TIDMSMDS
RNS Number : 1420I
Smith (DS) PLC
10 December 2020
10 December 2020
DS Smith Plc - 2020/21 HALF YEAR RESULTS
Growing momentum into H2
6 months to 31 October 2020 Change Change
Continuing operations (reported) (constant currency)
------------------------------ ---------- ------------ ---------------------
Revenue GBP2,889m (9%) (10%)
Adjusted operating profit(1) GBP230m (34%) (35%)
Profit before tax GBP97m (54%) (55%)
Adjusted EPS(1) 10.8p (38%) (38%)
Statutory basic EPS 5.4p (55%) (55%)
Free cash flow ("FCF") GBP207m +16% +16%
Interim dividend per share 4.0p NA NA
Return on sales(4) 8.0% (300bps) (300bps)
ROACE(5) 8.7% (310bps) (300bps)
See notes to the financial
table below
Financial highlights
-- Resilient volume performance despite challenging environment
-- Progressive improvement in volumes throughout H1
o October +3%, overall H1 -1.0%
o Good start to H2, November >+5%
-- Revenue and profitability adversely impacted by effects of Covid-19 particularly in Q1
-- Progressive US momentum with good Indiana plant progress
-- Significant return on sales progression in period: H1 8.0%, Q2 9.5%
-- Strong cash flow: FCF +16% reflecting prudent management of cash
-- Robust financial position and long-term liquidity
-- Dividend resumed
Operational and Commercial highlights
-- Agile and responsible
o All plants operational
o Excellent service and quality throughout H1
o Furlough being repaid
-- Strong growth with large pan-European and US FMCG customers -
market share gains; offsetting weaker industrial performance
-- Covid-19 has accelerated structural mega-trends in e-commerce and sustainability
o E-commerce sales up c.30% in period
o Plastic substitution remains key customer focus
-- Leadership in the circular economy - launched new Sustainability strategy
Miles Roberts, Group Chief Executive, said:
"I am really proud of the commitment, professionalism and
flexibility of our employees in this extraordinary time, keeping
all our plants operational and responding to our customers' needs
throughout the period. This has enabled the Group to perform well
in the context of an unprecedented environment. Q1 was particularly
impacted by Covid-19, but pleasingly we saw real momentum in
corrugated box volumes and profitability through Q2 and into H2,
together with continued excellent cash flow generation. We have
maintained our track record of winning market share through our
fibre-based offering focussed on FMCG and e-commerce customers,
where the seasonal period has seen solid growth. Growth with our
largest customers has been excellent and our US business has seen
good underlying progress during the period, reflecting the recent
investment in our new plant in Indiana and the award of a number of
significant supply contracts from major FMCG companies.
We are as excited as ever about the structural growth drivers
for corrugated packaging with a number of trends accelerated by the
Covid-19 pandemic. We are well positioned to capitalise and are
announcing today the construction of two new state of the art
packaging plants in the fast growth regions of Italy and Poland to
supply the burgeoning FMCG/ e-commerce sector. While the economic
and political environment remains uncertain due to Covid-19 and
Brexit, we see continued momentum for our business, underpinning
confidence in continued performance in line with our expectations
for the year. Strong demand has driven ongoing paper price
increases, supporting future box pricing, which, together with
customer wins in Europe and the US and our strong position to
benefit from attractive structural trends, reinforces our
confidence in the business going forward."
Progress against medium-term targets
Medium-term targets Delivery in H1 2020/21(8)
Continuing operations
---------------------------------------- --------------------------
Organic volume growth(2) >=GDP(3) +1%,
being (9%) (1.0%)
Return on sales(4) 10% - 12% 8.0%
ROACE(5) 12% - 15% 8.7%
Net debt / EBITDA(6) <=2.0x 2.37x
Cash conversion(7) >=100% 146%
---------------------------------------- --------------------------
See notes to the financial tables below
Enquiries
DS Smith Plc +44 (0)20 7756 1800
Investors
Hugo Fisher, Group Investor Relations Director
Rachel Stevens, Investor Relations Director
Media
Greg Dawson, Corporate Affairs Director
Brunswick +44 (0)20 7404 5959
Dan Roberts
Sophia Lazarus
Presentation and dial-in details
There will be a webcast audio presentation at 9:00am with the
slides of the half year results, followed by a live Q&A.
To access the webcast, please register here . A copy of the
slides presented will also be available on the Group's website,
https://www.dssmith.com/investors/results-and-presentations shortly
before the start of the presentation.
If you would like to ask a question at the end of the webcast,
then you will need to dial into the associated conference call
using the following details. Please dial in 15 minutes before the
start of the webcast to allow for registration.
Standard International Access: +44 (0) 20 3003 2666
UK Toll Free: 0808 109 0700
Password: DS Smith
The webcast will remain available for replay, accessed via our
website per the link above, and a replay is available for 7 days on
+44 (0) 20 8196 1998, pin 5838908.
Notes to the financial tables
The Group uses certain key non-GAAP measures in order to provide
an additional view of the Group's overall performance and position,
eliminating significant items that may impact understanding of the
key trends and position. These measures are used internally to
evaluate business performance, as a key constituent of the Group's
planning process, as well as comprising targets against which
compensation is determined. Reporting of non-GAAP measures
alongside reported measures is considered useful to enable
investors to understand how management evaluates performance and
value creation internally, enabling them to track the Group's
adjusted performance and the key business drivers which underpin it
over time. Note 15 to the financial statements explains the use of
non-GAAP performance measures and reconciles them to the closest
IFRS measure.
(1) Before adjusting items (see note 3 to the financial
statements), and amortisation of intangible assets
(2) Corrugated box volumes (based on area (m(2) ) of corrugated
box sold), adjusted for working days, on an organic basis
(3) GDP growth (year-on-year) for the countries in which DS
Smith operates, weighted by our sales by country = -10.0%. Source:
Eurostat (13 Nov 2020)
(4) Operating profit before adjusting items and amortisation of
intangible assets as a percentage of revenue
(5) Return on average capital employed being operating profit
for the prior 12 month period before adjusting items and
amortisation of intangible assets as a percentage of the average
monthly capital employed over the previous 12 month period. Average
capital employed includes property, plant and equipment,
right-of-use assets, intangible assets (including goodwill),
working capital, provisions, capital debtors/creditors and
assets/liabilities held for sale.
(6) Net debt at average exchange rates over Group operating
profit before depreciation, adjusting items and amortisation of
intangible assets for the previous 12 month period, calculated in
accordance with banking covenants. The Group's banking covenant
requirements currently exclude IFRS 16 lease liabilities from the
definition of net debt as well as requiring that EBITDA is
calculated under the previous IAS 17 basis
(7) Free cash flow before tax, net interest, growth capital
expenditure and pension payments as a percentage of operating
profit before adjusting items and amortisation of intangible
assets
(8) Organic corrugated box volume growth, cash conversion and
return on sales given for the six months to 31 October 2020; ROACE
and net debt / EBITDA given for the 12 months to 31 October
2020
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.
Unless otherwise stated, all commentary and comparable analysis
in the overview and operating review relates to the continuing
operations of the Group, on constant currency basis.
Overview
During the six month period to 31 October we experienced a very
difficult economic environment due to the impact of Covid-19. We
responded responsibly and with agility, focusing on keeping our
staff safe, working with our communities to keep all our plants
open and by meeting the changing needs of our customers with
exceptional service.
We have eliminated non-essential expenditure and costs, while
protecting necessary operational investment into our business
particularly during the first 3 months of the financial period.
The response of our customers has been significant; after an
initial challenging start where many of our customers' operations
were either closed or disrupted due to Covid-19, sales volumes
recovered strongly throughout the first half of this financial year
in both Europe and the US. Overall corrugated box volumes in May
were 4.7% below May 2019 but recovered to growth of 3% in October
resulting in the half year being 1.0% down on the corresponding
period last year.
As a consequence of the above, together with a deflationary
pricing environment, overall profitability fell against last year.
However, profitability progressed strongly during the half year
with the result that Q2 return on sales averaged 9.5% compared to
the half year average of 8.0%.
We delivered strong free cash flow generation during the period
and ahead of the last year comparative. This has resulted from
reducing working capital through excellent debtor and supplier
management, together with reductions in capital expenditure. The
balance sheet of the Company remains strong with an Investment
Grade rating for our publicly traded debt.
Our business model has demonstrated resilient trading and strong
cash flow despite the unprecedented pandemic situation and GDP for
our markets declining by c.10% compared to the six months to 31
October 2019. Our strength is built on the foundations of our broad
FMCG and e-commerce customer base, which together comprise c.84 per
cent of our total volumes, where our differentiated offer and
commitment to quality and service during mass lockdowns has seen us
win further customer business and build our market share.
Corrugated box volume growth among our large multi-national
customers remains significantly ahead of the average volume growth
rate as we work with them to develop their Environmental, Social
and Governance ("ESG") agenda and also to optimise their e-commerce
offering.
Our service delivery levels have improved further along with our
product quality scores, despite the disruption to working patterns
in the initial lockdowns. All our sites remained operational during
the half year period due to the continued excellent commitment and
professionalism of all our employees. Staffing levels have remained
consistent and any money received from the UK government's Furlough
scheme is being repaid.
Over the half year period, there was an initial further
reduction in paper prices as European corrugated demand fell during
lockdowns, which, combined with the temporary but sharp peak in OCC
prices, due to the impact of lockdowns on the recycling
infrastructure, and other Covid-19 related costs in Q1, impacted
margins in that quarter. In Q2, OCC prices have largely normalised
and towards the end of the second quarter, European paper prices
have risen following strong domestic demand. While the average
corrugated box price has declined modestly compared to the prior H1
period, as the impact of the decline in paper prices over the last
two years has rolled through, we believe the more recent increases
in European paper pricing should provide a support against further
erosion as we look forward.
Performance in North America reflects the ramping up of our
greenfield box plant in Indiana. The recently announced increases
in paper prices have not affected the H1 result as they came too
late in the period. Having reported H2 FY20 adjusted operating
profit of GBP9 million, in this half year adjusted operating profit
improved to GBP24 million, representing a significant sequential
improvement and underlying progress compared to H1 last year. While
lower than the GBP30 million reported in H1 FY20, this reflects
some ongoing Covid-19 impact costs and the continued costs while
ramping up initial production in the Indiana site, which opened in
December 2019. Customer feedback on this new facility has been
excellent and we are very pleased with the combination of new
customer acquisition and existing customer growth. By the end of
this financial year, we expect to be operating at a run-rate of
around 40% volume capacity, or c.50 thousand tonnes per annum,
further reducing the amount of paper that we sell to the export
market.
