• DS Smith released a positive Q3 22E trading update this morning (from 1 November 2021 to 31 January 2022): They have seen continued momentum during H2 with good progress in profitability and cash generation. Encouragingly, volume growth and continuing packaging price increases have more than offset ongoing input cost increases.
  • Good box volume growth driven by FMCG customers (85% of their volumes): Despite “very strong” comparatives, DS Smith is still seeing continued like-for-like volume growth. Within Europe, the Eastern region was their fastest growing (+read-though for Mondi), while North America benefitted from continued strong growth at their new Indiana plant.
  • A trend we are seeing across most producers, increased input costs fully offset by packaging price progression and volume growth: Across European peers, DS Smith appears to be the most hedged across energy, fuel and starch. The actual cost savings from hedging is not disclosed; however, management provided a level of comfort around energy costs for both FY 22E and FY 23E (negligible y/y tick-up). In terms of OCC, there has been a recent increase as export demand has been quite strong as US ports have been congested, limiting OCC exports from the US.
  • Negligible Ukraine and Russia exposure: They have a minority investment in a Ukrainian business, which serves customers predominantly in Ukraine with limited sales in Russia. Production in these operations is currently suspended. The carrying value of the investment in FY 21A was GBP 23mn and the contribution to FY 21A was GBP 4mn after tax.  
  • Currently there is no embargo on containerboard exports from Russia: Russia exports c.300ktpa of kraftliner to Europe (small part of the overall market). DS Smith purchases a small amount from Russia but has stopped. With the FSC removing accreditation from Russian supplies, DS thinks it’s too early to see the MT impact, but don’t expect a significant impact. The wider impact would not be on kraftliner but rather on the lumber market (wood and pellets).
  • DS Smith’s EUR 50/t price increase was successful in February, despite not having been reflected in the FOEX price index: Containerboard availability is currently sufficient, with reasonable stocks across the supply chain. They would not be surprised to see further price increases announced on the back of cost push rather than supply/demand fundamentals.
  • DS Smith still expects a “significant” increase in profitability in H2 (h/h and y/y): DS Smith expects mid-single-digit like-for-like volume growth for FY 22E, with H2 volumes higher h/h and y/y (H2 21A: +8%). DS Smith appears confident that even if there is a slowdown in consumer spending due to rising costs such as energy, their volumes should be resilient due to their FMCG exposure (never seen a reduction here). Encouragingly, they still expect costs to be recovered through increased packaging pricing in FY 23E. Additionally, they expect continued strong FCF generation to drive a further reduction in their leverage from 1.9x in FY 21A.  

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