- DS Smith H1 24A results revealed a decrease in profitability in line with guidance: Revenue fell by -18% y-o-y (-10% h-o-h), largely impacted by a weaker pricing environment (-£273mn: from lower packaging prices). Meanwhile corrugated volumes were down 4.7% y-o-y (revenue headwind: -£64mn). This meant adjusted EBIT declined by -13% y-o-y (-18% h-o-h), with the adjusted EBIT margin reaching 10.4% (+67bps y-o-y & -91bps h-o-h). The interim dividend was kept flat at GBp 6/share, following a 25% increase the previous year.
- Corrugated box volumes declined by 4.7% y-o-y (H1 23A: -3% and H1 22A: +9%): Encouragingly, current volumes are 2% higher than pre-Covid levels. Furthermore, volumes are improving and destocking is largely over. Regionally, North America recorded positive volume growth. Eastern Europe volumes were better than the group average and Southern Europe was in line. Meanwhile, Northern Europe was the weakest due to its exposure to Germany and the UK, which have a greater weighting to industrial and e-commerce customers.
- Europe revenue fell 19% y-o-y, while adjusted EBIT declined by only 11% as cost relief helped to offset lower prices: Although revenue in Northern Europe came under pressure, adjusted EBIT for the segment climbed 26% y-o-y, with strong margin expansion as a higher proportion of indexed pricing meant packaging pricing reduced less than input costs. Meanwhile, margins in Southern Europe remained robust at 14.6% and profitability in Eastern Europe was stable with lower costs more than offsetting lower prices.
- North America revenue dropped 15% y-o-y but was only 3% softer h-o-h: Packaging volumes grew but profitability declined by 23% y-o-y. This was mainly driven by the decline in paper profitability as the region produces more paper than it currently utilises for their own packaging production. Hence, the business retains some exposure to the paper export market (25% of volumes). Given volume growth is expected to improve further, this exposure will reduce further.
- The focus in Europe is now to maximize returns as their footprint has largely been achieved: DS Smith expects a ROIC of 15-20% on all discretionary capex initiatives. Discretionary expenditure in the previous two financial years, together with the current year, will total c.£500mn with a further c.£300mn expected by the end of our FY 26E, totaling c.£800mn over the five-year period FY 22-26E. This includes €250mn to be spent at Lucca mill in Italy (adding 270Kt/yr by H1 26E), and €145mn at its Viana kraftliner mill in Portugal, adding 30Kt/yr of kraft top paper.
- The shift from plastics continues to gain traction: DS Smith has helped Coca-Cola reduce plastic consumption by 200t/yr in Austria by replacing shrink wrap with a 100% recyclable corrugated handle. Over the medium term, the structural growth drivers of plastic replacement and changing retail formats remain strong and DS Smith expects market corrugated volumes to return to being in line with GDP growth rates.
- Significant jump in gearing: Net debt increased by 70% y-o-y (+22% h-o-h) to just under £2bn, with net debt/EBITDA now at 1.7x (FY 23A: 1.3x). This was driven by lower profitability, CapEx increasing by 28% y-o-y to £208mn and a large NWC outflow of £253mn.
- Although DS Smith expects the markets to remain challenging, the company expects to report their 2nd highest profit in FY 24E: This assumes an improvement in volumes in H2 vs. H1, with further cost mitigation and resilient pricing. FY capex guidance remains unchanged at £500mn (H2 24E: £292mn).
Download DS Smith Paper Packaging Insights (H1 24A)
