• H2/FY 21A snapshot (y/y % chg.): Revenue +8% (-1%), EBITDA -8% (-16%) with margin compression of 240bps (-233bps) to 13.6% due to OCC cost pressures (consumes c. 4mpta). Sequentially, there was slight margin expansion driven by the North American business. ROCE was down 170bps (240bps) to 7.7% (continues to be impacted by the integration of Interstate Resources and Europac). Net debt/EBITDA of 2.2x, supported by strong FCF generation, up 59% (37%). Final dividend of GBp 8/share (FY: GBp 12).
  • Recent trading updates point to Smurfit outperforming Mondi & DS: With DS not reporting Q1 and Q3 EBITDA and a different year-end to MNP and SKG, like for like comparison is difficult. However, assuming an equal weighting for EBITDA for DS Smith between Q1 and Q2 as well as Q3 and Q4, it appears that DS Smith’s performance for the period Feb-April 21 (EBITDA -8.1% y/y), was in line with MNP’s 8.3% decline in EBITDA, both well below SKG’s 1.6% growth.
  • Strong volume growth of 8.2% in H1 (H1: -1%), driving FY volumes up 3.5%: 82% of their volumes relate to FMCG, e-commerce and consumer, with the rest exposed to industrial. DS has seen an improvement for higher quality contracts, with the average key account now 3 years, with new large contracts c.3-5 years. >10% of their volume growth is from their top-20 customers.       
  • Europe (87% of EBIT) performance disappointing despite strong revenue growth: Revenue +10% y/y (8% h/h) but insufficient to offset cost pressures driving EBIT decline of 22% y/y (+13% h/h), margin contraction of 343bps y/y to 8.2%. Southern Europe (44% of EBIT) volumes in the green supported by good growth in Italy but margins were under pressure due to OCC costs and pulp costs at its Viana kraftliner mill.  Northern Europe (27% of EBIT) benefitted from “very strong” corrugated box volume growth in the UK (from e-commerce) and good trading in Benelux and Germany. Eastern Europe (16% of EBIT) continues to perform well with a strong performance from Poland & the Baltics. With lower paper capacity than other regions, OCC costs did not impact EBIT as much.
  • North America (13% of EBIT) continues to gain momentum: Volumes were “very good”, supported by the ramp-up the new box plant in Indiana. Full ramp-up is on track for FY 23E. Despite a drop in revenue (-9% y/y & -6% h/h) due to increased internal paper utilisation, EBIT was up materially y/y and 63% h/h supported by positive momentum in paper and box pricing. The North American EBIT margin (14.9%) is now well above the blended European margin of 8.2%.
  • Capital allocation focussed on leveraging accelerated growth trends from e-commerce and sustainability: Two new packaging plants in Italy and Poland to be operational by Q4 22E. DS is also significantly expanding their Arnstadt packaging facility in Germany (FMCG focus). Combined, the 3 sites will add 5% to DS’s corrugated capacity and are all expected to yield at least a 15% ROCE.
  • Bullish outlook: FY 22E has started well, with Q4 volume momentum continuing, due to strong demand.  Recovery of higher paper prices and margins is under way.  DS did flag further inflationary costs pressures (energy, transport & labour). DS is confident paper prices will be recovered, consistent with 2017/18. Packaging comprises c.1% of total costs for most customers.

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