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Hello, and welcome to the DS Smith AGM Trading Statements Call. My name is Rosie, and I'll be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions]I will now hand you over to Miles Roberts to begin today's conference. Thank you.
Good morning, everybody. And firstly, thank you for joining us today. I'm Miles Roberts, the group's Chief Executive, and I'm joined by -- with Adrian Marsh, our CFO. Our statement today covers our trading for the period since the 1st of May. I'd like to start by saying I really am very pleased with the progress that we've made in the financial year-to-date. We have continued to build on our strong customer relationships, resulting in really excellent volume growth, really right across the business, and good progress towards recovering the increasing cost of production through higher prices. Our box volumes have grown very strongly versus the comparable period last year and also versus 2019. And whilst this growth has been across all parts of the group, it has been especially strong in the U.S. and Southern Europe and also with our large FMCG multinational customers. As I've mentioned, input costs have continued to rise, with some notable increase in the cost of energy and transportation. This, combined with the cost of OCC remaining high, has resulted in further significant increases to the price of paper. But given the strong demand for our packaging, we've seen really very good progress in recovering these costs through increasing prices. So consequently, overall trading continues to strengthen in line with our expectations. We continue to invest in the business, and I'm pleased to say that the development of the new packaging sites in Italy and Poland is proceeding to plan, and they're expected to begin operations in Q4 of our current financial year. Both have already received advanced commitments for over 50% of their capacity. These new plants are in part being funded by the recently announced proposed disposal of our noncore De Hoop paper mill. Our investment plans continue to prioritize meeting the growth of our packaging customers, both for now, the near and the medium term. So over many years, we've built a business that is ideally positioned to benefit from the long-term structural growth drivers of fiber-based packaging, exemplified by the e-commerce and sustainability trends. And these trends have really been accelerated and continued to be accelerated by the effects of COVID. So accordingly, whilst the macroeconomic environment remains uncertain, we remain confident about the prospects for the business for this financial year and beyond. So thank you. I would now like to invite questions, which Adrian and myself will answer between us. Thank you very much indeed.
[Operator Instructions] And the first question comes from the line of Cole Hathorn from Jefferies.
I've got 2 longer-term questions that I'll ask one at a time, and I hope you can help me on those. So the first one is on how DS Smith is positioned to invest and manage box volume growth medium term. And the second one is on how you will manage your containerboard or your paper supply to your box plants.So on the first question, with structural tailwinds of e-commerce and sustainability, so kind of the plastic to paper and I'm in the camp that medium term, the industry box volumes could be slightly better going forward than they were in the past. And we've got your competitor like Smurfit Kappa that's announced EUR 500 million corrugated investment plan over the next few years. So I just want to think, if we think about DS Smith, you're ramping up a box plant in the U.S., you've positively called out that 50% of your 2 new box plants in Italy and Poland are filled. How do you -- how do you think about your growth plans? And how are you positioned to make sure that you get your fair share of industry growth? And importantly, how do you grow in the right segments is the first question.
Thank you, Cole. It's a very, very good question indeed. We -- if we look at our growth, we're very pleased about how it's really coming from the FMCG sector. I mean, this is a long-term structural growth business. We see our very high volumes now. It's not really a bounce back of the industrial part because that's such a modest part of our business. This is building longer-term contracts with more of our FMCG customers. They're growing for a number of reasons, sustainability, et cetera, they're coming out of -- out of plastics and other formats. And we're seeing the growth in our business. So I'm certainly with you that we would expect growth over the medium term to be -- certainly to be healthy. This is all part of our long-term planning, and we set this out, what, 11 years ago about the expected growth in fiber-based packaging, the sustainability angles, that large customers and we've been investing considerable sums really ever since. If we look at where we are today, we're really benefiting. If we take Southern Europe from the Europac acquisition, they had substantial capacity, free capacity in their packaging plants. And we still got some way to go to fill that up. There's obviously a greater operational leverage from that. In the U.S., again, we do have the box plant there which we're filling up very nicely. We are really very pleased with the growth there and, I should say, the profitability as well. But in time, I could imagine us needing another plant. We've got our 2 new box plants as well coming through. Looking over further ahead, we do see a number of opportunities to increase capacity elsewhere. Firstly, it's about putting on extra shifts, which we have been doing at a number of plants for quite a few years and there's still some -- there's still further to go. Secondly, this whole digital revolution about understanding more and more about your assets. The amount of data we're getting and how we can seek to control those assets even better than we have in the past through this new -- just through the availability of data and our -- and the control of the asset base, we think, is going to give us more capacity.But in time, I won't be surprised if there were some more -- if there were some more box plant investments in Europe. If not now, I think we're looking over the next 3, 4, 5 years, and we think we can manage those quite adequately within our stated financial ratio. So it's, I think, getting the benefits of the investment that we've made.
