Half-year Report
08/12/2022 07:00
For best results when printing this announcement, please click on link below:
http://newsfile.refinitiv.com/getnewsfile/v1/story?guid=urn:newsml:reuters.com:20221208:nRSH9818Ia&default-theme=true
RNS Number : 9818I Smith (DS) PLC 08 December 2022
8 December 2022
DS Smith Plc - 2022/23 HALF YEAR RESULTS
Excellent performance despite volatile markets
6 months to 31 October 2022 Change Change
Continuing operations (reported) (constant currency)
Revenue £4,299m +28% +26%
Adjusted operating profit((1)) £418m +51% +49%
Profit before tax £315m +80% +79%
Adjusted basic EPS((1)) 20.9p +53% +49%
Statutory basic EPS 16.9p +72% +71%
Dividend per share 6.0p +25% NA
Return on sales (RoS)((2)) 9.7% +150bps +150bps
ROACE((3)) 13.2% +380bps +400bps
Net debt / EBITDA((6)) 1.0x - -
See notes to financial table below
Miles Roberts, Group Chief Executive, commented:
"The performance during this six month period has been strong, benefiting from
our constant focus on our customers' evolving needs during this time of
significant economic volatility. This has enabled us to achieve continued
market share gains, an increase in profitability and improvements in our key
financial performance ratios. We are particularly pleased with the performance
of the Southern Europe region that continues to deliver major benefits from
the acquisition of Europac in 2019.
The macro-economic outlook for the rest of the financial year remains
challenging. However, we have an excellent customer base, efficient high
quality assets, dedicated colleagues and a strong balance sheet allowing
continued organic investment to support our customers. These benefits,
combined with current momentum in the business, mean we now expect FY23
performance to be ahead of previous expectations with H2 being consistent with
H1."
This announcement includes inside information as defined in Article 7 of the
Market Abuse Regulation No. 596/2014 (as it forms part of domestic law by
virtue of the European Union (Withdrawal) Act 2018).
The person responsible for arranging the release of this announcement is Iain
Simm, Company Secretary of DS Smith Plc
Enquiries
DS Smith Plc
+44 (0)20 7756 1800
Investors
Hugo Fisher, Group Investor Relations Director
Anjali Kotak, Investor Relations Director
Media
Greg Dawson, Corporate Affairs Director
Brunswick
+44 (0)20 7404 5959
Simon Sporborg
Dan Roberts
A presentation for investors and analysts will be held today at 9:00am by
webcast.
To access the webcast, please register here
(https://eur01.safelinks.protection.outlook.com/?url=https%3A%2F%2Fstream.brrmedia.co.uk%2Fbroadcast%2F634e75f86815e65bb9fdaf76&data=05%7C01%7CNikki.Robinson%40dssmith.com%7C7e873722d2594bbdb9fc08dac336ff37%7C423430e8247c44d1976722723b7d4cb2%7C0%7C0%7C638036938222598862%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&sdata=rTGfYigiAT1Hm%2BHvpnPEZTiBuYtVYsbGea48niyw1zA%3D&reserved=0)
. A copy of the slides presented will also be available on the Group's
website, https://www.dssmith.com/investors/results-and-presentations
(https://www.dssmith.com/investors/results-and-presentations) shortly before
the start of the presentation.
If you would like to ask a question at the end of the webcast, then you will
need to dial into the associated conference call using the following details.
Please dial in 15 minutes before the start of the webcast to allow for
registration.
Dial-in number (UK): +44 (0)33 0551 0200
UK Toll Free: 0808 109 0700
Dial-in number (US): +1 212 999 6659
Password: DS Smith
An audio file and transcript will also be available on
https://www.dssmith.com/investors/results-and-presentations
(https://www.dssmith.com/investors/results-and-presentations)
Notes to the financial tables
Note 14 explains the use of non-GAAP performance measures. These measures are
used both internally and externally to evaluate business performance, as a key
constituent of the Group's planning process, they are applied in the Group's
financial and debt covenants, as well as establishing the targets against
which compensation is determined. Reporting of non-GAAP measures alongside
reported measures is considered useful to enable investors to understand how
management evaluates performance and value creation internally, enabling them
to track the Group's adjusted performance and the key business drivers which
underpin it over time. Reported results are presented in the Consolidated
Income Statement and reconciliations to adjusted results are presented on the
face of the Consolidated Income Statement, in note 2, note 3, note 7, and note
14.
(1) Operating profit (adjusted EBITA) is before adjusting items (as set out
in note 3) and amortisation of £62 million.
(2) Operating profit before amortisation and adjusting items as percentage
of revenue.
(3) Operating profit before amortisation and adjusting items as a percentage
of the average monthly capital employed over the previous 12 month period.
Average capital employed includes property, plant and equipment, right-of-use
assets, intangible assets (including goodwill), working capital, provisions,
capital debtors/creditors, biological assets and assets/liabilities held for
sale.
(4) Corrugated box volumes on a 6 months basis (based on area (m2) of
corrugated box sold), adjusted for working days, on an organic basis.
(5) GDP growth for rolling 6 months (year-on-year) for the countries in
which DS Smith operates, weighted by our sales by country = 3%. Source:
Eurostat (16 Nov 2022) and ONS
(6) EBITDA being operating profit before adjusting items, depreciation and
amortisation and adjusted for the full year effect of acquisitions and
disposals in the period. Net debt is calculated at average exchange rates as
opposed to closing rates. Ratio as calculated in accordance with bank
covenants. See note 14 on non-GAAP measures for reconciliation.
(7) Free cash flow before tax, net interest, growth capital expenditure,
pension payments and adjusting cash flows as a percentage of operating profit
before amortisation and adjusting items.
(8) Free cash flow is the net movement on debt before cash outflow for
adjusting items, dividends paid, acquisitions and divestment of subsidiary
businesses (including borrowings acquired) and proceeds from issue of share
capital.
Cautionary statement: This announcement contains certain forward-looking
statements with respect to the operations, performance and financial condition
of the Group. By their nature, these statements involve uncertainty since
future events and circumstances can cause results and developments to differ
materially from those anticipated. The forward-looking statements reflect
knowledge and information available at the date of preparation of this
announcement and DS Smith Plc undertakes no obligation to update these
forward-looking statements. Nothing in this statement should be construed as a
profit forecast.
Unless otherwise stated, all commentary and comparable analysis in the
overview and operating review relates to the continuing operations of the
Group, on a constant currency basis.
Operating Review
Strong customer focus driving profit growth
In a very challenging macro-economic environment, our comprehensive geographic
footprint, security of supply and high service levels have enabled us to
achieve ongoing market share gains and strong profit growth. However, the
overall market was worse than we originally expected, leading to a decline in
our volumes of 3 per cent(4). The volume reduction reflected very strong
comparatives, a weaker than expected industrial sector and economic challenges
particularly in the UK and Germany. Looking ahead, while the challenges remain
ongoing, we still expect an improved volume performance in the second half of
the year compared to the first half.
For the six month period, revenue grew to £4,299 million, up 26 per cent on a
constant currency basis and 28 per cent on a reported basis with a small
decline in box volumes (£64 million) more than offset by higher selling
prices (£950 million) across the Group. £655 million of this increase was
due to higher packaging prices with the remainder of £295 million due to
increases in price of external sales of paper, recycling material and energy.
These increases reflect the lag in recovery of the significant increases in
input costs during 2021 and 2022. Overall pricing more than offset reduced
external paper volumes sold as we utilised more of our own manufactured paper.
Input costs were significantly impacted by inflationary price rises, supply
chain issues and general availability which led to an increase in costs of
£779 million versus the comparable period with rises in raw materials costs
of £370 million, energy costs of £158 million and other costs, including
labour and distribution, of £251 million. Our excellent procurement and risk
management function ensured that our production was unaffected, with the
impact of rising energy costs being mitigated by OUR three-year rolling energy
hedging programme and a price benefit on external electricity sales.
Group return on sales grew during the year to 9.7 per cent (2021/22: 8.2 per
cent), reflecting the increase in profitability and despite the dilutive
impact of the inflationary environment. We expect to be within the target
range of 10-12 per cent by the year end.
Basic earnings per share from continuing operations grew 71 per cent on a
constant currency basis to 16.9 pence. Adjusted basic earnings grew by 49 per
cent on a constant currency basis to 20.9 pence per share, reflecting the
growth in profitability.
Return on average capital employed significantly increased by 400 bps to 13.2
per cent, principally reflecting the growth in adjusted operating profit for
the prior 12 months, and well within our medium-term target range of 12-15 per
cent. The Group's strong performance supports our confidence in continuing to
meet this medium-term target.
Strong cash generation and investing for growth
Cash generation remains strong, with £494 million of free cash flow(8)
compared to £188 million in the comparative period, principally driven by the
enhanced profitability and a working capital inflow. The working capital
inflow of £138 million benefitted from £197 million in respect of margin
calls made in both this year and last year to manage our energy hedging
position. These margin calls will reverse in part in the second half of the
year. The underlying working capital outflow was reflective of higher sales
prices and inventory costs. Our net debt has reduced to £1,147 million at 31
October 2022 from £1,484 million at 30 April 2022 and the net debt/EBITDA
ratio has significantly improved to 1.0 times from 1.6 times at 30 April 2022,
within our medium-term target of at or below 2.0 times.
