DS Smith PLC
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DS Smith PLC
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Good morning, and welcome to the DS Smith Q1 Trading Statement Call. My name is Rosie, and I'll be your coordinator for today's conference. [Operator Instructions] I will now hand you over to Miles Roberts to begin today's conference. Thank you.
Good morning, everybody, and thank you for joining us today. I'm Miles Roberts, the CEO of DS Smith, and I'm joined here by Adrian Marsh, our CFO. Our trading statement released this morning relates to the period of trading since the 1st of May 2018. We continue to be excited by our prospects. Our focus on sustainable packaging in resilient and growing sectors, including FMCG and e-commerce, is consistently driving our market share gain. We are seeing good like-for-like volume growth in the year-to-date, with progress in all geographic regions. Recovery of input cost increases from earlier in the calendar year is in line with our expectations, with the consequent positive margin effect. Cash flows also remained a focus in the period as we maintain a disciplined approach to working capital and CapEx. Trading remains in line with our expectations. It is now a year since we acquired Interstate Resources in North America, and it continues to perform very strongly. Integration continues to go well and we have added additional capacity and further enhanced our customer offering via the acquisition of Corrugated Container Corporation, which completed on the 1st of June. We're delighted with the customer reaction, with a number of our major customers seeking to and partnering with DS Smith for their packaging solutions, not only throughout Europe, but now in the U.S. as well. And turning to Europac, you'll recall that we are partway through the acquisition process. The required regulatory approval process is progressing as expected, and we anticipate completion in calendar Q4 2018, as previously indicated.So in summary, I'm pleased with our momentum in the year-to-date. Corrugated packaging continues to demonstrate excellent growth prospects, driven by changing shopping habits, e-commerce and the ever-increasing relevance of sustainability, and DS Smith is in a wonderful position as the market leader to capitalize on these opportunities. And the board looks future -- looks forward to the future with confidence. Thank you. I'd now like to invite any questions either for myself or Adrian. Thank you.
[Operator Instructions] And the first question comes from the line of Barry Dixon from Davy.
A couple of questions from me, Miles, if you don't mind. Firstly, just in terms of the volume, you're talking about decent good like-for-like growth across the piece. You might just maybe give us a bit more sort of color around that, particularly, I suppose, looking at the underlying market, what you think the underlying market is growing by and then how much you think e-commerce and that sort of whole move from plastics to paper is adding to the volume growth environment for you? Secondly, just in terms of raw material costs, we're hearing a lot about OCC pricing and the impact of Chinese tariffs, particularly on U.S. imports of OCC. Maybe just your own thoughts around OCC costs in Europe. And then, finally, on corrugated pricing, you've previously guided to 8% to 10% increase in corrugated pricing. Are you still happy with that guidance? Or do you think that there could be more, from a pricing perspective, that you can achieve from that -- from those levels?
Thank you, Barry. Yes, volume continues to be very, very good. Historically, we've been doing around about 3% like-for-like. Last year, it moved up to 5%. And I expect us to be somewhere between the 2 of those, hopefully, more towards the upper end of it. We're only through the first quarter, but the demand is still very strong. You talked about e-commerce in there. E-commerce overall for us, in terms of percentage of our sales, is in the sort of a 12%, something like that, range. That's growing steady, about 15% per annum, so you can see 15% as well, that's going to give us like-for-like of well over 1%. On the sustainability, it's been difficult to understand exactly why people have chosen our product. Is it sustainability? Is it the service? Is it innovation, et cetera, et cetera? But there's no doubt that it's a good tailwind. I think we're still at the early stage of it. There's a lot more that can be done here. It's not sort of the complete replacement of plastics, it's that steady erosion of the plastics market share, taking plastic out wherever possible. What does it give us? It's really difficult to say. We've actually started asking customers exactly why and it's just to understand how well we're doing in this area. I'll be surprised if there's probably, this is purely a guess, it could be another 0.5% or something like that, perhaps 0.75%, but it is difficult to know as there are a number of things, obviously, in our offer. But it's certainly a tailwind, and I have to say it shows absolutely no sign of abating at all. I think in some ways a number of customers have been surprised just how easy it is just to change to a much more sustainable