The Covid-19 pandemic has accelerated a number of the underlying
market trends, in particular towards the use of the e-commerce
channel, with the spike in online sales of goods (from c.19% to a
peak of c.34%, in the UK) which is expected to result in a more
permanent step up in this channel with online sales now c.28%, an
increase of c.900bps. This trend is now contributing to the strong
volume growth being seen throughout the whole business. Our design
and innovation teams are working with customers to bring bespoke
e-commerce solutions to the market as customers increasingly demand
high quality sustainable packaging for this increasingly important
market segment. The acquisitions undertaken over the past three
years are proving integral to the strength of our customer offering
across Europe and North America. Looking forward, with both the
growth of e-commerce, the market requirement for sustainable
solutions to replace single use plastic and the impressive growth
we have achieved over the last three years, we now see
opportunities to grow organically through investment in
constructing two new greenfield sites in Europe with an estimated
combined cost of approximately GBP100 million, which will be
financed through non-core asset disposals and cash flow. Land has
been secured in Italy and Poland with the facilities expected to be
operational in the coming two years.
Performance for six months to 31 October 2020
Organic corrugated box volume declined slightly by 1.0% for the
six month period which comprised a sharp decrease in Q1 due to
Covid-19 lockdowns substantially hitting customers with businesses
deemed "non-essential", offset by a strong rebound in Q2 as
economies restarted. The weighted average GDP progression over the
first two quarters of the year is c.-10% and, as such, our
performance is significantly ahead of this benchmark, reflecting
our focus on resilient categories and channels such as FMCG and
e-commerce.
For the half year period, revenues declined by 10% (9% on a
reported basis), principally reflecting the impact of lower box and
paper prices and the decline in both box volumes and other volumes
which includes sheet and externally sold paper.
Return on sales for the period was 8.0%, down 300 basis points
on the comparable prior period. Underlying this, disruption costs
and volume declines driven by Covid-19 in Q1 had a significant
impact, with a material recovery during Q2, where the return on
sales averaged 9.5%.
Adjusted operating profit was down 35% (34% on a reported
basis). While the volume declines fed through to profit, and
synergies from Europac contributed positively, the substantial
proportion of the decline came from the fall in sales price and mix
of GBP149 million, of which approximately GBP119 million related to
corrugated box mix and pricing, partially offset by savings in
input costs of GBP55 million, largely paper costs. These declines
in box pricing represented the annualisation of box price
reductions driven by the decline in paper prices over the past two
years. Overall, box price decreases have been modest relative to
movements in paper pricing and are expected to begin to stabilise
due to the recent increases in paper prices as the annualisation of
pre-agreed box prices tails off through the remainder of the
year.
Return on average capital employed was down 190 basis points to
8.7% compared to that at 30 April 2020 (10.6%), principally
reflecting the decline in adjusted operating profit for the prior
12 months. The improving trend in profitability combined with our
structured approach, and the improving returns from recent
acquisitions and investments, gives us confidence in progression to
our medium term ROACE target of 12-15%.
Balance Sheet
Free cash flow has improved by GBP29 million, despite a lower
EBITDA, following a heightened approach to managing cash through
the pandemic. In the period, working capital discipline resulted in
an inflow compared to an outflow in the comparable prior period
with factored receivables broadly unchanged at constant currency.
Capex was also held tight to reflect the uncertain economic
environment and represented GBP135 million compared to GBP179
million last year. After other items, including the settlement of
the 10% Interstate Resources put option which was exercised in
2019/20, there was a GBP101 million net movement on debt prior to
FX, fair value and other non-cash movements, which took the change
in net debt to a reduction of GBP14 million from 30 April 2020. DS
Smith now owns a 90% share in Interstate Resources; the remaining
10% remains subject to a put option exercisable in 2021 or 2022.
The ratio of net debt / EBITDA has increased slightly to 2.37x,
reflecting the decline in the rolling-12-month EBITDA, impacted by
the decline in profitability, particularly in Q1 due to
Covid-19.
Operating Review
Northern Europe
Half year Half year Change Change - constant
ended ended - reported currency
31 October 31 October
2020 2019
Revenue GBP1,146m GBP1,227m (7%) (7%)
Adjusted operating
profit* GBP69m GBP104m (34%) (34%)
Return on sales 6.0% 8.5% (250bps) (250 bps)
*Operating profit before amortisation and adjusting items (refer
to note 3 of the financial statements)
In Northern Europe, organic corrugated box volume growth was
strong, with good performances in the UK, the Nordics and Germany,
partially offset by Benelux where volumes were more impacted by
customers with exposure to the hospitality industry. UK growth was
driven in particular by the extremely strong growth and our
e-commerce leadership in that market.
Revenues have decreased by 7% in the region due to a combination
of the decline in corrugated box pricing and the impact from a
reduced sales price for externally sold paper. Adjusted operating
profit fell 34%. The decline in adjusted operating profit over the
period was substantially due to lower paper prices in our paper
mills and the impact of the pass through of this into box
prices.
Southern Europe
Half year Half year Change Change - constant
ended ended - reported currency
31 October 31 October
2020 2019
Revenue GBP1,026m GBP1,175m (13%) (14%)
Adjusted operating
profit* GBP100m GBP170m (41%) (42%)
Return on sales 9.7% 14.5% (480bps) (480bps)
* Operating profit before amortisation and adjusting items
(refer to note 3 of the financial statements)
Southern Europe saw the greatest impact on volumes as a result
of Covid-19 with a significantly impacted agricultural and tourist
season in Q1. Q2 volumes are recovering well and have improved
progressively.
Revenue decreased by 14%, due to declines in both box and paper
pricing and the impact of lower box volumes. Adjusted operating
profit fell by 42% compared to the prior period, with the packaging
operations impacted by the pass through of lower paper prices and
the effect of lower paper prices in the paper mills in the region.
The region continued to benefit from the continuation of the
synergies being realised from the Europac acquisition, in the
period GBP14 million, and the network of box plants acquired in the
acquisition are now profitable.
Eastern Europe
Half year Half year Change Change - constant
ended ended - reported currency
31 October 31 October
2020 2019
Revenue GBP438m GBP469m (7%) (5%)
Adjusted operating
profit* GBP37m GBP47m (21%) (20%)
Return on sales 8.4% 10.0% (160bps) (150bps)
* Operating profit before amortisation and adjusting items
(refer to note 3 of the financial statements)
Organic corrugated box volumes in Eastern Europe have been
broadly in line with the Group average, with particularly good
volume growth in Poland and the Baltic region. Revenues fell 5%,
principally reflecting changes in corrugated box pricing. Adjusted
operating profit fell 20%, reflecting the pass through of paper
price reductions to box prices, which were partially offset by
lower costs. This region has a greater exposure to industrial and
e-commerce customers than the rest of the European business and is
exiting the half year period very strongly as economic activity in
the region recovers well.
North America
Half year Half year Change Change -
ended ended - reported constant currency
31 October 31 October
2020 2019
Revenue GBP279m GBP317m (12%) (10%)
Adjusted operating
profit* GBP24m GBP30m (20%) (17%)
Return on sales* 8.6% 9.5% (90bps) (80bps)
* Operating profit before amortisation and adjusting items (refer
to note 3 of the financial statements)
Corrugated box volume declines have been more substantial than
the Group average in Q1 reflecting the particular difficulties that
customers faced during the initial lockdown and the state by state
approach to Covid-19 containment. Q2 volume growth has been good
with several key contract wins and the ramp-up of our Indiana
greenfield facility. Revenues decreased by 10%, principally
reflecting the decline in export paper prices, although this
situation is now reversing with paper prices rising again both
domestically and for export driven by strong demand for paper in
both the USA and China. Adjusted operating profit declined by 17%,
reflecting the very close correlation between paper prices and the
ramp- up losses in Indiana, which was not operational in the
comparable period last year.
Outlook
We are as excited as ever about the structural growth drivers
for corrugated packaging with a number of trends accelerated by the
Covid-19 pandemic. We are well positioned to capitalise and are
announcing today the construction of two new state of the art
packaging plants in fast growth regions to supply the burgeoning
FMCG/ e-commerce sector. While the economic and political
environment remains uncertain due to Covid-19 and Brexit, we see
continued momentum for our business, underpinning confidence in
continued performance in line with our expectations for the year.
Strong demand has driven ongoing paper price increases, supporting
future box pricing, which, together with customer wins in Europe
and the US and our strong position to benefit from attractive
structural trends, reinforces our confidence in the business going
forward.
Financial Review
Prior year comparatives within the following commentary relate
to the continuing operations of the Group.
Revenue decreased by 9% on a reported basis and 10% on a
constant currency basis to GBP2,889 million for the half year ended
31 October 2020 (H1 2019/20: GBP3,188 million), driven by the
continued effects of the Covid-19 pandemic on volumes in the first
quarter and a reduction in average selling prices of both paper and
boxes. The decline in revenues was partially offset by the recovery
of overall volumes in the second quarter, which returned to
positive growth versus the prior year across all regions. Despite
significant headwinds in the period, volumes were down just 1% on
the prior period, with positive growth in the second quarter
leading to an extremely strong result in the first month of the
second half (5.7% growth). This strong recovery was aided by the
ability of all plants to remain operational throughout the
pandemic. Within North America, the ramp-up of production out of
the new Indiana facility continues to increase the level of
vertical integration of paper into packaging within that region,
reducing exposure to export paper prices.
Operating profit of GBP138 million decreased by 47% versus the
prior year (H1 2019/20: GBP259 million), and adjusted operating
profit decreased to GBP230 million, a 34% and 35% reduction on a
reported and constant currency basis respectively (H1 2019/20:
GBP351 million), principally due to the impact of lower paper
prices being passed through to box pricing and Covid-19 on volumes
and mix. The effect of a decrease in the average sales price and
mix (GBP149 million) and overall reduction in volumes (GBP41
million) was partially offset by a reduction in costs (GBP55
million). Labour costs remained broadly in line with the prior
year, reflecting the continued operation of all sites in the
period. Reductions in the market prices of energy across Europe
were a positive to profitability, although increased distribution
costs in Q2 partially offset the benefit. The reduction in reported
costs is after the significant direct and indirect costs incurred
as a consequence of Covid-19 specific measures taken to ensure all
factories remained operational throughout the period. The ramping
up of the new facility in Indiana and the impact of export paper
pricing continued to impact North American results compared to the
prior first half period. The Group continued to benefit from
Europac synergies (GBP14 million incremental benefit) and ongoing
efficiency programmes throughout the Group.
Amortisation remained in line with that of the prior year at
GBP72 million (H1 2019/20: GBP71 million), with the current period
charge primarily related to the continued amortisation of
intangible assets acquired as part of past acquisitions.
Depreciation increased by GBP8 million to GBP155 million (H1
2019/20: GBP147 million), principally related to the commissioning
of new capital investments as the Group continues to target growth
and efficiency opportunities, which includes the additional
contribution from the new facility in Indiana.
Free cash flow, comprising adjusted operating profit plus
depreciation, movements in working capital (in addition to
provisions and employee benefits), net capital expenditure, taxes
and net interest paid increased to GBP207 million (H1 2019/20:
GBP178 million), owing to an increased focus on managing cash
through the pandemic which resulted in a favourable inflow of cash
from working capital and reductions in capital expenditure and
taxes paid, which more than offset the reduction in adjusted
operating profit. Factored receivables remained broadly flat at
constant currency at GBP447 million. This result highlights the
strength of the cash management programmes implemented across the
Group in response to the unprecedented Covid-19 pandemic.
