Before amortisation and exceptional items




In Continental European Corrugated Packaging, revenues were up 56% and operating profit was up 99%, half-year on half-year. This reflects the inclusion of the Otor business for the full six months of the financial period, compared to two months in the prior period. Otor has integrated well, delivering a return on investment of 14.8% in the last 12 months of ownership. Excluding the impact of the acquisition, revenues were up 8% and adjusted operating profits were up 23% as the underlying business performed well. Return on sales has increased by 160 basis points, as the period benefitted from the mix effect of inclusion of Otor, and also the underlying benefit of cost synergies, procurement-led savings and operational gearing.

In France, the business has seen good revenue and volume growth ahead of the market, as our FMCG customers have shown good consistent demand in their volume requirements. We are continuing to extend our position with key customers, benefitting from the enlarged size of the DS Smith group. In order to satisfy the demand for our products, we are investing in additional offset capacity in south-west France, designed to produce high quality packaging product.

The performance of the business in Poland has been very strong, with excellent volumes despite disciplined pricing actions taken at the start of the financial year, to recover input cost rises. The performance of the business has been driven by both FMCG and industrial customers.

In Italy, we continue to out-perform the market while remaining disciplined on our pricing and have rolled out packaging design programmes developed by the French business.

Plastic Packaging


Half-year ended

31 October 2011

Half-year ended

31 October 2010




Operating profit *



Return on sales *



12 month return on average capital employed *



* Before amortisation and exceptional items



The Plastic Packaging segment has seen revenue growth of 8% and operating profit growth of 11%, period-on-period, with operating profit margin increasing by 20 basis points and ROACE improving by 120 basis points.

The Liquid Packaging and Dispensing business has performed steadily over the period, with continued good growth in the US business driven by multi-serving coffee-to-go products, and beverage dispensing products such as tea-urn liners.

The returnable transit packaging business has performed well overall in difficult markets, with a good performance from the business in Poland, balanced by more difficult conditions in other parts of the business.

Update on strategy implementation

On 24 June 2010 we announced that we would be reviewing our business portfolio with a view to creating a growing business that is more focused, producing higher margins and returns with less cyclicality. On 8 December 2010, one year ago, we set out our strategy to be the leading supplier of recycled packaging for consumer goods in Europe. In order to achieve this we set out our plan to focus on our packaging business; to expand our recycling business that supports and is integral to our recycled packaging; to reduce our exposure to paper manufacturing and to streamline the Group. We also outlined our plans to realise significant cost and capital efficiencies through changing the organisational structure and ways of working.

We are pleased with achievements to date and see significant opportunity to continue to develop the business.

We have built the packaging and recycling businesses through the integration of the Otor business to form DS Smith Packaging France, and by driving the sharing of know-how and best practice through the Group, for example, in the development of pre-print technology in the UK business and the roll-out of R-Flute® in Continental Europe. As set out above, we also have a programme of investment in additional capacity across the corrugated packaging business, with two major projects in the UK and one in France, focusing on high quality product for our demanding FMCG customers. We have also made a small acquisition in south-west Russia (in conjunction with our associate in Ukraine) for consideration of €6.5 million and output of c. 50m sqm per annum. Our recycling business has expanded into Poland as it has secured agreement to collect used paper and cardboard from Tesco stores in that country, as we do in the UK.

In the past six months we have taken action to reduce our non-integrated paper capacity, with the sale of Higher Kings Mill in September 2011, and the announcement in June 2011 of commencement of consultation on the closure of the Hollins Mill. Together, these mills have output volumes of c. 130kt per annum. In terms of our objective to streamline the Group, we announced in July 2011 the disposal of Spicers, our Office Products Wholesaling segment, for £200 million enterprise value, a 6.9x 2010/11 EBITDA multiple. On completion of this disposal, DS Smith will be a business focused on recycled packaging.

The efficiency programmes that were announced in December 2010 and also in March 2011 are on track. The UK efficiency programme is expected to deliver run-rate savings of £10 million by April 2014. An example of the integrated approach within the UK business is that the waste disposal processes at Kemsley Mill is now managed by DS Smith Recycling, rather than outsourced. The procurement programme is expected to deliver £10 million run-rate by the end of the current financial year, and is on track to deliver this. There have been a number of significant successes, for example, in the capital purchase of "offset" machines by the Group in both the UK and France, where a co-ordinated approach resulted in a substantial cost saving. The Otor synergies of €13 million run-rate by April 2013 are also on track, with an incremental €6 million expected to be delivered in the current financial year as the business benefits from the full year effect of the range of actions. In terms of capital efficiency, we continue to use our capital with discipline. Working capital reduced further in the half-year to 31 October 2011 resulting in a net inflow of £8.5 million. Taking into account the implied working capital increase as a result of increased revenues from continuing operations in the half year, there has been a total net saving in working capital efficiency of approximately £15.9 million over the half year period. This takes the total savings from working capital achieved since 30 April 2010, to approximately £40 million.

In line with our strategy, the Group is a net purchaser of paper for our corrugated packaging operations. In the UK business we sell the modest surplus of packaging paper produced versus our requirements to third parties, while in continental Europe we buy in most of the paper required by our packaging operations. Profits from the paper business are expected to be only c.10% of the profit for the Group this year, reflecting the greater size of our packaging business. Paper prices are currently in a downward phase of the cycle due to the economic environment, but the actions that we are taking to develop the packaging business and to drive efficiency improvements are expected to offset the impact of the paper cycle on the Group.

In order to achieve the aim of being the leading supplier of recycled packaging for consumer goods, DS Smith will consider organic investments, bolt-on acquisitions and large acquisitions, focusing on the European market. In evaluating any opportunity, we will be disciplined in our use of capital, mindful of the medium-term key performance indicators that we have previously established, namely:

· organic growth over 3% per annum (GDP+ growth)

· return on sales in the range of 7% to 9%

· return on capital between 12% and 15%

· net debt / EBITDA less than 2.0x

· Cash flow from operating activities, before growth capital expenditure, to exceed 120% of profit from operating activities.

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 27 to 30 of the 2011 Annual Report, remain relevant, available on the Group's website at www.dssmith.uk.com.

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

· volatility of pricing and availability of globally traded raw materials, including the pricing and availability of paper;

· the risk that suitable acquisitions are not available, or are acquired and not integrated effectively;

· the continuing availability of borrowing facilities, including compliance with borrowing covenants;

· the funding position of the Group's UK defined benefit pension scheme;

· the risk of a material environmental incident.

Going concern

The Group's recent trading and forecasts, after taking account of reasonably possible changes in trading performance, show that the Group is able to operate within its current debt facilities. The Group refinanced its medium term borrowings in September 2011, increasing committed facilities by £250 million. 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 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 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).

Miles Roberts

Group Chief Executive

Steve Dryden

Group Finance Director

6 December 2011