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Hello and welcome to the DS Smith Q1 AGM trading statement.My name is Jess, and I'll be your coordinator for today's event. [Operator Instructions] I will now hand you over to your host, Miles Roberts, to begin today's call.Thank you.
Good morning, everybody, and firstly, thank you very much for joining us on this call today.I'm Miles Roberts, the Chief Executive; and I'm joined here with Adrian Marsh, our CFO.Our statement today covers our trading period since the 1st of May 2019. And overall, the business to -- continues to progress well despite the as-expected continued macroeconomic uncertainty, and our expectations for overall financial performance remain unchanged. Our excellent customer engagement and differentiators of scale, service, quality and innovation have enabled strong pricing discipline. This, combined with ongoing cost efficiencies and focus on cash generation, together with new business wins in Europe and in the U.S., give us confidence in our resilient business model despite the ongoing subdued volumes in some markets, in particular those economies with significant export-led exposure, including Germany.We continue to win with our customers, and as such, we expect an improving trend in our volumes through this financial year as we previously indicated. Strategically, we completed the remedy disposals in June. Our paper optimization review continues. And we expect -- and we continue to expect completion of the disposal of our Plastics division before the end of this calendar year. Europac integration and synergy delivery are progressing very well, with excellent customer and employee engagement. The construction of our new state-of-the-art greenfield packaging plant in Indiana, which will enhance our capability in the U.S. by around 1/3 of our capacity and reduce our long lay -- paper position, is fully on track and production is expected to start this calendar year.So in summary. The underlying drivers of demand for sustainable corrugated packaging remain strong, and our leading offerings for highly resilient FMCG and e-commerce customers give us confidence of volume and market share growth. Whilst volatility in the macroeconomic environment and input costs remains, our focus on pricing discipline, margin progression, enhanced cost and efficiency improvements with cash generation support our expectation of further good progress this year.Thank you. I'd now like to open the lines to questions for myself and Adrian. Thank you.
Thank you.
[Operator Instructions] And we do have a few questions in the queue. The first question comes from the line of Alexander Mees from JPMorgan.
Just the first, I wonder if you could give us a little bit more color on how you see Europac integrating. It's obviously reasonably early days. There's positive comments in your statement, but I just wonder how it compares to what you'd expected to see at this stage. And then secondly, I wonder if you could just comment on your expectations for where pricing is likely to go. You mentioned pricing discipline, also some new tenders. Does this mean that we ought to able to see stability in pricing going forward? Or are we to be more conscious of the possibility that they could come down?
Now thanks, Alex. Firstly, with the Europac integration, I mean, we are very pleased with this indeed. The, as I said, customer and employee reaction has been excellent. We have -- at the full year, we enhanced our -- we raised our synergy target from EUR 50 million cost synergies to EUR 70 million. And I'll say we're performing very well against that revised target. It certainly gave us quite a bit of new capacity in this market. It's capacity that we are now starting to utilize. That -- the packaging business there has been challenged for quite a long time, but we're now seeing growth coming through into that business that they haven't seen before. They were seeing a good, positive customer reaction. So overall, we remain very pleased with it. As I said, the -- all of our new colleagues and our customers are really supporting us there, so overall very good.You asked about pricing, and here we have seen, I would say, probably better retention than we reasonably thought. Yes, there are -- indices start to move as expected. The price of paper has been flat now for some time. Some of these indices start to move. That's really on about 40% of our business. In terms of our customers where we don't have these automatic mechanisms, I have to say our service and quality is absolutely excellent. We're getting good recognition for that. And overall we're very pleased with how we've been able to retain pricing. Looking forward, obviously we will see some erosion of our pricing because of the indexed deals, but [ as well the others ], our -- we're very encouraged with how pricing has -- our pricing has held up pretty much so.
The next question comes from the line of Barry Dixon from Davy.
Miles, you might just give us a bit more color on the volume environment. And you cite sort of some subdued volumes in some markets like Germany. And so maybe just a little bit more color around the various regions. And also particularly interested in your thoughts around volume demand in the FMCG side versus the industrial side. And I suppose, very specifically, is it that industrial side that you're seeing most of the weakness? And then can you characterize what kind of volume growth you're seeing on the FMCG side? And not to push you too much on the pricing side, but there has been this expectation that we'll see some price weakness in the second half of this year. And again, maybe your thoughts around the scale of that price decline as we head towards the end of the year.