The Group's net debt position decreased by GBP14 million to
GBP2,087 million (30 April 2020: GBP2,101 million; 31 October 2019:
GBP2,444 million), due to the increased free cash flow for the
period, offset by payments made for the 10% settlement of the
Interstate put option of GBP82 million, GBP19 million of adjusting
items and foreign exchange, fair value and other non-cash movements
of GBP80 million.
Net capital expenditure reduced by GBP42 million to GBP132
million (H1 2019/20: GBP174 million) as spending on some
non-maintenance capital projects was delayed until greater
confidence in the economic outlook was established.
Return on average capital employed (ROACE) decreased by 310
basis points to 8.7%, which is below the Group's target rate of 12
to 15% (12 months to 31 October 2019: 11.8%). Despite challenging
trading conditions and uncertainty in the wider economic recovery
across regions, the Group remains committed to meeting the
medium-term targets established by the Board.
Certain items are presented within the financial statements as
adjusting items, in order to assist in understanding the trading
results of the Group. Costs of GBP23 million (H1 2019/20: GBP24
million) relating to restructuring programmes (GBP11 million),
ongoing integration programmes (GBP5 million), impairment charges
(GBP3 million), finance costs relating to the unwind of the
discount on the Interstate put option (GBP3 million) and
acquisition-related costs (GBP1 million) have been incurred in the
first half, with costs for the full year expected to be GBP50
million.
Net financing costs before adjusting items of GBP41 million (H1
2019/20: GBP46 million) primarily relate to interest on borrowings
and lease liabilities, with an additional GBP3 million related to
the continued unwinding of the discount of the Interstate Resources
put option classified as adjusting (H1 2019/20: GBP3 million).
Profit before income tax decreased to GBP97 million (H1 2019/20:
GBP213 million) due to lower operating profit, partially offset by
a GBP5 million reduction in net financing costs.
The rate of tax on adjusted profits before amortisation and
adjusting items is 23%, an increase from the full year 19/20 rate
of 22%.
Due to the reduction in operating profit, profit after tax
decreased to GBP74 million (H1 2019/20: GBP164 million), reflecting
a reduction in income tax of GBP26 million. Income from associates
of GBP3 million remained in line with that of the comparative
period.
Basic earnings per share before amortisation and adjusting items
reduced by 38% to 10.8 pence (H1 2019/20: 17.4 pence), impacted by
the reduction in operating profit. Basic unadjusted earnings per
share decreased to 5.4 pence (H1 2019/20: 12.0 pence).
Covid-19
Whilst all regions in which the Group operates were affected by
the Covid-19 pandemic in the half, all sites remained fully
operational as an essential supplier to critical supply chains. In
the first quarter, overall box volumes trailed the prior period
comparative, principally due to reduced demand across the
industrial sector and the impact of customer plant closures due to
Covid-19 outbreaks or lockdowns. Volume growth in the second
quarter demonstrated the resilience of the business and the success
of the Group's strategy to focus on FMCG and e-commerce customers.
Overall, the Group's performance in the first half has exceeded
expectations, despite incurring material cost increases due to
lower paper recycling collections, labour cost increases and
further additional costs to ensure the continued health and safety
of our employees. Working capital management remained a focus for
the Group, in particular accounts receivable collections. Whilst
there remains some uncertainty in the economic outlook, the Group
remains committed to achieving its medium-term targets, and has set
out management's plan to achieve these in the coming year within
the Going Concern disclosure. The resumption of the payment of the
interim dividend further highlights the strength in the Group's
ability to deliver its business model and in its statement of
financial position.
Financial position
Total shareholder funds increased to GBP3,484 million (30 April
2020: GBP3,351 million; 31 October 2019: GBP3,187 million). The
movement is due to profit attributable to shareholders of GBP74
million (H1 2019/20: GBP171 million), actuarial losses on employee
benefits of GBP16 million (2019/20: GBP7 million loss), the
suspension of the dividend programme resulting in nil outflow in
the current period (H1 2019/20: GBP71 million) and a net increase
in the translation reserve of GBP55 million (being foreign currency
translation gains of GBP111 million, offset by a GBP56 million
movement in the net investment hedge).
Reported net debt of GBP2,087 million has decreased from year
end (30 April 2020: GBP2,101 million), with working capital inflows
of GBP25 million following targeted programmes across the Group,
and a reduction in capital expenditure following Covid-19 related
cash measures. The Group calculates its net debt to adjusted
earnings before interest, tax, depreciation and amortisation
(EBITDA) ratio in accordance with the methodology prescribed by its
bank and private placement debt covenants, which excludes the
effects of IFRS 16 Leases. The ratio has increased to 2.37 times
(30 April 2020: 2.14 times), owing mainly to a reduction in EBITDA
as a result of unprecedented trading conditions amidst the Covid-19
pandemic and the settlement of the exercise of the first tranche of
the Interstate put option in the first half. The ratio remains well
within the banking covenant requirements, which were permanently
amended from 3.25 times to 3.75 times on 26 June 2020. The Group
has also negotiated extensions for GBP1.1 billion of the GBP1.4
billion committed rolling credit facility maturity date with its
lenders to November 2025, with GBP300 million maturing in November
2024.
The Group continues to sell trade receivables without recourse,
a process by which the trade receivable balance sold is
de-recognised, with proceeds then presented within operating cash
flows. Such arrangements enable the Group to optimise its working
capital position and reduces the quantum of early payment discounts
given. At constant currency, trade receivables sold under the
factoring programme remained broadly flat at GBP447 million, with
the actual movement over the prior year end position of GBP428
million being driven primarily by exchange (GBP12 million).
Dividend
The Board took the difficult decision to not pay a dividend for
FY20 based on uncertainty of outlook and the need to preserve
financial flexibility. Reflecting the strong demand for packaging,
and increasing visibility and confidence over the future the Board
accordingly declares an interim dividend for this half year of 4.0
pence per share. The dividend will be paid on 4 May 2021 to
ordinary shareholders on the register at the close of business on 9
April 2021.
The Board considers the dividend to be an important component of
shareholder returns. As first set out in December 2010, our policy
is that dividends will be progressive and, in the medium term,
dividend cover should be on average 2.0x to 2.5x through the cycle.
In considering future dividends the Board will continue to be
mindful of the Group's earnings growth potential, future expansion
and leverage.
Brexit
We have been working on robust contingency plans for every
potential Brexit outcome for some time, and we are well positioned
to manage in the new environment. We have experienced strong growth
in Europe for many years and that has been aided by free movement
of skilled workers, free trade and movement of goods, and a
predictable regulatory landscape.
Risks and uncertainties
The Board has reconsidered the principal risks and uncertainties
affecting the Group in the second half of the year. The principal
risks and uncertainties discussed on pages 51 to 59 of the 2020
Annual Report, available on the Group's website at www.dssmith.com
, remain relevant.
In summary, the Group's key risks and uncertainties are:
-- Eurozone and macroeconomic markets;
-- Paper price volatility;
-- Disruptive markets;
-- Liquidity;
-- Shopping habits;
-- Organisation flexibility;
-- Regulation and governance;
-- Sustainability promise;
-- Security of Paper supply;
-- Cyber;
-- Workforce capability;
-- Packaging transformation; and
-- Fibre technology changes.
Going concern
The Board have reviewed a detailed consideration of going
concern, based on the Group's recent trading and forecasts, and
including scenario analysis. This takes into account reasonably
foreseeable changes in trading performance, including the
significant uncertainty of the long-term impacts on the economic
landscape presented by Covid-19. More detail of the assessment
performed is included in note 1 to the financial statements.
The Group is considered an essential supplier with sites
continuing to operate throughout the most restrictive lockdown
periods. At 31 October 2020 there was significant headroom on the
Group's committed debt facilities of c.GBP1.5 billion. The going
concern assessment covered a forecast period of 12 months from the
date of this half-yearly financial report. Based on the resilience
of the Group's operations to continued Covid-19 impact, as well as
the current and forecast liquidity available, the Board believes
that the Group is well placed to manage its business risks
successfully despite the uncertainties inherent in the current
economic outlook, and to operate within its current debt
facilities.
The Group's current committed bank facility headroom, its
forecast liquidity headroom over the going concern period of
assessment and potential mitigating activities available to
management have been considered by the Directors in forming their
view that it is appropriate to conclude that there is a reasonable
expectation that the Group has adequate resources to continue in
operational existence for the foreseeable future. For this reason,
the going concern basis has been adopted in preparing the interim
financial statements.
Responsibility statement
We confirm that to the best of our knowledge:
(a) the condensed set of financial statements, prepared in
accordance with IAS 34 "Interim Financial Reporting" as adopted by
the European Union, gives a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company
and the undertakings included in the consolidation taken as a
whole;
(b) the interim management report includes a fair review of the
information required by DTR 4.2.7R (indication on important events
during the first six months and description of principal risks and
uncertainties for the remaining six months of the year); and
(c) the interim management report includes a fair review of the
information required by DTR4.2.8R (disclosure of related parties'
transactions and changes therein).
Miles Roberts Group Adrian Marsh
Chief Executive Group Finance Director
9 December 2020
INDEPENT REVIEW REPORT TO DS SMITH PLC
We have been engaged by the Company to review the condensed set
of financial statements in the half yearly financial report for the
six months ended 31 October 2020 which comprises the Condensed
consolidated income statement, the Condensed consolidated statement
of comprehensive income, the Condensed consolidated statement of
financial position, the Condensed consolidated statement of changes
in equity, the Condensed consolidated statement of cash flows and
related notes 1 to 16. We have read the other information contained
in the half yearly financial report and considered whether it
contains any apparent misstatements or material inconsistencies
with the information in the condensed set of financial
statements.
DIRECTORS' RESPONSIBILITIES
The half yearly financial report is the responsibility of, and
has been approved by, the Directors. The Directors are responsible
for preparing the half yearly financial report in accordance with
the Disclosure Guidance and Transparency Rules of the United
Kingdom's Financial Conduct Authority.
As disclosed in note 1, the annual financial statements of the
Group are prepared in accordance with IFRSs as adopted by the
European Union. The condensed set of financial statements included
in this half yearly financial report has been prepared in
accordance with International Accounting Standard 34 Interim
Financial Reporting as adopted by the European Union.
OUR RESPONSIBILITY
Our responsibility is to express to the Company a conclusion on
the condensed set of financial statements in the half yearly
financial report based on our review.
SCOPE OF REVIEW
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity issued by the Financial Reporting Council for use in
the United Kingdom. A review of interim financial information
consists of making inquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures. A review is substantially less in scope than an
audit conducted in accordance with International Standards on
Auditing (UK), and consequently does not enable us to obtain
assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not
express an audit opinion.
CONCLUSION
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half yearly financial report for the six months ended 31
October 2020 is not prepared, in all material respects, in
accordance with International Accounting Standard 34 as adopted by
the European Union and the Disclosure Guidance and Transparency
Rules of the United Kingdom's Financial Conduct Authority.
