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Hello, and welcome to the DS Smith 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.
Well, firstly, good morning, everybody, and thank you for joining us today. I'm Miles Roberts, the CEO of DS Smith, and I'm joined on the line by Adrian Marsh, our CFO.So our statement today covers our trading period since the 1st of May 2020. But looking at our trading, our business has progressed well in the period with performance continuing to be in line with our expectations, obviously despite the macroeconomic challenges that resulted from COVID. Our like-for-like corrugated box volume performance has improved over the period since the initial impact of COVID-19. And in August, we've now seen a return to positive growth versus August of last year.Our leading FMCG and e-commerce business has grown throughout the whole period, demonstrating a consistently strong performance, and our multinational companies -- with our multinational customers more than offsetting the continuing challenging conditions in a number of industrial categories.Our Northern European region has continued to perform well, and I'm very pleased to see the recovery, good momentum in Southern and Eastern Europe since May. But we're also encouraged by the progress in North America, in particular, in attracting new customers, including multinational to our new Indiana plants. This gives us added confidence in an improving North American divisional performance for the year.Our supply chains have remain robust, and our strong commercial offering continues to help mitigate the ongoing lower pricing environments. And as expected, the impact of lockdowns on the recycling infrastructure and the associated short-term impact on OCC pricing has now reduced to more normal levels. And in addition, we continue to see further opportunities in terms of efficiencies within our cost base.So the underlying drivers of demand for sustainable corrugated packaging remain strong, and our sustainable packaging solutions for our resilient FMCG and e-commerce customers are more relevant than ever. But given the performance over the last quarter and our improved clarity over the outlook, combined with our strong financial position, the Board intends to declare a dividend for the half year to the 31st of October 2020.So while the macroeconomic outlook remains challenging, our customer focus, strong cost control, cash generation with an excellent liquidity profile with our performance to date gives us confidence for the future.Thank you. I'm now very happy to take any questions, which, together with Adrian, we'll answer between us. Thank you.
[Operator Instructions] The first question comes from the line of Paul Bradley from Citi.
It's Paul Bradley at Citi. Thanks to the reassurance statement. It's good to hear a commitment on dividend regime at the half year. Is there any -- should we read any commitment into that for any sort of catch-up to the previous fiscal year? Or is that still to be determined as we go? That's my first question.Second question is, it's encouraging to see volumes up year-on-year in August. What's your sort of volume and demand looking like as we sort of start into September with everyone sort of getting back to schools and working things?And finally, any comment on pricing to go alongside this? And as you've seen testliner pricing coming off, OCC coming off, what are you seeing on the sort of negotiated contracts that you have?
Thank you, Paul. Look, on the dividend, obviously, the Board will take its decision at the half year. All I can say is that the -- catch-up in terms of last year will absolutely be discussed and considered by the Board. So I can't sort of give you a definitive answer now, we have to wait until December, but it would absolutely be discussed and debated, so we're aware that -- very, very aware of not paying anything in respect to last year.On the volumes, we saw a provisional figure -- at the time of the full year results, we saw a provisional figure for June. And we showed an improvement on May. July was a very good month for us, very good. And as you say -- as we said, August is now positive, so -- reasonably positive. And obviously, September has started very well.As we said in the announcement, the e-commerce, FMCG has been positive throughout the period, but it really has picked up over the last few months. Maybe talk about our multinationals, we've done extremely well there. And overall, we're really pleased to see that robustness. And obviously, hopefully, sometime in the future, we'll see the industrial part come back more vigorously.In terms of pricing, we put in a statement here. We have noted a somewhat surprising really, but there's been some weakness in some markets on testliner prices. If you look at our progress on trajectory in margin, retention in packaging, it actually -- it's been very good, and it continues to be good. We're pleased with that. We've retained a lot of the reduction in paper prices because of the added value, et cetera. We're giving customers our service, the pan-European supply. There's no doubt that it's going to be -- with our prices, there will be ongoing debates and discussions with customers. But all I can say, I mean, overall, it's going reasonably well. I think customers really do -- they're looking for that security of supply.I mean our service levels have been outstanding out -- throughout this whole period. I mean that's one of the reasons I think our volumes have been so strong, has basically taken more share of our large customers' business. So I think it will be -- as always, it will be competitive, but nothing that gives us particular cause for concern there.