Yes, absolutely. Well, the total market conditions remain pretty much unchanged from our -- from when we talked about at the [ full year ]. We have seen some markets have been more subdued. We do call out Germany. It's got a big export-led manufacturing market, and it remains subdued. It does. It's -- it isn't exporting as it has. You've seen it in their overall GDP figures. And that falls through into the overall market demand. But I think it's pretty much unchanged from where we were at the time of the full year, hence our assertion that our expectations on -- for our financial performance for this year remain unchanged. There is still some uncertainty. I mean I have to say we've got this situation in the U.K. I mean the U.K. is about 10% of our business. It's not the biggest part, but goodness knows what's happening at the moment or what will happen at the end of October. And that is causing some nervousness not just in the U.K. but across with some of our customers across the markets in Northern Europe. Hopefully, we'll get some clarity on this over the coming few weeks, but broadly it's remaining pretty much as we saw, as we described at the time of the full year. The FMCG is more resilient than the industrial sectors, pretty much as expected. When we look at our big customers, we're seeing good, continuing growth there. It's a very strong feature of our market, and we expect them to see volumes grow, obviously, this half year, pretty much as we've expected, and actually see an improving trend over the remainder of this year, obviously subject to the uncertainties that -- as I previously described.This -- in terms of the pricing, we do have these -- as I say, we have 40% of our business that are on the indexed deals. These indices don't sort of -- they [ write ] the highs of paper. They end up [ writes ] the lows. So it very much depends on sort of average prices over a period. We are seeing quite a bit of stability in paper prices at the moment. But -- so there a part of it starts to these -- the pricing on these larger customers, it can be on for 3, 4, 5 months. So we are -- start to see some of that coming through. And in individual customers, you're looking maybe there's a minus 1%, minus 2%, minus 3%, something like that. I'll say that's really around about 40% of our business. As I said, on the other, on the 60%, we focus hugely on the value that we add to our customers, and the margin retention has been very good. And there have been limited, very limited, reductions so far. You will see how the rest of the year plays out, but we're very pleased with that, very pleased indeed.
And so just one follow-on, Miles. I mean that's sort of, at the time of the full year, I think the volume indication in the second half of last year was kind of 1% to 2%. Is that still sort of a good way to characterize the volume environment growth at the moment?
Yes, I think that's absolutely right. It's in that sort of range. It can bob up and down any one month to the next, but it's certainly in that range. We're seeing ongoing improvements, but we just have these macro uncertainties. I mean our U.K. business has been doing very well. We talk to our customers here, and they're clearly nervous. And you ask them about their outlook for their volumes, and some of them say, well, you tell me what's going to happen with Brexit and we'll tell you what's going to -- what our volumes are going to be. So it's just that little bit of uncertainty, but overall, absolutely right, we're seeing that sort of that 1% to 2% level.
The next question comes from the line of Justin Jordan from Exane.
Sorry. I just want to -- maybe you can give us a little bit more color on volume and pricing, please. In the second 6 months to April 2019, you reported 1.6% organic volume growth. Has it accelerated or decelerated since then? Can you just give us some more color on that? And secondly, just on the -- you've -- you're disclosing 1% to 3% falls so far in indexed [ books ] price contracts for 40% of the European volumes. Is that sort of the situation so far? And do you expect further concessions going forward in coming weeks and months? Can you just help us out on that, please?
Sure. Well, look, on the volume, all I can say is that the overall market has remained pretty much unchanged from what we described at the full year.
Sure. But Miles, at the time, you were expecting a pickup in volumes in this year. Clearly, that hasn't happened is what you're saying now.
No, no, no. I'm not -- no. So our thinking here, we're saying that during this year, we do expect to see an improvement in the volume over this year from the second half of last year. I think we're very clear on that. I'm saying for this first half, very much as expected, we are not seeing the markets improving from the time of the full year results. And I think we -- as I said, I think we're very clear on that. It's very much as we expect. We are winning new business, and we do see the second half being better in terms of a like-for-like improvement. Nothing has changed in our outlook from what we described at the full year, nothing at all. In terms of pricing, I'm saying you've got these indexed deals. Barry previously asked what sort of reductions that we're seeing coming through; and it's in those sort of early, early few percent on that 40% of the business. Obviously, looking forward, it depends what happens with the price of paper. We are actually seeing quite a bit of stability there. It all depends what happens in the second half for the year. And there's some room for -- I mean it's just too early to call where we think things are going, where we think future paper prices will be. We just simply don't know. But in terms of pricing it's really going on those indexed deals exactly as we thought. No change there. But on the nonindexed deals, as I've said, our service and quality and the value adding, the retention has been better than we thought at this -- at the time of the full year.
The next question comes from the line of Lars Kjellberg from Crédit Suisse.
I just had a question on you just mentioned future -- next pricing move on the containerboard side, but you've also been talking about the -- or need or a want to integrate -- or bring down integration from 80% to 60%. What sort of progress are you making now? Are you going to grow into that or are you actually now considering some exit of some capacity?
