TIDMSMDS
RNS Number : 0343C
Smith (DS) PLC
13 June 2019
13 June 2019
DS Smith Plc - 2018/19 FULL YEAR RESULTS
A year of Significant delivery
12 months to 30 April Change Change
2019 (reported) (constant currency)
Continuing operations
----------------------------- --------- ----------- --------------------
Revenue GBP6,171m +12% +12%
Adjusted operating profit(1) GBP631m +28% +28%
Adjusted profit before
tax(1) GBP569m +31% +31%
Profit before tax GBP350m +35% +35%
Adjusted EPS(1) 33.3p +8% +8%
Basic EPS 19.7p (7%) (8%)
Dividend per share 16.2p +13% +13%
Return on sales(4) 10.2% +130bps +120bps
ROACE(5) 13.6% -10bps -10bps
----------------------------- --------- ----------- --------------------
See notes to financial table below
Highlights
-- Strong operational performance
Market outperformance - volume growth at 2.4%(2)
Volume growth in all regions through FMCG and e-commerce
focus
Continued success of US operations
-- Strong financial performance
Record return on sales and upgrade of medium-term target to 10 -
12%
Organic adjusted operating profit growth(8) of 9%
Profit before tax up 35%
Free cash flow up 84%
Robust balance sheet - pro-forma net debt/EBITDA(9) <2.0X
-- Strategic delivery
Acquisition of Europac - upgrade to synergies from EUR50m to
EUR70m
Sale of plastics division agreed
Miles Roberts, Group Chief Executive, commented:
"This strong set of results from DS Smith demonstrates the
company's growing scale and strategic progress in key markets. We
are continuing to gain market share throughout Europe, particularly
among more resilient FMCG customers, and our US business is
performing well following our recent acquisition there.
I am very pleased to be able to raise our medium-term return on
sales target, up to 10 - 12 per cent, as well as adding to our cost
synergy estimate following successful initial progress in
integrating Europac, which we acquired during the year. DS Smith is
increasingly well-placed to capitalise on rising consumer demand
for sustainable corrugated packaging as well as greater convenience
from both e-commerce and more traditional retail channels.
The underlying drivers of demand for sustainable corrugated
packaging and our differentiated offering give us confidence in
ongoing volume and market share growth. We saw some volume weakness
in certain export-led markets in the second half of 2018/19,
including Germany, but we expect this to improve during the current
year. While volatility in the macro-economic environment and input
costs remains, our focus on pricing discipline, operating
efficiencies and cash flows supports our expectations of further
good progress in the coming year."
Delivery against our medium-term targets
Medium-term targets Delivery in 2018/19
----------------------------------------- -------------------
Organic volume growth(2) at least GDP(3)
+1% (2.9%) 2.4%
Return on sales(4) 8% - 10% 10.2%
ROACE(5) 12% - 15% 13.6%
Net Debt / EBITDA(6) <=2.0x 2.3x
Operating cash flow/operating profit(7)
>= 100% 102%
----------------------------------------- -------------------
See notes to the financial tables, below
Enquiries
DS Smith Plc +44 (0)20 7756 1800
Investors
Hugo Fisher, Group Communications Director
Rachel Stevens, Investor Relations Director
Media
Greg Dawson, Corporate Affairs Director
Brunswick +44 (0)20 7404 5959
Simon Sporborg
Dan Roberts
A presentation for investors and analysts will be held today at
9:00am at the London Stock Exchange, 10 Paternoster Square, London,
EC4M 7LS. Due to security at the London Stock Exchange, please
bring photographic identity, e.g. passport, driving licence or
European ID card. Coffee will be available from 8:30am.
The event is available by webcast by registering via the link on
our website
https://www.dssmith.com/investors/results-and-presentations.
Alternatively, dial-in access for the presentation is available on
the details as follows:
+44 (0)20 3003 2666 (standard access) or 0808 109 0700 (UK toll
free) Password:
DS Smith. The slides accompanying the presentation will be
available on our website shortly before the start of the
presentation, as well as on the webcast.
A replay of the event is available for seven days, on +44 (0)20
8196 1998, PIN 0331153. An audio file and transcript will also be
available on
www.dssmith.com/investors/results-and-presentations.
Notes to the financial tables
Note 15 explains the use of non-GAAP performance measures. These
measures are used both internally and externally to evaluate
business performance, as a key constituent of the Group's planning
process, they are applied in the Group's financial and debt
covenants, as well as establishing the targets against which
compensation is determined. Reported results are presented in the
Consolidated Income Statement and reconciliations to adjusted
results are presented on the face of the Consolidated Income
Statement, in note 2, note 7, and note 15.
(1) Before adjusting items of GBP90 million (as set out in note
3) and amortisation of GBP114 million
(2) Corrugated box volumes (excluding Europac) and adjusted for
the number of working days
(3) GDP growth (year-on-year) for the countries in which DS
Smith operates, weighted by our sales by country, for the period
April 2018 - March 2019 = 1.9%. Source: Eurostat (15/5/2019)
(4) Operating profit before amortisation and adjusting items as
percentage of revenue. Comparative on a constant currency basis
(5) Operating profit before amortisation and adjusting items as
a percentage of the average monthly capital employed over the
previous 12 month period. Average capital employed includes
property, plant and equipment, intangible assets (including
goodwill), working capital, provisions, capital debtors/creditors
and assets/liabilities held for sale. Comparative on a constant
currency basis
(6) EBITDA being operating profit before adjusting items,
depreciation and amortisation and adjusted for the full year effect
of acquisitions and disposals in the period. Net debt is calculated
at average exchange rates. Ratio as calculated in accordance with
bank covenants. See note 15 on non-GAAP measures for
reconciliation
(7) Free cash flow before tax, net interest, growth capital
expenditure, pension payments and adjusting cash flows as a
percentage of operating profit before amortisation and adjusting
items
(8) See note 15 on non-GAAP measures for reconciliation
(9) Pro-forma net debt to EBITDA is derived by adjusting the 30
April 2019 calculation of net debt for the expected sale proceeds
of the anticipated Plastics and remedy disposals and adjusting for
the EBITDA of these businesses
Cautionary statement: This announcement contains certain
forward-looking statements with respect to the operations,
performance and financial condition of the Group. By their nature,
these statements involve uncertainty since future events and
circumstances can cause results and developments to differ
materially from those anticipated. The forward-looking statements
reflect knowledge and information available at the date of
preparation of this announcement and DS Smith Plc undertakes no
obligation to update these forward-looking statements. Nothing in
this statement should be construed as a profit forecast.
Overview
2018/19 has been another year of good delivery from DS Smith,
with substantial progress developing our strategic position in
Europe along with further organic growth. We have delivered record
return on sales margins of 10.2 per cent alongside continued market
share gains and return on capital of 13.6 per cent, in the middle
of our target range. We also made the significant acquisition of
Europac, which was announced in June 2018 and completed in January
2019. Europac represented an exceptional scale opportunity to
enhance our customer offer in Iberia, a key packaging growth
region, and strengthen our global supply platform, in particular
with the addition of a strategically important kraftliner mill to
our assets. Initial integration work has been excellent and I am
pleased to announce that we are now able to increase our initial
cost synergy target for this acquisition, from EUR50 million per
annum to EUR70 million per annum, by the end of 2021/22. Our North
America operations, comprising Interstate Resources (acquired in
August 2017), along with Corrugated Container Corporation (acquired
in May 2018), have continued to perform ahead of plan with $33
million of the target $40 million cost synergies now achieved. We
have also agreed the disposal of our plastics business for c.
GBP400 million (net), with completion expected by the end of this
calendar year.
The success of these acquisitions means that we are now able to
look at how we best optimise our paper assets so that we maintain
the optimum balance between paper and packaging manufacturing,
consistent with our short paper strategy, as well as leveraging
further efficiency across the Group.
Strong organic growth
Organic corrugated box volumes have grown 2.4 per cent across
the year (excluding Europac), reflecting a strong H1 period and a
lower growth rate through H2, due to some weakness in export-led
markets, including Germany, as well as some capacity constraints in
North America. Once again, all regions have reported growth, with
particularly strong regional volumes in the UK and in Central
Europe and Italy. Growth once again has been particularly strong
from our multinational customers, particularly FMCG, e-commerce and
shelf-ready packaging. We have been particularly focused on
achieving sales price increases to reflect increasing input costs,
resulting in a record return on sales achieved in the year. Our
focus is on corrugated packaging, where we see continued market
growth, and to be differentiated to succeed in that market. The
core market growth drivers of e-commerce, plastic substitution and
retail changes are more relevant than ever. In particular, public
awareness of the importance of alternatives to plastic packaging
has increased substantially over the past 12 months and we have
corrugated packaging alternatives that are currently marketed to
take advantage of this opportunity. Our differentiators of scale,
innovation, end-to-end solutions and partnership approach continue
to resonate with customers as we help them to increase their sales,
reduce their costs and manage their risks.
For the full year, revenue growth of 12 per cent on a constant
currency basis was due to organic growth, the contribution from
Europac (which was owned for just over three months of the period)
and the incremental four month contribution from Interstate
Resources (which was acquired part way through the prior year).
Organic growth was driven principally by increases in sales price
reflecting rises in underlying costs, plus a contribution from
volume growth in corrugated boxes, partially offset by reduced
volume in external recycling and paper sales reflecting greater
matching of our paper manufacturing with the requirements of our
packaging operations.
Adjusted operating profit (continuing operations) increased by
28 per cent on a constant currency basis to GBP631 million
(2017/18: GBP492 million). This was driven by the significant
contribution from acquisitions, including just over three months
from Europac, the full year effect of ownership of Interstate
Resources, and synergies delivered from the North America business,
together with strong organic profit growth. Volume growth together
with increases in the sales price due to the lagged pass-through of
paper price rises, principally in calendar 2018, offset in part by
rising costs, contributed 8.8 per cent growth (GBP46 million)
compared to the prior year. Operating profit increased 29 per cent
on a constant currency basis to GBP427 million.
Adjusted earnings per share for continuing operations increased
by 8 per cent on a constant currency basis to 33.3 pence (2017/18:
30.7 pence). Including the earnings per share contribution from
discontinued operations i.e. the Plastics division, of 1.7 pence,
total adjusted earnings per share was 35.0 pence. This result
builds on nine years of consistently strong growth, with the nine
year compound annual growth rate for adjusted EPS being 23 per
cent. Earnings per share for continuing operations decreased by 8
per cent to 19.7 pence per share, reflecting the benefit of profit
growth offset by the increase in number of shares in issue.
The Board considers the dividend to be an important component of
shareholder returns and, as such, has a policy to deliver a
progressive dividend, where dividend cover is between 2.0 and 2.5
times, through the cycle and having taken into account the future
financing requirements of the Group. For the year 2018/19, in
accordance with our dividend policy, the Board recommends a final
dividend of 11.0 pence per share, which will be paid to all shares
on the record date. This, combined with the 2018/19 interim
dividend of 5.2 pence, makes a total dividend for the year of 16.2
pence (2017/18: 14.4 pence).
Developing the business
The year 2018/19 has been one of substantial strategic progress.
It has been the first full year of ownership of our North America
business Interstate Resources, we have acquired Europac in Iberia,
and we have also agreed the disposal of our plastics business.
These steps together mean that DS Smith will be a fibre-based
packaging focused, strategically aligned and financially
strengthened business.
Our North America business has performed well ahead of our
initial expectations. Integration work has continued through the
year such that the majority of the upgraded cost synergy target of
$40 million has been achieved, well ahead of schedule. Meanwhile,
the customer reaction to our packaging continues to be very good,
with a number of customer wins from large multinational groups that
we had previously served only in Europe. Our success means that we
are now expanding our packaging operations in the region with a new
greenfield site in Indiana, substantially increasing our capacity
in the region. That site is expected to begin production towards
the end of calendar 2019. A one-off impact on divisional
profitability of GBP15 million is expected in 2019/20 relating to
start-up losses from this new site.
Europac was acquired on 22 January 2019 and integration work is
going very well, with the management team established and positive
engagement from employees. We are now announcing an increase to our
estimate of cost synergies from Europac from EUR50 million to EUR70
million, due to additional synergies from head office cost
reductions and paper optimisation.
Optimisation programme in paper
DS Smith has grown substantially over the past nine years with a
unique footprint of European capability and operations, and this
presents an opportunity to optimise our paper operations.
Our paper assets are managed to support our packaging
operations, for example, producing specific paper grades required
for our performance packaging, particularly in regions where
external supply is scarce. The strategy of DS Smith has
consistently been to be 'short' paper, i.e. a net buyer of paper in
the market, in order to maintain the consistency of our
profitability. The recent acquisitions have resulted in a much
improved network of high quality paper mills (in addition to our
packaging operations), both geographically and from a product
perspective. We have added mills in key locations where there is a
shortage of specialist grades, such as the lightweight paper mill
of EcoPaper, and significant kraftliner production though the
acquisition of Europac. We now plan to optimise our footprint and
capability. Taking into account the full operational run-rate of
Europac, DS Smith has an annual external corrugated case material
(CCM) requirement of around 800 thousand tonnes in Europe. This is
equivalent to c. 20 per cent of our total paper requirement, and as
such we are c. 80 per cent integrated. Taking into account future
growth in packaging, we expect to reduce integration to towards 60
per cent in Europe, in the medium-term. In the US, our strategy has
always been to have full security of supply given the differences
in market structure in that region. At present we are 'long' c. 275
thousand tonnes CCM per annum in the US and expect to bring this to
a balanced position as we continue to build the packaging side of
our business, including the new site in Indiana currently under
construction.
Upgrading our medium-term margin targets
DS Smith has reported a record return on sales margin in 2018/19
of 10.2 per cent, ahead of our medium-term financial KPI of 8 - 10
per cent. We expect margin to continue to grow in the medium-term
due to our value-adding customer proposition, the benefit of
contribution from NAPP and Europac, and from a continuous focus on
cost and efficiency. As a result, the Board intends to increase the
medium-term target for return on sales up to 10 - 12 per cent.
Operating review
Unless otherwise stated, any commentary and comparable analysis
in the operating review is based on constant currency
performance.
UK
Year ended Year ended Change
30 April 2019 30 April 2018
Revenue GBP1,134m GBP1,088m +4%
Adjusted operating profit* GBP121m GBP109m +11%
Return on sales* 10.7% 10.0% +70bps
*Adjusted to exclude amortisation and adjusting items
Our UK corrugated packaging business has performed very well
despite the uncertain political and economic backdrop. Overall
volumes were very good, driven by both FMCG and e-commerce. Revenue
increased reflecting volume gains and price recovery, with the
additional revenue dropping through to profit, leading to a 11 per
cent increase in adjusted operating profit and a 70 basis points
increase in margin.
The Group has considered and planned for the potential impact of
Brexit on our business. The UK operations utilise paper
manufactured at our Kemsley mill in Kent, UK, in addition to paper
from other mills on continental Europe. We also import some other
input materials such as starch. The substantial majority of our
packaging product is distributed to customers in the UK with our
Kemsley mill exporting an element of its production to continental
Europe. We have also made plans for contingency levels of spare
parts and other essential items for continuous running. As such,
while not immune from disruption that might occur in the event of a
disorderly Brexit, including the impact of changes in order
patterns from customers, we expect disruption to our own operations
to be relatively contained.