As described in our results to 30 April 2022, we have continued to invest in
our business with net capital expenditure up 30 per cent in the first half of
the year to £162 million, including a number of ongoing customer led projects
in relation to energy efficiency and packaging capacity. Our expectation for
full year capital expenditure remains unchanged as previously guided at £500
million.
Leading the way in sustainability
Sustainability has been at the heart of our business for many years as we have
developed and grown into a solely fibre-based corrugated packaging business.
We continue to work actively with our customers to help them address their
sustainability challenges. Momentum in plastic replacement continues and we
have replaced 520 million units of plastic in since 2020.
We continue to make progress against our sustainability targets including
improvements in both carbon emissions and water use and we are delighted that
this has been recognised with further improvements in our rating by a number
of external indices including S&P Global and Sustainalytics and through
our continuing top ratings at MSCI and Ecovadis.
Dividend
The Board considers the dividend to be a very important component of
shareholder returns. Today, we are announcing an interim dividend for this
year of 6.0 pence per share, an increase of 25 per cent and consistent with
our policy of 2.0-2.5 times dividend cover over the medium term.
Progress against medium-term targets
Medium-term targets Delivery in H1 2022/23
Continuing operations
Organic volume growth((4)) ≥GDP((5))+1%, being 4% (3%)
Return on sales((2)) 10% - 12% 9.7%
ROACE((3)) 12% - 15% 13.2%
Net debt / EBITDA((6)) ≤2.0x 1.0x
Cash conversion((7,8)) ≥100% 160%
See notes to the financial tables above
Outlook
The macro-economic outlook for the rest of the financial year remains
challenging. However, we have an excellent customer base, efficient high
quality assets, dedicated colleagues and a strong balance sheet allowing
continued organic investment to support our customers. These benefits,
combined with current momentum in the business, mean we now expect FY23
performance to be ahead of previous expectations with H2 being consistent with
H1.
Operating Review
Northern Europe
Half year ended Half year ended Change - reported Change - constant currency
31 October 2022 31 October 2021
Revenue £1,624m £1,331m 22% 22%
Adjusted operating profit* £85m £87m (2%) (1%)
Return on sales((2)) 5.2% 6.5% (130bps) (130bps)
*Operating profit before amortisation and adjusting items (refer to note 3 of
the financial statements)
In Northern Europe, organic corrugated box volumes across the region declined
more than the Group average with UK and Germany showing higher levels of
decline due to overall economic conditions, including some customers limiting
production to reduce energy usage and very strong growth in the comparative
period.
Revenues increased by 22 per cent in the region due to a combination of the
increases in box prices in packaging and an increase in sales price for
externally sold paper and volumes of recycled fibre. Adjusted operating profit
declined slightly reflecting greater increases in input costs than experienced
in other regions. This impact is expected to be reversed through additional
price recovery in the second half.
Southern Europe
Half year ended Half year ended Change - reported Change - constant currency
31 October 2022 31 October 2021
Revenue £1,672m £1,234m 35% 35%
Adjusted operating profit* £252m £122m 107% 107%
Return on sales((2)) 15.1% 9.9% 520bps 520bps
* Operating profit before amortisation and adjusting items (refer to note 3 of
the financial statements)
Southern Europe saw a slight decline in box volumes with France weaker than
Iberia and Italy reflecting comparative performances in the prior period and
excellent customer traction.
Revenue grew by 35 per cent, due to the impact of increases in both packaging
and paper pricing. Adjusted operating profit grew by over 100 per cent
compared to the prior period, due to a very positive performance from the
former Europac business acquired in 2019 as well as the drop through of price
increases in packaging. Accordingly, return on sales for the region grew to
the highest within the Group.
Eastern Europe
Half year ended Half year ended Change - reported Change - constant currency
31 October 2022 31 October 2021
Revenue £648m £523m 24% 27%
Adjusted operating profit* £38m £31m 23% 27%
Return on sales((2)) 5.9% 5.9% - -
* Operating profit before amortisation and adjusting items (refer to note 3 of
the financial statements)
Organic corrugated box volumes in Eastern Europe declined less than the Group
average, reflecting the relative economic stability in the region.
Revenues grew 27 per cent, principally reflecting increases in pricing and
adjusted operating profit also grew 27 per cent, reflecting the recovery of
higher paper prices through increased packaging pricing after the usual lag.
North America
Half year ended Half year ended Change - reported Change -
31 October 2022 31 October 2021 constant currency
Revenue £355m £274m 30% 11%
Adjusted operating profit* £43m £36m 19% 2%
Return on sales((2)) 12.1% 13.1% (100bps) (110bps)
*Operating profit before amortisation and adjusting items (refer to note 3 of
the financial statements)
*Operating profit before amortisation and adjusting items (refer to note 3 of
the financial statements)
Packaging volumes in the region declined slightly, reflecting the overall
economic environment and labour shortages which temporarily restricted our
production capacity.
Revenues increased by 11 per cent, principally reflecting the increases in
paper and packaging prices.
Financial Review
2022/23 half year results
Prior year comparatives within the following commentary relate to the
continuing operations of the Group.
Revenue increased by 28% on a reported basis and 26% on a constant currency
basis to £4,299 million for the half year ended 31 October 2022 (H1 2021/22:
£3,362 million), driven by higher average selling prices reflecting recovery
of paper and other input costs. Box volumes declined by 3% over the period
versus the previous year, reflective of the strong sales volumes experienced
in H1 2021/22 and the volatile economic environment in the current year.
Operating profit of £349 million increased by 69% versus the prior year, 68%
on a constant currency basis (H1 2021/22: £207 million), and adjusted
operating profit increased to £418 million, a 51% and 49% increase on a
reported and constant currency basis (H1 2021/22: £276 million). On a
constant currency basis, the effect of an increase in the average sales price
and mix (£950 million) more than offset lower volumes (£33 million) and the
significant rises in input, distribution, energy and other costs of (£779
million). The costs continue to be actively managed, with the impact of rising
energy costs mitigated by the Group's three year rolling hedging programme.
Labour costs increased, reflecting inflationary pay rises.
Amortisation of £62 million is lower than the prior half year on both a
reported (H1 2021/22: £69 million) and constant currency basis, as
intangibles recognised on the acquisition of SCA Packaging are now fully
amortised.
After the effects of exchange and disposals in the current and prior periods,
depreciation was £154 million, £7 million higher on a reported basis and £5
million on a constant currency basis (H1 2021/22: £147 million), as a result
of increased capital expenditure.
Free cash flow, comprising adjusted operating profit plus depreciation,
movements in working capital (in addition to provisions and employee
benefits), net capital expenditure, taxes and net interest paid was £494
million (H1 2021/22: £188 million). The improvement in adjusted operating
profit was offset by increased capital expenditure and higher taxes paid.
Underlying working capital was an outflow of £59 million which was more than
offset by £197 million of margin received from energy hedges. The underlying
working capital outflow was due to the effect of box price rises on
receivables and paper prices on the value of inventory. The reported working
capital cash flow was in total an inflow of £138 million. Factored
receivables reduced from the previous year end to £380 million (30 April
2022: £381 million).
The Group's net debt position improved by £337 million to £1,147 million
compared to the prior year end (30 April 2022: £1,484 million; 31 October
2021: £1,640 million). Net debt was impacted principally by free cash flow
for the period of £494 million and dividend payments of £66 million. Foreign
exchange and fair value movements were a negative £95 million.
Net capital expenditure was higher than in the previous half year at £162
million (H1 2021/22: £125 million) driven by investment in growth. The
greenfield Packaging plants in Italy and Poland are now both fully
operational.
At 30 April 2022, the Group's net debt position had benefitted from £109
million of margin calls related to energy and carbon hedges unwinding in
2022/23. In the current period, as energy prices continued to rise, further
margin calls were made to continue to manage counterparty risk. These calls
amounted to £267 million cash received whilst £70 million of the position as
at 30 April 2022 reversed resulting in a net benefit to working capital in the
half year of £197 million. There was no impact on income from these margin
calls.
Return on average capital employed (ROACE) increased by 380 basis points to
13.2%, which is within the Group's target rate of 12% to 15%. The Group's
strong performance supports our confidence in continuing to meet this
medium-term target.
Return on sales for the continuing operations is 9.7 per cent, improved 150
basis points against the previous half year of 8.2 per cent and is expected to
be at the target range of 10-12 per cent by the year end.
In response to the market turmoil following the UK "mini- budget" in September
2022, the Group made funding support of up to £100 million to the main UK
defined benefit pension scheme. This took the form initially of a cash advance
in anticipation of potential margin calls and latterly a liquidity facility.
The cash advance was fully repaid within days of being made and as at 31
October 2022 the liquidity facility remained in place but was undrawn.
Certain items are presented within the financial statements as adjusting
items, in order to assist in understanding the trading results of the Group.
Non-cash costs of £7 million (H1 2021/22: £nil) relating to the put option
for the final 10% stake in Interstate Resources resulting when the option
crystallised on 1 September 2022, have been recognised. There were no new
adjusting items and none are anticipated for the full year.
Net financing costs before adjusting items of £35 million (H1 2021/22: £34
million) relate to interest on borrowings and lease liabilities, higher than
last year due to the significant rise in interest rates in the period despite
lower levels of borrowing.