No, absolutely. We're about -- we're just under 80% at the moment, and our desire is to bring that down to 60%. There are 2 ways of doing that. Firstly, we'll continue to grow our packaging business, and that obviously increases the short position. And we are looking at reshaping our paper business. It's very consistent with what we said at the time of the Europac acquisition. We're looking particularly around Central Europe, where there's more capacity. And the work on reshaping our paper, I mean, we're really talking about sort of one paper mill or something like that. We're looking at about 400,000 tonnes. The work on that is progressing well, and it's actually being supported by this -- the current stability in paper prices. So we're pleased with that, but we did say we've got to come back this financial year and that's exactly what we expect to do.
I just sense no urgency to remove any capacity from your system today. It is what it is until you tell us different.
Yes. That's right. We -- I mean we've got our existing capacity. We just -- strategically, we just want to have a bit less paper, particularly around Central Europe. We've identified how we're going to do that, organic growth and just reshaping perhaps one of our mills, et cetera. And the work on that reshaping is continuing well. We've got some good assets. It's just strategically they aren't for us. And as I said, we'll come back this year, this financial year, on the progress on that. And we're really saying in this announcement that work is going exactly as we expected. I'm quite pleased with it actually, how that's going, just [indiscernible] short position.
The next question comes from the line of David O'Brien from Goodbody.
Two from me, please. Firstly, look, it's encouraging to hear price stability, I guess, in the 60% of the business. And given what you're seeing on that front and stable paper prices at the moment sequentially, should we be all expecting a material expansion in the margin in H1 given that you don't have a significant benefit from lower costs? So leaving aside Europac and synergies, the market should expect material organic margin expansion for H1 and H2. And secondly, how do the recycled containerboard inventories through your own system feel at the moment? I guess that's the big question on people's minds heading into mid-September when there may or may not be an attempted price increase.
Yes. I mean, look, we've given medium-term guidance on our margin. We raised our margin expectation. At the full year, we were 10.2%, I think. And we raised the target from being between 8% and 10% to 10% to 12%, and we absolutely expect to be in that range. That is a tick up, and that does rely on things like the Europac synergies coming through. I wouldn't say we're expecting sort of a surge in margin in the first half because we simply haven't generated all of the synergies yet, but we do expect to be in that range. It is an enhanced range and we absolutely expect to be there for this year.In terms of paper inventories. You probably saw in July, I think, industry stocks fell. I think they're about 100,000 tonnes over where they were the previous year. So we've seen them come down. It really is too early to tell where we're going. Where it's going to end up, we'll see obviously this month's figures. But we're seeing ongoing demand for fiber-based solutions. And obviously, I don't know how everybody else is doing. We'll just have to wait and see where the numbers come out for August but did see that reduction in July. In fact, we've seen a few reductions recently. There's been a bit of downtime, et cetera. I mean that's on recycled kraft. As well, we'll see what the current hurricane season does in terms of U.S. supplies in this. I mean there's quite a bit of a concern there as to some of these storms and what that could do to supply. So it's really just too early to tell. And we're not, we're certainly not -- we'll just have to see what happens.
If I could just add one follow-up maybe on the first question. I suppose a different way to ask is -- I suppose you are implicitly guiding the market now that the value add that you're generating to the customer base is going to yield an expansion in the corrugated price versus the raw material costs, which is something we haven't seen and for quite some time. So is that your opinion, that you're finally going to get paid for the value you're delivering to customers and we are going to materially see that through what will be your bridge of price versus costs in H1 and H2?
Yes. I mean, look, it's -- we're in our first quarter. So we have said we will see an -- we're expecting a medium-term expansion in our margins. And we're saying that our expectation of our financial performance this year is unchanged from the half -- from the announcement at the full year. But in some -- and we have seen a growing margin in our business. We have seen -- if we look into packaging, we have seen over many years our ability to add more value to our customers. And those customers have been prepared to pay for that, and we see that progressing in the -- over the coming years. We see further room for growth in our margin. But in terms of our half year, in terms of our full year, always [ maintains ]. Our expectation of that remain unchanged from what we said at the full year.
Great. And just one on the U.S. The EUR 15 million starter costs, how should we think about the phasing on that this year?
Yes. So you've got -- yes. It's mainly H2, a bit in H1, but it's mainly in H2.
There are currently no further questions in the queue. [Operator Instructions] And we do have a few more questions in the queue. The next one comes from the line of Mikael Doepel from UBS.
Just a couple of questions from me. Maybe you could comment a bit on the costs side what kind of a development you are seeing there if you look at the wood costs and recycled fiber and chemicals and then so on.
