DS Smith : Annual financial and audit reports Final Results

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22 June 2023

DS SMITH PLC - 2022/23 FULL-YEAR RESULTS

EXCELLENT PERFORMANCE IN CHALLENGING MARKETS

12 months to 30 April 2023		Change	Change
Continuing operations		(reported)	(constant currency)
Revenue	£8,221m	+14%	+11%
Adjusted operating profit(1)	£861m	+40%	+35%
Profit before tax	£661m	+75%	+71%
Adjusted basic EPS(1)	43.0p	+40%	+34%
Statutory basic EPS	35.8p	+75%	+71%
Dividend per share	18.0p	+20%	NA
Return on sales (RoS)(2)	10.5%	+200bps	+190bps
ROACE(3)	14.3%	+350bps	+350bps
See notes to financial table below

• Excellent adjusted operating profit growth of 35% driven by improved product "added value" and effective cost mitigation more than offsetting volume declines and a more challenging inflationary environment
• Strengthening customer relationships driving record customer ratings and contract wins
• Good free cash flow of £354m(8) reducing leverage to 1.3x net debt/EBITDA (2021/22: 1.6x)
• Continued momentum in plastic replacement with 762 million units of plastic replaced since 2020 and 297 million in 2022/23
• Further improvements in sustainability metrics and ESG ratings
• Continued investment in innovation, capacity, efficiency and environmental projects
• Current trading in line with our expectations

Miles Roberts, Group Chief Executive, commented:

"The performance of the business during the year has been excellent, despite the challenging economic environment and I am extremely proud of all our colleagues for their dedication and support. We have had an unremitting focus on meeting our customers' rapidly changing needs with new innovation. This, together with high levels of service and our sustainability performance, has been rewarded through market share gains during the period.

Our operational, environmental and financial performances have all been strong through the year. Our service levels have remained very high, supporting our customers through our robust and flexible supply chain. We have made excellent progress in reducing the environmental impact of our business, and also helped customers replace c.300 million pieces of plastic with fibre-based alternatives during the year. Our cost and risk management, together with price increases to reflect multi-year cost inflation, have more than offset reduced volumes during the year and delivered the excellent growth in profit and returns.

While economic conditions have continued to be volatile and box volumes have remained lower than normal, trading for the year to date is in line with our expectations. Our

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strong customer relationships in the resilient FMCG sector, together with the investments we are making to drive cost efficiencies and growth, give us confidence for the future."

Enquiries
DS Smith Plc	[phone]
Investors
Hugo Fisher, Group Investor Relations Director
Anjali Kotak, Investor Relations Director
Media
Greg Dawson, Corporate Affairs Director
Brunswick	[phone]
Simon Sporborg
Dan Roberts

There will be a webcast audio presentation today at 9:00am BST with the slides of the full- year results, followed by a live Q&A, given by Miles Roberts, Group Chief Executive, Adrian Marsh, Group Finance Director and Richard Pike, Group Finance Director Designate.

To access the webcast, please register here. A copy of the slides presented will also be available on the Group's website, https://www.dssmith.com/investors/results-and-presentationsshortly 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): [phone]

Dial-in number (UK Toll Free): 0808 109 0700

Password: DS Smith

An audio file will also be available on https://www.dssmith.com/investors/results-and-presentations

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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. Adjusted operating profit (adjusted EBITA) is before adjusting items (as set out in note 3) and amortisation of £113 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 12 months basis (based on area (m2) of corrugated box sold), adjusted for working days, on an organic basis.
5. GDP growth for rolling 12 months (year-on-year) for the countries in which DS Smith operates, weighted by our sales by country = 3%. Source: Eurostat (16 May 2023) 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.

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Operating Review

Deep customer relationships and cost mitigation driving profit growth

The macro-economic backdrop has remained challenging, with overall market demand worse than we originally expected, particularly in the second half of the year when we saw an impact from de-stocking by our customers and weak end consumer demand, leading to a full-year decline in our like for like box volumes of 5.8 per cent(4). The medium-term target for box volume growth of GDP+1% was 3% and has been heavily distorted by inflation. Despite this, our strong customer relationships and focus on quality and service enabled us to gain market share with the more resilient fast moving consumer goods (FMCG) and other consumer related sectors, now representing 84 per cent of our volumes.