Income from associates was £1 million, below the previous year (H1 2021/22:
£4 million) following the impact of the war in Ukraine on the Group's
Ukrainian associate.
Profit before income tax increased to £315 million (H1 2021/22: £175
million) principally due to higher operating profit)
The rate of tax on adjusted profits before amortisation and adjusting items is
25%, an increase against the previous year's rate of 24%. The total tax
expense is £83 million (H1 2021/22: £40 million.
Profit after tax increased to £232 million (H1 2021/22: £135 million), due
to higher operating profit offset by an increase in income tax.
Basic earnings per share before amortisation and adjusting items increased by
49% to 20.9 pence on a constant currency basis (H1 2021/22: 13.7 pence),
driven by the improvement in operating profit. Basic unadjusted earnings per
share increased to 16.9 pence (H1 2021/22: 9.8 pence).
Financial position
Total shareholder funds increased to £4,590 million (30 April 2022: £4,232
million; 31 October 2021: £3,607 million). The movement is due primarily to
profit attributable to shareholders of £232 million (H1 2021/22: £135
million), actuarial losses on employee benefits of £34 million (H1 2021/22:
£11 million gain), dividends to shareholders recognised of £206 million (H1
2021/22: £166 million), a net increase in the translation reserve of £129
million (net foreign currency translation gains of £195 million, offset by a
£66 million movement in the net investment hedge) and a net movement on
derivative hedges of £319 million. The latter is driven by commodity hedging
positions which have increased in value as energy prices have risen. The tax
charge of total comprehensive income items amounts to £91 million (H1
2021/22: £63 million).
Reported net debt of £1,147 million has decreased from year end (30 April
2022: £1,484 million). The Group calculates its net debt to adjusted earnings
before interest, tax, depreciation and amortisation (EBITDA) ratio in
accordance with the methodology prescribed by its bank and private placement
debt covenants, which excludes the effects of IFRS 16 Leases. The ratio has
reduced to 1.0 times (30 April 2022: 1.6 times, 31 October 2021: 1.9 times),
well within the primary covenant requirements of 3.75 times, owing to an
improvement in EBITDA as a result of strong price growth more than recovering
rising input costs, together with the strong cash generation reducing our
level of net debt.
The Group continues to sell trade receivables without recourse, a process by
which the trade receivable balance sold is de-recognised, with proceeds then
presented within operating cash flows. Such arrangements enable the Group to
optimise its working capital position and reduces the quantum of early payment
discounts given. At constant currency, trade receivables sold under the
factoring programme reduced marginally to £380 million (30 April 2022: £381
million).
Dividend
The Board considers the dividend to be an important component of shareholder
returns. As first set out in December 2010, our policy is that dividends will
be progressive and, in the medium term, dividend cover should be on average
2.0x to 2.5x through the cycle. In considering future dividends the Board will
continue to be mindful of the Group's earnings growth potential, future
expansion and leverage.
The Board declares an interim dividend of 6.0 pence per share in light of the
strong business performance, building on the robust position of the second
half of the previous year. The dividend will be paid on 31 January 2023 to
ordinary shareholders on the register at close of business on 16 December
2022.
Risks and uncertainties
The Board has reconsidered the principal risks and uncertainties affecting the
Group in the second half of the year. The principal risks and uncertainties
discussed on pages 52 to 55 of the 2022 Annual Report, available on the
Group's website at www.dssmith.com, remain relevant.
In summary, the Group's key risks and uncertainties are:
· Eurozone and macro-economic impacts
· Paper/fibre price volatility
· Cyber attacks
· Regulation and governance
· Sustainability commitments
· Security of paper/fibre supply
· Packaging capacity limits to growth
· Organisation capability
· Disruptive market players
· Substitution of fibre packaging
· Digital enablement
· Shopping habits
In addition to the risks noted above, the Group actively managed its exposure
to energy related costs which have seen upward cost pressure during the first
half year.
Going Concern
The Board have reviewed a detailed consideration of going concern, based on
the Group's recent trading and forecasts, and including scenario analysis.
This takes into account reasonably foreseeable changes in trading performance,
including the continued uncertainty of the long-term impacts on the economic
landscape presented by an inflationary economic environment and the ongoing
war in Ukraine. More detail of the assessment performed is included in note 1
to the financial statements.
At 31 October 2022 there was significant headroom on the Group's committed
debt facilities, at a level c.£1.5 billion. The going concern assessment
includes the period of 12 months from the date of approval of this interim
financial report with the scenarios assessed extending to 30 April 2024. Based
on the resilience of the Group's operations to both Covid-19 and the high-cost
environment experienced throughout the last 12 months, as well as the current
and forecast liquidity available, the Board believes that the Group is well
placed to manage its business risks successfully despite the uncertainties
inherent in the current economic outlook, and to operate within its current
debt facilities.
The Group's current committed bank facility headroom, its forecast liquidity
headroom over the going concern period of assessment and potential mitigating
activities available to management have been considered by the Directors in
forming their view that it is appropriate to conclude that there is a
reasonable expectation that the Group has adequate resources to continue in
operational existence for the foreseeable future. For this reason, the going
concern basis has been adopted in preparing the financial statements.
Responsibility Statement
We confirm that to the best of our knowledge:
a) the condensed set of financial statements, prepared in accordance with
IAS 34 "Interim Financial Reporting" as adopted for use in the United Kingdom
and the Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority, gives a true and fair view of the
assets, liabilities, financial position and profit or loss of the Company and
the undertakings included in the consolidation taken as a whole;
b) the interim management report includes a fair review of the information
required by DTR 4.2.7R (indication on important events during the first six
months and description of principal risks and uncertainties for the remaining
six months of the year); and
c) the interim management report includes a fair review of the information
required by DTR4.2.8R (disclosure of related parties' transactions and changes
therein).
Miles Roberts Adrian
Marsh
Group Chief Executive Group Finance Director
7 December 2022
INDEPENDENT REVIEW REPORT TO DS SMITH PLC
Conclusion
We have been engaged by the Company to review the condensed set of financial
statements in the half-yearly financial report for the six months ended 31
October 2022 which comprises the Condensed consolidated income statement, the
Condensed consolidated statement of comprehensive income, the Condensed
consolidated statement of financial position, the Condensed consolidated
statement of changes in equity, the Condensed consolidated statement of cash
flows and the related notes 1 to 16. We have read the other information
contained in the half-yearly financial report and considered whether it
contains any apparent misstatements or material inconsistencies with the
information in the condensed set of financial statements.
Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the half-yearly
financial report for the six months ended 31 October 2022 is not prepared, in
all material respects, in accordance with UK adopted International Accounting
Standard 34 and the Disclosure Guidance and Transparency Rules of the United
Kingdom's Financial Conduct Authority.
Basis for Conclusion
We conducted our review in accordance with International Standard on Review
Engagements 2410 (UK) "Review of Interim Financial Information Performed by
the Independent Auditor of the Entity" (ISRE) issued by the Financial
Reporting Council. A review of interim financial information consists of
making enquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review procedures. A
review is substantially less in scope than an audit conducted in accordance
with International Standards on Auditing (UK) and consequently does not enable
us to obtain assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not express an audit
opinion.
As disclosed in note 1, the annual financial statements of the group are
prepared in accordance with UK Adopted International Accounting Standards. The
condensed set of financial statements included in this half-yearly financial
report has been prepared in accordance with UK adopted International
Accounting Standard 34, "Interim Financial Reporting".
Conclusions Relating to Going Concern
Based on our review procedures, which are less extensive than those performed
in an audit as described in the Basis of Conclusion section of this report,
nothing has come to our attention to suggest that management have
inappropriately adopted the going concern basis of accounting or that
management have identified material uncertainties relating to going concern
that are not appropriately disclosed.
This conclusion is based on the review procedures performed in accordance with
this ISRE, however future events or conditions may cause the entity to cease
to continue as a going concern.
Responsibilities of the directors
The directors are responsible for preparing the half-yearly financial report
in accordance with the Disclosure Guidance and Transparency Rules of the
United Kingdom's Financial Conduct Authority.
In preparing the half-yearly financial report, the directors are responsible
for assessing the company's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern and using the
going concern basis of accounting unless the directors either intend to
liquidate the company or to cease operations, or have no realistic alternative
but to do so.
Auditor's Responsibilities for the review of the financial information
In reviewing the half-yearly report, we are responsible for expressing to the
Company a conclusion on the condensed set of financial statements in the
half-yearly financial report. Our conclusion, including our Conclusions
Relating to Going Concern, are based on procedures that are less extensive
than audit procedures, as described in the Basis for Conclusion paragraph of
this report.
Use of our report
This report is made solely to the company in accordance with guidance
contained in International Standard on Review Engagements 2410 (UK) "Review of
Interim Financial Information Performed by the Independent Auditor of the
Entity" issued by the Financial Reporting Council. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone other
than the company, for our work, for this report, or for the conclusions we
have formed.