solution. I want to say change. A lot of it's quite sticky, I think an excellent chance of retaining these over the long term. Nice structural market growth there. When you come to OCC, I mean, this is a very fluid area. You're absolutely right, Barry. There have been tariffs put on between the U.S. and China. What's going to happen? We expect these very tight restrictions on imports into China to remain there. Interestingly, China isn't importing the amount of OCC that it actually has licenses for, and it's all around the quality. So we expect China to remain -- volumes of OCC into China to remain low. What does that mean for OCC pricing? Well, collection makes Germany continue to improve. If I had to guess, and it is an extremely volatile area, I think we're going to see the next 6 months, I think OCC is going to remain very subdued. It's difficult to see why that will change in the absence of a change in China. But of course, China could change. I mean, they just introduced these new regulations, they could move back. So it remains a volatile area, but I think OCC is probably likely to stay low, probably over the next 6 months. And that leaves us the other side of it. There obviously has been a very strong demand for paper, both in the U.S. and in Europe. The demand remains strong. Prices are stable, but obviously much higher than they have been. As I said previously, we're looking to pin an exact region, 8% to 10%. Prices on paper in Germany have been pretty static now for some time. So we remain on the 8% to 10% level, and we are recovering absolutely in line with that, and it's rebuilding the margins from, I think, second half last year, we're 9.4%, so full year, 9.2%. So it's having the -- it's having a positive effect on that margin with that volume increase as well and the operational leverage we get from that.
The next question comes from the line of Kevin Fogarty from Numis Securities.
Just a couple. I guess, just firstly on plastics, appreciate there's nothing sort of conclusive you can sort of say on it, but I just wondered if you can sort of talk around sort of levels of interest and just a bit more detail on any progress you've made there. And just secondly, North America continues to perform very strongly. A couple of months ago, you sort of talked about sort of transcontinental deals and just customer reaction there. I just wondered if you could put a little bit more color on that at this point, so anything further to add there?
Look, with plastics, we have started the whole review. There's, as you can imagine, there's quite a bit of work to do on the asset to fully review it and prepare it for what we want to do. That work has gone extremely well. There's been, at the same time, we've had a lot of inbound interest. It's a very attractive business. It's growing quite nicely. There are a number of other players out there who have smaller positions but really quite synergistic. So we remain really very optimistic about the attractiveness of this asset. I'd say the work is going absolutely as we expected and so it's going well, it's going well. Yes, North America, we are -- as I said, their performance has been very strong. We are delighted with the reception that we've had from our customers, I say, plus all of our new employees there as well. We've really been delighted with that. We have now signed up a number of customers in the U.S. that we've really, where the relationship has been in Europe, looking for the same solutions, all the shelf-ready packaging, all of the performance-based packaging that for us has just been such a differentiator in Europe and has been very well received there, so we have signed up a number of them. We have, interestingly, with some larger customers working on and developing these framework agreements, and we really do like these. They just set the overall premise about what we're both trying to achieve. It sets the -- our objectives together, how we're going to work, et cetera. And we've been working on these with some customers. We're very pleased with that. It's really driven somewhat very strong volume growth we saw in the U.S. last year. Obviously, we talk about North America at the half -- at this half year. But it's all around the service, the innovation, the performance packaging, and we remain very optimistic about it. It's one of the reasons we bought the CCC, that container corporation business, again, very well received. It's just these areas we want to go into. And as you know, we're taking the lightweight paper from Europe across this space. We're bringing paper back from the east coast, so it's working very well for us indeed.
The next question comes from the line of Cole Hathorn from Jefferies.
I was hoping you can call out some of the bright spots within your -- which regions are doing particularly better from kind of volume growth perspective. And then also on the Europac acquisition, what are the main outstanding points that need to be done before the deal will complete? And then, finally, with the big gap between OCC and testliner at the moment, I just wanted to confirm that you're not seeing any pushback from FMCG customers, et cetera, on passing through that box price increases?