Western Europe
Year ended Year ended Change- reported Change- constant
30 April 2019 30 April 2018 currency
Revenue GBP1,739m GBP1,476m +18% +18%
Adjusted operating profit* GBP139m GBP102m +36% +36%
Return on sales* 8.0% 6.9% +110bps +110bps
*Adjusted to exclude amortisation and adjusting items
The Western Europe division has seen like-for-like volume growth
ahead of market growth in the period, although volume growth was
behind the Group average. While volume growth in France was
impacted somewhat by the periods of civil disruption in the
country, this was partially offset by good growth in Iberia and
very good growth in the Benelux region. The growth in revenue was
largely driven by the inclusion of Europac for just over three
months, having been acquired on 22 January 2019, in addition to the
increase in sales price from recovery of historic paper price
rises. The increase in adjusted operating profit relates to the
inclusion of Europac as described above and good recovery of
operating costs through pricing from the underlying business.
Return on sales increased significantly by 110 basis points,
broadly in line with the Group margin increase, to 8.0 per
cent.
DCH and Northern Europe
Year ended Year ended Change-reported Change -
30 April 2019 30 April 2018 constant
currency
Revenue GBP1,076m GBP1,106m (3%) (2%)
Adjusted operating profit* GBP100m GBP90m +11% +12%
Return on sales* 9.3% 8.1% +120bps +120bps
*Adjusted to exclude amortisation and adjusting items
Volumes have grown modestly across the region, driven by very
good volume growth in Northern Europe, offset by a contraction in
Germany and Switzerland due to a focus on price discipline and
difficult market conditions. These tough trading conditions related
to packaging for export-led industrial customers in Germany,
particularly in the second half of 2018/19, where a wider economic
slow-down has been seen. Revenues fell 2 per cent due to a
reduction in external volumes from paper and recycling and, in
addition, reduced pricing from recycling, partially offset by sales
price recovery in packaging.
Adjusted operating profit increased by 12 per cent, reflecting
the contribution from our paper manufacturing operations in the
region. Consequently, return on sales increased to the upper end of
our target range at 9.3 per cent.
Central Europe and Italy
Year ended Year ended Change - Change -
30 April 2019 30 April 2018 reported constant
currency
Revenue GBP1,583m GBP1,462m +8% +9%
Adjusted operating
profit* GBP165m GBP129m +28% +29%
Return on sales* 10.4% 8.8% +160bps +150bps
* Adjusted to exclude amortisation and adjusting items
Volumes in this region have again been good, slightly ahead of
Group growth, with performance in Italy particularly pleasing.
Revenue growth of 9 per cent was driven in approximately equal
parts due to the inclusion of EcoPaper and EcoPack, and from
organic growth in packaging, particularly sales price. EcoPack and
EcoPaper were acquired on 6 March 2018 and hence this year was the
first full year of inclusion and represented an incremental 10
months contribution.
Adjusted operating profit increased 29 per cent, reflecting a
small contribution from the acquired businesses and organic growth
from the benefit of drop-through from volume and sales price
increases. As a result, return on sales increased by 150 basis
points.
North America
Year ended Year ended Change - reported Change - constant
30 April 2019 30 April 2018 currency
Revenue GBP639m GBP386m +66% +59%
Adjusted operating
profit* GBP106m GBP62m +71% +63%
Return on sales* 16.6% 16.1% +50bps +40bps
* Adjusted for amortisation and adjusting items
The performance of the North America Packaging and Paper
division has been very good once again, with margins considerably
above that of the Group. Corrugated box volumes have continued to
grow, though have been constrained to some degree by our available
capacity. We are, at present, part way through the construction of
a new packaging site in Indiana which will address this issue, and
which is expected to be operational by the end of calendar 2019.
Revenue grew 59 per cent principally driven by the incremental four
months contribution from the Interstate Resources business,
acquired in late August 2017, and from Corrugated Container
Corporation, acquired in May 2018. Increases in sales price also
contributed to revenue growth. Adjusted operating profit for the
division grew by 63 per cent, reflecting both the incremental
contribution from the acquired businesses and the benefit of
synergies ($23 million) from the Interstate Resources acquisition.
Combined with the synergies delivered in 2017/18, this brings the
total synergies to $33 million, close to the total of $40 million
targeted, substantially earlier than planned.
Our medium-term targets and key performance indicators
We measure our performance according to both our financial and
non-financial medium-term targets and key performance
indicators.
As set out above, like-for-like corrugated box volumes grew by
2.4 per cent (excluding Europac). This was modestly lower than our
target of GDP+1 per cent, with year-on-year GDP growth, weighted by
our sales in the markets in which we operate, estimated at 1.9 per
cent (source: Eurostat). All regions have again recorded volume
growth in the year, with a particularly strong contribution from
the UK and Central Europe and Italy regions. Towards the end of the
year we have seen some weakness, particularly in industrial
customers in export-led markets including Germany, reflecting wider
macroeconomic conditions. In addition, the North America business
was capacity constrained. Underlying the regional performances has
been the strong growth of our pan-European customer base, where we
continue to make significant gains with existing customers as we
increase our market share with them, further demonstrating the
demand for a high quality pan-European supplier of corrugated
packaging, operating on a co-ordinated multinational basis.
Adjusted return on sales increased 120 basis points to 10.2 per
cent (2017/18: 8.9 per cent), above the top of our target range of
8 to 10 per cent, reflecting our strong commercial offering and the
benefit of the sales price increases, partially offset by increased
overall input costs.
Adjusted return on average capital employed (ROACE) is 13.6 per
cent (2017/18: 13.7 per cent), around the middle of our medium-term
target range of 12 to 15 per cent and significantly above our cost
of capital, despite the recent significant acquisitions of
Interstate Resources in North America and of Europac in Europe, and
the exclusion of our plastic packaging business (now discontinued),
all of which has a dilutive impact on this ratio. This result
reflects a continuous focus on an efficient capital base, in
addition to profitability. We have maintained our continual focus
on tight capital allocation and management within the business,
including capex, which has been closely managed as shown by the
year-on-year reduction despite the increased size of the business.
ROACE is our primary financial measure of success, and is measured
and calculated on a monthly basis.
Net debt as at 30 April 2019 was GBP2,277 million (30 April
2018: GBP1,680 million) reflecting the significant acquisitions
made in the year of GBP1,702 million (including debt assumed of
GBP204 million including deposits), less the issue of new equity of
GBP1,006 million net. Cash generated from operations before
adjusting items of GBP774 million was used to invest in net capex
of GBP289 million which included GBP17 million in relation to
Europac, a reduction from GBP312 million in 2017/18, reflecting our
focus on cash management, while still including substantial growth
capex. Adjusting items of GBP93 million primarily related to the
acquisition and integration of the new businesses. Net debt/EBITDA
(calculated in accordance with our banking covenant requirements)
is 2.3 times (2017/18: 2.2 times). This reflects the acquisitions
made as well as ongoing tight cash management and control
throughout the business and is 0.2 times lower than anticipated at
the time of the 2018 rights issue. This ratio excludes the cash
required to fulfil the Interstate Resources put option which, if
exercised, would take reported leverage to c. 2.5 times. On a pro
forma basis, taking into account the disposal of the Plastics
business for GBP400 million (net) and remedy disposals of c. GBP54
million (as discussed in the financial review), and the relevant
adjustment to EBITDA, net debt/EBITDA at 30 April 2019 would have
been under 2.0 times. The Group remains fully committed to its
investment grade credit rating.
During the year, the Group generated free cash flow of GBP339
million (2017/18: GBP184 million), an improvement of 84 per cent.
Cash conversion, as defined in our financial KPIs (note 15) was 102
per cent, in line with our target of being at or above 100 per
cent.
DS Smith is committed to providing all employees with a safe and
productive working environment. We are pleased once again to report
improvements in our safety record, with our accident frequency rate
(defined as the number of lost time accidents per million hours
worked) reducing by a further 23 per cent from 3.0 to 2.3,
reflecting our ongoing commitment to best practice in health and
safety. The prior year figure of 3.0 is based on the full inclusion
of Interstate Resources on a like-for-like basis. We are proud to
report that 265 sites achieved our target of zero accidents this
year and we continue to strive for zero accidents for the Group as
a whole. We did, however, have a tragic accident in our Tallinn
plant in the year that resulted in the fatality of a colleague,
which overshadows all our performance improvements. Our thoughts
are with the family, colleagues and friends of the deceased as we
support them and the local authority investigation.
The Group has a challenging target for customer service of 97
per cent on-time, in-full deliveries. In the year we achieved 95
per cent, a further year on year improvement but still below our
target. While there has been improvement, management remains
dissatisfied with this outcome and is fully committed to delivering
the highest standards of service, quality and innovation to all our
customers and will continue to challenge ourselves to meet the
demanding standards our customers expect.
One key part of the DS Smith strategy is to lead the way in
sustainability. Corrugated packaging is a key part of the
sustainable economy, providing essential protection to products as
they are transported and, at the end of use, it is fully
recyclable. Corrugated packaging is also substantially constructed
from recycled material, as are many of our plastic packaging
products. Our Recycling business works with customers across Europe
to improve their recycling operations and overall environmental
performance. In calendar year 2018, compared to calendar year 2017,
on a restated basis to reflect acquisitions, our CO(2) equivalent
emissions, relative to production, has reduced by 6 per cent, a
good step towards our overall goal of 30 per cent reduction
(compared to 2015) by 2030. We have also become a global partner of
the Ellen MacArthur Foundation, a leading environmental charity
focused on sustainability, in line with our corporate purpose.
Outlook
The underlying drivers of demand for sustainable corrugated
packaging and our differentiated offering give us confidence in
ongoing volume and market share growth. We saw some volume weakness
in certain export-led markets, including Germany, but we expect
this to improve during the current year. While volatility in the
macro-economic environment and input costs remains, our focus on
pricing discipline, operating efficiencies and cash flows supports
our expectations of further good progress in the coming year.
Financial review
Delivering strong financial performance
Unless otherwise stated, the following commentary relates to the
continuing operations of the Group. Comparatives have been restated
for the adoption of IFRS 15 Revenue from Contracts with Customers,
the effect of the bonus element of the rights issue during the
year, and the classification of the Plastics business as a
discontinued operation.
Overview
The Group performed strongly in 2018/19, with good organic
volume and revenue growth, reflecting the recovery of input costs
in box prices and growth from acquisitions. As usual the benefits
of Group procurement, ongoing efficiency programmes and prior year
capital investments compensated for other input cost headwinds. In
the year we acquired Papeles y Cartones de Europa, S.A. (Europac),
a leading western European integrated packaging business. Through
this important acquisition DS Smith has strengthened its position
in having the widest reach in Europe of any packaging group and, as
a result, is perfectly placed to offer a complete pan-European
solution to all of our customers. In addition, the acquisition of
Interstate Resources and the creation of our North American
Packaging and Paper business in the previous year has allowed us to
now deliver our solutions to our customers that operate in both
continents.
The Group continues to perform well against the targets that the
Board has set for its financial key performance indicators, as well
as being confident that it will achieve all of its medium-term
financial measures:
-- Revenue up 12 per cent on a constant currency and reported
basis at GBP6,171 million (2017/18: GBP5,518 million)
-- Adjusted operating profit before adjusting items and
amortisation up 28 per cent on a constant currency and reported
basis at GBP631 million (2017/18: GBP492 million)
-- Operating profit at GBP427 million is up 30 per cent (2017/18: GBP329 million)
-- Organic corrugated box volume growth(2) of 2.4 per cent (2017/18: 5.2 per cent)
-- Adjusted return on sales(1) of 10.2 per cent (2017/18: 8.9 per cent)
-- Adjusted return on average capital employed(1) of 13.6 per cent (2017/18: 13.7 per cent)
-- Net debt/EBITDA of 2.3 times (2017/18: 2.2 times)
Non-GAAP performance measures
The Group uses certain key non-GAAP measures in order to provide
a balanced and comparable view of the Group's overall performance
and position, eliminating amortisation and unusual or
non-operational items that may obscure understanding of the key
trends and performance. These measures are used both internally and
externally to evaluate business performance, as a key constituent
of the Group's planning process, they are applied in the Group's
financial and debt covenants, as well as establishing the targets
against which compensation is determined. Amortisation relates
primarily to customer contracts and relationships arising from
business combinations - significant costs are incurred in
maintaining, developing and increasing these, costs which are
charged in determining adjusted profit; exclusion of amortisation
remedies the double count which would otherwise occur. Unusual or
non-operational items include business disposals, restructuring and
optimisation, acquisition related and integration costs, and
impairments, and are referred to as adjusting items.
Reporting of non-GAAP measures alongside reported measures is
considered useful to investors to understand how management
evaluates performance and value creation internally, enabling them
to track the Group's performance and the key business drivers which
underpin it and the basis on which to anticipate future
prospects.
Note 15 of the consolidated financial statements explains
further the use of non-GAAP performance measures and provides
reconciliations as appropriate to information stemming directly
from the financial statements.
Where a non-GAAP measure is referred to in the review, the
equivalent measure stemming directly from the financial statements
(if available and appropriate) is also referred to.
Trading results
Group revenue increased to GBP6,171 million (2017/18: GBP5,518
million), a growth of 12 per cent on a reported basis, reflecting
volume and sales price growth and the impact of acquisitions partly
offset by a negative currency translation effect. Corrugated box
volume growth was lower than expected in the second half of the
year driven largely by overall economic slowdown in Germany
resulting in the target, of GDP +1 per cent, at 2.9 per cent not
being achieved. Revenue growth reflected the sales price increases
that took place to recover the significant paper price increases
seen last year and in the first half of this year. The euro
accounted for 56 per cent of Group revenue and the slight weakening
of the euro and other European currencies against sterling during
the year represented the majority of the GBP21 million of negative
currency impact. On a constant currency basis, revenue increased by
12 per cent, including organic growth of GBP190 million.
Operating profit of GBP427 million increased from the prior year
(2017/18: GBP329 million) following our initiatives to recover the
impact of higher paper prices, partially offset by higher adjusting
items of GBP90 million (2017/18: GBP73 million) and higher
amortisation of GBP114 million (2017/18: GBP90 million) driven by
the significant acquisitions made in the last two years.
Adjusted operating profit rose by 28 per cent on a reported
basis to GBP631 million (2017/18: GBP492 million), with currency
having a small positive impact of GBP1 million. Growth on a
constant currency basis was also 28 per cent, benefiting from a
GBP40 million impact from the acquisition of Europac in the
financial year and a GBP32 million impact from the acquisitions of
Interstate Resources in the US and EcoPack and EcoPaper in Romania
in the previous financial year. These acquisitions are all
contributing significant synergies and are on track to deliver or
outperform their targets. These strong results are testament to the
Group's experience in the effective integration of, and support
for, acquired businesses.