Ernst & Young LLP
London
7 December 2022
Condensed consolidated income statement
Half year ended Half year ended Year ended
31 October 2022
31 October 2021
30 April 2022
Unaudited
Unaudited
Audited
Continuing operations Note Before Adjusting After Before Adjusting After Before Adjusting After
adjusting
items
adjusting
adjusting
items
adjusting
adjusting
items
adjusting
items
(note 3)
items
items
(note 3)
items
items
(note 3)
items
£m
£m
£m
£m
£m
£m
£m
£m
£m
Revenue 2 4,299 - 4,299 3,362 - 3,362 7,241 - 7,241
Operating costs (3,881) - (3,881) (3,086) (4) (3,090) (6,625) (37) (6,662)
Operating profit before amortisation, 2 418 - 418 276 (4) 272 616 (37) 579
acquisitions and divestments
Amortisation of intangible assets; (62) (7) (69) (69) 4 (65) (138) 2 (136)
acquisitions and divestments
Operating profit 356 (7) 349 207 - 207 478 (35) 443
Finance income 5 1 - 1 - - - 1 - 1
Finance costs 5 (36) - (36) (33) (2) (35) (68) (2) (70)
Employment benefit net finance expense - - - (1) - (1) (3) - (3)
Net financing costs (35) - (35) (34) (2) (36) (70) (2) (72)
Profit after financing costs 321 (7) 314 173 (2) 171 408 (37) 371
Share of profit of equity accounted investments, net of tax 1 - 1 4 - 4 7 - 7
Profit before income tax 322 (7) 315 177 (2) 175 415 (37) 378
Income tax (expense)/credit (83) - (83) (42) 2 (40) (100) 2 (98)
Profit for the period 239 (7) 232 135 - 135 315 (35) 280
Profit for the period attributable to:
Owners of the parent 239 (7) 232 135 - 135 315 (35) 280
Non-controlling interests - - - - - - - - -
Earnings per share
Earnings per share from continuing operations
Basic 7 16.9p 9.8p 20.4p
Diluted 7 16.8p 9.8p 20.3p
Adjusted earnings per share from continuing operations
Basic 7 20.9p 13.7p 30.7p
Diluted 7 20.8p 13.6p 30.5p
Condensed consolidated statement of comprehensive income
Half year ended
31 October 2022 Half year ended Year ended
Unaudited 31 October 2021 Unaudited 30 April 2022
£m £m Audited
£m
Profit for the period 232 135 280
Items which will not be reclassified subsequently to profit or loss
Actuarial (loss)/gain on employee benefits (34) 11 68
Income tax on items which will not be reclassified subsequently to profit or 9 - (14)
loss
Items which may be reclassified subsequently to profit or loss
Foreign currency translation differences 195 (107) (40)
Reclassification from translation reserve to income statement arising on - (3) (3)
divestment
Cash flow hedges fair value changes 674 309 1,069
Reclassification from cash flow hedge reserve to income statement (355) (80) (357)
Reclassification from cash flow hedge reserve to the balance sheet - (5) -
Movement in net investment hedge (66) 41 28
Income tax on items which may be reclassified subsequently to profit or loss (100) (63) (162)
Other comprehensive income for the period, net of tax 323 103 589
Total comprehensive income for the period 555 238 869
Total comprehensive income attributable to:
Owners of the parent 555 238 869
Non-controlling interests - - -
Condensed consolidated statement of financial position
Note At 31 October
2022
Unaudited
£m
At 31 October
2021
At 30 April
Restated(1)
2022
Unaudited
Audited
£m
£m
Assets
Non-current assets
Intangible assets 2,980 2,883 2,906
Biological assets 11 9 10
Property, plant and equipment 3,249 2,972 3,128
Right-of-use assets 198 205 199
Equity accounted investments 18 42 17
Other investments 16 15 16
Deferred tax assets 7 8 7
Other receivables 1 1 -
Derivative financial instruments 797 237 495
Total non-current assets 7,277 6,372 6,778
Current assets
Inventories 758 624 703
Biological assets 7 6 7
Income tax receivable 32 49 34
Trade and other receivables 1,385 1,009 1,229
Cash and cash equivalents 10 656 744 819
Derivative financial instruments 337 123 316
Assets classified as held for sale 2 1 -
Total current assets 3,177 2,556 3,108
Total assets 10,454 8,928 9,886
Liabilities
Non-current liabilities
Borrowings 10 (1,419) (1,400) (1,391)
Employee benefits 4 (112) (153) (86)
Other payables (37) (15) (37)
Provisions (7) (8) (7)
Lease liabilities 10 (139) (143) (140)
Deferred tax liabilities (490) (296) (396)
Derivative financial instruments (168) (15) (28)
Total non-current liabilities (2,372) (2,030) (2,085)
Current liabilities
Bank overdrafts 10 (196) (130) (73)
Borrowings 10 (23) (674) (681)
Trade and other payables (2,811) (2,126) (2,503)
Income tax liabilities (179) (129) (143)
Provisions (86) (55) (48)
Lease liabilities 10 (63) (66) (63)
Derivative financial instruments (132) (109) (56)
Total current liabilities (3,490) (3,289) (3,567)
Total liabilities (5,862) (5,319) (5,652)
Net assets 4,592 3,609 4,234
Equity
Issued capital 138 137 137
Share premium 2,252 2,243 2,248
Reserves(1) 2,200 1,227 1,847
Total equity attributable to owners of the parent 4,590 3,607 4,232
Non-controlling interests 2 2 2
Total equity 4,592 3,609 4,234
1. The prior period condensed consolidated statement of financial position
has been restated (refer to note 1).
Condensed consolidated statement of changes in equity
Share Share Hedging Own Retained earnings(1,2) Total equity attributable Non-controlling Total
capital
premium
reserve
shares ( )£m
to owners of the parent
interests
equity
£m
£m
£m Translation
£m
£m
£m
£m
reserve
£m
At 1 May 2022 (audited) 137 2,248 609 (105) (9) 1,352 4,232 2 4,234
Profit for the period - - - - - 232 232 - 232
Actuarial loss on employee benefits - - - - - (34) (34) - (34)
Foreign currency translation differences - - - 195 - - 195 - 195
Cash flow hedges fair value changes - - 674 - - - 674 - 674
Reclassification from cash flow hedge reserve to income statement (355) (355) (355)
- - - - - -
Movement in net investment hedge - - - (66) - - (66) - (66)
Income tax on other comprehensive income - - (101) 1 - 9 (91) - (91)
Total comprehensive income - - 218 130 - 207 555 - 555
Issue of share capital 1 4 - - - - 5 - 5
Employee share trust - - - - 1 (1) - - -
Share-based payment expense (net of tax) - - - - - 4 4 - 4
Dividends - - - - - (206) (206) - (206)
Other changes in equity in the period 1 4 - - 1 (203) (197) - (197)
At 31 October 2022 (unaudited) 138 2,252 827 25 (8) 1,356 4,590 2 4,592
At 1 May 2021 (audited) 137 2,241 53 (84) (3) 1,189 3,533 2 3,535
Profit for the period - - - - - 135 135 - 135
Actuarial gain on employee benefits - - - - - 11 11 - 11
Reclassification from translation reserve to income statement arising on - - - (3) - - (3) - (3)
divestment
Foreign currency translation differences - - - (107) - - (107) - (107)
Cash flow hedges fair value changes - - 309 - - - 309 - 309
Reclassification from cash flow hedge reserve to income statement - - (80) - - - (80) - (80)
Reclassification from cash flow hedge reserve to balance sheet - - (5) - - - (5) - (5)
Movement in net investment hedge - - - 41 - - 41 - 41
Income tax on other comprehensive income - - (63) - - - (63) - (63)
Total comprehensive income - - 161 (69) - 146 238 - 238
Issue of share capital - 2 - - - - 2 - 2
Employee share trust - - - - (1) (4) (5) - (5)
Share-based payment expense (net of tax) - - - - - 5 5 - 5
Other changes - - 7 (7) - - - - -
Dividends (restated) (2) - - - - - (166) (166) - (166)
Other changes in equity in the period - 2 7 (7) (1) (165) (164) - (164)
At 31 October 2021 (unaudited) 137 2,243 221 (160) (4) 1,170 3,607 2 3,609
1. Retained earnings include a reserve related to merger relief.
2. The prior period condensed consolidated statement of changes in equity
has been restated (refer to note 1).
Condensed consolidated statement of cash flows
Continuing operations Note Half year ended Half year ended Year ended
31 October 2022
31 October 2021
30 April 2022
Unaudited
Unaudited
Audited
£m
£m
£m
Operating activities
Cash generated from operations 9 754 403 1,079
Interest received 1 - 1
Interest paid (50) (46) (63)
Tax paid (51) (50) (96)
Cash flows from operating activities 654 307 921
Investing activities
Acquisition of subsidiary businesses, net of cash and cash equivalents 13 - (23) (23)
Divestment of subsidiary businesses, net of cash and cash equivalents 13 - 37 35
Capital expenditure (163) (131) (431)
Proceeds from sale of property, plant and equipment and intangible assets 1 6 16
Cash flows used in restricted cash and other deposits (5) (6) (2)
Other - 1 2
Cash flows used in investing activities (167) (116) (403)
Financing activities
Proceeds from issue of share capital 4 2 7
Repayment of borrowings (680) (474) (529)
Proceeds from borrowings - 288 334
Payments in respect of derivative financial instruments (3) (11) (35)
Repayment of principal on lease liabilities (35) (35) (73)
Dividends paid to Group shareholders 8 (66) (55) (166)
Other - (5) (21)
Cash flows used in financing activities (780) (290) (483)
(Decrease)/increase in cash and cash equivalents (293) (99) 35
Net cash and cash equivalents at beginning of the period 746 719 719
Exchange gains/(losses) on cash and cash equivalents 7 (6) (8)
Net cash and cash equivalents at end of the period 10 460 614 746
1. Basis of preparation
The unaudited condensed consolidated interim financial statements for the half
year ended 31 October 2022 have been prepared in accordance with IAS 34
Interim Financial Reporting as adopted for use in the United Kingdom and the
Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's
Financial Conduct Authority.
