- DS Smith H1 23A results saw a continued increase in profitability and outlook upgraded: Revenue growth of +28% y/y (+11% h/h) was driven by improved pricing (GBP 950mn: 69% from higher packaging prices and 31% from an increase in external paper sales, recycling material and energy), while corrugated volumes were down 3% y/y (revenue headwind: -GBP 64mn). EBIT was up 51% y/y (+23% h/h), with the adjusted EBIT margin expanding to 9.7% (+151bps y/y & +96bps h/h). The interim dividend was up 25% y/y to GBp 6/share.
- Key insights from the results: Southern Europe is firing, Eastern Europe is holding up, while Northern Europe and Americas are under pressure. DS Smith believe prices for OCC and containerboard are more likely to be driven by costs (“not expecting deflation in the MT”) than demand fundamentals. In terms of OCC, industry stocks are sitting around 11-12 days in Europe, which is high (export market has dried up and containerboard production has been low).
- The overall market was worse than DS Smith originally expected in terms of corrugated box demand: Volumes were in the red, down 3% y/y (Southern Europe: “slight decline” with France weaker than Iberia and Italy; Eastern Europe in the red but <3%; and Northern Europe >3% decline due to weakness in the UK and Germany). This was on the back of a strong comparative in H1 22A (+9.4%); a weaker than expected industrial sector and continued weakness in the UK and Germany. DS Smith expects H2 box demand to improve y/y (H2 22A: +1.6%).
- DS Smith did not have to take any downtime as rising energy costs were mitigated by their 3-yr rolling energy hedging programme: Energy costs however increased by GBP 158mn y/y. DS Smith is 100% hedged for gas consumption in FY 23E. Looking forward, DS Smith appears more concerned around energy supply next winter (3-yr out hedging is currently c. EUR 50/MWH).
- Europe (90% of EBIT) revenue increased by 28% y/y (+11% h/h) and EBIT was up 56% y/y (+27% h/h), with an EBIT margin of 9.5% (+174bps y/y & +118bps h/h): This performance was mainly driven by Southern Europe (increases in both packaging and paper prices), which had the strongest performance across the Group (revenue: +48% y/y & +11% h/h; EBIT +105% y/y & +25% h/h, with an EBIT margin of 15.1%). Eastern Europe margins were stable at 5.9%, while Northern Europe disappointed (EBIT margin 5.2%) on the back of continued pressure in the UK and Germany, coupled with some customers limiting production to reduce energy usage. DS Smith expects Northern European margins to improve in H2 as input costs are recovered.
- North America (10% of EBIT) revenue increased by 30% y/y (+10% h/h), and EBIT increased by 19% y/y (-2% h/h), with an EBIT margin of 12.1% (-103bps y/y & -151bps h/h): Revenue benefitted from higher paper and packaging prices. Volumes were however “slightly” in the red on the back of general economic weakness and labour shortages, which temporarily restricted their production capacity.
- Further de-gearing has provided DS Smith further optionality: Net debt/EBITDA decline to 1.0x (FY 22A: 1.6x), despite CapEx up 30% y/y to GBP 162mn (focussed on energy efficiency and packaging capacity). FY CapEx guidance remains unchanged at GBP 500mn (implying GBP 338mn in H2). The greenfield packaging plants in Italy and Poland are now both fully operational. Any further M&A is likely to be bolt on in nature.
- Despite macro uncertainty, DS Smith upgraded their already bullish outlook for FY 23E: DS Smith expects H2 23E to be consistent with H1 23A, implying adjusted EBITDA just under GBP 1.3bn. This is the first time in ten years that DS is providing this type of guidance (“very confident”). The company also expects the EBIT margin to be in the MT target range of 10-12% by the end of FY 23E (this implies further margin expansion h/h).
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