Look, the -- in terms of the volume, across Europe, it is all of our regions are in good levels of growth. The areas that continue to perform well for us Eastern Europe continues to be good -- very good strong performer. The more mature economies, place like the U.K. and France, are continuing to improve, but not at the rate of Eastern Europe. But some of the other markets that we have entered into, places like Portugal have been strong, but I think the standout for us over a number of years continues to be Eastern Europe. People are -- our big customers continue to expand there. We've seen a number of companies from us, some of them are boasting moving production from the U.K. to Eastern Europe with all the fiscal uncertainty in the U.K., and we're benefiting from that quite strongly in that region. I think that now could be the standout over the last sort of 6 months really, it's been very good. Just on Europac, we've had all of our regulatory approvals -- sorry, had all of our approvals from our shareholders. We're working with the European Commission now on the antitrust clearance. Again, all of the work, the questions, et cetera, as we expected. Once we get through that, we have to go through this Spanish CNMV -- it's basically the equivalent of sort of the U.K. [ delay ] really where they sort of oversee, administer, takeover as we have to go through their process, which is a little bit more undefined in terms of its timetable. I mean, is it 5, 8, 10 days, 2 weeks, et cetera. But everything is going as we expected. Very good dialogue with Europac as, obviously, as far as we're allowed to. Quite pleased with the trading of Europac, it continues to go well. We've -- obviously, in their last statement, their Q2, et cetera, that all seems to be progressing very nicely. So expect clearance at the end -- towards the end of this calendar year. That's always been our view and it remains our view today. There have been no surprises to date. Obviously, the big thing, we are just, as always, extremely grateful for the support that we've had from our shareholders. You probably saw the way the votes came out for the Class 1 and the take-up of rights. It was a -- it's absolutely we're extremely grateful for that massive level of support that we've received. And OCC and testliner, it is low. I mean, you're right. If you look at the margins in paper there, they have certainly increased. Look, we have our deals with our big customers. A lot of it is indexation. Prices go up, they go down. The industries move. And all of that has gone as we expected. Clearly, we're outside of those index deals. All customers are always looking for the best deal. All of them will always be negotiating as hard as they can where you're outside of these index deals. And we expect that, it's always been the case, and I think it always will be the case. But equally, we are very confident about the offer that we give about the service, about the innovation, about our coverage, about our continued investments into our business. And on that basis, we've been able to recover exactly as we've expected. And as I said, rebuild the margins. In the second half of last year, we're 9.4%. I mean, we've -- we haven't often been better than that. So you can see we're certainly moving in the right direction.
The next question comes from the line of Alex Mees from JPMorgan.
Just one question on Interstate. Obviously, the growth has been very strong since you acquired the business and you commented for the reasons for that. I'm just wondering where you are with capacity utilization and whether, notwithstanding the acquisition that you've done, whether there's some bottlenecks that you need to address, either through organic CapEx or further M&A.
Yes, I think I'll just answer this, Alex. It's Adrian here. We talked about -- or Miles mentioned the Corrugated Containers giving us the additional capacity we needed in the short term. I think looking forward, we've definitely got a requirement to maintain the organic growth. Inorganic growth always remains an option and we always got an eye to that. But in as far as what's in our control, we're currently working up a new site, a greenfield site, which will come into play sometime in the next 12 to 18 months, depending on when will that permitting takes place, and we've got the site in mind. So that comes out in CapEx, not this year, will be out in the next year. We'll talk about that probably at the half year and the full year. But nothing that changes where that -- our overall capital direction of capital is it's a reallocation issue. But yes, there's undoubtedly a need for some capacity. I mean, the growth has been very strong. The demand has been very strong. It's a decent problem to have. And the key for us now is where we locate it to maximize the impact, and the team has been working exceptionally hard on that and has a plan for the first one and potentially going forward at some point in time, a second and a third one. It's just how we're looking at where we grow the business and where the demand will be. But it's a question of building out where we've got the strong demand, Southeast, Midwest, very good business, very good level of interest, very good supply chain that we've got in place. So yes, so then if that's what you were looking to hear, Alex. But in terms of where we are with Corrugated Containers, was the first part. We've got -- we remain committed to the greenfield we described before, likely next year -- next financial year. And then going forward, we'll review over time. And clearly, North America, we discussed at our Capital Markets Day, too.