These interim financial statements should be read in conjunction with the
Group's annual financial statements for the year ended 30 April 2022, which
have been prepared in accordance with International Financial Reporting
Standards as adopted by the UK ('UK Adopted IFRSs'). Those accounts were
reported on by the Group's auditors, whom were Deloitte LLP for the year ended
30 April 2022 and delivered to the Registrar of Companies. The report of the
auditor was not qualified or modified, did not draw attention to any matters
by way of emphasis and did not contain an adverse statement under section 498
(2) or (3) of the Companies Act 2006.
The condensed information presented for the year ended 30 April 2022 does not
constitute full statutory accounts as defined in section 434 of the Companies
Act 2006. The financial information for the half year ended 31 October 2022 is
unaudited but has been reviewed in accordance with ISRE 2410 Review of Interim
Financial Information by Ernst & Young LLP, the Group's auditor, and a
copy of their review report forms part of this half year report.
The interim financial information has been prepared using the same accounting
policies as for the year ended 30 April 2022. The Statement of Financial
Position and Statement of Changes in Equity include in liabilities the 2021/22
full financial year dividend approved by the shareholders at the Annual
General Meeting. The 31 October 2021 comparative information has been
restated by £111m to reflect this presentation. The 30 April 2022
information is not affected
The interim financial information has been prepared using the same accounting
policies as those adopted in the annual financial statements for the year
ended 30 April 2022, apart from as detailed below.
The following new accounting standards, amendments or interpretations have
been adopted by the Group as of 1 May 2022:
· Annual Improvements to IFRS 2018-2020:
- Amendment to IFRS 1 First time adoption of International
Financial Reporting Standards - Subsidiary as a First-time Adopter;
- Amendment to IFRS 9 Financial Instruments - Fees in the
'10 percent' Test for Derecognition of Financial Liabilities;
- Amendment to IAS 41 Agriculture - Taxation in Fair Value
Measurements.
· Onerous Contracts - Costs of Fulfilling a Contract (Amendments to
IAS 37);
· Property, Plant and Equipment: Proceeds before Intended Use
(Amendments to IAS 16); and
· Reference to the Conceptual Framework (Amendments to IFRS 3).
The adoption of the amendments above has not had a material effect on the
results for the Group's financial statements.
The Group's main currency exposures are to the Euro and the US dollar. The
following significant exchange rates applied during the periods:
Foreign exchange rates
Half year ended Half year ended Year ended
31 October 2022
31 October 2021
30 April 2022
Average Closing Average Closing Average Closing
Euro 1.166 1.161 1.169 1.184 1.179 1.192
US dollar 1.189 1.151 1.386 1.378 1.359 1.256
Going concern
Overview
As explained in the narrative section of this half year financial report under
the heading 'Going concern' , the condensed interim financial statements are
prepared on the going concern basis. This is considered appropriate given that
the Directors believe that the Group has adequate resources to continue in
operational existence for the foreseeable future.
Further details, including the analysis performed and conclusion reached, are
set out below.
Liquidity and financing position
The total drawn debt facilities at 31 October 2022 were £1.4bn, of which
£1.4bn is publicly listed debt with no attached covenants. In addition, the
Group has access to c£1.5bn committed bank facilities, which were undrawn at
31 October 2022, which provide liquidity to the Group and all carry the same
covenant of Net Debt:EBITDA of less than 3.75 times. The Group is not forecast
to increase net debt in the going concern analysis. There is significant
liquidity/financing headroom across the going concern forecast period. For
this reason, the going concern review has focused more on forecast covenant
compliance.
In determining the going concern basis for preparing the financial statements,
the Directors consider the Company's objectives and strategy, its principal
risks and uncertainties in achieving its objectives and its review of business
performance and financial position. The economic environment reflected in this
Going Concern assessment anticipates moderate organic box volume growth whilst
recognising the inflationary pressures in the Group's raw materials, energy
and overhead cost bases. In preparing the financial statements, the Group has
modelled two scenarios in its assessment of going concern. These are:
· The base case is derived from the latest full year forecast. The
key inputs and assumptions include: Packaging volume growth at moderate levels
across the future periods considered by the modelling, driven by continued
FMCG and e-commerce demand, together with a conservative recovery in
industrial volumes, together with flat pricing.
· The downside case assumes European packaging volumes largely
stagnating at FY22 levels, reflecting no future growth and a continued spike
in energy prices not mitigated by a commensurate increase in prices. With a
significant portion of the Group's packaging contracts being either directly
linked / referenced to a paper index, this would result in higher input costs
for the Group that are more difficult to pass through to end customers and
EBITDA at levels similar to the mid-stage of the pandemic. A significant cash
outflow from working capital is incorporated into FY24, providing an
additional headwind to the Group's net debt and covenant ratios.
The going concern assessment included the period of 12 months from the date of
approval of this interim financial report with both scenarios extending to 30
April 2024.
Mitigating actions
The outturns of the above scenario modelling, combined with the strong
performance seen so far in FY23, provide the Group a level of comfort that no
significant cost / cash flow mitigations need to be built in to the going
concern modelling. However, a range of options remain at the Group's disposal
should they be required which provide the opportunity to support EBITDA, cash
flow and net debt, including:
· Action in respect of variable and controllable costs such as
discretionary bonuses, pay rises, recruitment freezes and wider labour force
actions in response to higher levels of volume reductions.
· Limiting capital expenditure to minimum maintenance levels by
pausing growth spend (including greenfield sites and other expansionary
spend).
· Strategic actions in respect of the Group's asset base could be
considered in respect of disposals, mothballing and closures.
· A reduction or temporary suspension of the Group's dividend.
The Group could also consider actions to assist covenant compliance, such as
increased utilisation of debt factoring facilities and optimising working
capital by negotiating longer payment terms whilst continuing to pay suppliers
in full and in line with contractual terms.
At a high level, it is estimated that the Group EBITDA would have to fall by
about 39% from FY22 levels for a breach of the Net Debt:EBITDA covenant to
occur.
Conclusion
Based on the forecast and the scenarios modelled, together with the
performance of the Group in the current year, the Directors consider that the
Group has significant covenant and liquidity headroom in its borrowing
facilities to continue in operational existence for at least 12 months from
the date of approval of this report. Accordingly, at the December 2022 Board
meeting, the Directors concluded from this analysis it was appropriate to
continue to adopt the going concern basis in preparing the financial
statements.
Estimates and judgements
The preparation of consolidated financial statements requires management to
make judgements, estimates and assumptions that affect whether and how
policies are applied, and the reported amounts of assets and liabilities,
income and expenses.
The application of the Group's accounting policies requires management to make
estimates and assumptions; these estimates and assumptions affect the reported
assets and liabilities and financial results of the Group. Actual outcomes
could differ from the estimates and assumptions used.
In preparing these interim financial statements, the key sources of estimates
and the critical accounting judgement were the same as those that applied to
the Group's consolidated financial statements for the year ended 30 April
2022. Key estimates were taxation, impairments and employee benefits. The
critical accounting judgement is applying the adjusting items policy.
Goodwill impairment assessment - key assumptions and methodology
The cash-generating units (CGU) that represent the lowest level at which
goodwill is monitored for impairment indicators and internal management
purposes remain consistent with the CGUs disclosed in the 2022 Annual Report.
IAS 36 requires goodwill and other intangibles with indefinite lives to be
tested for impairment on an annual basis. DS Smith does this annually at the
year end date, 30 April. At 31 October 2022, a review of "indicators of
impairment" was undertaken, underpinned by high level modelling of future
discounted cash flows based on the most recent view of the current year's
performance.
The methodology used to determine the pre-tax discount rates (derived from the
weighted average cost of capital ('WACC') for the Group of 9.5%) plus a
blended country risk premium for each CGU, remained consistent with that
adopted at 30 April 2022, as disclosed in the 2022 financial statements,
updated for current rates as at 31 October 2022.
The modelling is based upon anticipated discounted future cash flows. At 31
October 2022, assessments performed indicated sufficient headroom existed.
Whilst the Directors believe the assumptions used are realistic, it is
possible that a reduction in the headroom would occur if any of the above key
assumptions applied were adversely changed. Factors which could cause an
impairment are:
· significant and prolonged underperformance relative to the
forecast; and
· deteriorations in the economies in which the Group operates.
To support their assertions, the Directors have reviewed the sensitivity
analyses to determine the impact that would result from the above situations,
including reduction or delays in future growth and increased discount rates
and have concluded that no reasonably possible scenarios have been identified
where headroom would be eradicated. In these cases, if estimates of future
economic growth were delayed, or if the estimated discount rates applied to
the cash flows were increased by 0.5%, there would continue to be adequate
headroom to support the carrying value of the assets assessed. Accordingly,
the Directors believe that a reasonably possible change in any of the key
assumptions detailed above would not cause the carrying value of CGUs assessed
to exceed their recoverable amounts, although the headroom would decrease.
Therefore, no impairments were identified against the carrying value of
goodwill at 31 October 2022.
