DS Smith earnings dip and rebound in first half of 2020-21 fiscal year

DS Smith, a London-based provider of sustainable packaging, describes its half-year financial results, which ended Oct. 31, as “resilient” despite the challenging environment.

According to the company’s earnings report for the first half of its 2020-2021 fiscal year, revenue and profitability were adversely affected by the COVID-19 pandemic, particularly in the first quarter. The company reports that sales volumes were down 1 percent for the first half of the year compared with the same time frame last year. DS Smith says its revenue for the first half of its fiscal year is down 10 percent compared with the prior-year period, reflecting the impact of lower box and paper prices and the decline in box volumes and other volumes, which includes sheet and externally sold paper.

However, the company reports, much of that was because of the onset of the pandemic in the spring, adding that sales volumes have been rebounding in its second quarter of the year. DS Smith says sales volumes increased 3 percent in October and 5 percent in November compared with the same months in 2019. DS Smith reports strong cash flow in the first half of its 2020-2021 fiscal year, which it says was up 16 percent compared with the prior-year period.

Over the half-year period, DS Smith says recovered paper prices spiked in the first quarter at the onset of the pandemic, which impacted margins in that quarter. Old corrugated containers (OCC) prices fell by the second quarter, though, normalizing, while European paper prices have risen following strong domestic demand.

DS Smith says, “While the average corrugated box price has declined modestly compared to the prior [first-half] period, as the impact of the decline in paper prices over the last two years has rolled through, we believe the more recent increases in European paper pricing should provide a support against further erosion as we look forward.”

The company says it continues to ramp up its greenfield box plant in Indiana in the United States. Customer feedback on that new facility, which opened in December 2019, has been “excellent,” according to DS Smith. “By the end of this financial year, we expect to be operating at a run-rate of around 40 percent volume capacity” or 50,000 metric tons per year, reducing the amount of paper the company sells to the export market, it states in its earnings report.

“The boom in e-commerce packaging resulting from rapidly shifting consumer habits during the pandemic enabled our flagship Lebanon, Indiana, facility to do what it was built to do: produce millions of square feet of sustainable, performance packaging for the e-commerce and retail supply chains,” says Keith Ledbetter, managing director at DS Smith's North American operations.

The recycling landscape

“We are pleased with how we have performed over what has undoubtedly been a challenging six-month period,” says Colin McIntyre, CEO of Paper and Recycling at DS Smith, regarding the company’s first-half performance.

He adds, “The COVID-19 pandemic has brought huge volatility in [paper for recycling] markets, and I am really proud of the way we were able to flex our European recycling network to make sure we could continue to collect material and deliver it where it was needed most.”

McIntyre says the company saw declines in paper for recycling from traditional manufacturing sectors in the first half of its fiscal year, but he adds, it saw spikes in material coming through traditional grocery retail channels, as well as through e-commerce as the trend to online shopping was accelerated by COVID-19 shopping behaviors. He says the company expects to see those supply trends to continue and that paper packaging will likely become “more prevalent in domestic recycling streams.”

“Our recycling expertise across Europe means we are well-positioned to make sure we capture that material and continue to provide the high-quality recycled paper needed for our own and third-party paper mills,” he says.

McIntyre adds that the company kept production at all of its mills going in the first half of its fiscal year. He says, “It was with a real sense of pride that we were able to supply the packaging papers needed to ensure that essential consumer and pharmaceutical goods were supplied to homes and shops throughout the pandemic. As countries began to emerge from lockdowns, alongside the rise of e-commerce, the demand for our packaging papers has been unprecedented, and again we can be pleased with how we have responded to that. With the continued rise of e-commerce and the move away from hard to recycle plastics, the outlook for paper-based packaging is exciting.”

Trends and uncertainties

According to DS Smith, COVID-19 has accelerated some megatrends in e-commerce and sustainability. The company says its e-commerce sales are up 30 percent compared with the prior-year period. DS Smith expects the increase in e-commerce sales to continue as a trend in the near-term future. It says this trend is contributing to the strong volume growth being seen throughout its business.

“Our design and innovation teams are working with customers to bring bespoke e-commerce solutions to the market as customers increasingly demand high-quality sustainable packaging for this increasingly important market segment,” DS Smith states. “The acquisitions undertaken over the past three years are proving integral to the strength of our customer offering across Europe and North America. Looking forward, with both the growth of e-commerce, the market requirement for sustainable solutions to replace single-use plastic and the impressive growth we have achieved over the last three years, we now see opportunities to grow organically through investment in constructing two new greenfield sites in Europe with an estimated combined cost of approximately 100 million pounds, which will be financed through noncore asset disposals and cash flow. Land has been secured in Italy and Poland with the facilities expected to be operational in the coming two years.”

DS Smith reports several risks could affect the business. Brexit is one such concern.

“We have been working on robust contingency plans for every potential Brexit outcome for some time, and we are well-positioned to manage in the new environment. We have experienced strong growth in Europe for many years and that has been aided by free movement of skilled workers, free trade and movement of goods,” the company says.

Looking ahead, other risks and uncertainties include:

• Eurozone and macroeconomic markets;
• paper price volatility;
• disruptive markets;
• liquidity;
• shopping habits;
• organizational flexibility;
• regulation and governance;
• sustainability promises;
• security of paper supply;
• workforce capability;
• packaging transformation; and
• fiber technology changes.

Miles Roberts, group chief executive at DS Smith, concludes, “I am really proud of the commitment, professionalism and flexibility of our employees in this extraordinary time, keeping all our plants operational and responding to our customers’ needs throughout the period. This has enabled the group to perform well in the context of an unprecedented environment. [The first quarter] was particularly impacted by COVID-19, but pleasingly we saw real momentum in corrugated box volumes and profitability through [the second quarter] and into [the second half], together with continued excellent cash-flow generation. … Growth with our largest customer has been excellent, and our U.S. business has seen good underlying progress during the period, reflecting the recent investment in our new plant in Indiana and the award of a number of significant supply contracts from major [fast-moving consumer goods] companies.

“We are as excited as ever about the structural growth drivers for corrugated packaging, with a number of trends accelerated by the COVID-19 pandemic,” he says. “We are well-positioned to capitalize and are announcing today the construction of two new state-of-the-art packaging plants in the fast-growth regions of Italy and Poland to supply the burgeoning [fast-moving consumer goods]/e-commerce sector. While the economic and political environment remains uncertain due to COVID-19 and Brexit, we see continued momentum for our business, underpinning confidence in continued performance in line with our expectations for the year. Strong demand has driven ongoing paper price increases, supporting future box pricing, which, together with customer winds in Europe and the U.S. and our strong position to benefit from attractive structural trends, reinforces our confidence in the business going forward.”