Yes. We have invested heavily over the last 10 years in growth capacity, probably more so than other companies. So we're seeing the benefits of that coming through, too.
And you asked another question, Cole, about containerboard. As you know, we have a position where there is substantial free capacity in Germany. And there's a load more paper capacity coming on stream. We contract with these independent paper producers for the short, medium and long term. We have a deep relationships with them. And as our packaging business grows, we call off more paper from the increasing supply. And that gives us I mean certainly, among us, given us a very secure supply. Now going forward, we expect, as I said, more capacity to come on stream, particularly around Germany. Hence, we have a short position there because why build our own assets when we can just -- we can buy the paper. And as you know, the German market is probably the most or it is certainly the most cyclical market. But elsewhere, we have invested in paper assets and we continue to invest to keep them in the -- producing the right grades that we need. We have disposed of the De Hoop mill because it's a noncore asset. It makes heavy grades, it's not part of the future, there's plenty of capacity coming on stream. So again, as we said, we've got a capital reallocation out of De Hoop into the packaging plants. At the moment, we're calling off the paper that we need to supply our customers.
The next question comes from the line of Lars Kjellberg from Credit Suisse.
I just wanted to put some extra color on what you just said about paper availability. There's been, of course, all sorts of articles talking about very tight supply that is equally driving prices in a very, very strong way. And of course, there has been a huge amount of capacity coming on, but operating rates are extremely high. But what you're saying is you are comfortably supplied. Does that mean that other players in the market aren't getting paper because you've contracted the volume? So how should we view this? Or are you saying the market isn't tight?
No, Lars, I mean, we see the paper market, as a market overall, is extremely tight. We've seen numerous price increases going through on paper. And I wouldn't be surprised, although I'm not saying you're were happy, I wouldn't be surprised if there were further increases because it is so tight. And what I'm saying is, whilst the overall market totally have deep long-term relationships, we have contracted to take certain supplies and then we have floating arrangements as well. So the price of paper has been going up, but we continue to pull the paper that we need because we are, I think, probably the world's largest buyer of paper. And we continue to grow and our supply chain wants to work. It doesn't mean it's no different from calling off on inks or start suppliers, et cetera. So I really can't comment on what other people are finding and how they're being supplied. But I mean, we're very comfortable with where we are. As always, every now and again there can be some issues, a few issues with transportation over the last couple of months of -- of course, there are a few very short-term logistics issues. But in terms of the paper, we -- no, we have -- we continue to otherwise get what we need, absolutely.
The next question comes from the line of Mikael Doepel from UBS.
Just a couple of questions. Firstly, on the demand side of things, would like to ask about e-commerce growth trends that you see right now. In Europe, how are things trending there? I would assume that the comps are perhaps, they're coming a bit tough there. But if you could talk a bit about what you see in terms of e-commerce growth trends in Europe and your expectations going forward. Also on the growth aspects, the secular trends about the plastics to paper substitution, how much incremental growth would you expect that this trend could bring to the market and to you over the next couple of years? And then finally, on the containerboard markets, what kind of export/import dynamics are you seeing in Europe right now? And how is that impacting the market?