USE OF OUR REPORT
This report is made solely to the Company in accordance with
International Standard on Review Engagements (UK and Ireland) 2410
Review of Interim Financial Information Performed by the
Independent Auditor of the Entity issued by the Financial Reporting
Council. Our work has been undertaken so that we might state to the
Company those matters we are required to state to it in an
independent review report and for no other purpose. To the fullest
extent permitted by law, we do not accept or assume responsibility
to anyone other than the Company for our review work, for this
report, or for the conclusions we have formed.
Deloitte LLP
Statutory Auditor
London, United Kingdom
9 December 2020
Condensed consolidated income statement
Half year ended Half year ended Year ended
31 October 2020 31 October 2019 30 April 2020
Unaudited Unaudited Audited
Adjusting Adjusting Adjusting
Before items After Before items After Before items After
adjusting (note adjusting adjusting (note adjusting adjusting (note adjusting
items 3) items items 3) items items 3) items
Continuing operations Note GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------ ---- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Revenue 2 2,889 - 2,889 3,188 - 3,188 6,043 - 6,043
Operating costs (2,659) (19) (2,678) (2,837) (20) (2,857) (5,383) (58) (5,441)
------------------------ ---- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Operating profit before
amortisation,
acquisitions and
divestments 2 230 (19) 211 351 (20) 331 660 (58) 602
------------------------ ---- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Amortisation of
intangible
assets;
acquisitions and
divestments 2 (72) (1) (73) (71) (1) (72) (143) (4) (147)
------------------------ ---- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Operating profit 158 (20) 138 280 (21) 259 517 (62) 455
Finance income 5 1 - 1 - - - 4 - 4
5,
Finance costs 3 (41) (3) (44) (44) (3) (47) (88) (7) (95)
Employment benefit net
finance expense (1) - (1) (2) - (2) (3) - (3)
------------------------ ---- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Net financing costs (41) (3) (44) (46) (3) (49) (87) (7) (94)
------------------------ ---- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Profit after financing
costs 117 (23) 94 234 (24) 210 430 (69) 361
Share of profit of
equity
accounted investments,
net of tax 3 - 3 3 - 3 7 - 7
------------------------ ---- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Profit before income tax 120 (23) 97 237 (24) 213 437 (69) 368
Income tax 6,
(expense)/credit 3 (27) 4 (23) (54) 5 (49) (92) 14 (78)
------------------------ ---- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Profit for the period from
continuing operations 93 (19) 74 183 (19) 164 345 (55) 290
------------------------------ --------- --------- --------- --------- --------- --------- --------- --------- -----------
Discontinued operation
Profit for the period
from
discontinued operation,
net of tax 14 - - - 9 (2) 7 10 227 237
------------------------ ---- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Profit for the period 93 (19) 74 192 (21) 171 355 172 527
------------------------ ---- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Profit for the period
attributable
to:
------------------------ ---- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Owners of the parent 93 (19) 74 192 (21) 171 355 172 527
Non-controlling
interests - - - - - - - - -
------------------------ ---- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Earnings per share
------------------------ ---- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Earnings per share from continuing and
discontinued operation
Basic 7 5.4p 12.5p 38.5p
Diluted 7 5.4p 12.4p 38.2p
------------------------ ---- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Earnings per share from
continuing operations
Basic 7 5.4p 12.0p 21.2p
Diluted 7 5.4p 11.9p 21.0p
------------------------ ---- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Adjusted earnings per share
from continuing operations
Basic 7 10.8p 17.4p 33.2p
Diluted 7 10.8p 17.3p 33.0p
------------------------ ---- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Condensed consolidated statement of comprehensive income
Half year Half year Year ended
ended ended 30 April
31 October 31 October 2020
2020 2019 Audited
Unaudited Unaudited GBPm
GBPm GBPm
----------------------------------------------------- ----------- ----------- ----------
Profit for the period 74 171 527
----------------------------------------------------- ----------- ----------- ----------
Items which will not be reclassified subsequently
to profit or loss
Actuarial loss on employee benefits (16) (7) (46)
Equity interests at FVOCI - net change in
fair value (3) - -
Income tax on items which will not be reclassified
subsequently to profit or loss 5 2 15
Items which may be reclassified subsequently
to profit or loss
Foreign currency translation differences 111 (13) 39
Reclassification from translation reserve
to income statement arising on divestment - - (30)
Cash flow hedges fair value changes (8) (21) (31)
Reclassification from cash flow hedge reserve
to income statement 23 - (1)
Movement in net investment hedge (56) 10 (23)
Income tax on items which may be reclassified
subsequently to profit or loss (2) 2 11
----------------------------------------------------- ----------- ----------- ----------
Other comprehensive income/(expense) for the
period, net of tax 54 (27) (66)
----------------------------------------------------- ----------- ----------- ----------
Total comprehensive income for the period 128 144 461
----------------------------------------------------- ----------- ----------- ----------
Total comprehensive income attributable to:
----------------------------------------------------- ----------- ----------- ----------
Owners of the parent 128 144 461
Non-controlling interests - - -
----------------------------------------------------- ----------- ----------- ----------
Condensed consolidated statement of financial position
At 31 At 30
October At 31 October April
2020 2019 2020
Unaudited Unaudited Audited
Note GBPm GBPm GBPm
---------------------------------------- ---- ---------- ------------- --------
Assets
Non-current assets
Intangible assets 3,185 3,165 3,197
Biological assets 9 9 9
Property, plant and equipment 3,100 2,989 3,042
Right-of-use assets 241 223 256
Equity accounted investments 38 37 35
Other investments 15 11 12
Deferred tax assets 77 71 77
Other receivables 10 15 19
Derivative financial instruments 13 4 27
---------------------------------------- ---- ---------- ------------- --------
Total non-current assets 6,688 6,524 6,674
---------------------------------------- ---- ---------- ------------- --------
Current assets
Inventories 513 541 518
Biological assets 6 6 6
Income tax receivable 42 18 42
Trade and other receivables 828 836 753
Cash and cash equivalents 10 534 445 595
Derivative financial instruments 14 21 34
Assets classified as held for sale 24 280 3
---------------------------------------- ---- ---------- ------------- --------
Total current assets 1,961 2,147 1,951
---------------------------------------- ---- ---------- ------------- --------
Total assets 8,649 8,671 8,625
---------------------------------------- ---- ---------- ------------- --------
Liabilities
Non-current liabilities
Borrowings 10 (2,145) (2,279) (2,300)
Employee benefits 4 (209) (167) (199)
Other payables (15) (15) (15)
Provisions (12) (11) (12)
Lease liabilities 10 (173) (163) (182)
Deferred tax liabilities (298) (302) (305)
Derivative financial instruments (32) (12) (41)
---------------------------------------- ---- ---------- ------------- --------
Total non-current liabilities (2,884) (2,949) (3,054)
---------------------------------------- ---- ---------- ------------- --------
Current liabilities
Bank overdrafts 10 (59) (130) (90)
Borrowings 10 (207) (291) (98)
Trade and other payables (1,690) (1,744) (1,708)
Income tax liabilities (157) (151) (149)
Provisions (72) (26) (58)
Lease liabilities 10 (72) (72) (73)
Derivative financial instruments (18) (15) (44)
Liabilities classified as held for sale (6) (106) -
---------------------------------------- ---- ---------- ------------- --------
Total current liabilities (2,281) (2,535) (2,220)
---------------------------------------- ---- ---------- ------------- --------
Total liabilities (5,165) (5,484) (5,274)
---------------------------------------- ---- ---------- ------------- --------
Net assets 3,484 3,187 3,351
---------------------------------------- ---- ---------- ------------- --------
Equity
Issued capital 137 137 137
Share premium 2,239 2,238 2,238
Reserves 1,107 811 975
---------------------------------------- ---- ---------- ------------- --------
Total equity attributable to owners of
the parent 3,483 3,186 3,350
Non-controlling interests 1 1 1
---------------------------------------- ---- ---------- ------------- --------
Total equity 3,484 3,187 3,351
---------------------------------------- ---- ---------- ------------- --------
Condensed consolidated statement of changes in equity
Total
equity
attributable
Retained to owners
Share Share Hedging Translation Own earnings of the Non-controlling Total
capital premium reserve reserve shares (1) parent interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------- ------- ------- ------- ----------- ------ --------
At 1 May 2020
(audited) 137 2,238 (39) 14 (3) 1,003 3,350 1 3,351
------------------ ------- ------- ------- ----------- ------ -------- ------------ --------------- -------
Profit for the
period - - - - - 74 74 - 74
Actuarial loss on
employee
benefits - - - - - (16) (16) - (16)
Equity interests
at FVOCI
- net change in
fair
value - - - - - (3) (3) - (3)
Foreign currency
translation
differences - - - 111 - - 111 - 111
Cash flow hedges
fair
value changes - - (8) - - - (8) - (8)
Reclassification
from
cash flow hedge
reserve
to income
statement - - 23 - - - 23 23
Movement in net
investment
hedge - - - (56) - - (56) - (56)
Income tax on
other
comprehensive
income - - (2) - - 5 3 - 3
------------------ ------- ------- ------- ----------- ------ -------- ------------ --------------- -------
Total
comprehensive
income - - 13 55 - 60 128 - 128
------------------ ------- ------- ------- ----------- ------ -------- ------------ --------------- -------
Issue of share
capital - 1 - - - - 1 - 1
Employee share
trust - - - - 1 (1) - - -
Share-based
payment expense
(net of tax) - - - - - 4 4 - 4
Other changes in
equity
in the period - 1 - - 1 3 5 - 5
------------------ ------- ------- ------- ----------- ------
At 31 October 2020
(unaudited) 137 2,239 (26) 69 (2) 1,066 3,483 1 3,484
------------------ ------- ------- ------- ----------- ------ -------- ------------ --------------- -------
At 1 May 2019
(audited) 137 2,236 (13) 23 (1) 729 3,111 1 3,112
------------------ ------- ------- ------- ----------- ------ -------- ------------ --------------- -------
Profit for the
period - - - - - 171 171 - 171
Actuarial loss on
employee
benefits - - - - - (7) (7) - (7)
Foreign currency
translation
differences - - - (13) - - (13) - (13)
Cash flow hedges
fair
value changes - - (21) - - - (21) - (21)
Movement in net
investment
hedge - - - 10 - - 10 - 10
Income tax on
other
comprehensive
income - - 2 - - 2 4 - 4
------------------ ------- ------- ------- ----------- ------ -------- ------------ --------------- -------
Total
comprehensive
(expense)/
income - - (19) (3) - 166 144 - 144
------------------ ------- ------- ------- ----------- ------ -------- ------------ --------------- -------
Issue of share
capital - 2 - - - - 2 - 2
Employee share
trust - - - - (2) (2) (4) - (4)
Share-based
payment expense
(net of tax) - - - - - 4 4 - 4
Dividends paid - - - - - (71) (71) - (71)
------------------ ------- ------- ------- ----------- ------ -------- ------------ --------------- -------
Other changes in
equity
in the period - 2 - - (2) (69) (69) - (69)
------------------ ------- ------- ------- ----------- ------ -------- ------------ --------------- -------
At 31 October 2019
(unaudited) 137 2,238 (32) 20 (3) 826 3,186 1 3,187
------------------ ------- ------- ------- ----------- ------ -------- ------------ --------------- -------
(1.) Retained earnings include a reserve related to merger
relief.