The profit drop-through from higher box volumes (GBP27 million)
and the benefit of higher pricing and sales mix (GBP174 million)
was offset in part by lower other volumes (GBP20 million) and
higher input costs (GBP115 million). Input costs were substantially
higher than in the prior year, reflecting increases in paper
prices, which are the largest single component of input costs, and
general inflationary pressures on other costs with large impacts
coming from energy and distribution costs. The commercial finance
function within the Group continues to work closely with sales
teams to ensure that increased paper prices are recovered through
pass through mechanisms to our customers, and packaging strategists
work with our customers to mitigate these impacts through
performance packaging and innovation. The Group looks to mitigate
the impact of other input costs through improvements in efficiency
and procurement initiatives. Towards the end of the 2018 calendar
year we started to see paper prices falling
which has broadly continued each month until April 2019. This
will result in a time lag similar to that which is experienced when
paper prices rise albeit this will be beneficial until the price
reductions are fully passed on to customers or paper prices start
to rise again.
Depreciation increased by GBP32 million in the year on a
reported basis mainly from the acquisition of Europac and
Interstate Resources and previous capital investments. The increase
in amortisation for the year from GBP90 million in 2017/18 to
GBP114 million in 2018/19 was driven primarily by intangible assets
recognised through the acquisition of Europac and Interstate
Resources. Amortisation in the year ahead is expected to be GBP140
million.
Group margins continue to benefit from both operational leverage
and continuous focus on cost and efficiency, which mitigated
increases in other direct material costs, resulting in a growth in
adjusted return on sales to 10.2 per cent (2017/18: 8.9 per cent).
In 2015 the return on sales target range was increased to 8-10 per
cent and performance this year has exceeded this upgraded target.
Consequently, the Board has again decided to raise the medium-term
margin target to 10-12 per cent.
The return on average capital employed for the year was 13.6 per
cent (2017/18: 13.7 per cent), which is well within the target set
by the Board of 12-15 per cent, significantly above the Group cost
of capital. Given the measure of capital employed is the average
balance and not a single point in time, this current year ratio is
affected fully by acquisitions made in 2017/18 and partially by
acquisitions made in 2018/19.
Adjusting items
Adjusting items before tax, financing costs and share of results
of associates were GBP90 million (2017/18: GBP73 million).
Acquisition related costs of GBP32 million (2017/18: GBP28
million) were the largest element of adjusting items in 2018/19
driven by the costs of Europac which accounted for GBP22 million of
the total. They comprise professional advisory and legal fees, and
directly attributable staff costs related to acquisition activity
during the year as well as transactions which have either not yet
concluded or been shelved. Integration costs of GBP27 million
related to both current and prior year acquisitions. Restructuring
costs of GBP3 million relate to the completion of projects started
in the previous year.
On 26 October 2018, the High Court issued a judgement with
respect to the equalisation between men and women of guaranteed
minimum pension (GMP) benefits accrued between 1990 and 1997, in
order to comply with sex discrimination legislation. An adjustment
for the UK defined benefit scheme of GBP8 million has been charged
to the income statement as an adjusting item. The estimate is based
on broad assumptions about the scheme's characteristics and
represents a reduction from GBP15m estimated at the half year based
on data available at the time.
Other adjusting items of GBP20 million (2017/18: GBP16 million)
principally relate to significant multi-year European
centralisation and optimisation projects, including the development
of a Group-wide financial enterprise resource planning (ERP)
solution, shared service centres and major IT integration projects.
These projects arise primarily as a consequence of the Group's
acquisition activities, where the existing ERP, general IT systems
and infrastructure are limited. The total costs of individual
projects are significant and tend to be incurred over more than one
financial period although most of the projects which incurred
expenditure in this year have now come to an end.
Finance costs adjusting items of GBP15 million (2017/18: GBP12
million) relate to financing costs incurred in the acquisition of
Europac of GBP7 million, with the remainder relating to the unwind
of the discount on the redemption liability related to the purchase
of Interstate Resources.
Adjusting items in the new financial year are expected to be c.
GBP76 million.
Interest, tax and earnings per share
Net financing costs were GBP86 million (2017/18: GBP74 million).
Net financing costs before adjusting items were GBP71 million, up
GBP9 million from the prior year. The increase from the prior year
was primarily due to the acquisitions of Europac and Interstate
Resources. Interest costs include a charge of GBP3 million
(2017/18: GBP2 million) to reflect the additional finance cost
which would be incurred if the Interstate Resources put option had
been exercised. Adjusting financing costs of GBP15 million
(2017/18: GBP12 million) include the unwind of the discount on the
put option liability recognised on the acquisition of Interstate
Resources, and debt bridge financing costs associated with the
acquisition of Europac. The employment benefit net finance expense
was GBP2 million (2017/18: GBP4 million).
The share of the profit of equity accounted investments was GBP9
million (2017/18: GBP5 million).
Profit before tax was higher at GBP350 million (2017/18: GBP260
million), due to flow through of higher operating profit and
improved share of results of associates, partially offset by higher
amortisation and higher finance costs. Adjusted profit before tax
of GBP569 million (2017/18: GBP435 million) was higher due to the
growth in adjusted operating profit.
The tax charge of GBP88 million was GBP65 million higher than
the prior year primarily due to higher adjusted profits and the
recognition in the prior year of a reduction in tax liabilities as
a result of major tax reform in the US (tax credit GBP37 million).
The Group's effective tax rate on adjusted profit, excluding
amortisation, adjusting items and associates was 22.8 per cent
(2017/18: 21.5 per cent). The tax credit on adjusting items was
GBP14 million (2017/18: GBP13 million).
In addition, there was a net tax adjusting charge of GBP1
million, comprising a release of a provision of GBP32 million in
respect of a tax dispute in connection with a business closure
prior to the Group ownership of SCA Packaging, offset by a
provision of GBP33 million which represents the maximum potential
tax exposure which could arise in connection with the recent
decision by the EU Commission on State Aid in relation to the UK
Controlled Foreign Company regime.
On 25 April 2019, the EU Commission released its final decision
which concluded that, up until 31 December 2018, the UK Controlled
Foreign Company legislation partially represents State Aid.
There is significant uncertainty surrounding the quantum of
additional tax exposure due to a number of different factors which
are likely to impact the overall State Aid collection process. To
date, no formal guidance has been issued by the UK Government in
relation to its likely approach to identifying and recovering any
State Aid. The potential additional liability ranges from nil to
GBP33 million depending upon the method of calculation. In view of
the significant level of uncertainty and the potentially broad
range of outcomes, the Group has recognised a provision for the
maximum potential exposure of GBP33 million, which includes an
estimate of GBP2 million for interest on overdue tax.
Profit for the year from discontinued operations was GBP12
million (2017/18: GBP22 million).
Reported profit after tax, amortisation and adjusting items was
GBP274 million (2017/18: GBP259 million).
Basic earnings per share were 19.7 pence (2017/18: 21.2 pence).
Adjusted earnings per share from continuing operations were 33.3
pence (2017/18: 30.7 pence), an increase of 8 per cent on a
reported basis and on a constant currency basis, driven by the
growth in operating profit. Earnings per share were impacted in the
period by the equity rights issue on 25 July 2018 which raised c.
GBP1 billion of funds for the Europac acquisition that completed on
22 January 2019, in addition to the equity raise and equity issues
to the vendors of both Interstate Resources and EcoPack and
EcoPaper in the previous year.
Dividend
The proposed final dividend is 11.0 pence (2017/18: 9.8 pence),
which will be paid on 1 November 2019 to ordinary shareholders on
the register at close of business on 4 October 2019. As at 30 April
2019, the Company had distributable reserves of GBP1,469 million
(30 April 2018: GBP1,651 million).
Acquisitions and disposals
In line with its strategic aims, the Group has continued to grow
the business in order to meet the requirements of its major
customers.
This year the Group made another significant strategic step with
the acquisition of Papeles y Cartones de Europa, S.A. (Europac) on
22 January 2019. Europac is a highly complementary, vertically
integrated packaging business with a strategically important
kraftliner mill in Portugal giving us for the first time capacity
to supply an element of our kraft paper needs in Europe. Europac
has a diversified customer portfolio with strong customer
relationships and FMCG orientation. In the year ended 30 April 2019
Europac contributed revenue of GBP191 million and adjusted
operating profit before amortisation and adjusting items of GBP40
million. The total consideration of GBP1,460 million plus debt
acquired, including deposits, of GBP200 million was funded in part
by an equity rights issue. The fair value exercise is on-going and
values presented are provisional.
On 31 May 2018 the Group acquired Corrugated Container
Corporation and integrated it into its existing North America
Packaging and Paper business.
In the prior year the Group acquired an 80 per cent holding in
Interstate Resources in the US on 25 August 2017, EcoPack and
EcoPaper in Romania on 6 March 2018 and also the two box plants of
the DPF Groupe in France.
On 8 March 2019, the Group announced an agreement to sell its
Plastics business for an enterprise value of $585 million
(approximately GBP450 million). We expect net cash proceeds after
taxation, transaction adjustments and expenses of approximately
GBP400 million. This sale represents an important step in the
Group's continued progress as a leader in sustainable packaging and
accelerates the programme of deleveraging, alongside organic cash
flow. The sale is expected to result in a substantial adjusting
gain and be marginally EPS dilutive. The effective date for the
sale is 1 November 2018, with completion expected in the second
half of this calendar year following customary closing conditions
including regulatory approvals, which are proceeding as
expected.
On 16 April 2019, the Group also reached agreement for the
proposed sale of two packaging businesses in North Western France
and Portugal for EUR63 million (GBP54 million). The sales are to
fulfil the commitment made to the European Commission in relation
to the clearance of the Group's acquisition of Europac, which
completed on 22 January 2019. Completion of these sales is subject
to customary closing conditions including works council
consultation and regulatory approvals and are expected to take
place in the first quarter of the new financial year.
The cash proceeds of these disposals are expected to be used to
reduce the financial gearing of the Group, in line with its
medium-term target of net debt/EBITDA at or below 2.0 times.
Cash flow
Closing net debt of GBP2,277 million (30 April 2018: GBP1,680
million) has increased year-on-year with outflows on strategic
acquisitions and borrowings acquired more than offsetting higher
cash inflows from operating activities. Working capital outflows of
GBP12 million, including a reduction in underlying trade
receivables of GBP32 million and trade receivables acquired with
Europac of GBP41 million, represent an underlying working capital
inflow of GBP70 million offset by the planned reduction in factored
trade receivables.
Capital expenditure net of asset disposals decreased to GBP289
million in the year (2017/18: GBP312 million) inclusive of GBP17
million related to Europac. The Group capital expenditure strategy
of balancing asset renewal/replacement and investment in growth and
efficiency has been maintained. Growth and efficiency together
account for 67 per cent of expenditure. Proceeds from the disposal
of property, plant and equipment were GBP14 million (2017/18: GBP16
million), resulting in profits of GBP4 million (2017/18: GBP1
million). Net capital expenditure in the year ahead is expected to
be GBP370 million. This will include the investment in a greenfield
box plant in Indiana and GBP85 million for Europac.
Net interest payments of GBP61 million were GBP20 million higher
than the prior year principally driven by interest on the Euro
Medium Term Notes (EMTN) issued in July 2017 being payable
annually. Amortisation of debt issue costs and other finance costs
accounts for the majority of the difference between cash interest
paid and finance costs in the income statement.
Cash costs of adjusting items amounted to GBP93 million,
representing the cash investment in acquisition costs,
restructuring and infrastructure. Acquisition of subsidiary
businesses, net of cash and cash equivalents (but before acquired
debt), totalled GBP1,498 million in the year. No businesses were
disposed of in 2018/19.
During the year dividends of GBP187 million, representing the
2017/18 interim dividend and final dividend, were paid.
Cash generated from operations before adjusting cash items was
GBP774 million, GBP169 million higher than the prior year. The net
cash outflow of GBP1,445 million (2017/18: GBP670 million) reflects
significantly higher acquisition costs in the year.
Loans and borrowings from acquired businesses were GBP204
million. Net proceeds from the issue of share capital were GBP1,006
million in the year, primarily due to an equity rights issue on 25
July 2018 which raised funds for the Europac acquisition. Foreign
exchange, fair value and other non-cash movements decreased net
debt by GBP49 million.
Statement of financial position
Shareholders' funds have increased to GBP3,111 million at 30
April 2019, an increase of GBP1,002 million over the reported
position of the prior year. The improvement in shareholders' funds
is principally due to profit attributable to shareholders of GBP274
million (2017/18: GBP259 million) and the issue of share capital of
GBP1,006 million (2017/18: GBP576 million) partly offset by
actuarial losses on employee benefits of GBP62 million (2017/18:
GBP57 million gain) and the dividend payments of GBP187 million
(2017/18: GBP157 million). Equity attributable to non-controlling
interests was GBP1 million (30 April 2018: GBP1 million).
The net debt to adjusted earnings before interest, tax,
depreciation and amortisation (EBITDA) ratio, calculated in
accordance with the Group's debt covenants, was 2.3 times at 30
April 2019, slightly up from 2.2 times at the previous year end.
The Group is in compliance with all financial covenants, which
specify an EBITDA to net interest payable ratio of not less than
4.50 times and a maximum ratio of net debt to EBITDA of 3.25 times.
This calculation excludes the Interstate Resources put option
which, if exercised, would increase leverage to c. 2.5 times.
The Group has announced the sale of the Plastics business for
$585 million, and the Europac acquisition related remedy disposals
for EUR63 million. The cash receipts from these disposals will
reduce net debt by c. GBP450 million and the net debt to EBITDA
ratio to under 2.0 times. Sold receivables are not treated as debt
by the Group's lending banks and are, therefore, not included in
financial indebtedness from a covenant perspective.
The covenant calculations also exclude from the income statement
adjusting items and any interest arising from the defined benefit
pension schemes. At 30 April 2019, the Group had substantial
headroom under its covenants. The Group has an investment grade
credit rating from Standard and Poor's of BBB- which takes into
account all of the items excluded from covenant calculations and
working capital.
Energy costs
Energy is a significant cost for the Group and gas, electricity
and other fuel costs totalled GBP327 million in the year, including
GBP63 million related to recent acquisitions (2017/18: GBP246
million). Capital invested in combined heat and power facilities,
lower prices and energy efficiency initiatives have all contributed
to the management of energy costs. The Group continues to manage
the risks associated with its purchases of energy through its
Energy Procurement Group. By hedging energy costs with suppliers
and financial institutions the Group aims to reduce the volatility
of energy costs and provide a degree of certainty over future
energy costs.
Capital structure and treasury management
The Group funds its operations from the following sources of
capital: operating cash flow, borrowings, finance and operating
leases, shareholders' equity and, where appropriate, disposals of
non-core businesses. The Group's objective is to achieve a capital
structure that results in an appropriate cost of capital whilst
providing flexibility in short and medium-term funding so as to
accommodate material investments or acquisitions. The Group also
aims to maintain a strong balance sheet and to provide continuity
of financing by having borrowings with a range of maturities from a
variety of sources, supported by its financial covenants and
investment grade credit rating.
The Group's overall treasury objectives are to ensure that
sufficient funds are available for the Group to carry out its
strategy and to manage financial risks to which the Group is
exposed.