No. Thank you, Mikael. Yes, e-commerce, we had sort of a Capital Markets Evening a few months ago where we're talking about this. And we said that we, during the pandemic, with e-commerce, it's really brought forward a lot of future demand. But the actual penetration of e-commerce in the retail market is -- was something that we absolutely expected to get to. It just got a little bit earlier. And we said that we expect e-commerce to continue to grow even when the pandemic -- the effects of the pandemic soften. And that's exactly what we're seeing. We have some very tough comparators in e-commerce, but it's continued to grow. Not at the same level as it was during the height of the pandemic, but it continues to grow. And I think what we really tried to bring out in that Capital Markets Evening is, yes, you have -- you've got the big e-tailers, you're very successful, but you have the branded companies are setting up their own e-commerce operations. They want to have direct access to the consumer. We're going to see a long-term move away, particularly in convenience shopping into e-commerce was why go to the high street domestics for more of sort of an occasion. And that continues to drive the growth. So the big e-tailers have done extremely well, and I'm sure will continue to. But these branded companies and sort of the smaller startups, we've seen very strong growth there, and that continues to -- that continues to grow. When we look at the trends and just coming on about circular trends and plastics, the whole sustainability debate, particularly in the recycling angle, that circular economy, has significantly moved up the agenda. When we look at our large FMCG customers, we feel that we're in a very special position being Europe's largest recycler of fiber. With extensive operations, we can show them how we pick up all the old refuse and it's all recycled using our own infrastructure. We've -- we are trialing with some customers to how we actually can log their actual packaging and where it actually goes and how that's recycled. And we've seen this whole sustainability angle, particularly the circular economy really rise up in all of the renegotiations that we've had. Whereas before perhaps it was #3 or 4 on the agenda, now it's #1 on the agenda. And we're seeing one of the reasons we've been growing, I think, so well with a lot of our large customers, taking share of their business and longer-term contract is because of this move to a greater focus on sustainability, particularly that circular economy. I think we are so well positioned. In terms of plastics, yes, there's a lot of discussion about plastic replacement. We have certainly seen that increased. We've got some really great new products that are coming on to the market. And you will see them over the coming months, some really big brands coming out of plastic containers. It's really very exciting indeed. And we anticipate that the plastic replacement could ultimately mean about a 10% increase to the volumes of fiber-based corrugated packaging over the coming years.Just lastly, in terms of the import and export, the paper market is very tight. Exports of paper from Europe, and I'm including Turkey in Europe. I don't know your jurisdictions, but I'm including Turkey in that, we have seen that still some quite large exports going to the Far East, particularly Turkey and some of the new capacity there. From Europe, it's obviously -- the export's obviously hit, are lower, where it's more of a sort of a spot arrangement because of the increasing price in Europe. So overall, we see less supply to the Far East at the moment despite good demand from sort of Central sort of Europe, but Turkey does continue to supply. Some quite large volumes are still going out there. But the demand is very strong. From the U.S., our kraftliner demand is very strong, but the volumes are very contained. The volumes are tight coming out of the U.S. into the Far East.
The next question comes from the line of Sam Bland from JPMorgan.
Could I ask two questions, please. The first one was on cost inflation. I think OCC is obviously the most obvious bit, but could you talk about how much cost inflation there is from other cost lines, whether it's transport or energy or anything else?And the second question is on volume. If you look at your volume versus, let's say, 2019 levels, have you seen any slowing in growth versus that 2019 baseline yet? And if not, do you think you could be taking some market share there? Some market data maybe said the market is starting to slow a little bit.
If I take the volume, Adrian, can you talk on the cost? Is that...
Yes. Sam, on cost inflation, it's obviously impossible to give a specific number, but you're right. In terms of energy costs year-on-year, they're higher and you can see the market indices of those, and we'll be no different other than obviously, and you can see from our annual report, the amount of hedging we have against energy. So we do have protection there, but we're not immune to the rise in prices. The bigger issue now is particularly distribution, transport, and logistics. The U.K., there's a national extreme that you can read in every newspaper at the moment. In some ways, we're very fortunate having our own fleet. But clearly, there's a national shortage of lorry drivers. We've got a very good logistics team, and we're working around that. But again, we're not immune to it. In Europe, again, across Europe, there's an issue. It's not as extreme in the U.K. And then in North America, we're also seeing significantly rising logistics costs. We manage that through our usual pricing mechanisms, as you would expect. But they would be the main 2 that I would call out year-on-year, energy and logistics. But across the supply chain, at the moment, there's a global shortage of products, and we're seeing that filter through, and that what's resulting in our higher pricing as well in terms of box prices.