The next question comes from the line of Cole Hathorn from Jefferies.
Could you give a little bit of color on the underlying performance in the North America division? I believe at the full year results, you talked about some of the trading being impacting by some of the processes that were -- had some COVID interruptions to their business. I'm just hoping you could give color on now that their business is a bit better.And then if we think about your June volumes that you gave for the overall business, those were obviously preliminary estimates. Some other commentary was that trading picked up a little bit towards the end of June. This was -- that minus 4%, did it end up being a little bit better than your initial expectations?
Well, look, on the first point, Cole, in North America, we have seen a noticeable improvement there, really as some of the COVID-related issues that we suffered sort of fell away, particularly as -- if you go back to the time of the full year, we talked about some of our protein -- our customers who process protein, low-temperature environments, we've had a few hits there. But we have seen quite a very noticeable improvement since then.If you look at August, it was slightly behind August of the previous year, just to give you some indication of the rebound there. And as I said in our notes, we're very pleased with the new wins we've been getting for the Indiana plant, particularly for multinationals.There's no doubt that COVID, I think, slowed things down for a while, as we said at the full year, but -- at the full year announcement. But where we are today, it's very pleasing to see those new wins coming through. And as I said, that gives us some more confidence for the -- for continuing real improvement in the performance of that business.In terms of our volumes, we did see a pickup in -- during June. That continued really into July and into August and the beginning of September. That's given us quite a bit of -- it's just very pleasing to see the volumes that we wanted to see to come through. I'll be honest with you, it is a bit better than we thought, not massively. It is a bit better though. The underlying demand has been quite -- has been good. So really since probably mid-June, we've seen quite a decent recovery.
The next question comes from the line of Barry Dixon at Davy.
Well done on the quarter. Just continuing on the volume story, I suppose we're all interested in that sort of trajectory, Miles. Would you like to, if you could, give us some color? I mean it's gone from minus 4% in June to positive in August. Could you give us a little bit of color around the regions in terms of Northern Europe growing very strong? Are Southern and Eastern Europe still down year-on-year in August? Or is the shape of the recovery the same?And I suppose the second question, really looking at e-commerce. I mean there was this sort of rebound or this sort of big spike in e-commerce shipments through March, April and May during the sort of the worst of the pandemic. There's been some commentary that you might see some pullback in that. I mean just your comments around those e-commerce shipments, whether they're continuing to be as strong.And just a final question on pricing. I think you said that you thought that the weakness in testliner prices was surprising. I might have picked you up wrong on that. But just your own thoughts in terms of the likely sort of direction of pricing from here. I mean there's lots of chat about capacity coming on and the prices will be weaker and all of that. But just your own thoughts in terms of how pricing might evolve from here over the next sort of 3 to 6 months.
No. Thank you, Barry. If you look at the region, say, Northern Europe has remained strong and positive throughout. We have seen a rebound in Eastern Europe and in Southern Europe. There are quite a few countries now in Eastern Europe that are -- in August were positive. They were above last year. Places like Poland has been very strong throughout.When we come to Southern Europe, here, we have seen a noticeable improvement, really coinciding with the reductions in lockdown. Some regions are still negative. If we look at Iberia, it's still negative. I have to say not very much, but it is -- whilst it's rebounded, it's still behind last year.But when we talk to -- we're looking at our customers, we're looking at the end customer, looking at demand, there are a lack of tourists, and that has affected overall consumption in Spain. And in some ways, that's probably one of the reasons why it's been slightly stronger in the north, as people have stayed in their home countries. So everywhere, there's been improvement. Some regions, I think, still have to -- are still behind last year.E-commerce is a great question because it's just been running at sort of basically at levels up to double what it was last year. I mean the proportion of our business in e-commerce is now up in the high teens. It's really -- it's moved forward very, very well.We don't actually see much of a pullback. We didn't expect the evidence of the end of the lockdown. I mean the people are going back to the High Street, et cetera. However, the pullback is very modest, very modest.If we look forward, we've got Christmas coming up. Possibilities, who knows where the High Street is going to be. Things like the resurgence of COVID, et cetera, in some areas; how shoppers are feeling; are they going to be going to the High Street? Our assessment is this Christmas could be extremely busy on e-commerce. And putting it bluntly, we are already building -- we're already building a capacity to cope with this coming Christmas.Our service is outstanding. We have to always supply our customers at the highest level of service we always do. But we're expecting Christmas to be very busy on e-commerce, really, particularly in the countries where it's so well established. And again, we have absolutely, without any question, leading positions there. In fact, we've consolidated our position even further there over the recent months.On pricing, I said -- I was surprised that the price of testliner fell. And whilst we can talk there is some more capacity coming on, equally there have been some capacity restrictions. But if I look at our own demand, it's pretty good. And sure, there's some more capacity coming on, but the export markets are strong as well. Our end demand for our packaging business is good. So I was a little surprised.There's no doubt that the sentiment of new capacity may -- the sentiment could drive something on pricing. But the end demand is, for us, what we're seeing is reasonable. So do I expect the price of paper to re-bounce on the upwards? No, I don't. Equally, I'll be surprised if it fell, but listen, I don't know. It's anybody's guess. There seems to be slight disconnect between the pricing and actual demand for paper. It's quite -- what we're seeing is it's quite good. So we just have to wait and see just how that -- how the German demand goes.