The Group regularly reviews the level of cash and debt
facilities required to fund its activities. At 30 April 2019, the
Group's committed borrowing facilities totalled c. GBP3.6 billion
of which c. GBP1.1 billion were undrawn. Undrawn committed
borrowing facilities are held to provide protection against any
refinancing risk on maturing facilities, the exercise of the
Interstate put option or deterioration in working capital balances.
These committed borrowing facilities do not include GBP538 million
of three year committed factoring lines which allow the without
recourse sale of receivables described below. The Group's committed
borrowing facilities at 30 April 2019 had a weighted average
maturity of 4.6 years (30 April 2018: 4.4 years). The Group's total
gross borrowings at 30 April 2019 were GBP2,625 million (30 April
2018: GBP1,973 million).
On 29 November 2018 the Group signed a GBP1.4 billion five year
(up to seven years including extension options) revolving credit
facility (RCF) with our banking group to replace our existing
GBP800 million RCF and to ensure liquidity for the five to seven
years following the Europac acquisition. In March 2019, the Group
signed a EUR44 million seven year term loan which benefits from
material subsidies as a result of its use to finance
environmentally beneficial capital expenditure projects in Germany.
During the year, the Group inherited EUR336 million of committed
debt facilities when it acquired Europac. This principally consists
of a EUR261 million syndicated bank facility, split between term
loan and RCF. The remaining EUR75 million are bilateral term loans.
In addition to this committed funding, the Group has also
maintained the Europac EUR200 million Spanish Commercial Paper
programme which offers the Group access to short term financing at
attractive interest rates.
The Group has for many years sold without recourse certain trade
receivables and on realisation the trade receivable is
de-recognised and proceeds are presented within operating cash
flows. These arrangements have systematically reduced early payment
discounts and have thus provided the Group with more economic
alternatives. The facilities available are generally committed for
three years and are not relied upon by the Group for liquidity.
There has been an underlying reduction in factoring balances of
GBP82 million to GBP483 million, partly offset by additional
arrangements acquired with Europac of GBP42 million, resulting in a
30 April 2019 balance of GBP525 million. The reduction of GBP82
million reflects a planned programme to bring the prior year
balance of GBP559 million to under GBP500 million and has been
achieved through more efficient management of working capital in
general and receivables in particular, as the Group seeks to
optimise its working capital profile through non-financial
arrangement initiatives.
Impairment
When applying IAS 36 Impairment of Assets, the Group compares
the carrying amounts of goodwill and intangible assets with the
higher of their net realisable value and their value-in-use to
determine whether impairment exists. The value-in-use is calculated
by discounting the future cash flows expected to be generated by
the assets or group of assets being tested for impairment. In April
2019, tests were undertaken to determine whether there had been any
impairment to the balance sheet carrying values of goodwill and
other intangible assets. The key assumptions behind the
calculations are based on the regional long-term growth rates and a
pre-tax discount rate of 9.5 per cent which is a basic weighted
average cost of capital of 8.8 per cent plus a blended country risk
premium of 0.7 per cent. In addition, testing is undertaken when
there is an indication of impairment. No impairments were
identified as a result of the testing.
The net book value of goodwill and other intangibles at 30 April
2019 was GBP3,211 million (30 April 2018: GBP2,043 million) with
the increase a result of the acquisitions of Europac and Corrugated
Container Corporation in the year.
Pensions
The Group's principal funded defined benefit pension scheme is
in the UK and is closed to future accrual. The Group also operates
various local post-retirement and other employee benefit
arrangements for overseas operations, as well as a small UK
unfunded scheme relating to two former directors and secured
against assets of the UK business.
IAS 19 Employee Benefits (Revised 2011) requires the Group to
make assumptions including, but not limited to, rates of inflation,
discount rates and current and future life expectancies. The use of
different assumptions could have a material effect on the
accounting values of the relevant assets and liabilities, which in
turn could result in a change to the cost of such liabilities as
recognised in the income statement over time. The assumptions
involved are subject to periodic review.
The aggregate gross assets of the schemes at 30 April 2019 were
GBP1,102 million and the gross liabilities at 30 April 2019 were
GBP1,272 million, resulting in the recognition of a gross balance
sheet deficit of GBP170 million (30 April 2018: GBP106 million).
The net deficit was GBP133 million (30 April 2018: GBP80 million)
after taking into account deferred tax assets of GBP37 million (30
April 2018: GBP26 million).
A triennial valuation of the main UK scheme was carried out at
30 April 2016, following which a deficit recovery plan was agreed
with the Trustee Board on 28 April 2017. The Group agreed to
increase existing annual cash contributions under the deficit
recovery plan by 10 per cent per annum commencing with 2016/17. The
recovery plan is expected to be completed on or around November
2025. The 2019 triennial valuation has commenced.
The total cash contributions paid into the Group pension schemes
were GBP20 million in 2018/19 (2017/18: GBP25 million), principally
comprising GBP19 million (2017/18: GBP20 million) in respect of the
agreed contributions to the pension scheme deficit (for the deficit
recovery plan) and are included in cash generated from operations.
The increase in the gross balance sheet deficit of GBP64 million is
principally attributable to a decrease in discount rates, an
increase in inflation assumptions in the main UK scheme and the GMP
adjustment detailed above.
IFRS 16
On implementation of IFRS 16 Leases there will be a material
increase in lease liabilities, along with a corresponding increase
in right of use assets within property, plant and equipment. The
Group's most significant leases relate to property and production
equipment and the undiscounted commitments under non-cancellable
operating leases in accordance with IAS 17 Leases total GBP259
million at 30 April 2019 (30 April 2018: GBP209 million).
The Group will adopt the modified retrospective approach using
practical expedients available, with a cumulative adjustment to
equity at 1 May 2019, and as such will not restate comparatives.
The Group will make use of the practical expedient available on
transition to IFRS 16 not to reassess whether a contract is or
contains a lease.
Accordingly, the definition of a lease in accordance with IAS 17
and IFRIC 4 Determining Whether an Arrangement Contains a Lease
will continue to apply to those leases entered or modified before 1
May 2019. On transition, the Group will measure all right-of-use
assets at the amount of the lease liability on adoption. The
adoption of IFRS 16 is expected to have the following impact on the
Group's results:
Property, plant and equipment Increase c. GBP235m
-------- ----------
Net debt Increase c. GBP235m
-------- ----------
EBITDA Increase c. GBP75m
-------- ----------
Adjusted profit before
tax Decrease c. GBP5m
-------- ----------
Net debt to EBITDA Increase Negligible
-------- ----------
Return on average capital
employed Decrease 30 bps
============================= ======== ==========
Discontinued operations and disposal group held for sale
The Plastics business has been classified as 'held for sale' and
treated as a discontinued operation following Board approval, prior
to the period-end, to explore a potential sale of the business.
The consolidated income statement has been restated to present
the Plastics business as a discontinued operation. The consolidated
statement of financial position presents the discontinued assets
and liabilities as 'assets held for sale' and 'liabilities held for
sale' respectively. The consolidated statement of cash flows has
also been restated, presenting a single amount of net cash flow
from discontinued operations.
Consolidated income statement
Year ended 30 April 2019
Before Adjusting
Before Adjusting adjusting items
adjusting items items 2018
(note (note
items 3) 2018 3) 2018
2019 2019 2019 (restated)(1) (restated)(1) (restated)(1)
Note GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------- ---- ----------- --------- ------- -------------- -------------- --------------
Continuing operations
Revenue 2 6,171 - 6,171 5,518 - 5,518
Operating costs (5,540) (50) (5,590) (5,026) (45) (5,071)
------------------------------- ---- ----------- --------- ------- -------------- -------------- --------------
Operating profit before
amortisation,
acquisitions, disposals
and guaranteed minimum pension
equalisation 2 631 (50) 581 492 (45) 447
------------------------------- ---- ----------- --------- ------- -------------- -------------- --------------
Amortisation of intangible
assets;
acquisitions and disposals 3 (114) (32) (146) (90) (28) (118)
Guaranteed minimum pension
equalisation 3 - (8) (8) - - -
------------------------------- ---- ----------- --------- ------- -------------- -------------- --------------
Operating profit 517 (90) 427 402 (73) 329
Finance income 5 - - - - - -
3,
Finance costs 5 (69) (15) (84) (58) (12) (70)
Employment benefit net finance
expense (2) - (2) (4) - (4)
------------------------------- ---- ----------- --------- ------- -------------- -------------- --------------
Net financing costs (71) (15) (86) (62) (12) (74)
------------------------------- ---- ----------- --------- ------- -------------- -------------- --------------
Profit after financing costs 446 (105) 341 340 (85) 255
Share of profit of equity
accounted
investments, net of tax 9 - 9 5 - 5
------------------------------- ---- ----------- --------- ------- -------------- -------------- --------------
Profit before income tax 455 (105) 350 345 (85) 260
6,
Income tax (expense)/credit 3 (101) 13 (88) (69) 46 (23)
------------------------------- ---- ----------- --------- ------- -------------- -------------- --------------
Profit for the year from
continuing operations 354 (92) 262 276 (39) 237
Discontinued operations
Profit for the year from
discontinued operations,
net of tax 13 22 (10) 12 24 (2) 22
Profit for the year 376 (102) 274 300 (41) 259
Profit for the year
attributable
to:
------------------------------- ---- ----------- --------- ------- -------------- -------------- --------------
Owners of the parent 376 (102) 274 300 (41) 259
Non-controlling interests - - - - - -
------------------------------- ---- ----------- --------- ------- -------------- -------------- --------------
Earnings per share
------------------------------- ---- ----------- --------- ------- -------------- -------------- --------------
From continuing operations and
discontinued operations
Basic 7 20.6p 23.2p
Diluted 7 20.6p 23.1p
------------------------------- ---- ----------- --------- ------- -------------- -------------- --------------
From continuing operations
Basic 19.7p 21.2p
Diluted 19.7p 21.1p
------------------------------- ---- ----------- --------- ------- -------------- -------------- --------------
Adjusted earnings per share from
continuing operations
Basic 33.3p 30.7p
Diluted 33.2p 30.5p
------------------------------- ---- ----------- --------- ------- -------------- -------------- --------------
1. Comparatives have been restated for the adoption of IFRS 15
Revenue from Contracts with Customers, the rights issue during the
year, and the classification of the Plastics business as a
discontinued operation.
(a) Subject to approval of shareholders at the Annual General
Meeting to be held on 3 September 2019, the final dividend of 11p
will be paid on 1 November 2019 to ordinary shareholders on the
register at the close of business on 4 October 2019.
(b) The financial information presented in this preliminary
announcement is extracted from, and is consistent with, the Group's
audited financial statements for the year ended 30 April 2019. The
financial information set out above does not constitute the
Company's statutory financial statements for the years ended 30
April 2019 or 30 April 2018 but is derived from those financial
statements. Statutory accounts for the year ended 30 April 2018
have been delivered to the Registrar of Companies. Statutory
accounts for the year ended 30 April 2019 will be delivered
following the Company's Annual General Meeting. The Auditor's
report on these accounts was not qualified or modified and did not
contain any statement under Sections 498(2) or (3) of the Companies
Act 2006.
(c) The Group's audited financial statements have been prepared
in accordance with International Financial Reporting Standards
(IFRSs) as adopted by the EU. The preliminary announcement has been
agreed with the Company's Auditor for release.
2018
Consolidated statement of comprehensive income 2019 (restated)
Year ended 30 April 2019 GBPm GBPm
------------------------------------------------------------- ------ -----------
Profit for the year 274 259
------------------------------------------------------------- ------ -----------
Items which will not be reclassified subsequently
to profit or loss
Actuarial (loss)/gain on employee benefits 4 (62) 57
Income tax on items which will not be reclassified
subsequently to profit or loss 11 (14)
Items which may be reclassified subsequently to profit
or loss
Foreign currency translation differences (45) 1
Cash flow hedges fair value changes 29 8
Reclassification from cash flow hedge reserve to income
statement (37) 10
Movement in investment hedge 17 -
Income tax on items which may be reclassified subsequently
to profit or loss 3 5
------------------------------------------------------------- ------ -----------
Other comprehensive (expense) / income for the year,
net of tax (84) 67
------------------------------------------------------------- ------ -----------
Total comprehensive income for the year 190 326
------------------------------------------------------------- ------ -----------
Total comprehensive income attributable to:
------------------------------------------------------------- ------ -----------
Owners of the parent 190 326
Non-controlling interests - -
------------------------------------------------------------- ------ -----------
1. Comparatives have been restated for the adoption of IFRS 15
Revenue from Contracts with Customers, the rights issue during the
year, and the classification of the Plastics business as a
discontinued operation.
Consolidated statement of financial position 2019 2018
At 30 April 2019 Note GBPm GBPm
-------------------------------------------------- ---- ------- -------
Assets
Non-current assets
Intangible assets 3,211 2,043
Biological assets 9 3
Property, plant and equipment 2,993 2,396
Equity accounted investments 33 24
Other investments 12 11
Deferred tax assets 64 64
Other receivables 9 7
Derivative financial instruments 12 15
-------------------------------------------------- ---- ------- -------
Total non-current assets 6,343 4,563
-------------------------------------------------- ---- ------- -------
Current assets
Inventories 584 543
Biological assets 6 4
Income tax receivable 18 15
Trade and other receivables 914 863
Cash and cash equivalents 382 297
Derivative financial instruments 35 44
Assets held for sale 237 -
-------------------------------------------------- ---- ------- -------
Total current assets 2,176 1,766
-------------------------------------------------- ---- ------- -------
Total assets 8,519 6,329
-------------------------------------------------- ---- ------- -------
Liabilities
Non-current liabilities
Borrowings (2,392) (1,811)
Employee benefits 4 (170) (106)
Other payables (16) (14)
Provisions (16) (4)
Deferred tax liabilities (323) (195)
Derivative financial instruments (14) (35)
-------------------------------------------------- ---- ------- -------
Total non-current liabilities (2,931) (2,165)
-------------------------------------------------- ---- ------- -------
Current liabilities
Bank overdrafts (129) (29)
Borrowings (233) (162)
Trade and other payables (1,855) (1,705)
Income tax liabilities (133) (118)
Provisions (17) (16)
Derivative financial instruments (16) (24)
Liabilities classified as held for sale (93) -
-------------------------------------------------- ---- ------- -------
Total current liabilities (2,476) (2,054)
-------------------------------------------------- ---- ------- -------
Total liabilities (5,407) (4,219)
-------------------------------------------------- ---- ------- -------
Net assets 3,112 2,110
-------------------------------------------------- ---- ------- -------
Equity
Issued capital 137 107
Share premium 2,236 1,260
Reserves 738 742
-------------------------------------------------- ---- ------- -------
Total equity attributable to owners of the parent 3,111 2,109
Non-controlling interests 1 1
-------------------------------------------------- ---- ------- -------
Total equity 3,112 2,110
-------------------------------------------------- ---- ------- -------
Approved by the Board of Directors of DS Smith Plc on 12 June
2019 and signed on its behalf by:
M W Roberts A R T Marsh
Director Director
The accompanying notes are an integral part of these
consolidated financial statements.