Condensed consolidated statement of cash flows
Half year Half year
ended ended Year ended
31 October 31 October 30 April
2020 2019 2020
Unaudited Unaudited Audited
Continuing operations Note GBPm GBPm GBPm
----------------------------------------------------- ---- ----------- ----------- ----------
Operating activities
Cash generated from operations 9 402 428 836
Interest received - - 2
Interest paid (52) (53) (79)
Tax paid (30) (49) (94)
----------------------------------------------------- ---- ----------- ----------- ----------
Cash flows from operating activities 320 326 665
----------------------------------------------------- ---- ----------- ----------- ----------
Investing activities
Acquisition of subsidiary businesses, net
of cash and cash equivalents 13 (88) (4) (4)
Divestment of discontinued operation, net
of cash and cash equivalents 13 - - 422
Divestment of subsidiary businesses, net of
cash and cash equivalents 13 - 62 62
Capital expenditure (135) (179) (376)
Proceeds from sale of property, plant and
equipment and intangible assets 3 5 12
Cash flows (used in)/from restricted cash
and other deposits (1) 49 56
Other - - 6
----------------------------------------------------- ---- ----------- ----------- ----------
Cash flows (used in)/from investing activities (221) (67) 178
----------------------------------------------------- ---- ----------- ----------- ----------
Financing activities
Proceeds from issue of share capital 1 2 2
Repayment of borrowings (1,078) (2,342) (3,497)
Proceeds from borrowings 990 2,283 3,235
Payments in respect of derivative financial
instruments - (6) (5)
Repayment of principal on lease liabilities (36) (39) (71)
Dividends paid to Group shareholders 8 - (71) (222)
Other - (4) (4)
----------------------------------------------------- ---- ----------- ----------- ----------
Cash flows used in financing activities (123) (177) (562)
----------------------------------------------------- ---- ----------- ----------- ----------
(Decrease)/increase in cash and cash equivalents
from continuing operations (24) 82 281
----------------------------------------------------------- ----------- ----------- ----------
Discontinued operation
Cash flows used in discontinued operation 14 (10) (19) (29)
----------------------------------------------------- ---- ----------- ----------- ----------
(Decrease)/increase in cash and cash equivalents (34) 63 252
Net cash and cash equivalents at beginning
of the period 505 253 253
Exchange gains/(losses) on cash and cash equivalents 4 (1) -
----------------------------------------------------- ---- ----------- ----------- ----------
Net cash and cash equivalents at end of the
period 10 475 315 505
----------------------------------------------------- ---- ----------- ----------- ----------
1. Basis of preparation
The unaudited condensed consolidated interim financial
statements for the half year ended 31 October 2020 have been
prepared in accordance with IAS 34 Interim Financial Reporting and
the Disclosure Guidance and Transparency Rules of the Financial
Conduct Authority. These interim financial statements should be
read in conjunction with the Group's annual financial statements
for the year ended 30 April 2020, which have been prepared in
accordance with International Financial Reporting Standards as
adopted by the EU ('IFRSs'). Those accounts were reported on by the
Company's auditor and delivered to the Registrar of Companies. The
report of the auditor was not qualified or modified, did not draw
attention to any matters by way of emphasis and did not contain an
adverse statement under section 498 (2) or (3) of the Companies Act
2006.
The condensed information presented for the year ended 30 April
2020 does not constitute full statutory accounts as defined in
section 434 of the Companies Act 2006. The financial information
for the half year ended 31 October 2020 is unaudited but has been
reviewed in accordance with ISRE 2410 Review of Interim Financial
Information by Deloitte LLP, the Group's auditor, and a copy of
their review report forms part of this half year report.
The interim financial information has been prepared using the
same accounting policies as those adopted in the annual financial
statements for the year ended 30 April 2020, apart from as detailed
below.
The following new accounting standards, amendments or
interpretations have been adopted by the Group as of 1 May
2020:
- Amendments to IFRS 3 Business Combinations;
- Amendments to IFRS 9, IAS 39 and IFRS 7 Interest Rate Benchmark Reform;
- Amendments to IAS 1 and IAS 8 Definition of Material; and
- Amendments to the Conceptual Framework for Financial Reporting.
The adoption of the amendments above has not had a material
effect on the results for the Group's financial statements.
Foreign exchange rates
Half year ended Half year ended Year ended
31 October 2020 31 October 2019 30 April 2020
Average Closing Average Closing Average Closing
----------- --------- -------- --------- -------- -------- --------
Euro 1.110 1.109 1.124 1.161 1.139 1.151
US dollar 1.276 1.297 1.253 1.295 1.251 1.252
----------- --------- -------- --------- -------- -------- --------
Going concern
Overview
The financial statements have been prepared on the going concern
basis, after a detailed consideration with, this half year, a
particular focus on appropriate incorporation of the global
economic uncertainty of the Covid-19 pandemic.
Further details, including the analysis performed and conclusion
reached, are set out below.
Liquidity and financing position
The Group's total drawn debt facilities at 31 October 2020 were
GBP2.4 billion, of which GBP1.9 billion is publicly listed debt
with no attached covenants, GBP0.2 billion carries a covenant of
net debt/EBITDA of less than 3.25 times, and GBP0.2 billion carries
a covenant of net debt/EBITDA of less than 3.75 times. In addition,
the Group has access to c. GBP1.5 billion committed bank
facilities, which were undrawn at 31 October 2020, which provide
liquidity to the Group and carry the same covenant of net
debt/EBITDA of less than 3.75 times. The Group is not forecast to
increase net debt in the period of the going concern analysis to 31
October 2022.
There is significant liquidity/financing headroom across the
going concern forecast period in all three scenarios considered and
outlined in more detail below. For this reason, the going concern
review has focused primarily on forecast covenant compliance.
Operational and business impact of Covid-19
As a critical part of the supply chain across each of the
geographies in which it operates the Group has been and continues
to be designated as an 'essential business' throughout the lockdown
periods, continuing to trade throughout the most stringent lockdown
restrictions and beyond, adapting operations to ensure the business
can respond to and meet specific local requirements, whether
restrictions are reducing or increasing.
Although the duration and severity of the lockdown restrictions
have varied from country to country, in general Covid-19 impacted
trading most heavily between March and June 2020, with overall
modest positive growth in the latter months of the half year,
reflecting the business mix of the Group with the heavy weighting
on supplying packaging for food and drink customers and a strong
e-commerce business. The actual experience of trading across the
six months is a key data point that has been used to inform
forecasting and modelling in the going concern assessment.
Financial modelling
The Group has modelled three scenarios in its assessment of
going concern: a base case, a downside case, and an extreme
downside case.
The base case takes into account the estimated impact of the
Covid-19 pandemic across the going concern period and reflects the
actual trading experience to date. The base case assumes, on a
Group basis, that packaging volumes remain broadly flat in H2 of
the current year, with a slow recovery with low single digit growth
in 2021/22. This overall annual decline in volumes is consistent
with the reduction in volume experienced at the height of the
crisis and is, therefore, felt by the Board to be a prudent base
case, taking into account the experience of the resilience of
packaging for the food and drink sector and a strong performance in
e-commerce during the crisis to date, offset by continued
uncertainty as local and national Covid-19 restrictions continue to
be subject to frequent change.
The price assumptions reflect expectations of broadly consistent
packaging prices, maintaining the shift towards the food and drink
and
e-commerce sectors, as industrial segments are expected to
continue their recovery from lockdown at a slower pace. Paper
prices are modelled to reduce marginally in Europe in the short
term before stabilising, although this reduction is more than
offset by movements in the price of paper for recycling (PfR, the
principal input cost in producing testliner), which is expected to
reduce from the spike in pricing seen during the early phase of the
initial national and regional lock-downs.
The trading performance in the base case considered for the
purposes of the interim financial statements represents a slight
improvement on the base case presented to the Board at the time of
approving the Group's annual financial statements for 2020, as
experience demonstrated trading recovery under the slightly reduced
restrictions across most jurisdictions. The base case also now
assumes resumption of a normal programme of dividend payment.
The downside case shows a more pronounced decline in volumes in
the second half of 2020/21, assuming another significant Covid-19
related period of downturn similar to H1, and then reverts back to
the modest recovery foreseen in the base case forecast for
2021/22.
The extreme downside case models year-on-year contraction in
packaging volumes through 2021/22 that then stabilise in 2022/23,
as well as increased PfR costs above those seen in the lockdown
spike in early 2020/21 with no mitigation from increased paper
prices, and a significant worsening of the Group's working capital
position.
The purpose of the scenarios was to consider if there was a
significant risk that the Group would breach its financial
covenants on the committed bank facilities of net debt/EBITDA less
than 3.75 times. Under the base case and the two sensitised
scenarios, the covenant is not breached at any of the forecast
testing dates, being 30 April 2021, 31 October 2021 and 30 April
2022.
The extreme downside case has been used as the reverse stress
test consideration for the point at which covenants may be
breached. Whilst the case did not breach covenants, a significant
and sustained reduction in packaging volumes, beyond what is
considered reasonable, would require management to take further
actions to conserve cash. Whilst the Board considers the forecasts
and assumptions in the extreme downside case to be extremely
remote, a programme of further actions to mitigate the impact would
be actioned should such a scenario occur.
Mitigating actions
As outlined above, in addition to the cost actions that are
built into the base case, and subsequently into the downside case
and the extreme downside case, there are a number of potential
management actions which could be employed but are not included in
the scenarios modelled:
- Action in respect of variable and controllable costs such as
discretionary bonuses, pay rises, recruitment freezes and wider
labour force actions in response to higher levels of volume
reductions;
- Limiting capital expenditure to minimum maintenance levels, pausing growth spend;
- Satisfaction of the outstanding Interstate put option for shares instead of cash; and
- Strategic actions in respect of the Group's asset base could
be considered in respect of disposals, mothballing and
closures.
The Group could also consider actions to assist covenant
compliance, such as increased utilisation of debt factoring
facilities, optimising working capital by negotiating longer
payment terms whilst continuing to pay suppliers in full and in
line with contractual terms and reconsidering the level of
dividends to be paid. The Group's adjusted operating profit would
have to fall by more than half from the GBP660m achieved in the
year ended 30 April 2020 before the covenant would be breached.
Going concern basis
Considering the above, the Directors believe that the Group has
significant covenant and liquidity headroom in respect of its
borrowing facilities to continue in operational existence for the
foreseeable future, despite the uncertainties inherent in the
current economic outlook.
Accordingly, the Directors concluded from this assessment that
it was appropriate to continue to adopt the going concern basis in
preparing the interim financial statements, and that no material
uncertainty exists that casts significant doubt over the going
concern assumption. The long-term impact of Covid-19 is uncertain
and should the impact of the pandemic on trading conditions be more
prolonged or severe than currently forecast by the Directors under
the extreme downside case scenario, the Group would need to
implement additional operational or financial measures.