Look, on the volume, again, it's very interesting, and the devil's really in the detail here. We continue to see very, very strong demand. We are very focused in the FMCG sector, and we can see that demand is really by taking a greater share of our customers' business, but also our customer's growing as well. If you look at the industrial sector, which is smaller, there's very strong demand there. However, some of that sector are having their own supply chain issues about getting components, et cetera. So there's a bit of a sort of a clogging in some parts. But when we look at our business, which is so much in FMCG and those big customers, we aren't seeing a slowing in demand. It remains very strong. But I can understand why some piece, some suppliers may be feeling that their industrial customers could be -- could just be suffering from some of the supply chain issues that are out there. I mean a completely separate sector supplies into the car industry and their suppliers are down. Car manufacturers are -- have the world publicized issues. I mean, it's fantastic consumer demand, but a bit of sort of a -- a bit of friction in their supply chain.
The next question is a follow-up from the line of Cole Hathorn from Jefferies.
Just one quick follow-up on the first question on -- sorry, on the second question on containerboard supply. Can you just give a little bit of color around how you secure some of that supply. Is this offtake agreements that you've agreed with some of these independent mills that give you security of supply for the exact right types of paper that you need for your various box plants is the first one. And then just following up on the last question around the industrial recovery. Are there any areas where if there is supply chain issues, there's an opportunity for you to expand that business? Or do you continue to remain focused on the FMCG side of things?
With the -- with our paper suppliers, we will be discussing with them our needs of paper out for many years in the future. I mean, it can be 1, 2, 3, 4 and 5. It's not a -- we're not sort of guaranteeing that, but we will be talking to them. And on the back of that, a number of those customers -- a number of those suppliers have invested in new capacity. And indeed, in some of these suppliers, we would -- we can take 40% of their output, some very, very high percentages based on the long-term -- a long-term relationship and understanding of how we work. And it's worked extremely well for us. A lot of these suppliers, particularly in Germany, have a very, very low cost of capital. They are happy to invest in new plant machinery and paper making at returns that our shareholders wouldn't be very happy with. And we call it off, I'm thinking about one particular supplier who's coming on stream at the moment and we first discussed that with them 4 years ago. So it's all about that and we're very happy with that indeed. I think it works extremely well. And in terms of the industrial, for us, last year, during COVID, our volumes increased by 3.5% in our last financial year. That was a full year of COVID. We had a whole 12 months of it. It's not as if we've got a calendar year-end, where we had a few months without COVID. We had a full 12 months. And our volumes were up 3.5%. But the FMCG sector never stopped growing, one quarter to the next and next. It was always positive. So when we look at our business, we remain convinced that our best opportunities for our shareholders to secure that -- the volume and get the right sort of the asset utilization remains in the FMCG sector. Now we do obviously work in the industrial sector that's using spare capacity that we may have at any time, but you've seen that just shrink as a proportion of our business as the FMCG has grown. And I expect that to continue, roughly 80% is in the FMCG, and I wouldn't be surprised over the next few years that got up into the 90%.
We have another follow-up question now from the line of Lars Kjellberg from Credit Suisse.
I just had two follow-up questions. One being, Miles, if you can put a bit more color on what you said about sustainable packaging. You talked about 10% over the next whatever period that was. If you can sort of lay out what sort of period you were looking at. And number two, are you actually -- that's the first question combined, actually. The sort of growth contribution in the current fiscal year, is that actually sustainable packaging contributing? Or are we going to see that really coming in at a later stage given the tightness of the market and plastic seems to be in good demand as well? The second question relates to OCC. As the biggest European recycler, what are you seeing in those trends? Are we seeing a stabilization there? And what is your best guess over the next sort of 3 to 6 months for OCC?