Consolidated statement of changes in equity
Year ended 30 April 2019
Total
reserves
attributable
to owners
Share Share Hedging Translation Own Retained of the Non-controlling Total
capital premium reserve reserve shares earnings parent interests equity
Note GBPm GBPm GBPm GBPm GBPm 1 GBPm GBPm GBPm GBPm
----------------- ---- ------- ------- ------- ----------- ------ --------
At 1 May 2017 95 728 (22) 40 (4) 516 1,353 2 1,355
----------------- ---- ------- ------- ------- ----------- ------ -------- ------------ --------------- ------
Profit for the
year - - - - - 259 259 - 259
Actuarial gain on
employee
benefits - - - - - 57 57 - 57
Foreign currency
translation
differences - - - 1 - - 1 - 1
Cash flow hedges
fair
value changes - - 8 - - - 8 - 8
Reclassification
from
cash flow hedge
reserve
to income
statement - - 10 - - - 10 - 10
Income tax on other
comprehensive
income - - (3) 8 - (14) (9) - (9)
----------------------- ------- ------- ------- ----------- ------ -------- ------------ --------------- ------
Total
comprehensive
income - - 15 9 - 302 326 - 326
----------------- ---- ------- ------- ------- ----------- ------ -------- ------------ --------------- ------
Issue of share
capital 12 532 - - - 32 576 - 576
Employee share
trust - - - - 3 (7) (4) - (4)
Share-based
payment expense
(net of tax) - - - - - 15 15 - 15
Dividends paid 8 - - - - - (157) (157) - (157)
Transactions with
non-controlling
interests - - - - - - - (1) (1)
----------------- ---- ------- ------- ------- ----------- ------ -------- ------------ --------------- ------
Other changes in equity
in the year 12 532 - - 3 (117) 430 (1) 429
----------------------- ------- ------- ------- ----------- ------ -------- ------------ --------------- ------
At 30 April 2018 107 1,260 (7) 49 (1) 701 2,109 1 2,110
----------------- ---- ------- ------- ------- ----------- ------ -------- ------------ --------------- ------
Profit for the
year - - - - - 274 274 - 274
Actuarial loss on
employee
benefits - - - - - (62) (62) - (62)
Foreign currency
translation
differences - - - (44) - (1) (45) - (45)
Cash flow hedges
fair
value changes - - 29 - - - 29 - 29
Reclassification
from
cash flow hedge
reserve
to income
statement - - (37) - - - (37) - (37)
Movement in net
investment
hedge - - - 17 - - 17 - 17
Income tax on other
comprehensive
income - - 2 1 - 11 14 - 14
----------------------- ------- ------- ------- ----------- ------ -------- ------------ --------------- ------
Total comprehensive
(expense)/income - - (6) (26) - 222 190 - 190
----------------------- ------- ------- ------- ----------- ------ -------- ------------ --------------- ------
Issue of share
capital 30 976 - - - - 1,006 - 1,006
Employee share
trust - - - - - (8) (8) - (8)
Share-based
payment expense
(net of tax) - - - - - 1 1 - 1
Dividends paid 8 - - - - - (187) (187) - (187)
----------------- ---- ------- ------- ------- ----------- ------ -------- ------------ --------------- ------
Other changes in equity
in the year 30 976 - - - (194) 812 - 812
----------------------- ------- ------- ------- ----------- ------ -------- ------------ --------------- ------
At 30 April 2019 137 2,236 (13) 23 (1) 729 3,111 1 3,112
----------------- ---- ------- ------- ------- ----------- ------ -------- ------------ --------------- ------
1. Retained earnings include a reserve related to merger relief.
Consolidated statement of cash flows
Year ended 30 April 2019
2018
2019 (restated)(1)
Continuing operations Note GBPm GBPm
------------------------------------------------------- ---- ------- --------------
Operating activities
Cash generated from operations 10 681 527
Interest received 1 1
Interest paid (62) (42)
Tax paid (85) (68)
------------------------------------------------------- ---- ------- --------------
Cash flows from operating activities 535 418
------------------------------------------------------- ---- ------- --------------
Investing activities
Acquisition of subsidiary businesses, net of cash and
cash equivalents 14 (1,498) (615)
Capital expenditure (303) (328)
Proceeds from sale of property, plant and equipment
and intangible assets 14 16
Cash flows from restricted cash and other deposits (4) (6)
------------------------------------------------------- ---- ------- --------------
Cash flows used in investing activities (1,791) (933)
------------------------------------------------------- ---- ------- --------------
Financing activities
Proceeds from issue of share capital 1,006 283
Repayment of borrowings (3,335) (490)
Proceeds from borrowings 3,810 1,008
(Payments in respect of)/proceeds from settlement of
derivative financial instruments (36) 2
Repayment of finance lease obligations (4) (4)
Dividends paid to Group shareholders 8 (187) (157)
Other (6) (4)
------------------------------------------------------- ---- ------- --------------
Cash flows from financing activities 1,248 638
------------------------------------------------------- ---- ------- --------------
(Decrease)/increase in cash and cash equivalents from
continuing operations (8) 123
------------------------------------------------------- ---- ------- --------------
Discontinued operations
Cash flows from discontinued operations 13 (3) 18
(Decrease)/increase in cash and cash equivalents (11) 141
Net cash and cash equivalents at beginning of the year 268 123
Exchange (losses)/gains on cash and cash equivalents (4) 4
------------------------------------------------------- ---- ------- --------------
Net cash and cash equivalents at end of the year 253 268
------------------------------------------------------- ---- ------- --------------
1. Restated for the classification of the Plastics business as a discontinued operation (note 13)
1. Basis of preparation
The consolidated financial statements have been prepared and
approved by the Directors in accordance with International
Financial Reporting Standards as adopted by the EU ('adopted
IFRSs'), and have also applied IFRSs as issued by the International
Accounting Standards Board (IASB).
The consolidated financial statements are prepared on the
historical cost basis with the exception of biological assets,
other investments, assets and liabilities of certain financial
instruments and employee benefit plans that are stated at their
fair value and share-based payments that are stated at their grant
date fair value.
The consolidated financial statements have been prepared on a
going concern basis.
The preparation of consolidated financial statements requires
management to make judgements, estimates and assumptions that
affect whether and how policies are applied, and the reported
amounts of assets and liabilities, income and expenses.
The comparative information presented in this report has been
restated as a result of the adoption of IFRS 15 Revenue from
Contracts with Customers , the rights issue during the year, and
the classification of the Plastics business as a discontinued
operation.
Discontinued operation
The Group classifies non-current assets and disposal groups as
held for sale if their carrying amounts will be recovered
principally through a sale transaction rather than through
continuing use. Non-current assets and disposal groups classified
as held for sale are measured at the lower of their carrying amount
and fair value less costs to sell. Costs to sell are the
incremental costs directly attributable to the disposal of an asset
(disposal group), excluding finance costs and income tax
expense.
The criteria for held for sale classification is regarded as met
only when the sale is highly probable and the asset or disposal
group is available for immediate sale in its present condition.
Actions required to complete the sale should indicate that it is
unlikely that significant changes to the sale will be made or that
the decision to sell will be withdrawn. Management must be
committed to the plan to sell the asset and the sale expected to be
completed within one year from the date of the classification.
On 6 March 2019, the Group announced the agreement to sell the
Plastics division. Accordingly, the Group considered the Plastics
division to meet the criteria of a discontinued operation as the
sale is expected to be completed within one year from the reporting
date.
Assets and liabilities classified as held for sale are presented
separately as current items in the statement of financial
position.
Discontinued operations are excluded from the results of
continuing operations and are presented as a single amount as
profit or loss after tax from discontinued operations in the
statement of profit or loss. Cash flows generated from discontinued
operations are presented as a single item in the statement of cash
flows.
All other notes to the financial statements include amounts for
continuing operations, unless otherwise stated comparative
information has been restated.
New accounting standards adopted
The following new accounting standards, amendments or
interpretations have been adopted by the Group as of 1 May
2018:
-- IFRS 15 Revenue from Contracts with Customers;
-- IFRS 9 Financial Instruments;
-- IFRIC Interpretation 22 Foreign Currency Transactions and Advance Consideration; and
-- Amendments to IFRS 2 Classification and Measurements of
Share-based Payment Transactions.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 replaces IAS 18 Revenue and related interpretations,
introducing a single, principles-based approach to the recognition
and measurement of revenue from all contracts with customers. The
new approach requires identification of performance obligations in
a contract and revenue to be recognised when or as those
performance obligations are satisfied, as well as additional
disclosure.
The Group's review of the requirements of IFRS 15 against
existing policy and practice concluded that timing of revenue
recognition was materially consistent with the requirements of IFRS
15. For the majority of the Group's contracts, the performance
obligation is the delivery of goods, which under IFRS 15 would be
recognised at a single point of time, on delivery of goods,
consistent with the current accounting treatment under IAS 18.
The Group utilises customised dies, tools and moulds in order to
fulfil customer orders, which vary considerably in value and
treatment in the customer contracts. While some are immaterial in
the context of the contract, others are of more significant value
and contractually distinct and are therefore considered a separate
performance obligation under IFRS 15. Previously, revenue from
dies, tools and moulds was netted within operating costs, while
under IFRS 15 it represents a separate performance obligation and
is included within revenue. In addition to the IFRS 15 adjustment
relating to dies, tools and moulds, energy income, historically
netted within operating costs while not material, has been
determined to be more appropriately stated within revenue.
The Group has applied IFRS 15 with effect from 1 May 2018, with
full restatement of prior periods to ensure comparability of the
consolidated income statement. The impact of applying the changes
described above on the restatement of the results for the year
ended 30 April 2018 was to increase revenue and increase operating
costs relating to continuing operations by GBP99 million with no
impact on net profit and loss. There was no impact on discontinued
operations revenue. Other areas identified in the review of IFRS 15
were concluded not to have material differences to current
practice.
IFRS 9 Financial Instruments
IFRS 9 has replaced IAS 39 Financial Instruments: Recognition
and Measurement and concerns the classification, measurement and
de-recognition of financial assets and financial liabilities,
introduces the expected credit loss model for the assessment of
impairment of financial assets, introduces new classification and
measurement rules for financial assets affecting the Group's other
investments previously classified as available for sale and held at
fair value, and changes the hedge accounting requirements.
The Group has determined that all existing effective hedging
relationships will continue to qualify for hedge accounting under
IFRS 9. The Group has elected to continue to apply the hedge
accounting requirements of IAS 39, as allowed under IFRS 9.
The Group's other investments previously classified as available
for sale under IAS 39 and held at fair value have been designated
on
transition as fair value through other comprehensive income,
after which the Group will record their fair value movements in
other comprehensive income.
On the date of initial application, 1 May 2018, the financial
instruments of the group were as follows, with any
reclassifications noted:
Financial instruments Measurement Carrying amount at 1 May 2018
---------------------------------- --------------------------------------- ----------------------------------
Original New
Non-current financial assets Original (IAS 39) New (IFRS 9) GBPm GBPm Difference
---------------------------------- -------------------- ----------------- ---------- --------- -----------
Other investments Available for sale FVOCI 11 11 -
Other receivables Amortised cost Amortised cost 7 7 -
Derivative financial instruments FVTOCI FVTOCI 15 15 -
Current financial assets
---------------------------------- -------------------- ----------------- ---------- --------- -----------
Trade and other receivables Amortised cost Amortised cost 863 863 -
Cash and cash equivalents Amortised cost Amortised cost 297 297 -
Derivative financial instruments FVTOCI FVTOCI 44 44 -
Non-current borrowings
---------------------------------- -------------------- ----------------- ---------- --------- -----------
Borrowings Amortised cost Amortised cost (1,811) (1,811) -
Other payables Amortised cost Amortised cost (14) (14) -
Derivative financial instruments FVTOCI FVTOCI (35) (35) -
Current borrowings
---------------------------------- -------------------- ----------------- ---------- --------- -----------
Borrowings Amortised cost Amortised cost (162) (162) -
Bank overdrafts Amortised cost Amortised cost (29) (29)
Derivative financial instruments FVTOCI FVTOCI (24) (24) -
Trade and other payables Amortised cost Amortised cost (1,705) (1.705) -
---------------------------------- -------------------- ----------------- ---------- --------- -----------
The Group has adopted the simplified approach to provide for
losses on receivables within the scope of IFRS 9. The impact of
applying the expected credit loss model has been concluded not to
be material considering the quality and short-term nature of the
Group's trade receivables. As the anticipated impact of adopting
IFRS 9 is not material, the Group has not restated prior periods on
adoption of IFRS 9.
The adoption of the remaining standards, amendments and
interpretations has not had a material effect on the results for
the year.
Except for the new accounting standards adopted during the year,
the accounting policies, presentation methods and methods of
computation followed are the same as those detailed in the 2018
Annual Report and Accounts, which is available on the Group's
website (www.dssmith.com/investors/results-and-presentations).
Whilst the financial information included in the preliminary
announcement has been computed in accordance with IFRS, this
announcement does not itself contain sufficient information to
comply with IFRS.
New and revised IFRS standards in issue but not yet
effective
IFRS 16 Leases
IFRS 16 provides a comprehensive model for the identification of
lease arrangements and their treatment in the financial statements
for both lessors and lessees. IFRS 16 supersedes the current lease
guidance including IAS 17 Leases and the related Interpretations
for accounting periods beginning on or after 1 January 2019. The
date of initial application of IFRS 16 for the Group is 1 May
2019.
In contrast to lessee accounting, IFRS 16 substantially carries
forward the lessor accounting requirements in IAS 17.
IFRS 16 prescribes a single lessee accounting model that
requires the recognition of a right of use asset and corresponding
liability for all leases with terms over 12 months unless the
underlying asset is of low value. The liability is initially
measured as the present value of future lease payments for the
lease term. Depreciation of right of use assets and interest on the
corresponding lease liabilities are recognised in the income
statement over the lease term. In the cash flow statement, the
total amount of cash paid is separated into a principal portion
(within financing activities) and an interest portion (within
operating activities) in the cash flow statement.
On implementation of IFRS 16 there will be a material increase
in lease liabilities, along with a corresponding increase in right
of use assets within property, plant and equipment. The Group's
most significant leases relate to property and production equipment
and the undiscounted commitments under non-cancellable operating
leases in accordance with IAS 17 total GBP259m for continuing
operations at 30 April 2019 (2018: GBP209m).
The Group will adopt the modified retrospective approach using
practical expedients available, with a cumulative adjustment to
equity at 1 May 2019, and as such will not restate comparatives.
The Group will make use of the practical expedient available on
transition to IFRS 16 not to reassess whether a contract is or
contains a lease. Accordingly, the definition of a lease in
accordance with IAS 17 and IFRIC 4 will continue to apply to those
leases entered or modified before 1 May 2019. On transition, the
Group will measure all right-of-use assets at the amount of the
lease liability on adoption.
Additionally, the adoption of IFRS 16 does not have any material
impact on the Group's current accounting for finance leases.