The next question comes from the line of Lars Kjellberg from Crédit Suisse.
I have 2 quick questions. You mentioned comparatively bullish view on Christmas. Just to get some sort of sense of the confidence in that, is that your customers now contacting you to -- so your investment that you're making today are underpinned by sort of customers' commentary and they're already placing orders for Christmas? First question.The second one relates to, you mentioned your constructive demand, which, of course, is positive. The supply side of the equation, you have, of course, as a strategy to reduce your integration levels again back to the level around 60%. Have you made any progress on that?And secondary, given that supply and demand, supply is a function of -- well, pricing is a function of supply and demand, were you -- are you considering any removal of capacity on the higher end in absence of potential purchasers of assets that you want to dispose?
No. Thanks, Lars. The -- in the run-up to Christmas, in retail, it's sort of the golden quarter. It's the time when a lot of retail outlets, et cetera, I mean it's their busy time of year. And we would -- customarily, we would be agreeing with our customers about the supply, the forecasted demand. We've got a lot of expertise. We've got a lot of experience here. We know how these businesses have performed in the past. So all of our sales and operational planning is a very, very well-established set of processes that we have.Those demand forecasts about Christmas being very busy are from our customers. We have our own views. Typically, a lot of customers -- we can look across customers. And actually, we have our own views, and we'll be discussing these and agreeing sort of a -- whether it's a stock build or just the sort of demand that they're going to be facing. But the references that I made to Christmas being busy in e-commerce are our customers' forecast. And we think -- their robust forecast, and we think it's going to be very, very busy. And we're gearing up for that now, which is excellent news.In terms of the paper, you're absolutely right. We have a target to get to 60%. It comes on 2 ways: one is increasing our packaging and the other is disposing of some assets. We have reduced some of our paper capacity. It's in-house where we've turned off parts of mills. But the disposal of a mill, that is still ongoing. We are still discussing that facility with some potential buyers, but it has been slower.The whole sort of COVID -- the environment for selling the asset isn't great. They're pure good assets, but we're certainly not -- we're certainly not giving them away. But those discussions, whilst they're ongoing, they have been held up just with the whole COVID, et cetera. But -- so I don't expect anything for the half year, but we remain hopeful something can happen in the second half. But as you can appreciate, they are -- these are uncertain times on the M&A front.
The next question comes from the line of Justin Jordan at Exane.
Firstly, just on -- I guess, delighted to see the return to positive like-for-likes in August. I've got 2 quick follow-up questions on that.Firstly, on box pricing. The German box association, VDW, would say that in Germany, box prices fell by 6.9% in the first 6 months of this year. Just wondering what your experience has been, not just in Germany but clearly on a pan-European basis in terms of pricing in recent months.And secondly, clearly, in the environment of falling testliner prices, do you expect continued drift lower in box prices in the latter half of calendar 2020 and early '21?And secondly, just following up on what you said to Lars when you talked about turning off part of mills, can you give us some quantification of the capacity reductions that you've actually done through that, to use your phrase, turning off part of mills, please?