Estimates and judgements
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 application of the Group's accounting policies requires
management to make estimates and assumptions; these estimates and
assumptions affect the reported assets and liabilities and
financial results of the Group. Actual outcomes could differ from
the estimates and assumptions used.
In preparing these interim financial statements, the key sources
of estimates and the critical accounting judgement were the same as
those that applied to the Group's consolidated financial statements
for the year ended 30 April 2020. Key estimates were taxation,
impairments and employee benefits. The critical accounting
judgement is applying the adjusting items policy.
Goodwill impairment assessment - key assumptions and
methodology
The cash-generating unit groups (CGU) that represent the lowest
level at which goodwill is monitored for impairment indicators and
internal management purposes remain consistent with the CGUs
disclosed in the 2020 Annual Report.
In accordance with IAS 36 Impairment of Assets, the Group
assesses goodwill annually for impairment, or more frequently
should any potential indicators of impairment exist. External
factors, such as the unprecedented impact of Covid-19 on the
economies in which the Group operates, are required to be
considered as part of this assessment and, as such, the Group has
performed an update of the exercise performed at April 2020. This
included a review of the 2020/21 forecast adopted for each CGU in
the testing completed at April 2020 against the latest view of the
current year's performance. For each CGU, the latest outlooks on
cash flows are expected to exceed those previously anticipated and
applied in the April 2020 testing performed.
Updated assessments utilised the latest cash flow projections
prepared by management, which reflect the anticipated Covid-19
recovery trends, mitigation activities in progress and impacts of
likely movements in paper pricing and material input costs, taking
into account the cyclical nature of the business. These, and the
additional scenarios modelled and applied to sensitivity analyses
performed, are described further in the going concern note
above.
The methodology used to determine the pre-tax discount rates
(derived from the weighted average cost of capital ('WACC') for the
Group of 9.5%) and country-specific, long-term growth rates
remained consistent with those adopted at April 2020, as disclosed
in the 2020 financial statements. Similarly, there were no changes
to the rates applied in the updated assessment performed at 31
October 2020.
The value-in-use is based upon anticipated discounted future
cash flows. At 31 October 2020, assessments performed indicated
sufficient headroom existed. Whilst the Directors believe the
assumptions used are realistic, it is possible that a reduction in
the headroom would occur if any of the above key assumptions
applied were adversely changed. Factors which could cause an
impairment are:
- significant and prolonged underperformance relative to the forecast; and
- deteriorations in the economies in which the Group operates.
To support their assertions, the Directors have reviewed the
sensitivity analyses to determine the impact that would result from
the above situations, including reduction or delays in future
growth and increased discount rates. In these cases, if estimates
of future recovery from the Covid-19 pandemic were delayed, or if
the estimated discount rates applied to the cash flows were
increased by 0.5%, there would continue to be adequate headroom to
support the carrying value of the assets assessed. Accordingly, the
Directors believe that a reasonably possible change in any of the
key assumptions detailed above would not cause the carrying value
of CGU groups assessed to exceed their recoverable amounts,
although the headroom would decrease. Therefore, no impairment was
required against the carrying value of goodwill at 31 October
2020.
Non-GAAP performance measures
In the reporting of financial information, the Group has adopted
certain non-GAAP measures of historical or future financial
performance, position or cash flows other than those defined or
specified under International Financial Reporting Standards
(IFRSs).
Non-GAAP measures are either not defined by IFRS or are adjusted
IFRS figures, and therefore may not be directly comparable with
other companies' reported non-GAAP measures, including those in the
Group's industry.
Non-GAAP measures should be considered in addition to, and are
not intended to be a substitute for, or superior to, IFRS
measures.
Details of the Group's non-GAAP performance measures, including
reasons for their use and reconciliations to IFRS figures are
included as appropriate in note 15.
2. Segment reporting
Operating segments
The Plastics segment was classified as a discontinued operation
during the year ended 30 April 2019 and was disposed in the year
ended 30 April 2020, and as such is reported separately. Details
relating to the Plastics segment are set out in note 14.
Northern Southern Eastern North
Europe Europe Europe America Total continuing operations
Half year ended 31 October 2020 GBPm GBPm GBPm GBPm GBPm
-------------------------------------------- -------- -------- ------- -------- ---------------------------
External revenue 1,146 1,026 438 279 2,889
---------------------------------------------- -------- -------- ------- -------- ---------------------------
Adjusted operating profit(1) 69 100 37 24 230
---------------------------------------------- -------- -------- ------- -------- ---------------------------
Unallocated items:
Amortisation (72)
Adjusting items in operating profit (20)
---------------------------------------------- -------- -------- ------- -------- ---------------------------
Total operating profit (continuing operations) 138
---------------------------------------------- -------- -------- ------- -------- ---------------------------
Unallocated items:
Net financing costs (44)
Share of profit of equity accounted
investments, net of tax 3
--------------------------------------------- -------- -------- ------- -------- ---------------------------
Profit before income tax 97
Income tax expense (23)
---------------------------------------------- -------- -------- ------- -------- ---------------------------
Profit for the period (continuing operations) 74
---------------------------------------------- -------- -------- ------- -------- ---------------------------
Northern Southern Eastern North
Europe Europe Europe America Total continuing operations
Half year ended 31 October 2019 GBPm GBPm GBPm GBPm GBPm
-------------------------------------------- -------- -------- ------- -------- ---------------------------
External revenue 1,227 1,175 469 317 3,188
---------------------------------------------- -------- -------- ------- -------- ---------------------------
Adjusted operating profit(1) 104 170 47 30 351
---------------------------------------------- -------- -------- ------- -------- ---------------------------
Unallocated items:
Amortisation (71)
Adjusting items in operating profit (21)
---------------------------------------------- -------- -------- ------- -------- ---------------------------
Total operating profit (continuing operations) 259
---------------------------------------------- -------- -------- ------- -------- ---------------------------
Unallocated items:
Net financing costs (49)
Share of profit of equity accounted
investment, net of tax 3
--------------------------------------------- -------- -------- ------- -------- ---------------------------
Profit before income tax 213
Income tax expense (49)
---------------------------------------------- -------- -------- ------- -------- ---------------------------
Profit for the period (continuing operations) 164
---------------------------------------------- -------- -------- ------- -------- ---------------------------
(2.) Adjusted to exclude amortisation and adjusting items.
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.
Half year Half year
ended ended Year ended
31 October 31 October 30 April
2020 2019 2020
Unaudited Unaudited Audited
Continuing operations GBPm GBPm GBPm
------------------------------------------------------- ----------- ----------- ----------
Acquisition related costs (1) (7) (10)
Gains on acquisitions and divestments - 6 6
------------------------------------------------------- ----------- ----------- ----------
Acquisitions and divestments (1) (1) (4)
Integration costs (5) (12) (30)
Other restructuring costs (11) (8) (24)
Impairment of assets (3) - (4)
Total pre-tax adjusting items (recognised in operating
profit) (20) (21) (62)
Finance costs adjusting items (3) (3) (7)
Adjusting tax items - - (1)
Current tax credit on adjusting items 4 5 14
Deferred tax credit on adjusting items - - 1
------------------------------------------------------- ----------- ----------- ----------
Total post-tax adjusting items (19) (19) (55)
------------------------------------------------------- ----------- ----------- ----------
Half year ended 31 October 2020
Acquisition related costs of GBP1m comprise professional
advisory, legal and consultancy fees for review of potential
deals.
Integration costs relate to integration projects underway,
primarily to achieve cost synergies from the major acquisitions
made in the previous financial years (of which GBP3m relates to
Europac and GBP2m relates to Interstate Resources). They include
redundancies, professional fees, IT costs and those directly
attributable internal salary costs which would otherwise not be
incurred.
Other restructuring costs of GBP11m primarily comprise a
reorganisation and restructuring project across the Packaging
business (GBP8m), focusing predominantly on reduction of indirect
costs, begun in the prior year and expected to last three years,
and a restructuring project in North America (GBP2m).
Impairment of assets of GBP3m is directly related to the
restructuring project in North America and includes impairment of
property, plant and equipment and right-of-use assets.
Finance costs adjusting items relate to the unwind of the
discount on the redemption liability related to the purchase of
Interstate Resources.
The current tax credit on adjusting items of GBP4m for the half
year ended 31 October 2020 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 divestments.
Year ended 30 April 2020 and half year ended 31 October 2019
Acquisition related costs of GBP10m (half year ended 31 October
2019: GBP7m) comprised professional advisory, legal and consultancy
fees for review of potential deals, deferred consideration and
retention bonuses.
Gains on acquisition and divestments related primarily to the
remedy disposal of legacy Group sites required as part of the
Europac acquisition. The profit on disposal of the Plastics
business in the prior year is classified under discontinued
operation.
Integration costs related to integration projects underway,
primarily to achieve cost synergies from the major acquisitions
made in the previous financial years. For the year ended 30 April
2020, GBP19m related to Europac (half year ended 31 October 2019:
GBP10m), and GBP11m related to Interstate Resources (half year
ended 31 October 2019: GBP2m). They include redundancies,
professional fees, IT costs and those directly attributable
internal salary costs which would otherwise not be incurred.
For the year ended 30 April 2020 (half year ended 31 October
2019: GBP8m), other restructuring costs primarily comprised a
reorganisation and restructuring project across the Packaging
business, focusing predominantly on reduction of indirect
costs.
Impairment of assets comprised impairment, primarily of
property, plant and equipment, directly related to restructuring
projects.
Finance costs adjusting items related to the unwind of the
discount on the redemption liability related to the purchase of
Interstate Resources.
The current tax credit on adjusting items of GBP14m in the year
ended 30 April 2020 (half year ended 31 October 2019: GBP5m) was
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
divestments.
The adjusting tax item of GBP1m in the year ended 30 April 2020
was an increase in the State Aid provision in relation to the
estimate of interest on overdue tax covering the year to 30 April
2020.
4. Employee benefits
Movements in the net employee benefit deficit recognised in the
Condensed consolidated statement of financial position:
Half year Half year
ended ended Year ended
31 October 31 October 30 April
2020 2019 2020
Unaudited Unaudited Audited
GBPm GBPm GBPm
---------------------------------------------------------- ----------- ----------- ----------
Opening employee benefit deficit (199) (170) (170)
Divestments - 2 2
Expense recognised in operating profit (3) (4) (7)
Employment benefit net finance expense (excluding Pension
Protection Fund levy) (1) (1) (2)
Employer contributions 10 11 20
Other payments and contributions 3 3 6
Actuarial losses (16) (7) (46)
Currency translation (3) (1) (2)
Closing employee benefit deficit (209) (167) (199)
Deferred tax asset 47 38 45
---------------------------------------------------------- ----------- ----------- ----------
Closing net employee benefit deficit (162) (129) (154)
---------------------------------------------------------- ----------- ----------- ----------
During the period ended 31 October 2020, the Group received
government support for employee costs, in particular for furloughed
employees, amounting to GBP5m.