2. Segment reporting
Operating segments
Central Total
DCH and Northern Europe continuing
UK Western Europe Europe and Italy North America operations
Year ended 30 April 2019 Note GBPm GBPm GBPm GBPm GBPm GBPm
------------------------ ---- ----- -------------- ----------------- ---------- ------------- -----------------
External revenue 1,134 1,739 1,076 1,583 639 6,171
------------------------ ---- ----- -------------- ----------------- ---------- ------------- -----------------
Adjusted EBITDA 1 152 196 132 210 130 820
Depreciation (31) (57) (32) (45) (24) (189)
------------------------ ---- ----- -------------- ----------------- ---------- ------------- -----------------
Adjusted operating
profit1 121 139 100 165 106 631
------------------------ ---- ----- -------------- ----------------- ---------- ------------- -----------------
Unallocated items:
Amortisation (114)
Adjusting items in
operating profit 3 (90)
------------------------ ---- ----- -------------- ----------------- ---------- ------------- -----------------
Total operating profit (continuing
operations) 427
------------------------------------- -------------- ----------------- ---------- ------------- -----------------
Unallocated items:
Net financing costs (86)
Share of profit of
equity accounted
investments, net of
tax 9
------------------------ ---- ----- -------------- ----------------- ---------- ------------- -----------------
Profit before income tax 350
Income tax expense (88)
------------------------ ---- ----- -------------- ----------------- ---------- ------------- -----------------
Profit for the year
(continuing operations) 262
------------------------ ---- ----- -------------- ----------------- ---------- ------------- -----------------
Analysis of total assets and total
liabilities
Segment assets 870 3,112 974 1,508 1,262 7,726
----- -------------- ----------------- ---------- ------------- -----------------
Unallocated items:
Equity accounted
investments and
other investments 45
Derivative financial
instruments 47
Cash and cash
equivalents 382
Tax 82
Assets classified as
held for sale 237
------------------------ ---- ----- -------------- ----------------- ---------- ------------- -----------------
Total assets 8,519
------------------------ ---- ----- -------------- ----------------- ---------- ------------- -----------------
Segment liabilities (306) (847) (223) (407) (88) (1,871)
----- -------------- ----------------- ---------- ------------- -----------------
Unallocated items:
Borrowings and accrued
interest (2,787)
Derivative financial
instruments (30)
Tax (456)
Employee benefits (170)
Liabilities classified
as held for sale (93)
------------------------ ---- ----- -------------- ----------------- ---------- ------------- -----------------
Total liabilities (5,407)
------------------------ ---- ----- -------------- ----------------- ---------- ------------- -----------------
Capital expenditure 54 91 42 78 38 303
------------------------ ---- ----- -------------- ----------------- ---------- ------------- -----------------
1. Adjusted to exclude amortisation and adjusting items.
2. Segment reporting continued
Central Total
DCH and Northern Europe North continuing
Year ended 30 April 2018 UK Western Europe Europe and Italy America operations
(restated) Note GBPm GBPm GBPm GBPm GBPm GBPm
------------------------ ---- ----- -------------- ------------------- ---------- -------- --------------------
External revenue 1,088 1,476 1,106 1,462 386 5,518
------------------------ ---- ----- -------------- ------------------- ---------- -------- --------------------
Adjusted EBITDA 1 138 147 121 167 76 649
Depreciation (29) (45) (31) (38) (14) (157)
------------------------ ---- ----- -------------- ------------------- ---------- -------- --------------------
Adjusted operating
profit1 109 102 90 129 62 492
------------------------ ---- ----- -------------- ------------------- ---------- -------- --------------------
Unallocated items:
Amortisation (90)
Adjusting items in
operating profit 3 (73)
------------------------ ---- ----- -------------- ------------------- ---------- -------- --------------------
Total operating profit (continuing
operations) 329
------------------------------------- -------------- ------------------- ---------- -------- --------------------
Unallocated items:
Net financing costs (74)
Share of profit of
equity accounted
investment, net of
tax 5
------------------------ ---- ----- -------------- ------------------- ---------- -------- --------------------
Profit before income tax 260
Income tax expense (23)
------------------------ ---- ----- -------------- ------------------- ---------- -------- --------------------
Profit for the year
(continuing operations) 237
------------------------ ---- ----- -------------- ------------------- ---------- -------- --------------------
Analysis of total assets
and total liabilities
Segment assets 835 1,182 1,000 1,481 1,147 5,645
----- -------------- ------------------- ---------- -------- --------------------
Unallocated items:
Equity accounted
investment and other
investments 35
Derivative financial
instruments 59
Cash and cash
equivalents 297
Tax 79
Assets relating to
discontinued
operations(2) 214
------------------------ ---- ----- -------------- ------------------- ---------- -------- --------------------
Total assets 6,329
------------------------ ---- ----- -------------- ------------------- ---------- -------- --------------------
Segment liabilities (280) (680) (208) (394) (62) (1,624)
----- -------------- ------------------- ---------- -------- --------------------
Unallocated items:
Borrowings and accrued
interest (2,035)
Derivative financial
instruments (59)
Tax (313)
Employee benefits (106)
Liabilities relating
to discontinued
operations (82)
------------------------ ---- ----- -------------- ------------------- ---------- -------- --------------------
Total liabilities (4,219)
------------------------ ---- ----- -------------- ------------------- ---------- -------- --------------------
Capital expenditure 65 83 60 88 32 328
------------------------ ---- ----- -------------- ------------------- ---------- -------- --------------------
1. Adjusted to exclude amortisation and adjusting items.
2. Plastics division is classified as a discontinued operation in FY2018/19
Geographical areas
In presenting information by geographical area, external revenue
is based on the geographical location of customers. Non-current
assets are based on the geographical location of assets and exclude
investments, deferred tax assets, derivative financial instruments
and intangible assets (which are monitored at the operating segment
level, not at a country level).
External revenue
-------------------
2018
2019 (restated)
Continuing operations GBPm GBPm
---------------------- --- --- --- --- ------ -----------
UK 1,053 920
France 933 711
Germany 680 696
Italy 649 586
USA 652 350
Rest of the world 2,204 2,255
------------------------------------------ ------ -----------
6,171 5,518
-------------------------------------- ------ -----------
3. Adjusting items
Items are presented as adjusting in the financial statements
where they are significant items of financial performance that the
Directors consider should be separately disclosed to assist in the
understanding of the trading and financial results of the Group.
Such items include business disposals, restructuring and
optimisation, acquisition related and integration costs, and
impairments. With effect from 1 May 2017, the Group has changed the
description of these items from 'exceptional' to 'adjusting', to
better represent their nature.
2018
2019 (restated)
Continuing operations GBPm GBPm
--------------------------------------------------------------- ------ -----------
Acquisition related costs (32) (28)
Integration costs (27) (13)
Other restructuring costs (3) (15)
Impairment of assets - (1)
Guaranteed minimum pension equalisation (8) -
Other (20) (16)
--------------------------------------------------------------- ------ -----------
Total pre-tax adjusting items (recognised in operating profit) (90) (73)
Finance costs adjusting items (15) (12)
Adjusting tax items (1) 33
Current tax credit on adjusting items 14 13
Deferred tax credit on adjusting items - -
--------------------------------------------------------------- ------ -----------
Total post-tax adjusting items (92) (39)
--------------------------------------------------------------- ------ -----------
2018/19
Acquisition related costs of GBP32m relate to professional
advisory, legal and consultancy fees and directly attributable
internal salary costs relating to the review of potential deals,
and deals completed during the year. Of the total, GBP22m relates
to the acquisition of Europac, with the most significant components
being transaction and sponsor fees, legal costs, and financial and
tax due diligence and advice costs.
Integration costs relate to integration projects underway,
primarily to achieve cost synergies from the major acquisitions
made in the current year and previous financial years (of which
GBP14m relate to Europac and GBP9m relate to Interstate Resources).
They include those directly attributable internal salary costs
which would otherwise not be incurred.
On 26 October 2018, the High Court issued a judgment with
respect to the equalisation between men and women of guaranteed
minimum pension (GMP) benefits accrued between 1990 and 1997, in
order to comply with sex discrimination legislation. The impact of
this judgment was a charge of GBP8m for the Group.
Other restructuring costs of GBP3m include reorganisation and
restructuring in Western Europe (GBP1m), and various projects
commenced in the previous year.
Other adjusting items of GBP20m principally relate to a
significant multi-year major IT project which has been
substantially completed in this year. The costs of this project
extend over several years and as well as adjusting items include
capitalisation of intangible assets, particularly in the case of IT
systems. Those costs are primarily as a result of the Group's
acquisition activity, where the businesses acquired typically have
a limited IT and financial infrastructure.
Finance costs adjusting items relate to financing costs incurred
in the acquisition of Europac of GBP7m, with the remainder relating
to the unwind of the discount on the redemption liability related
to the purchase of Interstate Resources.
Adjusting tax items
Adjusting tax items comprise the release of a provision of
GBP32m in relation to the closure of a business in Denmark by SCA
Packaging prior to ownership by the Group. This amount has been
offset by a provision of GBP33m which represents the maximum
potential tax exposure which could arise in connection with the
recent decision by the EU Commission on State Aid in relation to
the UK Controlled Foreign Company regime.
On 25 April 2019, the EU Commission released its final decision
which concluded that up until 31 December 2018, the UK Controlled
Foreign Company legislation partially represents State Aid.
There is significant uncertainty surrounding the quantum of the
additional tax exposure due to a number of different factors which
are likely to impact the overall State Aid collection process. To
date, no formal guidance has been issued by the UK Government in
relation to their likely approach to identifying and recovering any
State Aid. The potential additional liability ranges from nil to
GBP33 million depending upon the method of calculation. In view of
the significant uncertainty and the broad range of possible
outcomes, the Group has recognised a provision for the maximum
potential exposure of GBP33 million, which includes an estimate of
GBP2 million for interest on overdue tax.
The current tax credit on adjusting items of GBP14m in the year
ended 30 April 2019 is the tax effect at the local applicable tax
rate of adjusting items that are subject to tax. This excludes
non-tax deductible deal related advisory fees in relation to
acquisitions and disposals.
3. Adjusting items continued
2017/18
Acquisition related costs of GBP28m relate to professional
advisory, legal and consultancy fees and directly attributable
internal salary costs relating to the review of potential deals,
and deals completed during the year, including the acquisition of
Interstate Resources, DPF Groupe and EcoPack and EcoPaper. Of the
total, GBP14m relates to the acquisition of Interstate Resources,
with the most significant components being transaction and sponsor
fees, legal costs, and financial and tax due diligence and advice
costs. Also included within acquisition costs is GBP2m for the year
end remeasurement of fair value on the redemption liability related
to the purchase of Interstate Resources.
Integration costs relate to integration projects underway,
primarily to achieve cost synergies from the acquisitions made in
the current financial year and previous financial years (of which
Interstate Resources comprises GBP6m). They include those directly
attributable internal salary costs which would otherwise not be
incurred.
Other restructuring costs of GBP15m include reorganisation and
restructuring in DCH and Northern Europe (GBP4m) and the UK
(GBP4m), primarily relating to completion of projects commenced in
the previous year.
Other adjusting items of GBP16m principally relate to
significant multi-year European centralisation and optimisation
projects, including the development of a Group-wide financial ERP
solution, shared service centre and major IT projects. The costs of
these programmes extend over several years and as well as adjusting
items include capitalisation of intangible assets, particularly in
the case of the financial ERP system. Those costs are primarily as
a result of the Group's acquisition activity, which has been
focused on businesses where the IT and financial infrastructure is
limited.
Finance costs adjusting items relate to financing costs incurred
in the acquisition of Interstate Resources of GBP5m, with the
remainder relating to the unwind of the discount on the redemption
liability related to the purchase of Interstate Resources.
On 22 December 2017, the US enacted a major tax reform bill,
which included, inter alia, the reduction in corporation tax rate
from 35% to 21%. The revised rate has been used to revalue net
deferred tax liabilities in the US, leading to a credit to profit
and loss of GBP37m to adjusting tax items, of which the most
significant element relates to the deferred tax liabilities arising
on the recognition of intangibles in business combinations. The
remaining GBP4m debit is an increase in tax provisions in respect
of tax risks in acquired businesses.
The current tax credit on adjusting items of GBP13m in the year
ended 30 April 2018 is the tax effect at the local applicable tax
rate of adjusting items that are subject to tax. This excludes
non-tax deductible deal related advisory fees in relation to
acquisitions and disposals.
4. Employee benefits
2019 2018
GBPm GBPm
---------------------------------------------------- ----- -----
Employee benefit deficit at beginning of the year (106) (181)
Acquisitions (12) (8)
Expense recognised in operating profit (6) (6)
Curtailment 2 -
Past service costs (GMP equalisation) recognised in
adjusting items (8) -
Employment benefit net finance expense (2) (3)
Employer contributions 20 25
Other payments and contributions - 13
Actuarial (losses)/gains (62) 57
Currency translation 2 (3)
Reclassification 2 -
---------------------------------------------------- ----- -----
Employee benefit deficit at 30 April (170) (106)
Deferred tax asset 37 26
---------------------------------------------------- ----- -----
Net employee benefit deficit at end of the year (133) (80)
---------------------------------------------------- ----- -----
The table above is the aggregate value of all Group employee
benefit schemes including both overseas and UK schemes. The Group's
principal funded, defined benefit pension scheme, the DS Smith
Group Pension scheme, is in the UK and is now closed to future
accrual.
The Group also operates various local post-retirement
arrangements for overseas operations, pre-retirement benefits and
long-service awards and a small UK unfunded scheme.
5. Finance income and costs
2018
2019 (restated)
Continuing operations GBPm GBPm
-------------------------------------- ------ -----------
Interest income from financial assets - -
-------------------------------------- ------ -----------
Finance income - -
-------------------------------------- ------ -----------
Interest on borrowings and overdrafts 62 54
Other 7 4
-------------------------------------- ------ -----------
Finance costs before adjusting items 69 58
Finance costs adjusting items 15 12
-------------------------------------- ------ -----------
Finance costs 84 70
-------------------------------------- ------ -----------
6. Income tax expense
2018
2019 (restated)
GBPm GBPm
------------------------------------------------------------------- ------ -----------
Current tax expense
Current year (123) (95)
Adjustment in respect of prior years 8 13
------------------------------------------------------------------- ------ -----------
(115) (82)
------------------------------------------------------------------- ------ -----------
Deferred tax credit
Origination and reversal of temporary differences 5 4
Reduction in tax rates (2) (1)
Adjustment in respect of prior years 11 10
------------------------------------------------------------------- ------ -----------
14 13
------------------------------------------------------------------- ------ -----------
Total income tax expense before adjusting items (101) (69)
Adjusting tax items (note 3) (1) 33
Current tax credit on adjusting items (note 3) 14 13
Total income tax expense in the income statement from continuing
operations (88) (23)
Total income tax expense in the income statement from discontinued
operations (6) (10)
------------------------------------------------------------------- ------ -----------
Total income tax expense in the income statement - total
Group (94) (33)
------------------------------------------------------------------- ------ -----------
The tax credit on amortisation was GBP26m (2017/18: GBP23m).