Yes. I mean with fiber, we've seen -- I mean generally, the environment is, raw material costs, whatever they are, things are more subdued in terms of pricing. So if you look at energy, you look at transportation, you look -- there's a number of things there, and there is a general softening in pricing. It's not dramatic, but it's just been a little bit softer. In terms of recycled fiber in the U.S., that has come down. That remains at low levels. In Europe, I think it has come down up until about 4, 5 months ago. And we're seeing some stability in the price of fiber at the moment, albeit at a low level. So overall, the raw material sort of input cost is -- certainly is reasonably subdued. We're not seeing any substantial increases coming through there, yes. Yes, I mean, if the -- sorry. Just that I think we mentioned energy was -- seeing anything there. And then our other big input cost is obviously on labor. And again there, we're seeing we have a very close relationships with sort of our works councils, et cetera. And there we're seeing some inflation coming through but very much in line with what we expect, increases generally around the 2% level or something like that. Generally quite a sort of a generally sort of a flat environment.
Okay. And then maybe if you could talk a bit about the U.S. market. What's happening in there? Are there any dynamics that goes in your favor? And also, in the Indiana capacity expansion, any more guidance on the timetable there?
In terms of the U.S., domestically within the box business we're very full. We've got a significant pipeline coming through relying on our -- on the Indiana greenfield being up and running to plan, which is as scheduled, guiding to make boxes in November and then ramping up over the 6 months following that. So from a box side and a generation -- generating of customer interest amongst our global customers, extremely strong. Obviously, the U.S. has delivered on the paper market. You've seen paper prices coming up a little bit domestically, quite a lot on the export side. Integrating our paper -- our long paper position into Lebanon is an extremely important part of our strategy there. As we said when we made the acquisition, originally we were looking to rapidly reduce the long paper position, which is very much the plan. But in terms of the drivers of our growth in our business there, a lot of interest around our e-commerce platform and designs in Europe; a lot of interest around our shelf-ready packaging, all as you'd expect; and very strong dialogue with a number of targeted customers. So we're very happy with what the prospects of that business looks like.
The next question comes from the line of Cole Hathorn from Jefferies.
I wonder if you can just give a little bit more color on what you're doing for -- to prepare for Brexit to make sure that you see limited production disruptions. And then can you just highlight some of your main concerns?
Brexit, well, look, we've done a huge amount of planning for this. We -- I'd say it's about 10% of the group. We've been through all what we think that customs are going to be and all the rest of it following the government's advice, and we are well ahead of that. We'd taken some contingency stocks into our business as well. So we've really tried to prepare as much as we can. We've had a whole sort of task force on this for about a year now. The thing that we don't know is the effects on our customers. So as we can protect our business, it's really what's happening to -- in our customer base. That's the bit of uncertainty. Those are uncertain. We supply a lot of, for example, food processors. A lot of these food processors are importing the food from Europe. They work really on just in time. A lot of them are fresh produce. We're talking to them. They have their plans, but of course, it's all very dependent on what the flow of goods is going to be. So it is a little uncertain. But in terms of our planning, I think we've done a lot to protect our business and how we operate so we can deal with -- and continues with our customers. But it's just uncertain as to what's going to happen. I mean is it going to be a hard Brexit on day 1? Is it not going to happen? I mean we really -- I think we don't know anything more than anybody else in the country.
Okay. Great. And then just on Amazon. We've recently seen Amazon increase the use of some plastic packaging, with some backlash from customers, in the U.K. Have you seen any impact on your box volumes from increased plastic use? And can you just remind us, despite designing an e-commerce using less packaging, how are you still able to get paid more for these kind of value-added e-commerce boxes?
Well, if you like, I'll just talk generally with e-commerce rather than any particular customer. We continue to see a number of customers try different formats. But you're absolutely right, the use of plastic, which has always been there, has received quite some customer backlash, particularly for certain customers. A lot of these products aren't recyclable, and I don't think it's what customers expect to see. So when we look at our overall e-commerce volumes, they continue to do well, and that's in the U.K. and across Europe. There is a lot of value that we can add to our customers, making sure of things like rightsizing or the printing and traceability, et cetera. It's a really exciting area, and it continues to develop in terms of the opportunity for us to add value to our customers. And with all of these things, we do expect to -- obviously to be paid for that. And we're very pleased with the value that we're able to add to our customers, and that is recognized in the margins that we make. Very good area for us. It continues to develop. They will always try different formats, but nothing beats the box, basically. Nothing beats the box.
There are no further questions in the queue, so we'll hand back over to your hosts for any concluding remarks.
Well, firstly, thank you very much, everybody, for your time today. I think the -- and as we said, our business continues to progress well despite the continued macroeconomic uncertainty, and our expectations for overall financial performance remain unchanged.Thank you very much.
Thank you for joining today's call. You may now disconnect your lines.