Yes. So firstly, on the box price. I mean the -- of course, if you look at the German market, that is the overall market, as you know, we are far more overweight in FMCG. The last figures that we have given were our full year results at the beginning of July, where we said that our price reductions over the previous year being between 3% and 4%. Not a lot has happened over the summer, as you would expect.The lower testliner prices, they're only in some markets. The testliner hasn't moved everywhere, and it's moved in stages. And it may or may not have an impact on the indexation with some of the larger customers. These things move on averages, and it's the actual sort of quantum of the change as well. It probably will have some effect, but we would just have to -- I don't expect it to have sort of a major effect, particularly compared to what's happened over the last 18 months.In terms of your question about future testliner prices, I mean we just don't know. I mean I said that there does -- from our point of view, there does seem to be a bit of a disconnect because demand is quite good, so stocks have been falling. I was surprised about the reduction. We just didn't -- we were just surprised by it. So let's see what happens in the -- over the remaining -- over the remainder of this year.In terms of our mills, as you know, mills can have a different -- we have a number of mills within the mill. And we have reduced some capacity there. It's probably running -- what's come out is probably about 150,000, 200,000 -- 150,000 tonnes, something like that, just as we've decided to sort of rationalize some of the capacity. It doesn't affect the overall mill, but it's just turning off perhaps 1 older mill within a larger mill, and this is just all part of our sort of asset management.
The next question comes from the line of Cole Hathorn from Jefferies.
Just a question on some of the commentary on your trading statements. You talked about OCC pricing has come down to more normalized levels, but you will see opportunities for efficiencies on the cost base. I was just wondering if maybe yourself or Adrian could give a little bit more color there because when you initially reported your full year results, there's still a lot of uncertainty and a few costs before COVID. I'm sure you've got a better picture of that now. Can you give a bit more on the opportunities you see on the cost side?
Adrian, do you want to take this?
Yes. Thanks, Miles. I think on the COVID side, Cole, when we've set out what we thought the overall cost would be, I think we are quite clear -- well, we're quite clear at that time. We expected that to be very much an H1 impact as we process engineered our way through it. Yes. And that's what we're seeing. So I'm quite confident that the costs that we outlined will be very much first-half-loaded. And the business has adapted extremely well in terms of working its way through all of the various implications around social distancing, how plants should operate and what the efficient -- the initial efficiency and/or inefficiency impacts would be and how we've worked them away.In terms of other costs and efficiencies, I think the whole business has been challenged pretty hard in terms of looking at just how you operate. And this time, it was up to a lot of companies and yourselves included in terms of what it actually means in terms of how you do business, the travel, the utilization of office space, the utilization of the technology. And we're seeing an increased emphasis on what we think our operating environment will look like going forward.At a plant level, we've always been focused on cost and efficiencies. And I think the unfortunate onset of COVID has very much -- the upside of it, if there's any, has been that we worked extremely collegiately with our workforces across Europe in terms of looking at how we can best optimize, how we do things and protect jobs in ultimately what's a very uncertain time. So I think the ability of the organization to look at on what we do and to inject pace into change has been quite extraordinary.
The next question comes from the line of Mikael Doepel from UBS.
Just a couple of questions here. Firstly, on the corrugated box volumes growth that you mentioned in August and apparently continuing into September, would you be able to quantify the magnitude of the increase? I mean are we talking about 1%, 2% for August and September? That would be the first question.And the second question would be on OCC cost. As you pointed out, the spike has reversed. Seems to be stabilizing maybe now, but what's your expectations for that? I mean given that the upcoming import ban in China, do you see further room for OCC to come down from these levels? Or do you think this is kind of the new established level, level?
No. On the box volumes for August, I mean I wouldn't concentrate particularly on 1 month. It's about a whole progression. But July was slightly behind July last year. But August, we're in that sort of put in the 1% to 2% range like-for-like increase on last year with a number of countries coming back.I think what I'm pleased about, it's not just the market spending, we can actually see where we're taking share and our customers taking share of their business. So it's -- it gives a bit of, as said, more confidence about the outlook. So it's a change in our position. It's not just the market coming back.And look, it's a good -- it's a very good question on OCC. I think overall, it has come back to a more normal levels. That's what we hoped. That's what we anticipated. We're very pleased to see that coming through.You're absolutely right. We've got the ban coming in China. There's actually been a little bit of a flurry in some markets. People buying a bit more. The export markets being particularly strong in some countries which have a big export business. So people wanting to get the fiber into China before the ban actually comes on. When the ban is there, we think, obviously, there is a -- you should -- it's not going to have a positive effect on pricing, that's for sure.But there is a minimum price. We think there is a fair price for this fiber. I think we are -- I think there are going to be some further reductions, but I don't think they're going to be particularly meaningful. And then we should be at a more normalized level really over the next couple of months. It's not much to go, but we do expect a little bit more to come off.
