• DS Smith delivered on its expectations of a significant increase in profitability in H2 22A (y/y & h/h): Revenue growth of +26% (+15%) was mainly driven by improved pricing (86% of total) and to a lesser extent volume growth (14% of total). Adjusted EBIT +25% (+23%) benefitted from improved pricing more than offsetting significant cost inflation (raw materials +34% and energy costs +82%); adjusted EBIT margin -5bps (+56bps) to 8.8%. ROCE improved by +440bps (+140bps) to 12.1%. Net debt/EBITDA improved to 1.6x (H2 21A: 2.2x) and the final dividend was up 26% y/y to GBp 10.2/share (FY: GBp 15).
  • Europe (87% of EBIT) revenue increased by 19% y/y (+10% h/h) and EBIT was up 27% y/y (+23% h/h), with an EBIT margin of 8.3% (+8bps y/y & +55bps h/h): This performance was mainly driven by Southern Europe (benefitted from external paper sales) and to a lesser extent Eastern Europe, while the Northern Europe performance deteriorated (greater cost inflation than other regions).
  • North America (13% of EBIT) revenue increased by 23% y/y (+18% h/h), and EBIT increased by 13% y/y (+22% h/h), with an EBIT margin of 13.6% (-126bps y/y & +48bps h/h): Packaging volumes continued to see the strongest increases within the Group. The box plant in Indiana is expected to reach full utilisation in FY 23E.
  • Record like-for-like corrugated box volume growth of +5.4% in FY 22A: This was mostly driven by a strong H1 (+9.4%), with only +1.6% in H2 (H2 21A: +8%). Volume growth was “very strong” in Iberia; “good” in Germany and the Benelux, while declines were seen in the UK. Organic growth in Eastern Europe was the strongest across Europe.
  • FMCG (83% of their volumes) sector growth continues: This is underpinned by plastic substitution; underpenetrated e-commerce (Italy, Spain, and France: 9-11%); changing retail formats, where the hard discounter segment is mostly growing strongly; and changing demographics, with smaller basket sizes which increases shopping frequency. DS Smith flagged softness in industrial demand (17% of their volumes) in the ST, which in their view is being driven by COVID and constrained supply chains.
  • CapEx set to increase by 20% (FY 22A: +28%) in FY 23E to GBP 500mn, (1.1x D&A) predominantly focussed on growth: Greenfield site in Italy is now operational and Poland is currently being commissioned. Both facilities are now 80% pre-sold and expected to generate a 15-20% ROACE in Y3.
  • The results appeared to show an increased emphasis on capital allocation: The focus is to maintain investment grade ratings, with net debt/EBITDA <2.0x in the MT. Organic investments are targeting a 15-20% ROIC. Dividend policy remains progressive, with a 2.0-2.5x cover targeted. DS Smith hinted at further M&A; however, focussed on smaller bolt-ons. DS Smith is confident that the 12-15% ROACE target will be achieved in FY 23E.
  • Bullish outlook for FY 23E, despite considerable macro uncertainty: FY 23E has started well, with continued momentum from 2022. DS Smith expects to deliver a further “substantial” improvement in performance. DS Smith expects 2-4% growth (FY 22A: 3.5%), with the contribution from greenfield projects c.0.5-1.0%. This implies organic growth in the range of 1-3%.

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