No, that's very clear. I suppose just to follow up. I wonder if you can just comment on the competitor response in North America. I mean, obviously, Interstate doesn't have a huge market share at this stage, but I'm sure the major players there are very aware of what you can do. So have you detected any competitor response to entry?
I mean, just generally, we have many, many competitors. I mean, obviously, we think we're absolutely head and shoulders above everybody. But we've chosen a region -- we've chosen a part of U.S. where the demographics, the economies are growing very strongly. It's a great market to be in. Its growth and margins are high. We have entered -- we are there to enhance the knowledge and the use of corrugated packaging. We think this is a great product that customers need to use more in the U.S. So we're not out there doing me-toos. We're not running around talking to our -- to these American competitors, been a long time, they had been -- there are good companies in the U.S. We're trying to offer something different. And as long as you do that, you're not just doing a me-too and running around with just focusing on -- solely on pricing. And I think it creates a -- it creates an environment that customers like and, obviously, we like, then I think other people respect. So the response to date has always been -- is always competitive, it always is, but we are very pleased with the position that we're in and the reception that we're getting, and you can see that in our numbers that continue to move forwards. So it's a great market. We've got a great initial entry there. And I will say we're really trying to further and further the development of corrugated packaging there. There's a lot of opportunity in the U.S. for us and I'd say probably the whole industry there. I think it's a performance-based packaging, the whole thing about e-commerce, the sustainability agenda, I think there's a -- it's very attractive to be there.
[Operator Instructions] You have a question now from the line of Robert Chantry from Berenberg.
Just a question on kind of the long-term paper structure really, because, obviously, you've got an integrated model. You were short about 1.4 million tonnes before Europac. That will bring some more paper production into the business. But given you've seen such very high growth rates given the capacity issues talked about in North America, as you can see it's very strongly there, I just wondered if you can outline on a 3-, 5-year view how you're thinking like dealing with that. Will that require more acquisitions, more greenfield? Will you carry more upstream? I just wondered if you could talk about that.
Look, as a company, we're absolutely committed to our short paper position. We think, without question, that's the right position for shareholders throughout the European market. We absolutely recognize that the Europac acquisition completes, subject to the regulatory side, that will bring on more paper. We're growing our packaging volumes strongly. That will start to increase the short position. And as I said previously, we're also looking at our paper assets and just what is the -- just -- we're just looking at having a review of some of our paper assets. There's going to be more capacity coming on, particularly in and around Germany, over the next couple of years, and we just -- we're very sort of cognizant of that and this whole issue of where we put our capital. Looking forward, we've given CapEx guidance for the current year. We gave that on the full year, and I think we've said about GBP 270 million. We're absolutely -- that's absolutely where we expect to finish up. We have announced that we're going to build a number of greenfields. Originally said 2 in Europe, that's now come down with the Europac acquisition, but we'll still be going ahead with the other one. It's in the region where we're growing very strongly. And we've also announced some further investments in the U.S. But that's all in the guidance that we've given people going forward. So we're not expecting an explosion in CapEx at all. We've been investing in the company for many years and our asset base is a very good asset base. And we think, broadly, we have enough capacity to carry on growing in the -- organically. However, we do think there are opportunities for us to grow through acquisition. The first, the primary objective is to get Europac in, produce the synergies, hopefully, really delight our shareholders in terms of the returns we get from that business, and then we'll have another look at the market. But there are still a lot of opportunities for DS Smith to grow in Europe and the U.S. But the first thing is get Europac in, and any additional CapEx, [ et cetera, ] we need is all in the guidance that we've given the -- gave the shareholders already.
[Operator Instructions] Okay, we have no further questions coming through. So I will hand the call back to Miles for any concluding remarks.
So as always, thank you very much for your time to listen to us today. But in summary, we're pleased with momentum in the year-to-date. There's a lot of opportunity, and we look forward to the future with confidence. Thank you very much.
Thank you for joining today's conference. You may now replace your handsets.