The next question comes from the line of David O'Brien at Goodbody.
If I could bring you back to the dividend commentary, I guess, there's 2 points to say that underpin your confidence to say that there will be an interim dividend, firstly, performance over the last quarter. So on that point, are you saying the range of organic profit decline in Q1 '21 is lower than that in H2 '20? You've seen a material improvement?And the second point is improved clarity on the outlook. In the 2 months since you reported your full year numbers, testliner prices have weakened by EUR 50 a tonne. COVID cases seem to be spiking across Europe. So I'm just wondering where the improved clarity in the outlook comes from? Is it purely from volume performance that you're seeing out there? Or is there something else you can add to that?And then overall, on the dividend, given you've the confidence at a very early stage in the period to say there is the intention for an interim dividend, what is the outlook for group profitability in the first half of the year on that basis?And on a separate point, if you could just clarify in terms of returning to like-for-like volume growth in August, does that include the Lebanon mill starting to take customers? And if you excluded that, would volume still be in positive territory?And finally, you mentioned that you're engaged with a number of buyers on assets -- paper assets in Europe. Are these guys people who have existing positions in the European containerboard market? Or are they new entrants to that market?
Thank you, David. And just -- look, all I can say on performance is that it's been in line with our expectations. Now clearly, mostly profits has been -- are below last year.In terms of on a quarterly basis, we have outlined that there were a number of costs in the first quarter which we thought will be very much into the first quarter, particularly things like OCC, some of the COVID-related costs as well. And we've seen those come off, and obviously, that's had a very positive effect on Q2.When we look at the dividend, at the time of the full year, which was right at the beginning of July, we've had, obviously, a full review of June's results. We've had July, and we've now had August. But at the time of the full year, we said we were being prudent. One, we wanted to see volumes coming back; and secondly, we wanted to see the OCC costs come down because both of them are having quite a severe impact.We have seen that happen, and therefore, the reasons why the -- we held back on the dividend have obviously softened. It's basically come back as we had really hoped. And therefore, when we're looking forward from where we are today as well for the half year, into September and October, expectations there, we can really see that a lot of the initial impacts of COVID in our first quarter has really softened. Obviously, not out of it, but it's -- the impact has softened.In terms of the volumes, you're right, we do have Lebanon. I said the U.S. was slightly negative. Europe was actually -- was quite very, very, very positively positive. We are pleased that Lebanon didn't have a particular impact on the group overall at all. That's not a reason for the rebound.And in terms of the paper assets, there have been a number of interested parties. Some of them are existing companies in the paper and packaging industry, but some of them aren't. Some of them are looking at the opportunity to enter that market for a variety of reasons, whether it's private equity or whether it's other -- sort of other companies in different sectors but they can see a synergy with their business from this sort of asset. So there's a -- there are a number of players there. But as I said, it's been slower than we wanted for the obvious reasons, but there remains quite a bit of interest there.Is there anything else you'd add on that, Adrian?
No. I think -- no, I think that's a reasonable assessment, Miles.I think on the dividend point, the -- we did set out at the full year, in our annual report, we looked at various different scenarios, and there was a negative scenario. And we wanted to make sure that we felt that was extremely unlikely. And as we've progressed through the quarter, I think we have now been able to rule out that scenario. So in terms of the confidence, the confidence is almost avoiding the negative. We haven't seen the -- as you said, the continued decline or the longer term OCC impact. It was the blip as we thought, and volumes are returning as we had expected. So no, nothing more I can add, Miles.
Very good.
There are no further questions in the queue, so I'll hand back over to your host for any closing remarks.
Well, firstly, thank you very much, everybody, for your time to listen to our update this morning and for your questions.Just as a summary, we are -- we're pleased with the progress. It's in line with our expectations. We're seeing the volumes coming back. That, together with our relationship with our customers, our liquidity profile, really does give us confidence for the future. Thank you very much for your time.
Thank you for joining today's call. You may now disconnect your lines.