2. Segment reporting
Operating segments
Half year ended 31 October 2022 Northern Southern Eastern North Total continuing operations
Europe
Europe
Europe
America
£m
£m
£m
£m
£m
External revenue 1,624 1,672 648 355 4,299
Adjusted EBITDA(1) 141 311 61 59 572
Depreciation (56) (59) (23) (16) (154)
Adjusted operating profit(1) 85 252 38 43 418
Unallocated items:
Amortisation (62)
Adjusting Items (note 3) (7)
Total operating profit 349
Unallocated items:
Net financing costs (35)
Share of profit of equity accounted investments, net of tax 1
Profit before income tax 315
Income tax expense (83)
Profit for the period 232
Analysis of total assets and total liabilities
Segment assets 2,282 3,755 1,217 1,335 8,589
Unallocated items:
Equity accounted investments and other investments 34
Derivative financial instruments 1,134
Cash and cash equivalents 656
Tax 39
Assets classified as held for sale 2
Total assets 10,454
Segment liabilities (1,429) (1,141) (306) (122) (2,998)
Unallocated items:
Borrowings, overdrafts and interest payable (1,643)
Derivative financial instruments (300)
Tax (669)
Dividend payable (140)
Employee benefits (112)
Total liabilities (5,862)
1. Adjusted to exclude amortisation and adjusting items.
Half year ended 31 October 2021 Northern Southern Eastern North Total continuing operations
Europe
Europe
Europe
America
£m
£m
£m
£m
£m
External revenue 1,331 1,234 523 274 3,362
Adjusted EBITDA(1) 143 175 53 52 423
Depreciation (56) (53) (22) (16) (147)
Adjusted operating profit(1) 87 122 31 36 276
Unallocated items:
Amortisation (69)
Total operating profit 207
Unallocated items:
Net financing costs (36)
Share of profit of equity accounted investment, net of tax 4
Profit before income tax 175
Income tax expense (40)
Profit for the period 135
Analysis of total assets and total liabilities
Segment assets 2,067 3,384 1,044 1,214 7,709
Unallocated items:
Equity accounted investments and other investments 57
Derivative financial instruments 360
Cash and cash equivalents 744
Tax 57
Assets classified as held for sale 1
Total assets 8,928
Segment liabilities (1,112) (832) (232) (117) (2,293)
Unallocated items:
Borrowings, overdrafts and interest payable (2,213)
Derivative financial instruments (124)
Tax (425)
Dividend payable (111)
Employee benefits (153)
Total liabilities (5,319)
1. Adjusted to exclude amortisation and adjusting items.
3. Adjusting items
Items are presented as adjusting in the financial statements where they are
significant items of financial performance that the Directors consider should
be separately disclosed to assist in the understanding of the trading and
financial results of the Group. Such items include business disposals,
restructuring and optimisation, acquisition related and integration costs, and
impairments.
Continuing operations Half year ended Half year ended Year ended
31 October 2022
31 October 2021
30 April 2022
Unaudited
Unaudited
Audited
£m
£m
£m
Acquisition related costs (7) - (1)
Gains on acquisitions and divestments - 4 3
Net (loss)/gain on acquisitions and divestments (7) 4 2
Other restructuring costs - (4) (8)
Impairment of associate - - (29)
Total pre-tax adjusting items (recognised in operating profit) (7) - (35)
Finance costs adjusting items - (2) (2)
Current tax credit on adjusting items - 2 2
Total post-tax adjusting items (7) - (35)
Half year ended 31 October 2022
On 1 September 2022, the put option for the final 10% stake in Interstate
Resources crystallised. A charge of £7m has been recognised in respect of
this crystallisation. Settlement is expected in the second half of the
year ended 30 April 2023.
Half year ended 31 October 2021
On 12 October 2021 the Group sold the De Hoop paper mill in the Netherlands.
Cash consideration, net of cash and cash equivalents and transaction costs,
was £37m and net assets divested were £29m, resulting in a net gain of £8m.
In addition, there were £4m of site disposal costs.
Other restructuring costs of £4m primarily comprise a reorganisation and
restructuring project across the Packaging business (£3m), focusing
predominantly on reduction of indirect costs.
Finance costs adjusting items related to the unwind of the discount on the
redemption liability related to the purchase of Interstate Resources.
The current tax credit on adjusting items of £2m for the half year ended 31
October 2021 was the tax effect at the local applicable tax rate of adjusting
items that are subject to tax. This excluded non-tax-deductible deal related
advisory fees in relation to acquisitions and divestments.
4. Employee benefits
Movements in the net employee benefit deficit recognised in the Condensed
consolidated statement of financial position:
Half year ended Half year ended Year ended
31 October 2022
31 October 2021
30 April 2022
Unaudited
Unaudited
Audited
£m
£m
£m
Opening employee benefit deficit (86) (175) (175)
Divestments - 1 1
Expense recognised in operating profit (3) (3) (5)
Employment benefit net finance expense (excluding Pension Protection Fund - (1) (3)
levy)
Employer contributions 11 10 21
Other payments and contributions 2 1 5
Actuarial (losses)/gains
- Assets (260) (61) (57)
- Liabilities 226 72 125
Currency translation (2) 3 2
Closing employee benefit deficit (112) (153) (86)
Deferred tax asset 28 38 21
Closing net employee benefit deficit (84) (115) (65)
5. Finance income and costs
Continuing operations Half year ended Half year ended Year ended
31 October 2022
31 October 2021
30 April 2022
Unaudited
Unaudited
Audited
£m
£m
£m
Interest income from financial assets (1) - (1)
Finance income (1) - (1)
Interest on borrowings and overdrafts 23 23 47
Interest on lease liabilities 5 5 11
Other 8 5 10
Finance costs before adjusting items 36 33 68
Finance costs adjusting items (note 3) - 2 2
Finance costs 36 35 70
6. Income tax expense
Tax on profit from continuing operations has been charged at an underlying
rate before adjusting items and amortisation of 25.0% (half year ended 31
October 2021: 24.0%), being the expected effective full year rate.
7. Earnings per share
Basic earnings per share from continuing operations
Half year ended Half year ended Year ended
31 October 2022
31 October 2021 30 April 2022
Unaudited
Unaudited
Audited
Profit from continuing operations attributable to ordinary shareholders £232m £135m £280m
Weighted average number of ordinary shares 1,376m 1,373m 1,374m
Basic earnings per share 16.9p 9.8p 20.4p
Diluted earnings per share from continuing operations
Half year ended Half year ended Year ended
31 October 2022 31 October 2021 30 April 2022
Unaudited
Unaudited Audited
Profit from continuing operations attributable to ordinary shareholders £232m £135m £280m
Weighted average number of ordinary shares 1,376m 1,373m 1,374m
Potentially dilutive shares issuable under share-based payment arrangements 4m 7m 8m
Weighted average number of ordinary shares (diluted) 1,380m 1,380m 1,382m
Diluted earnings per share 16.8p 9.8p 20.3p
The number of shares excludes the weighted average number of the Company's own
shares held as treasury shares during the period of 2m (half year ended 31
October 2021: 1m, year ended 30 April 2022: 2m).
Adjusted earnings per share from continuing operations
Adjusted earnings per share is a key performance measure for management
long-term remuneration and is widely used by the Group's shareholders.
Adjusted earnings is calculated by adding back the post-tax effects of both
amortisation and adjusting items.
Further detail about the use of non-GAAP performance measures, including
details of why amortisation is excluded, is given in note 14.
A reconciliation of basic to adjusted earnings per share is as follows:
Half year ended Half year ended Year ended
31 October 2022 31 October 2021 30 April 2022
Unaudited
Unaudited
Audited
£m Basic Diluted £m Basic Diluted £m Basic Diluted
pence
pence
pence
pence
pence
pence
per share
per share
per share
per share
per share
per share
Basic earnings 232 16.9p 16.8p 135 9.8p 9.8p 280 20.4p 20.3p
Add back:
Amortisation of intangible assets 62 4.4p 4.4p 69 5.0p 5.0p 138 10.0p 9.9p
Tax credit on amortisation (13) (0.9p) (0.9p) (16) (1.2p) (1.2p) (31) (2.3p) (2.3p)
Adjusting items, before tax 7 0.5p 0.5p 2 0.1p 0.1p 37 2.7p 2.7p
Tax on adjusting items and adjusting tax items - - - (2) - (0.1p) (2) (0.1p) (0.1p)
Adjusted earnings 288 20.9p 20.8p 188 13.7p 13.6p 422 30.7p 30.5p
8. Dividends proposed and paid
Pence £m
per share
2020/21 interim dividend - paid 4.0p 55
2020/21 final dividend - paid 8.1p 111
2021/22 interim dividend - paid 4.8p 66
2021/22 final dividend - declared and paid 10.2p 140
2022/23 interim dividend- declared 6.0p 83
Half year ended
31 October 2022
Unaudited
£m
Paid during the period 66
The 2021/22 interim dividend of 4.8 pence per share (£66m) was paid during
the half year ended 31 October 2022. The final dividend in respect of the year
ended 2021/22 of 10.2 pence per share (£140m) was paid on 1 November 2022.
An interim dividend in respect of the half year ended 31 October 2022 of 6.0
pence per share (£83m) has been proposed by the Directors after the reporting
date.