5. Finance income and costs
Half year Half year
ended ended Year ended
31 October 31 October 30 April
2020 2019 2020
Unaudited Unaudited Audited
Continuing operations GBPm GBPm GBPm
--------------------------------------- ----------- ----------- ----------
Interest income from financial assets - - (2)
Other (1) - (2)
--------------------------------------- ----------- ----------- ----------
Finance income (1) - (4)
--------------------------------------- ----------- ----------- ----------
Interest on borrowings and overdrafts 27 36 62
Interest on lease liabilities 6 6 12
Other 8 2 14
--------------------------------------- ----------- ----------- ----------
Finance costs before adjusting items 41 44 88
Finance costs adjusting items (note 3) 3 3 7
--------------------------------------- ----------- ----------- ----------
Finance costs 44 47 95
--------------------------------------- ----------- ----------- ----------
6. Income tax expense
Tax on profit from continuing operations has been charged at an
underlying rate before adjusting items and amortisation of 23.0%
(half year ended 31 October 2019: 23.0%), being the expected full
year rate.
7. Earnings per share
Basic earnings per share from continuing operations
Half year Half year Year ended
ended ended 30 April
31 October 31 October 2020
2020 2019 Audited
Unaudited Unaudited
----------------------------------------------------------- ----------- ----------- ----------
Profit from continuing operations attributable to ordinary
shareholders GBP74m GBP164m GBP290m
----------------------------------------------------------- ----------- ----------- ----------
Weighted average number of ordinary shares 1,372m 1,371m 1,371m
----------------------------------------------------------- ----------- ----------- ----------
Basic earnings per share 5.4p 12.0p 21.2p
----------------------------------------------------------- ----------- ----------- ----------
Diluted earnings per share from continuing operations
Half year Half year Year ended
ended ended 30 April
31 October 31 October 2020
2020 2019 Audited
Unaudited Unaudited
----------------------------------------------------------- ----------- ----------- ----------
Profit from continuing operations attributable to ordinary
shareholders GBP74m GBP164m GBP290m
----------------------------------------------------------- ----------- ----------- ----------
Weighted average number of ordinary shares 1,372m 1,371m 1,371m
Potentially dilutive shares issuable under share-based
payment arrangements 3m 4m 7m
----------------------------------------------------------- ----------- ----------- ----------
Weighted average number of ordinary shares (diluted) 1,375m 1,375m 1,378m
----------------------------------------------------------- ----------- ----------- ----------
Diluted earnings per share 5.4p 11.9p 21.0p
----------------------------------------------------------- ----------- ----------- ----------
The number of shares excludes the weighted average number of the
Company's own shares held as treasury shares during the period of
1m (half year ended 31 October 2019: nil, year ended 30 April 2020:
1m).
Half year Half year Year ended
ended ended 30 April
31 October 31 October 2020
2020 2019 Audited
Unaudited Unaudited
Basic Diluted Basic Diluted Basic Diluted
pence pence pence pence pence pence
per per per per per per
share share share share share share
---------------------------------------------------- ------ ------- ------ ------- ------ -------
Earnings per share from continuing operations 5.4p 5.4p 12.0p 11.9p 21.2p 21.0p
Earnings per share from discontinued operation - - 0.5p 0.5p 17.3p 17.2p
---------------------------------------------------- ------ ------- ------ ------- ------ -------
Earnings per share from continuing and discontinued
operation 5.4p 5.4p 12.5p 12.4p 38.5p 38.2p
---------------------------------------------------- ------ ------- ------ ------- ------ -------
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
15.
A reconciliation of basic to adjusted earnings per share is as
follows:
Half year ended Half year ended Year ended
31 October 2020 31 October 2019 30 April 2020
Unaudited Unaudited Audited
--------------------- --------------------- ---------------------
Basic Diluted Basic Diluted Basic Diluted
pence pence pence pence pence pence
per per per per per per
GBPm share share GBPm share share GBPm share share
----------------------------- ---- ------ ------- ---- ------ ------- ---- ------ -------
Basic earnings 74 5.4p 5.4p 164 12.0p 11.9p 290 21.2p 21.0p
Add back:
Amortisation of intangible
assets 72 5.2p 5.2p 71 5.2p 5.2p 143 10.4p 10.4p
Tax credit on amortisation (17) (1.2p) (1.2p) (16) (1.2p) (1.2p) (33) (2.4p) (2.4p)
Adjusting items, before
tax 23 1.7p 1.7p 24 1.8p 1.8p 69 5.0p 5.0p
Tax on adjusting items
and adjusting tax
items (4) (0.3p) (0.3p) (5) (0.4p) (0.4p) (14) (1.0p) (1.0p)
----------------------------- ---- ------ ------- ---- ------ ------- ---- ------ -------
Adjusted earnings 148 10.8p 10.8p 238 17.4p 17.3p 455 33.2p 33.0p
----------------------------- ---- ------ ------- ---- ------ ------- ---- ------ -------
8. Dividends proposed and paid
Pence Pence
per share GBPm per share GBPm
-------------------------------------- ---------- ------------ ----------- ----------
2018/19 interim dividend - paid - - 5.2p 71
2018/19 final dividend - paid - - 11.0p 151
2019/20 interim dividend - cancelled 5.4p 74 - -
2019/20 final dividend - proposed nil - - -
2020/21 interim dividend - proposed 4.0p 55 - -
-------------------------------------- ---------- ------------ ----------- ----------
Half year Half year
ended ended Year ended
31 October 31 October 30 April
2020 2019 2020
Unaudited Unaudited Audited
GBPm GBPm GBPm
-------------------------------------- ---------- ------------ ----------- ------------
Paid during the year - 71 222
-------------------------------------- ---------- ------------ ----------- ------------
The 2018/19 interim and final dividends were paid during the
2019/20 financial year. The Group announced on 8 April 2020 that
the interim dividend in respect of 2019/20 of 5.4 pence per share
(GBP74m), which was due to be paid after the year end on 1 May
2020, would no longer be paid, as a prudent action to respond to
the significant uncertainty in the global environment as a result
of Covid-19. The Directors did not propose a final dividend in
respect of 2019/20 for the same reasons. An interim dividend in
respect of the half year ended 31 October 2020 of 4.0p per share
(GBP55m) has been proposed by the Directors after the reporting
date.
9. Cash generated from operations
Half year Half year
ended ended Year ended
31 October 31 October 30 April
2020 2019 2020
Unaudited Unaudited Audited
Continuing operations GBPm GBPm GBPm
------------------------------------------------------------------ ----------- ----------- ----------
Profit for the period 74 164 290
Adjustments for:
Pre-tax integration costs and other adjusting items 19 20 58
Amortisation of intangible assets; acquisitions and divestments 73 72 147
Cash outflow for adjusting items (19) (26) (53)
Depreciation 155 147 296
Profit on sale of non-current assets - (2) (2)
Share of profit of equity accounted investments, net of
tax (3) (3) (7)
Employment benefit net finance expense 1 2 3
Share-based payment expense 4 3 5
Finance income (1) - (4)
Finance costs 44 47 95
Other non-cash items 1 - -
Income tax expense 23 49 78
Change in provisions 16 1 (21)
Change in employee benefits (10) (10) (19)
------------------------------------------------------------------ ----------- ----------- ----------
Cash generation before working capital movement 377 464 866
------------------------------------------------------------------ ----------- ----------- ----------
Changes in:
Inventories 14 23 45
Trade and other receivables (64) 10 86
Trade and other payables 75 (69) (161)
------------------------------------------------------------------ ----------- ----------- ----------
Working capital movement 25 (36) (30)
------------------------------------------------------------------ ----------- ----------- ----------
Cash generated from continuing operations 402 428 836
------------------------------------------------------------------ ----------- ----------- ----------
10. Net debt
At 31 October At 31 October At 30 April
2020 2019 2020
Unaudited Unaudited Audited
GBPm GBPm GBPm
--------------------------------------- ------------- ------------- -----------
Cash and cash equivalents 534 445 595
Bank overdrafts (59) (130) (90)
---------------------------------------- ------------- ------------- -----------
Net cash and cash equivalents 475 315 505
---------------------------------------- ------------- ------------- -----------
Other investments - restricted cash 3 3 3
Other deposits 34 41 33
Borrowings - after one year (2,145) (2,279) (2,300)
Borrowings - within one year (207) (291) (98)
Lease liabilities (245) (235) (255)
Derivative financial instruments
assets 3 4 13
liabilities (5) (2) (2)
---------------------------------------- ------------- ------------- -----------
(2,562) (2,759) (2,606)
--------------------------------------- ------------- ------------- -----------
Net debt - reported basis (2,087) (2,444) (2,101)
---------------------------------------- ------------- ------------- -----------
Net debt excluding IFRS 16 liabilities (1,847) (2,218) (1,852)
---------------------------------------- ------------- ------------- -----------
Net debt is a non-GAAP measure not defined by IFRS. While the
Group has included lease liabilities after transition to IFRS 16
Leases within total lease liabilities (in addition to arrangements
previously classified as finance leases under IAS 17), IFRS 16
liabilities are currently excluded from the definition of net debt
as set out in the Group's banking covenant requirements. Within
lease liabilities of GBP245m at 31 October 2020 are GBP240m of
lease liabilities that would have been classified as operating
leases and GBP5m of lease liabilities that would have been
classified as finance lease liabilities under IAS 17.
Further detail on the use of non-GAAP measures and a
reconciliation showing the calculation of adjusted net debt, as
defined in the Group's banking covenants, is included in note
15.
Derivative financial instruments above relate to forward foreign
exchange contracts and cross-currency swaps used to hedge foreign
exchange exposure on the Group's borrowings and net assets of
foreign operations. 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 firm commitments, and the Group's
purchases of energy.
Other deposits are included, as these short-term receivables
have the characteristics of net debt.
During the half year ended 31 October 2020, the Group repaid
private placement notes of $10m and EUR59m. In addition, a
bilateral term loan facility of EUR60m was repaid and a new
bilateral revolving credit facility of EUR60m was established.