The reconciliation of the actual tax charge to that at the
domestic corporation tax rate is as follows:
2019 2018
GBPm GBPm
------------------------------------------------------------------- ----- -----
Profit before income tax on continuing operations 350 260
Profit before income tax on discontinued operations 18 32
Share of profit of equity accounted investments, net of
tax (9) (5)
------------------------------------------------------------------- ----- -----
Profit before tax and share of profit of equity accounted
investments, net of tax 359 287
------------------------------------------------------------------- ----- -----
Income tax at the domestic corporation tax rate of 19.00%
(2017/18: 19.00%) (68) (55)
Effect of additional taxes and tax rates in overseas jurisdictions (36) (27)
Additional items deductible for tax purposes 19 19
Non-deductible expenses (25) (20)
Release of prior year provisions in relation to acquired
businesses 38 3
Deferred tax not recognised (2) (4)
Foreign exchange 1 (5)
Adjustment in respect of prior years (19) 20
Effect of change in corporation tax rates (2) 36
------------------------------------------------------------------- ----- -----
Income tax expense - total Group (94) (33)
------------------------------------------------------------------- ----- -----
The Group's e ective tax rate, excluding amortisation, adjusting
items and share of result from equity accounted investments was
22.8% (2017/18: 21.5%).
7. Earnings per share
Basic earnings per share from continuing operations
2018
2019 (restated)(1)
----------------------------------------------------------- ------- --------------
Profit from continuing operations attributable to ordinary
shareholders GBP262m GBP237m
----------------------------------------------------------- ------- --------------
Weighted average number of ordinary shares 1,327 1,117m
----------------------------------------------------------- ------- --------------
Basic earnings per share 19.7p 21.2p
----------------------------------------------------------- ------- --------------
Diluted earnings per share from continuing operations
2018
2019 (restated)
--------------------------------------------------------------- ------ -----------
Profit from continuing operations attributable to ordinary
shareholders GBP262 GBP237m
--------------------------------------------------------------- ------ -----------
Weighted average number of ordinary shares 1,327m 1,117m
Potentially dilutive shares issuable under share-based payment
arrangements 6m 7m
--------------------------------------------------------------- ------ -----------
Weighted average number of ordinary shares (diluted) 1,333m 1,124m
--------------------------------------------------------------- ------ -----------
Diluted earnings per share 19.7p 21.1p
--------------------------------------------------------------- ------ -----------
The number of shares excludes the weighted average number of the
Company's own shares held as treasury shares during the year of
1m (2017/18: 1m).
Adjusted earnings per share from continuing operations
Adjusted earnings per share is a key performance measure for
management long-term remuneration and is widely used by the Group's
shareholders. Adjusted earnings is calculated by adding back the
post-tax effects of both amortisation and adjusting items.
Further detail about the use of non-GAAP performance measures,
including details of why amortisation is excluded, is given in note
13.
A reconciliation of basic to adjusted earnings per share is as
follows:
2019 2018 (restated) (1)
Basic Basic Diluted
- Diluted - -
pence - pence pence pence
per per per per
GBPm share share GBPm share share
--------------------------------------- ---- ------ -------- ----- ------- -------
Basic earnings 262 19.7p 19.7p 237 21.2p 21.1p
Add back:
Amortisation of intangible assets 114 8.7p 8.6p 90 8.1p 8.0p
Tax credit on amortisation (26) (2.0p) (2.0p) (23) (2.1p) (2.1p)
Adjusting items, before tax 105 7.9p 7.9p 85 7.6p 7.6p
Tax on adjusting items and adjusting
tax items (13) (1.0p) (1.0p) (46) (4.1p) (4.1p)
--------------------------------------- ---- ------ -------- ----- ------- -------
Adjusted earnings 442 33.3p 33.2p 343 30.7p 30.5p
--------------------------------------- ---- ------ -------- ----- ------- -------
8. Dividends proposed and paid
2019 2018
Pence Pence
per per
share GBPm share GBPm
---------------------------------------------- ------ ---- ------ ----
2017/18 interim dividend - paid (restated)(1) - - 4.6p 53
2017/18 final dividend - paid - - 9.8p 134
2018/19 interim dividend - paid 5.2p 71 - -
2018/19 final dividend - proposed 11.0p 151 - -
---------------------------------------------- ------ ---- ------ ----
(1) Restated for rights issue 2017/18 interim dividend restated
to 4.56 pence per share
2019 2018
GBPm GBPm
--------------------- ----- -----
Paid during the year 187 157
--------------------- ----- -----
The interim dividend in respect of 2018/19 of 5.2 pence per
share (GBP71m) was paid after the year end on 1 May 2019. The
2017/18 interim and final dividends were paid during the 2018/19
financial year. A final dividend in respect of 2018/19 of 11 pence
per share has been proposed by the Directors after the reporting
date.
9. Net debt
2019 2018
GBPm GBPm
------------------------------------ ------- -------
Cash and cash equivalents 382 297
Overdrafts (129) (29)
------------------------------------ ------- -------
Net cash and cash equivalents 253 268
------------------------------------ ------- -------
Other investments - restricted cash 3 3
Other deposits 89 45
Borrowings - due after one year (2,385) (1,802)
Borrowings - due within one year (230) (158)
Finance leases (10) (13)
Derivative financial instruments
assets 12 12
liabilities (9) (35)
------------------------------------ ------- -------
(2,530) (1,948)
------------------------------------ ------- -------
Net debt (2,277) (1,680)
------------------------------------ ------- -------
Net debt is a non-GAAP measure not defined by IFRS, calculated
in accordance with the Group's banking covenant requirements.
Further detail on the use of non-GAAP measures is included in note
15.
Derivative financial instruments above relate to forward foreign
exchange contracts, interest rate and cross-currency swaps used to
hedge the Group's borrowings and the ratio of net debt to adjusted
EBITDA. The difference between the amounts shown above and the
total derivative financial instrument assets and liabilities in the
consolidated statement of financial position relates to derivative
financial instruments that hedge forecast foreign currency
transactions and the Group's purchases of energy.
Other deposits are included, as these short-term receivables
have the characteristics of net debt.
10. Cash generated from operations
2018
2019 (restated)
Continuing operations GBPm GBPm(1)
---------------------------------------------------------------- ------ -----------
Profit for the year 262 237
Adjustments for:
Pre-tax integration costs and other adjusting items 50 45
Amortisation of intangible assets; acquisitions and disposals 146 118
Guaranteed minimum pension equalisation 8 -
Cash outflow for adjusting items (93) (78)
Depreciation 189 157
Profit on sale of non-current assets (4) (1)
Share of profit of equity accounted investments, net of
tax (9) (5)
Employment benefit net finance expense 2 4
Share-based payment expense 7 9
Finance income - -
Finance costs 84 70
Other non-cash items (1) 2
Income tax expense 88 23
Change in provisions (19) (9)
Change in employee benefits (17) (27)
---------------------------------------------------------------- ------ -----------
Cash generation before working capital movement 693 545
---------------------------------------------------------------- ------ -----------
Changes in:
Inventories (7) (81)
Trade and other receivables - gross 85 (136)
Factored trade receivables (82) 118
Trade and other payables (8) 81
---------------------------------------------------------------- ------ -----------
Working capital movement (12) (18)
---------------------------------------------------------------- ------ -----------
Cash generated from continuing operations 681 527
---------------------------------------------------------------- ------ -----------
(1) Restated for the classification of the Plastics business as
a discontinued operation (note 14).
11. Reconciliation of net cash flow to movement in net debt
2018
2019 (restated)
GBPm GBPm(1)
-------------------------------------------------------------- ------- -----------
Continuing operations
Profit for the year 262 237
Income tax expense 88 23
Share of profit of equity accounted investments, net of
tax (9) (5)
Net financing costs 86 74
Amortisation of intangible assets; acquisitions and disposals 146 118
Guaranteed minimum pension equalisation 8 -
Adjusting items 50 45
-------------------------------------------------------------- ------- -----------
Adjusted operating profit 631 492
Depreciation 189 157
-------------------------------------------------------------- ------- -----------
Adjusted EBITDA 820 649
Working capital movement (12) (18)
Change in provisions (19) (9)
Change in employee benefits (17) (27)
Other 2 10
-------------------------------------------------------------- ------- -----------
Cash generated from operations before adjusting cash items 774 605
Capital expenditure (303) (328)
Proceeds from sale of property, plant and equipment and
other investments 14 16
Tax paid (85) (68)
Net interest paid (61) (41)
-------------------------------------------------------------- ------- -----------
Free cash flow 339 184
Cash outflow for adjusting items (93) (78)
Dividends paid (187) (157)
Acquisition of subsidiary businesses, net of cash and cash
equivalents (1,498) (615)
Other (6) (4)
-------------------------------------------------------------- ------- -----------
Net cash flow (1,445) (670)
Proceeds from issue of share capital 1,006 283
Borrowings acquired, including deposits (204) (204)
-------------------------------------------------------------- ------- -----------
Net movement on debt (643) (591)
Foreign exchange, fair value and other non-cash movements 49 (15)
-------------------------------------------------------------- ------- -----------
Net debt movement - continuing operations (594) (606)
Net debt movement - discontinued operations (3) 18
Opening net debt (1,680) (1,092)
-------------------------------------------------------------- ------- -----------
Closing net debt (2,277) (1,680)
-------------------------------------------------------------- ------- -----------
(1) Restated for the classification of the Plastics business as
a discontinued operation (note 13).
Adjusted operating profit, adjusted EBITDA, free cash flow, and
net debt are non-GAAP measures not defined by
IFRS. Further detail on the use of non-GAAP measures is included in note 15.
12. Financial instruments
Carrying amounts and fair values of financial assets and
liabilities
Set out below is the accounting classification of the carrying
amounts and fair values of all of the Group's financial assets and
liabilities:
2019 2018
----------------------------------------- ---------- ----------------- -----------------
Category Carrying Fair Carrying Fair
amount value amount value
GBPm GBPm GBPm GBPm
----------------------------------------- ---------- -------- ------- -------- -------
Financial assets
Amortised
Cash and cash equivalents cost 382 382 297 297
Available for sale - other investments FVTOCI 12 12 11 11
Amortised
Trade and other receivables cost 923 923 870 870
Derivative financial instruments FVTOCI 47 47 59 59
----------------------------------------- ---------- -------- ------- -------- -------
Total financial assets 1,364 1,364 1,237 1,237
----------------------------------------------------- -------- ------- -------- -------
Financial liabilities
Amortised
Trade and other payables cost (1,871) (1,871) (1,719) (1,719)
Amortised
Bank and other loans cost (448) (448) (1) (1)
Amortised
Commercial paper cost (148) (148) - -
Medium-term notes and other fixed-term Amortised
debt cost (2,019) (2,069) (1,959) (1,995)
Amortised
Finance lease liabilities cost (10) (10) (13) (13)
Amortised
Bank overdrafts cost (129) (129) (29) (29)
Derivative financial instruments FVTOCI (30) (30) (59) (59)
----------------------------------------- ---------- -------- ------- -------- -------
Total financial liabilities (4,655) (4,705) (3,780) (3,816)
----------------------------------------------------- -------- ------- -------- -------
The fair value is the amount for which an asset or liability
could be exchanged or settled on an arm's-length basis. For
financial instruments carried at fair value, market prices or rates
are used to determine fair value where an active market exists. The
Group uses forward prices for valuing forward foreign exchange and
commodity contracts and uses valuation models with present value
calculations based on market yield curves to value note purchase
agreements, the medium-term note, cross-currency swaps and interest
rate swaps. All derivative financial instruments are shown at fair
value in the Consolidated Statement of Financial Position.
The Group's medium-term notes and other fixed-term debt are in
effective cash flow and net investment hedges and are therefore
held at amortised cost. The fair values of financial assets and
liabilities which bear floating rates of interest are estimated to
be equivalent to their carrying amounts.
IFRS 7 Financial Instruments: Disclosures requires the
classification of fair value measurements using the fair value
hierarchy that reflects the significance of the inputs used in
making the assessments.
All of the Group's financial instruments are Level 2 financial
instruments in accordance with the fair value hierarchy, meaning
although the instruments are not traded in an active market, inputs
to fair value are observable for the asset and liability, either
directly (i.e. quoted market prices) or indirectly (i.e. derived
from prices).
13. Discontinued operations and disposal group held for sale
The Plastics segment has been classified as discontinued
operations as disclosed in note 1.
Plastics principally comprises flexible packaging and dispensing
solutions, extruded and injection moulded products and foam
products. The Condensed consolidated income statement has been
restated to present the Plastics segment as a discontinued
operation. The Condensed consolidated statement of financial
position presents the discontinued assets and liabilities as
'assets held for sale' and 'liabilities held for sale'
respectively. The Condensed consolidated statement of cash flows
has also been restated, presenting a single amount of net cash flow
from discontinued operations.
(a) Condensed consolidated income statement - discontinued
operations
Year ended Year ended
30 April 30 April
2019 2018
GBPm GBPm
--------------------------------------------------- ---------- ----------
Revenue 352 346
Operating costs (324) (308)
---------------------------------------------------- ---------- ----------
Operating profit before amortisation and adjusting
items 28 38
Amortisation of intangible assets (1) (3)
Pre-tax adjusting items (10) (3)
Net finance income/(cost) 1 -
Profit before income tax 18 32
Income tax expense (6) (10)
---------------------------------------------------- ---------- ----------
Profit for the year from discontinued operations 12 22
---------------------------------------------------- ---------- ----------
The income tax expense is net of a tax credit on adjusting items
of nil (30 April 2018: GBP1m credit).
Basic earnings per share from discontinued operations
2018
(restated)
2019 (1)
------------------------------------------------------------- ------ -----------
Profit from discontinued operations attributable to ordinary
shareholders GBP12m GBP22m
------------------------------------------------------------- ------ -----------
Weighted average number of ordinary shares 1,327m 1,117m
------------------------------------------------------------- ------ -----------
Basic earnings per share 0.9p 2.0p
------------------------------------------------------------- ------ -----------
Diluted earnings per share from discontinued operations
2019 2018
--------------------------------------------------------------- ------ ------
Profit from discontinued operations attributable to ordinary
shareholders GBP12m GBP22m
--------------------------------------------------------------- ------ ------
Weighted average number of ordinary shares 1,327m 1,117m
Potentially dilutive shares issuable under share-based payment
arrangements 6m 7m
--------------------------------------------------------------- ------ ------
Weighted average number of ordinary shares (diluted) 1,333m 1,124m
--------------------------------------------------------------- ------ ------
Diluted earnings per share 0.9p 2.0p
--------------------------------------------------------------- ------ ------
The number of shares excludes the weighted average number of the
Company's own shares held as treasury shares during the year of
1m (2017/18: 1m).
Adjusted earnings per share from discontinued operations for the
year is 1.7p (30 April 2018:2.3p).