9. Cash generated from operations
Continuing operations Half year ended Half year ended Year ended
31 October 2022 31 October 2021
30 April 2022
Unaudited Unaudited
Audited
£m £m
£m
Profit for the period 232 135 280
Adjustments for:
Pre-tax integration costs and other adjusting items - 4 37
Amortisation of intangible assets; acquisitions and divestments 69 65 136
Cash outflow for adjusting items (2) (6) (13)
Depreciation 154 147 290
Loss/(profit) on sale of non-current assets 3 - (1)
Share of profit of equity accounted investments, net of tax (1) (4) (7)
Employment benefit net finance expense - 1 3
Share-based payment expense 4 4 10
Finance income (1) - (1)
Finance costs 36 35 70
Other non-cash items 12 (13) (17)
Income tax expense 83 40 98
Change in provisions 38 8 -
Employee benefit contributions (11) (10) (21)
Cash generation before working capital movement 616 406 864
Changes in:
Inventories (44) (104) (200)
Trade and other receivables (131) (182) (449)
Trade and other payables 313 283 864
Working capital movement 138 (3) 215
Cash generated from continuing operations 754 403 1,079
10. Net debt
At 31 October At 31 October At 30 April
2022 2021
2022
Unaudited Unaudited Audited
£m
£m
£m
Cash and cash equivalents 656 744 819
Bank overdrafts (196) (130) (73)
Net cash and cash equivalents 460 614 746
Other investments - restricted cash 6 3 3
Other deposits 33 34 30
Borrowings - after one year (1,419) (1,400) (1,391)
Borrowings - within one year (23) (674) (681)
Lease liabilities (202) (209) (203)
Derivative financial instruments
assets - 3 12
liabilities (2) (11) -
(1,607) (2,254) (2,230)
Net debt - reported basis (1,147) (1,640) (1,484)
IFRS 16 liabilities 200 206 201
Net debt excluding IFRS 16 liabilities (947) (1,434) (1,283)
Net debt is a non-GAAP measure not defined by IFRS. While the Group has
included lease liabilities after transition to IFRS 16 Leases within total
lease liabilities (in addition to arrangements previously classified as
finance leases under IAS 17), IFRS 16 liabilities are currently excluded from
the definition of net debt as set out in the Group's banking covenant
requirements. Within lease liabilities of £202m at 31 October 2022 are £200m
of lease liabilities that would have been classified as operating leases and
£2m of lease liabilities that would have been classified as finance lease
liabilities under IAS 17.
Further detail on the use of non-GAAP measures and a reconciliation showing
the calculation of adjusted net debt, as defined in the Group's banking
covenants, is included in note 14.
Derivative financial instruments above relate to forward foreign exchange
contracts and cross-currency swaps used to hedge foreign exchange exposure on
the Group's borrowings and net assets of foreign operations. The difference
between the amounts shown above and the total derivative financial instrument
assets and liabilities in the consolidated statement of financial position
relates to derivative financial instruments that hedge forecast foreign
currency transactions and firm commitments, and the Group's purchases of
energy.
Other deposits are included, as these short-term receivables have the
characteristics of net debt.
During the half year ended 31 October 2022, the Group repaid €500m
medium-term notes and $268m USD Private Placement notes.
11. Reconciliation of net cash flow to movement in net debt
Half year ended Half year ended Year ended
31 October 2022 31 October 2021
30 April 2022
Unaudited Unaudited
Audited
£m £m
£m
Profit for the period 232 135 280
Income tax expense 83 40 98
Share of profit of equity accounted investments, net of tax (1) (4) (7)
Net financing costs 35 36 72
Amortisation of intangible assets; acquisitions and divestments 69 65 136
Pre-tax integration costs and other adjusting items - 4 37
Adjusted operating profit 418 276 616
Depreciation 154 147 290
Adjusted EBITDA 572 423 906
Working capital movement 138 (3) 215
Change in provisions 38 8 -
Employee benefit contributions (11) (10) (21)
Other 19 (9) (8)
Cash generated from operations before adjusting cash items 756 409 1,092
Capital expenditure (163) (131) (431)
Proceeds from sale of property, plant and equipment and other investments 1 6 16
Tax paid (51) (50) (96)
Net interest paid (49) (46) (62)
Free cash flow 494 188 519
Cash outflow for adjusting items (2) (6) (13)
Dividends paid (66) (55) (166)
Acquisition of subsidiary businesses, net of cash and cash equivalents - (23) (23)
Divestment of subsidiary businesses, net of cash and cash equivalents - 37 35
Other 2 (4) (19)
Net cash flow 428 137 333
Proceeds from issue of share capital 4 2 7
Borrowings and leases divested - 1 1
Net movement on debt 432 140 341
Foreign exchange, fair value and other non-cash movements (95) 15 (30)
Net debt movement - continuing operations 337 155 311
Opening net debt (1,484) (1,795) (1,795)
Closing net debt - reported basis (1,147) (1,640) (1,484)
Adjusted operating profit, adjusted EBITDA, free cash flow, and net debt are
non-GAAP measures not defined by IFRS. Further detail on the use of non-GAAP
measures is included in note 14.
12. Financial instruments
Carrying amounts and fair values of financial assets and liabilities
Set out below is the accounting classification of the carrying amounts and
fair values of all of the Group's financial assets and liabilities:
At 31 October 2022 At 31 October 2021 At 30 April 2022
Unaudited
Unaudited
Audited
Category Carrying amount Fair value Carrying Fair Carrying Fair
£m
£m
amount value amount value
£m
£m
£m
£m
Financial assets
Cash and cash equivalents Amortised cost 656 656 744 744 819 819
Restricted cash Amortised cost 6 6 - - 3 3
Other investments Fair value through other comprehensive income 10 10 15 15 13 13
Trade and other receivables Amortised cost 1,386 1,386 1,010 1,010 1,229 1,229
Derivative financial instruments Fair value - hedging instruments 1,134 1,134 360 360 811 811
Total financial assets 3,192 3,192 2,129 2,129 2,875 2,875
Financial liabilities
Trade and other payables Amortised cost (2,848) (2,848) (2,141) (2,141) (2,540) (2,540)
Bank and other loans Amortised cost (6) (6) (19) (19) (6) (6)
Commercial paper Amortised cost (12) (12) (33) (33) (37) (37)
Medium-term notes and other fixed-term debt Amortised cost (1,424) (1,273) (2,022) (2,084) (2,029) (2,015)
Lease liabilities Amortised cost (202) (202) (209) (209) (203) (203)
Bank overdrafts Amortised cost (196) (196) (130) (130) (73) (73)
Derivative financial instruments Fair value - hedging instruments (300) (300) (124) (124) (84) (84)
Total financial liabilities (4,988) (4,837) (4,678) (4,740) (4,972) (4,958)
The fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. For financial instruments carried at fair value, market
prices or rates are used to determine fair value where an active market
exists. The Group uses forward prices for valuing forward foreign exchange and
commodity contracts and uses valuation models with present value calculations
based on market yield curves to value fixed rate borrowings and cross-currency
swaps. All derivative financial instruments are shown at fair value in the
consolidated statement of financial position.
Derivatives hedging energy and carbon certificate costs at 31 October 2022 are
stated net of margin calls to reduce counterparty exposure amounting to £311m
(31 October 2021: £85m).
The majority of the Group's medium-term notes and other fixed-term debt are in
effective net investment hedges. The fair values of financial assets and
liabilities which bear floating rates of interest or are short-term in nature
are estimated to be equivalent to their carrying amounts.
The Group's financial assets and financial liabilities are categorised within
the fair value hierarchy that reflects the significance of the inputs used in
making the assessments. The majority of the Group's financial instruments are
Level 2 financial instruments in accordance with the fair value hierarchy,
meaning that although the instruments are not traded in an active market,
inputs to fair value are observable for the asset and liability, either
directly (i.e. quoted market prices) or indirectly (i.e. derived from prices).
The Group's medium-term notes are Level 1 financial instruments, as the notes
are listed on the Luxembourg Stock Exchange. Certain pension investments are
Level 3 financial instruments. The fair value of other investments at fair
value through other comprehensive income is derived from fair value
calculations based on their cash flows.
13. Acquisitions and divestments
(a) Acquisitions and divestments in the half year ended 31 October 2022
On 1 September 2022, the put option for the final 10% stake in Interstate
Resources crystallised. A charge of £7m has been recognised in respect of
this crystallisation. Settlement is expected in the second half of the
year ended 30 April 2023.
(b) 2021/22 acquisitions and divestments
In total, during the half year ended 31 October 2021, cash consideration for
acquisition of subsidiary businesses, net of cash and cash equivalents, was
£23m. This included £19m for the remainder of the consideration for the
purchase of a further 10% stake in Interstate Resources on 26 June 2020 after
the exercise of a portion of the put option held by the sellers. Remaining
acquisitions are not material to the Group individually or in aggregate.
On 12 October 2021, the Group sold the De Hoop paper mill in the Netherlands.
Cash consideration, net of cash and cash equivalents and transaction costs,
was £37 million and leases divested were £1m.
14. Non-GAAP performance measures
The Group presents reported and adjusted financial information in order to
provide shareholders with additional information to further understand the
Group's operational performance and financial position.
The principal adjustments to financial information are made to exclude the
effects of adjusting items (refer to note 3) and amortisation.