For the twelve month period, revenue grew to £8,221 million (2021/22: £7,241 million), up 11 per cent on a constant currency basis and 14 per cent on a reported basis with the decline in box volumes (£295 million) more than offset by higher selling prices (£1,196 million) across the Group which reflect the lag in recovery of the increases in input costs during the period 2021 to 2023. £1,026 million of this increase was due to higher packaging prices with the remainder of £170 million due to increases in the price of external sales of paper and energy, offset by a decline in the price of recycling materials.

The impact of box and other volume decline led to a (£99 million) reduction in adjusted operating profit. Despite our continued cost and risk mitigation programmes, input costs were significantly impacted by inflationary price rises which led to an increase in costs, excluding the impact of volume declines, of £872 million versus the comparable period with rises in raw materials costs of £426 million, energy costs of £73 million and other costs, including labour and distribution, of £373 million. The impact of higher energy costs have been mitigated by our 3 year rolling energy hedging programme and reduced consumption as we managed paper production particularly in the second half of the year.

Group return on sales grew during the year to 10.5 per cent (2021/22: 8.5 per cent), and within our medium-term target range of 10% - 12% reflecting the increase in profitability despite the dilutive impact of inflation on both revenues and costs.

Basic earnings per share from continuing operations grew 71 per cent on a constant currency basis to 35.8 pence. Adjusted basic earnings grew by 34 per cent on a constant currency basis to 43.0 pence per share, reflecting the growth in profitability.

Return on average capital employed increased significantly by 350 bps to 14.3 per cent. The improving trend in profitability through the year combined with the improving returns from acquisitions and investments means ROACE was at the upper end our medium-term target range of 12 to 15 percent.

Cashflow and net debt

During the year, the Group generated free cash flow(8) of £354 million (2021/22: £519 million), reflecting strong profits partly offset by a working capital outflow and increased capital expenditure spend. Cash conversion(7,8), as defined in our financial KPIs (note 14), was 101 per cent, in line with our target of being at or above 100 per cent.

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The working capital outflow of £121 million included a net benefit in the year of £69 million in respect of margin calls to manage our energy hedging position. The remaining balance of £181 million as at 30 April 2023 is expected to reverse in our financial year to 30 April 2024. The underlying working capital outflow reflects a decline in energy and raw material prices, principally paper, at the end of the financial year, partly mitigated by good cash collection and inventory management.

Cash generated from operations before adjusting cash items of £1,092 million (2021/22: £1,092 million) was used to invest in net capex of £526 million, which increased by 27 per cent on the prior year. We have continued to invest in a number of ongoing customer-led projects together with our de-carbonisation and energy efficiency programmes.

Net debt as at 30 April 2023 was £1,636 million (30 April 2022: £1,484 million), principally due to the increased capital expenditure and working capital outflow described above, together with an additional interim dividend cash payment due to a change in the timing of payments, as well as adverse movement in foreign exchange. Our net debt/EBITDA(6) ratio (calculated in accordance with our banking covenant requirements) improved to 1.3 times (2021/22: 1.6 times), substantially below our banking covenant of

3.75 times and within our medium-term target of at or below 2.0 times. The final payment of the Interstate put option was delayed by the beneficiary and had it been paid our leverage would have been 1.4 times. Standard & Poor's have reconfirmed our investment grade credit rating with a stable outlook. The Group remains fully committed to maintaining its investment grade credit rating.

Investing for growth

Over the last decade the Group has grown strongly through organic and inorganic growth as we have built a comprehensive platform of geographic coverage and capability to support our customers in our chosen markets. The structural drivers for growth in corrugated packaging remain more relevant than ever and support our long-term strategy of fully fibre-based solutions for a predominantly FMCG customer base. The consistent progress with our customers, as evidenced by record customer rating metrics and continued market share gains, gives us the confidence to invest further to support customers, drive growth and deliver attractive returns.

Our capital expenditure for 2023/24 is expected to be around £500 million. In addition to maintenance and health and safety focussed expenditure, this will be allocated across three main areas: investing in new product and service innovation including helping our customers drive their sustainability agendas; investing in our capacity and capability in both our packaging operations and aligning our paper capability to our customer needs; and investing to drive environmental and operational efficiency. We continue to invest to achieve our Science Based Targets initiative approved CO2 reduction target of 46 per cent from 2019 to 2030 and our commitment to achieving net zero carbon emissions by 2050.

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. Our

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