(b) Assets and liabilities held for sale
At 30 April
2019
GBPm
------------------------------ -----------
Intangible assets 74
Property, plant and equipment 74
Deferred tax assets 4
Inventories 29
Income tax receivable 6
Trade and other receivables 50
Assets held for sale 237
-------------------------------- -----------
Employee benefits (2)
Trade and other payables (73)
Deferred tax liabilities (5)
Income tax liabilities (13)
-------------------------------- -----------
Liabilities held for sale (93)
-------------------------------- -----------
13. Discontinued operations and disposal group held for sale
continued
(c) Cash flows from discontinued operations
Year ended Year ended
30 April 30 April
2019 2018
GBPm GBPm
----------------------------------- ---------- ----------
Net cash from operating activities 16 34
Net cash from investing activities (19) (16)
Net cash flows for the year (3) 18
------------------------------------ ---------- ----------
Net cash from operating activities is stated after cash outflows
in respect of adjusting items of GBP10m (30 April 2018: GBP2m).
14. Acquisitions and disposals
(a) Acquisition of Papeles y Cartones de Europa, S.A.
(Europac)
On 22 January 2019, the Group completed its acquisition of a
100% interest in Papeles y Cartones de Europa, S.A. (Europac), a
leading integrated packaging business in Iberia and France.
The acquisition was funded by the rights issue of 3 for 11
ordinary shares at 350 pence per share on 25 July 2018 (gross
proceeds of GBP1,027m offset by related transaction costs of
GBP25m) and a new committed debt facility entered into on 20
November 2018.
In the year ended 30 April 2019, Europac contributed combined
revenue of GBP191m and adjusted operating profit before
amortisation and adjusting items of GBP40m to the Group's results.
If the acquisition had occurred on 1 May 2018, estimated revenue
and adjusted operating profit before amortisation and adjusting
items for the combined group would have been GBP780m and GBP130m,
respectively.
The following table summarises the consideration paid for the
Europac business and provisional fair value of assets acquired and
liabilities assumed:
Carrying
values
before Provisional
acquisition fair values
GBPm GBPm
--------------------------------------- ------------ ------------
Intangible assets 5 488
Biological assets 6 6
Property, plant and equipment 623 604
Other non-current assets 9 9
Inventories 76 73
Income tax receivable 16 16
Trade and other receivables 117 117
Cash and cash equivalents 6 6
Borrowings, including deposits (200) (200)
Other non-current payables (94) (94)
Trade and other payables (126) (125)
Provisions and employee benefits (42) (50)
Income tax liabilities (23) (23)
Net deferred tax liabilities (31) (148)
--------------------------------------- ------------ ------------
Total identifiable net assets acquired 342 679
Goodwill 787
--------------------------------------- ------------ ------------
Total consideration 1,466
--------------------------------------- ------------ ------------
Satisfied by:
Cash consideration 1,466
Total consideration transferred
Net cash flow arising on acquisition
Cash consideration 1,466
Cash and cash equivalents acquired (6)
--------------------------------------- ------------ ------------
Total cash outflow 1,460
--------------------------------------- ------------ ------------
A detailed exercise has been undertaken to assess the
provisional fair values of assets acquired and liabilities assumed,
with the use of third party experts where appropriate. The
provisional fair values of intangible assets and property, plant
and equipment have been assessed by reference to work performed by
an independent valuation specialist. The intangible assets acquired
as part of the acquisition relate to customer relationships.
If new information obtained within one year from the acquisition
date about facts and circumstances that existed at the acquisition
date identifies adjustments to the above amounts, or any additional
provisions that existed at the acquisition date, then the
acquisition accounting will be revised.
Deferred tax is recognised on the temporary timing differences
created by the fair value adjustments.
14. Acquisitions and disposals continued
(a) Acquisition of Papeles y Cartones de Europa, S.A. (Europac)
continued
The provisional goodwill balance of GBP787m arising on the
acquisition of Europac (which is not expected to be tax deductible)
includes anticipated synergies from integrating Europac into the
Group, and the skills and technical talent of the Europac
workforce.
(b) Other 2018/19 acquisitions and disposals
In total, during the year ended 30 April 2019, cash
consideration for acquisition of subsidiary businesses, net of cash
and cash equivalents was GBP1,498m, and borrowings acquired,
including deposits, were GBP204m, giving a total impact on net debt
from acquisitions of GBP1,702m. Apart from the acquisitions of
Europac, the remaining acquisitions are not material to the Group
individually or in aggregate.
(c) 2017/18 acquisitions and disposals
In total, during the year ended 30 April 2018, cash
consideration for acquisition of subsidiary businesses, net of cash
and cash equivalents, was GBP615m, and borrowings acquired were
GBP204m, giving a total impact on net debt from acquisitions of
GBP819m. Acquisitions included Interstate Resources, and EcoPack
/EcoPaper.
On 25 August 2017, the Group acquired 80% of Indevco Management
Resources Inc. (IMRI), the owner of Interstate Resources Inc.
(Interstate Resources), for total consideration of GBP777m.
Interstate Resources is an integrated packaging and paper producer
based on the East Coast of the USA. The acquisition was funded by
the issue of a placing on 29 June 2017 of shares in the Company
with proceeds net of commissions and expenses of GBP270m, existing
debt facilities, new debt facilities of GBP400m and the issue of
52,474,156 ordinary shares to the seller. During the year, fair
value adjustments were made in relation to property, plant and
equipment and liabilities, leading to an increase in goodwill of
GBP10m.
On 6 March 2018, the Group acquired EcoPack and EcoPaper, a
leading integrated packaging and paper group in Romania, for total
consideration of GBP128m. The acquisition was funded by existing
cash and debt facilities and the issue of 6,492,411 ordinary shares
to the seller. During the year, fair value adjustments were made in
relation to property, plant and equipment and trade and other
payables, resulting in an increase to goodwill of GBP2m.
(d) Acquisition related costs
The Group incurred acquisition related costs of GBP32m (2017/18:
GBP28m) which primarily related to the acquisition of Europac as
detailed in note 14(a). In addition to the total of GBP32m which
was included in administrative expenses within adjusting items,
GBP25m of costs related to the share placing with existing DS Smith
equity holders has been netted against share premium.
15. Non-GAAP performance measures
The Group presents reported and adjusted financial information
in order to provide shareholders with additional information to
further understand the Group's operational performance and
financial position.
The principal adjustments to financial information are made to
exclude the effects of adjusting items (refer to note 3) and
amortisation.
Total reported financial information represents the Group's
overall performance and financial position, but can contain
significant unusual or non-operational items that may obscure
understanding of the key trends and position. These unusual or
non-operational items include business disposals, restructuring and
optimisation project costs, acquisition-related and integration
costs, and impairments. Restructuring and optimisation items
treated as adjusting items are major programmes usually spanning
more than one year, with uneven impact on the profit and loss for
those years affected. Other adjusting items, such as business
disposals, impairments, integration and acquisition costs, which
are by nature either highly variable or can also have a similar
distorting effect. Therefore, the Directors consider that
presenting non-GAAP measures which exclude adjusting items enable
comparability of the recurring core business, complementing the
IFRS measures presented.
Amortisation relates primarily to customer contracts and
relationships arising from business combinations. Significant costs
are incurred in maintaining, developing and increasing the value of
such intangibles, costs which are charged in determining adjusted
profit. Exclusion of amortisation remedies this double count as
well as providing comparability over the accounting treatment of
customer contracts and relationships arising from the acquisition
of businesses and those generated internally.
The Group's key non-GAAP measures are used both internally and
externally to evaluate business performance against the Group's
KPIs and banking and debt covenants, as a key constituent of the
Group's planning process, as well as comprising targets against
which compensation is determined.
Certain non-GAAP performance measures can be, and are,
reconciled to information presented in the financial statements.
Other financial key performance measures are calculated using
information which is not presented in the financial statements and
is based on, for example, average twelve month balances or average
exchange rates.
The key non-GAAP performance measures used by the Group and
their calculation methods are as follows:
Adjusted operating profit
Adjusted operating profit is operating profit excluding the
pre-tax effects of both amortisation and adjusting items. Adjusting
items include business disposal gains and losses, restructuring and
optimisation costs, acquisition related and integration costs and
impairments.
A reconciliation between reported and adjusted operating profit
is set out on the face of the consolidated income statement.
15. Non-GAAP performance measures continued
Operating profit before adjusting items
A reconciliation between operating profit and operating profit
before adjusting items is set out on the face of the consolidated
income statement.
Other similar profit measures before adjusting items are quoted,
such as profit before income tax and adjusting items, and are
directly derived from the consolidated income statement, from which
they can be directly reconciled.
Return on sales
Return on sales is adjusted operating profit measured as a
percentage of revenue and can be derived directly from the face of
the consolidated income statement. Return on sales is used to
measure the value we deliver to customers and the Group's ability
to charge for that value.
2018
2019 (restated)
GBPm GBPm
-------------------------- ------ -----------
Adjusted operating profit 631 492
Revenue 6,171 5,518
-------------------------- ------ -----------
Return on sales 10.2% 8.9%
-------------------------- ------ -----------
Adjusted earnings per share
Adjusted earnings per share is basic earnings per share adjusted
to exclude the post-tax effects of adjusting items and
amortisation. Adjusted earnings per share is a key performance
measure for management long-term remuneration and is widely used by
the Group's shareholders.
A reconciliation between basic and adjusted earnings per share
is provided in note 7.
Adjusted return on average capital employed (ROACE)
ROACE is the last 12 months' adjusted operating profit as a
percentage of the average monthly capital employed over the
previous 12 month period. Capital employed is the sum of property,
plant and equipment, goodwill and intangible assets, working
capital, capital debtors/ creditors, provisions, biological assets
and assets/liabilities held for sale.
2018
2019 (restated)
GBPm GBPm
------------------------------------------------ ------- -----------
Capital employed at 30 April 5,674 3,967
Currency, inter-month and acquisition movements (1,022) (364)
------------------------------------------------ ------- -----------
Last 12 months' average capital employed 4,652 3,603
------------------------------------------------ ------- -----------
Last 12 months' adjusted operating profit 631 492
------------------------------------------------ ------- -----------
Adjusted return on average capital employed 13.6% 13.7%
------------------------------------------------ ------- -----------
Adjusted EBITDA
Earnings before interest, tax, depreciation and amortisation
(Adjusted EBITDA) is adjusted operating profit excluding
depreciation. A reconciliation from adjusted operating profit to
adjusted EBITDA is provided in note 11.
Net debt
Net debt is the measure by which the Group assesses its level of
overall indebtedness within its financial position. The components
of net debt as they reconcile to the primary financial statements
and notes to the accounts is disclosed in note 9.
Net debt/EBITDA
Net debt/EBITDA is the ratio of net debt to adjusted EBITDA,
calculated in accordance with the Group's banking covenant
requirements.
Net debt/EBITDA is considered a key measure of balance sheet
strength and financial stability by which the Group assesses its
financial position.
In calculating the ratio, net debt is stated at average rates as
opposed to closing rates, and adjusting EBITDA is adjusted
operating profit before depreciation from the previous 12-month
period adjusted for the full year effect of acquisitions and
disposals in the period.
2019 2018
GBPm GBPm
-------------------------------------------------------- ----- -----
Net debt - reported basis (see note 9) 2,277 1,680
Currency effects 41 7
-------------------------------------------------------- ----- -----
Net debt - adjusted basis 2,318 1,687
-------------------------------------------------------- ----- -----
Continuing operations adjusted EBITDA - last 12 months'
reported basis 820 649
Acquisition effects 136 52
Add back of discontinued operations 40 49
-------------------------------------------------------- ----- -----
Adjusted EBITDA - banking covenant basis 996 750
-------------------------------------------------------- ----- -----
15. Non-GAAP performance measures continued
Free cash flow
Free cash flow is the net movement on debt before cash outflow
for adjusting items, dividends paid, acquisition and disposal of
subsidiary businesses (including borrowings acquired), and proceeds
from issue of share capital.
A reconciliation from Adjusted EBITDA to free cash flow is set
out in note 11.
Cash conversion
Cash conversion is free cash flow, as defined above, adjusted to
exclude tax, net interest, growth capital expenditure and pension
payments as a percentage of adjusted operating profit and can be
derived directly from note 11, other than growth capital
expenditure, which is capital expenditure necessary for the
development or expansion of the business as follows:
2018
2019 (restated)(1)
GBPm GBPm
------------------------------------ ------ --------------
Growth capital expenditure 140 165
Non-growth capital expenditure 163 163
------------------------------------ ------ --------------
Total capital expenditure (note 11) 303 328
------------------------------------ ------ --------------
Free cash flow (note 11) 339 184
Tax paid (note 11) 85 68
Net interest paid (note 11) 61 41
Growth capital expenditure 140 165
Pension payments (note 11) 17 27
------------------------------------ ------ --------------
Adjusted free cash flow 642 485
------------------------------------ ------ --------------
Adjusted operating profit 631 492
------------------------------------ ------ --------------
Cash conversion 102% 99%
------------------------------------ ------ --------------
1. Comparatives have been restated for the adoption of IFRS 15
Revenue from Contracts with Customers, the rights issue during the
year, and the classification of the Plastics business as a
discontinued operation.
Average working capital to sales
Average working capital to sales measures the level of
investment the Group makes in working capital to conduct its
operations. It is measured by comparing the monthly working capital
balances for the previous 12 months as a percentage of revenue over
the same period. Working capital is the sum of inventories, trade
and other receivables, and trade and other payables, excluding
capital and acquisition related debtors and creditors.
2018
2019 (restated)
Continuing operations GBPm GBPm
--------------------------------------------------------------- ------- -----------
Inventories 584 514
Trade and other receivables 833 781
Trade and other payables (1,587) (1,420)
Inter-month movements and exclusion of capital and acquisition
related items 174 114
--------------------------------------------------------------- ------- -----------
Last 12 months' average working capital 4 (11)
--------------------------------------------------------------- ------- -----------
Last 12 months' revenue 6,171 5,518
--------------------------------------------------------------- ------- -----------
Average working capital to sales 0.1% (0.2%)
--------------------------------------------------------------- ------- -----------
Constant currency and organic growth
The Group presents commentary on both reported and constant
currency revenue and adjusted operating profit comparatives in
order to explain the impact of exchange rates on the Group's key
income statement captions. Constant currency comparatives
recalculate the prior year revenue and adjusted operating profit as
if they had been generated at the current year exchange rates. In
addition, the Group then separates the first full year effects of
acquisitions to determine underlying organic growth. The table
below shows the calculations:
Adjusted
operating
Revenue profit
GBPm GBPm
----------------------------------------------------------------- ------- ----------
Reported basis - comparative year ended 30 April 2018 (restated) 5,518 492
Currency effects (21) 1
----------------------------------------------------------------- ------- ----------
Constant currency basis - comparative year ended 30 April
2018 (restated) 5,497 493
Prior year acquisitions 293 32
----------------------------------------------------------------- ------- ----------
5,790 525
Current year acquisitions 191 35
Synergies - 25
Organic growth 190 46
----------------------------------------------------------------- ------- ----------
Reported basis - year ended 30 April 2019 6,171 631
----------------------------------------------------------------- ------- ----------
16. Subsequent events
There are no subsequent events after the reporting date which
require disclosure.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR ZMGMVLZMGLZM
(END) Dow Jones Newswires
June 13, 2019 02:01 ET (06:01 GMT)
Smith (ds) (LSE:SMDS)
Historical Stock Chart
From Apr 2024 to May 2024
Smith (ds) (LSE:SMDS)
Historical Stock Chart
From May 2023 to May 2024