Total reported financial information represents the Group's overall
performance and financial position, but can contain significant unusual or
non-operational items that may obscure understanding of the key trends and
position. These unusual or non-operational items include business disposals,
restructuring and optimisation project costs, acquisition-related and
integration costs, and impairments. Restructuring and optimisation items
treated as adjusting items are major programmes usually spanning more than one
year, with uneven impact on the profit and loss for those years affected.
Other adjusting items, such as business disposals, impairments, integration
and acquisition costs, are by nature either highly variable or can also have a
similar distorting effect. Therefore, the Directors consider that presenting
non-GAAP measures which exclude these adjusting items enables comparability of
the recurring core business, complementing the IFRS measures presented.
Amortisation relates primarily to customer contracts and relationships and
infrastructure optimisation projects arising from or as a result of business
combinations. Significant costs are incurred in maintaining, developing and
increasing the value of such intangibles, costs which are charged in
determining adjusted profit. Exclusion of amortisation remedies this double
count as well as, in the case of customer contracts and relationships,
providing comparability over the accounting treatment of customer contracts
and relationships arising from the acquisition of businesses and those
generated internally.
The Group's key non-GAAP measures are used both internally and externally to
evaluate business performance against the Group's KPIs and banking and debt
covenants, as a key constituent of the Group's planning process, as well as
comprising targets against which compensation is determined.
Certain non-GAAP performance measures can be, and are, reconciled to
information presented in the financial statements. Other financial key
performance measures are calculated using information which is not presented
in the financial statements and is based on, for example, average 12-month
balances or average exchange rates.
Key non-GAAP performance measures
The key non-GAAP performance measures used by the Group and their calculation
methods are as follows:
Adjusted operating profit
Adjusted operating profit is operating profit excluding the pre-tax effects of
both amortisation and adjusting items. Adjusting items include business
divestment gains and losses, restructuring and optimisation costs, acquisition
related and integration costs and impairments.
A reconciliation between reported and adjusted operating profit is set out on
the face of the consolidated income statement.
Operating profit before adjusting items
A reconciliation between operating profit and operating profit before
adjusting items is set out on the face of the consolidated income statement.
Other similar profit measures before adjusting items are quoted, such as
profit before income tax and adjusting items, and are directly derived from
the consolidated income statement, from which they can be directly reconciled.
Adjusted EBITDA
Earnings before interest, tax, depreciation and amortisation (Adjusted EBITDA)
is adjusted operating profit excluding depreciation. A reconciliation from
adjusted operating profit to adjusted EBITDA is provided in note 11.
Adjusted earnings per share
Adjusted earnings per share is basic earnings per share adjusted to exclude
the post-tax effects of adjusting items and amortisation. Adjusted earnings
per share is a key performance measure for management long-term remuneration
and is widely used by the Group's shareholders.
A reconciliation between basic and adjusted earnings per share is provided in
note 7.
Return on sales
Return on sales is adjusted operating profit measured as a percentage of
revenue. Return on sales is used to measure the value we deliver to customers
and the Group's ability to charge for that value.
Half year ended Half year ended Year ended
31 October 2022
31 October 2021
30 April 2022
£m
£m
£m
Adjusted operating profit 418 276 616
Revenue 4,299 3,362 7,241
Return on sales 9.7% 8.2% 8.5%
Adjusted return on average capital employed (ROACE)
ROACE is the last 12 months' adjusted operating profit as a percentage of the
average monthly capital employed over the previous 12 month period. Capital
employed is the sum of property, plant and equipment, right-of-use assets,
goodwill and intangible assets, working capital, capital debtors/creditors,
provisions, biological assets and assets/liabilities held for sale.
Half year ended Half year ended Year ended
31 October 2022
31 October 2021
30 April 2022
£m
£m
£m
Capital employed 5,757 5,589 5,578
Currency, inter-month and acquisition/divestment movements (7) 258 113
Last 12 months' average capital employed 5,750 5,847 5,691
Last 12 months' adjusted operating profit 758 548 616
Adjusted return on average capital employed 13.2% 9.4% 10.8%
Net debt and net debt/EBITDA
Net debt is the measure by which the Group assesses its level of overall
indebtedness within its financial position. The components of net debt as they
reconcile to the primary financial statements and notes to the accounts are
disclosed in note 10.
Net debt/EBITDA is the ratio of net debt to adjusted EBITDA, calculated in
accordance with the Group's banking covenant requirements.
Net debt/EBITDA is considered a key measure of balance sheet strength and
financial stability by which the Group assesses its financial position.
The Group's banking covenant requirements currently exclude IFRS 16
liabilities from the definition of net debt, as well as requiring that EBITDA
is calculated before the effects of IFRS 16, so an adjustment to the previous
IAS 17 basis is made in the calculation.
In calculating the ratio, net debt is stated at average rates as opposed to
closing rates, and adjusted EBITDA is adjusted operating profit before
depreciation from the previous 12 month period adjusted for the full year
effect of acquisitions and divestments in the period, and adjusted to an IAS
17 basis.
Half year ended Half year ended Year ended
31 October 2022 31 October 2021
30 April 2022
£m £m
£m
Net debt - reported basis (see note 10) 1,147 1,640 1,484
IFRS 16 lease liabilities (see note 10) (200) (206) (201)
Adjustment to average rate (12) 32 13
Net debt - adjusted basis 935 1,466 1,296
Adjusted EBITDA - last 12 months' reported basis (continuing operations) 1,055 844 906
Adjust to IAS 17 basis (78) (80) (78)
Acquisition and divestment effects - (4) (7)
Adjusted EBITDA - banking covenant basis 977 760 821
Net debt/EBITDA 1.0x 1.9x 1.6x
Free cash flow
Free cash flow is the net movement on debt before cash outflow for adjusting
items, dividends paid, acquisition and divestment of subsidiary businesses
(including borrowings acquired), and proceeds from issue of share capital.
A reconciliation from Adjusted EBITDA to free cash flow is set out in note 11.
Cash conversion
Cash conversion is free cash flow, as defined above, adjusted to exclude tax,
net interest, growth capital expenditure and employee benefit contributions as
a percentage of adjusted operating profit. The cash conversion rate can be
derived directly from note 11, other than growth capital expenditure, which is
capital expenditure necessary for the development or expansion of the
business.
Half year ended Half year ended Year ended
31 October 2022 31 October 2021
30 April 2022
£m £m
£m
Growth capital expenditure 65 49 176
Non-growth capital expenditure 98 82 255
Total capital expenditure 163 131 431
Free cash flow (note 11) 494 188 519
Tax paid (note 11) 51 50 96
Net interest paid (note 11) 49 46 62
Growth capital expenditure 65 49 176
Employee benefit contributions (note 11) 11 10 21
Adjusted free cash flow 670 343 874
Adjusted operating profit 418 276 616
Cash conversion 160% 124% 142%
Average working capital to sales
Average working capital to sales measures the level of investment the Group
makes in working capital to conduct its operations. It is measured by
comparing the average monthly working capital balances for the previous 12
months as a percentage of revenue over the same period. Working capital is the
sum of inventories, trade and other receivables, and trade and other payables,
excluding capital and acquisition and divestment related debtors and
creditors.
Half year ended Half year ended Year ended
31 October 2022
31 October 2021
30 April 2022
£m
£m
£m
Inventories 758 624 703
Trade and other receivables 1,341 974 1,189
Trade and other payables (2,536) (1,869) (2,372)
Inter-month movements and exclusion of capital and acquisition and divestment 146 89 241
related items
Last 12 months' average working capital (291) (182) (239)
Last 12 months' revenue 8,178 6,449 7,241
Average working capital to sales (3.6%) (2.8%) (3.3%)
Constant currency and organic growth
The Group presents commentary on both reported and constant currency revenue
and adjusted operating profit comparatives in order to explain the impact of
exchange rates on the Group's key income statement items. Constant currency
comparatives recalculate the prior year revenue and adjusted operating profit
as if they had been generated using the current year exchange rates. In
addition, the Group then separates the incremental effects of acquisitions
made in the current year, and the incremental effects of acquisitions made in
the previous year, to determine underlying organic growth. The table below
shows the calculations:
Revenue Adjusted operating profit
£m
£m
Reported basis - comparative half year ended 31 October 2021 3,362 276
Currency effects 38 4
Constant currency basis - comparative half year ended 31 October 2021 3,400 280
Organic growth 899 138
Reported basis - half year ended 31 October 2022 4,299 418
15. Related party transactions
In response to the market turmoil following the mini-budget, the Group made
funding support of up to £100m available to the main UK defined benefit
pension scheme. This took the form initially of a cash advance in
anticipation of potential margin calls and latterly a liquidity facility. The
cash advance was fully repaid within days of being made and as at 31 October
2022 a liquidity facility remained in place but was undrawn.
16. Subsequent events
There are no subsequent events after the reporting date which require
disclosure.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact
rns@lseg.com (mailto:rns@lseg.com)
or visit
www.rns.com (http://www.rns.com/)
.
RNS may use your IP address to confirm compliance with the terms and conditions, to analyse how you engage with the information contained in this communication, and to share such analysis on an anonymised basis with others as part of our commercial services. For further information about how RNS and the London Stock Exchange use the personal data you provide us, please see our
Privacy Policy (https://www.lseg.com/privacy-and-cookie-policy)
. END IR TRBLTMTBMBIT