Thank you. When we talk about sustainable packaging, that's about reuse, that's about recycling, that's obviously about plastic replacement. But plastic replacement is just one part of it. It's a much, much broader discussion with our customers. In fact, we would argue that the biggest contributor -- an equal contribution to carbon reduction is in greater recycling of the existing of packaging. The Ellen MacArthur Foundation has shown that half of carbon reduction can come from much better recycling rates, a more efficiently recycling. And we certainly support that conclusion. So when we are growing with our customers, the whole sustainability debate, frankly, that's what they're talking about. How can they ensure that their packaging doesn't end up in a beach in India or Thailand. How can they show that it is being reused, recycled and the carbon effects of that. And because of our positioning and our technology, and as you know we've been here for many, many years, we are only a fiber-based business. We don't do plastics. I think our expertise in this area is certainly being recognized by our customers, mainly the larger customers, as they move that whole sustainability debate at the agenda. Plastic is obviously a very visible part and there's a long-term problem with plastic that we all know about. The 10% increase in fiber-based packaging to replace plastic comes from our look at that 5 particular segments within retail. And if we were to replace those current plastic solutions with fiber, it would take 1.4 million tonnes out of plastic into fiber and that translates into about a 10% increase in the volume of fiber. It's called the tipping point. We've got a whole -- we've got a whole study on that, that's been independently reviewed and commented on. It's on our website. The timing of that really depends on -- partly on our customers. We haven't given a time frame. We think that it's probably going to -- it's not -- it's going to certainly be in the medium term. And I think what is encouraging is some of the new European legislation on plastics and single-use plastics, the taxation there has certainly started to level up the costs of -- between plastic and fiber. So that's where it comes from. Yes, that's retailer pressure. That's where it comes from. But the report is on our website.On the OCC -- sorry, on the OCC, I mean, forecasting these prices is -- my goodness me. I think we would -- when we look at ourselves, we think they're probably going to be broadly stable for the rest of the -- our financial year. So over the next 6 months, probably broadly stable. But that is a -- that's our sort of central view. I have to say they are higher than we thought they were going to be. But our view is stable towards the end of the financial year, may be moderating slightly. But that's -- it's extremely uncertain, extremely uncertain to -- but that's kind of where we are.
Our final question comes from the line of David O'Brien from Goodbody.
Just three for me, please. Firstly, just could you put some numbers, please, around the volume growth experienced in the first quarter just to give us a sense of what the momentum is like. Similarly on corrugated box price, what has the either sequential or year-on-year improvement on box price being here for? And what is the -- how is the experience vary between indexed contracts and open market negotiations? And then finally, look, clearly, you're flagging a challenging cost backdrop. When I think back to the full year results, you were calling out a nice sequential improvement in the margin into the second half. What are you signaling in terms of margin for the first half of 2022? Is there still improvement there because box price is coming through? Or should we think about a little bit of a step back?
Thank you. Look, our Q1 volumes were very strong. They went up in the double digits Q1 on Q1, and it really builds on all the momentum we saw. In the last financial year, our second half was 8.2% like-for-like volume growth and it's obviously continued to accelerate. As we move through the year, obviously, you get some tougher comparators. The corrugated price increase have been going very well. We're very pleased with that. It depends when you sort of start and endpoint is, but it depends on the market. But we're now -- every quarter, prices are going up, and they're going up actually on the market by around about 5%, something like that, as each quarter rolls through. Depending on what happens on the price of paper, up until the end of the first quarter, we were looking to get box price increase sort of 10% to 15%, something like that. If paper rise again, then you can put further increases on that. It won't be -- well -- but it's going very well. It's only obviously on the price of paper, but we're also negotiating other -- other further increases for other increasing costs such as transportation. So the recovery is going well. And obviously, in terms of profits, then we do expect to see a significant -- a very significant improvement in our profitability this half compared to the first half of last year, very significant further increases on the -- for the reason we talked about, the volumes and the pricing, et cetera. So we continue to see very good profitability coming through, and we haven't changed our outlook for the half or the full year despite these increasing costs because of the price recovery and the strong volumes.
Okay. So we have reached the end of the Q&A. So I'll now hand back to Miles for any closing remarks.
I'll just say to everybody, thank you very much for your time today. As I said, we've -- I'm very pleased with the progress we've made during the year to date. It's really built on our strong customer relationships, excellent volume growth, and good progress in recovering the increasing input costs. Thank you very much for your time.
Thank you, everyone, for joining today's conference. You may now disconnect your lines. Hosts, if you could please stay connected. Thank you.