11. Reconciliation of net cash flow to movement in net debt
Half year Half year
ended ended Year ended
31 October 31 October 30 April
2020 2019 2020
Unaudited Unaudited Audited
GBPm GBPm GBPm
---------------------------------------------------------------- ----------- ----------- ----------
Profit for the period 74 164 290
Income tax expense 23 49 78
Share of profit of equity accounted investments, net of
tax (3) (3) (7)
Net financing costs 44 49 94
Amortisation of intangible assets; acquisitions and divestments 73 72 147
Pre-tax integration costs and other adjusting items 19 20 58
---------------------------------------------------------------- ----------- ----------- ----------
Adjusted operating profit 230 351 660
Depreciation 155 147 296
---------------------------------------------------------------- ----------- ----------- ----------
Adjusted EBITDA 385 498 956
Working capital movement 25 (36) (30)
Change in provisions 16 1 (21)
Change in employee benefits (10) (10) (19)
Other 5 1 3
---------------------------------------------------------------- ----------- ----------- ----------
Cash generated from operations before adjusting cash items 421 454 889
Capital expenditure (135) (179) (376)
Proceeds from sale of property, plant and equipment and
intangible assets 3 5 12
Tax paid (30) (49) (94)
Net interest paid (52) (53) (77)
---------------------------------------------------------------- ----------- ----------- ----------
Free cash flow 207 178 354
Cash outflow for adjusting items (19) (26) (53)
Dividends paid - (71) (222)
Acquisition of subsidiary businesses, net of cash and
cash equivalents (88) (4) (4)
Divestment of discontinued operation, net of cash and
cash equivalents - - 422
Divestment of subsidiary businesses, net of cash and cash
equivalents - 62 62
Other - (4) 2
---------------------------------------------------------------- ----------- ----------- ----------
Net cash flow 100 135 561
Proceeds from issue of share capital 1 2 2
Borrowings divested, including deposits - 3 2
---------------------------------------------------------------- ----------- ----------- ----------
Net movement on debt 101 140 565
Foreign exchange, fair value and other non-cash movements (80) (46) (118)
---------------------------------------------------------------- ----------- ----------- ----------
Net debt movement - continuing operations 21 94 447
Net debt movement - discontinued operation (10) (19) (29)
Opening net debt (2,101) (2,277) (2,277)
Transfer to held for sale 3 - -
Transition to IFRS 16 - (242) (242)
---------------------------------------------------------------- ----------- ----------- ----------
Closing net debt - reported basis (2,087) (2,444) (2,101)
---------------------------------------------------------------- ----------- ----------- ----------
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:
At 31 October At 31 October
2020 2019
Unaudited Unaudited
----------------- -----------------
Carrying Fair Carrying Fair
amount value amount value
Category GBPm GBPm GBPm GBPm
------------------------------ --------------------------------- -------- ------- -------- -------
Financial assets
Cash and cash equivalents Amortised cost 534 534 445 445
Other investments Amortised cost 12 12 3 3
Fair value through other
Other investments comprehensive income 3 3 8 8
Trade and other receivables Amortised cost 838 838 851 851
Derivative financial
instruments Fair value - hedging instruments 27 27 25 25
------------------------------- -------------------------------- -------- ------- -------- -------
Total financial assets 1,414 1,414 1,332 1,332
------------------------------------------------------------------ -------- ------- -------- -------
Financial liabilities
Amortised cost, except as
Trade and other payables detailed below (1,705) (1,705) (1,759) (1,759)
Bank and other loans Amortised cost (11) (11) (16) (16)
Commercial paper Amortised cost (30) (30) (220) (220)
Medium-term notes and
other
fixed-term debt Amortised cost (2,311) (2,400) (2,334) (2,400)
Lease liabilities Amortised cost (245) (245) (235) (235)
Bank overdrafts Amortised cost (59) (59) (130) (130)
Derivative financial
instruments Fair value - hedging instruments (50) (50) (27) (27)
------------------------------- -------------------------------- -------- ------- -------- -------
Total financial liabilities (4,411) (4,500) (4,721) (4,787)
------------------------------------------------------------------ -------- ------- -------- -------
The fair value is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. 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 fixed rate
borrowings and cross-currency swaps. All derivative financial
instruments are shown at fair value in the consolidated statement
of financial position.
The majority of the Group's medium-term notes and other
fixed-term debt are in effective cash flow and net investment
hedges. The fair values of financial assets and liabilities which
bear floating rates of interest or are short-term in nature are
estimated to be equivalent to their carrying amounts.
The Group's financial assets and financial liabilities are
categorised within the fair value hierarchy that reflects the
significance of the inputs used in making the assessments. The
majority of the Group's financial instruments are Level 2 financial
instruments in accordance with the fair value hierarchy, meaning
that 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). The Group's medium-term notes are Level 1
financial instruments, as the notes are listed on the Luxembourg
Stock Exchange. Certain other investments and the redemption
liability arising on the acquisition of Interstate Resources
(within trade and other payables) are Level 3 financial
instruments. The fair value of other investments at fair value
through other comprehensive income is derived from fair value
calculations based on their cash flows.
13. Acquisitions and divestments
(a) Acquisitions in the half year ended 31 October 2020
On 26 June 2020, the purchase of a further 10% stake in
Interstate Resources was completed after the exercise of a portion
of the put option held by the sellers. Of the GBP106m
consideration, GBP82m was paid in cash, with, by agreement, the
remainder deferred to October 2021. The final 10% stake remains
subject to the put option. As a substantial shareholder of the
Group, the seller met the definition of a related party.
In total, during the half year ended 31 October 2020, cash
consideration for acquisition of subsidiary businesses, net of cash
and cash equivalents, was GBP88m, and borrowings acquired,
including deposits, were GBPnil. Apart from the acquisition of the
10% stake in Interstate Resources, the remaining acquisitions are
not material to the Group individually or in aggregate.
(b) 2019/20 acquisitions and divestments
In February 2020, the Group completed the disposal of the
Group's Plastics division, classified as a discontinued operation
(see note 14).
In June 2019, the Group completed the remedy disposals required
as part of the acquisition of Europac for EUR73m. Cash
consideration received, net of transaction costs, was GBP62m, and
including net debt disposed of, the total impact on net debt from
disposals was GBP64m. Acquisition of subsidiary businesses in the
statement of cash flows, net of cash and cash equivalents, of GBP4m
related to completion accounts adjustments on prior year
acquisitions. Neither the remedy disposals nor the acquisition
adjustments were material to the Group individually or in
aggregate.
(c) Acquisition related costs
The Group incurred acquisition related costs in the half year
ended 31 October 2020 of GBP1m (half year ended 31 October 2019:
GBP7m, year ended 30 April 2020: GBP10m), primarily consisting of
professional fees relating to review of potential deals, which have
been included in administrative expenses within adjusting
items.
14. Discontinued operation
Plastics division
On 27 February 2020, in the prior financial year, the sale of
the Group's Plastics division to Olympus Partners and its affiliate
Liqui-Box Holdings was completed.
Plastics principally comprised flexible packaging and dispensing
solutions, extruded and injection moulded products and foam
products.
The consolidated income statement presents the Plastics segment
as a discontinued operation with a single line amount of profit
from discontinued operation, net of tax. At 31 October 2020 and 30
April 2020, the Plastics division had been sold, but in the
comparative
31 October 2019 consolidated statement of financial position the
discontinued assets and liabilities are classified as 'assets held
for sale'
and 'liabilities held for sale' respectively. The consolidated
statement of cash flows presents a single amount of net cash flow
from
discontinued operation.
Cash flows used in discontinued operation
Year ended
Half year ended 31 October 2020 Half year ended 31 October 2019 30 April 2020
Unaudited Unaudited Audited
GBPm GBPm GBPm
------------------------------------ ------------------------------- ------------------------------- --------------
Net cash used in operating
activities - (9) (18)
Net cash used in investing
activities (10) (7) (11)
Net cash used in financing
activities - (3) -
------------------------------------ ------------------------------- ------------------------------- --------------
Net cash flows for the period (10) (19) (29)
------------------------------------ ------------------------------- ------------------------------- --------------
Cash flows during the period ended 31 October 2020 relate to
settlement of professional fees and transaction costs relating to
the sale of the division.
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, 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 these adjusting items enables comparability
of the recurring core business, complementing the IFRS measures
presented.
Amortisation relates primarily to customer contracts and
relationships and infrastructure optimisation projects arising from
or as a result of 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, in the case of customer contracts and relationships,
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 12-month balances or average
exchange rates.
Key non-GAAP performance measures
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 divestment 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.
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.
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 .
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.
Return on sales
Return on sales is adjusted operating profit measured as a
percentage of revenue. Return on sales is used to measure the value
we deliver to customers and the Group's ability to charge for that
value.
Half year Half year
ended ended Year ended
31 October 31 October 30 April
2020 2019 2020
GBPm GBPm GBPm
-------------------------- ----------- ----------- ----------
Adjusted operating profit 230 351 660
Revenue 2,889 3,188 6,043
-------------------------- ----------- ----------- ----------
Return on sales 8.0% 11.0% 10.9%
-------------------------- ----------- ----------- ----------
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, right-of-use assets, goodwill and intangible
assets, working capital, capital debtors/creditors, provisions,
biological assets and assets/liabilities held for sale. Assets and
liabilities relating to the discontinued operation are
excluded.
Half year Half year
ended ended Year ended
31 October 31 October 30 April
2020 2019 2020
GBPm GBPm GBPm
----------------------------------------------------------- ----------- ----------- ----------
Capital employed 6,092 5,988 6,010
Currency, inter-month and acquisition/divestment movements 124 (224) 244
----------------------------------------------------------- ----------- ----------- ----------
Last 12 months' average capital employed 6,216 5,764 6,254
----------------------------------------------------------- ----------- ----------- ----------
Last 12 months' adjusted operating profit 539 678 660
----------------------------------------------------------- ----------- ----------- ----------
Adjusted return on average capital employed 8.7% 11.8% 10.6%
----------------------------------------------------------- ----------- ----------- ----------
Net debt and net debt/EBITDA
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 are disclosed in note 10.
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.
The Group's banking covenant requirements currently exclude IFRS
16 liabilities from the definition of net debt, as well as
requiring that EBITDA is calculated before the effects of IFRS 16,
so an adjustment to the previous IAS 17 basis is made in the
calculation.
In calculating the ratio, net debt is stated at average rates as
opposed to closing rates, and adjusted EBITDA is adjusted operating
profit before depreciation from the previous 12 month period
adjusted for the full year effect of acquisitions and divestments
in the period, and adjusted to an IAS 17 basis.
Half year Half year
ended ended Year ended
31 October 31 October 30 April
2020 2019 2020
GBPm GBPm GBPm
------------------------------------------------------------- ----------- ----------- ----------
Net debt - reported basis (see note 10) 2,087 2,444 2,101
IFRS 16 lease liabilities (see note 10) (240) (226) (249)
Adjustment to average rate (40) 47 17
------------------------------------------------------------- ----------- ----------- ----------
Net debt - adjusted basis 1,807 2,265 1,869
------------------------------------------------------------- ----------- ----------- ----------
Adjusted EBITDA - last 12 months' reported basis (continuing
operations) 843 921 956
Adjust to IAS 17 basis (82) (40) (80)
Acquisition and divestment effects - 39 (2)
Add back of discontinued operation - 47 -
------------------------------------------------------------- ----------- ----------- ----------
Adjusted EBITDA - banking covenant basis 761 967 874
------------------------------------------------------------- ----------- ----------- ----------
Net debt/EBITDA 2.37x 2.34x 2.14x
------------------------------------------------------------- ----------- ----------- ----------
Free cash flow
Free cash flow is the net movement on debt before cash outflow
for adjusting items, dividends paid, acquisition and divestment 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:
Half year Half year
ended ended Year ended
31 October 31 October 30 April
2020 2019 2020
GBPm GBPm GBPm
-------------------------------------- ----------- ----------- ----------
Growth capital expenditure 36 70 137
Non-growth capital expenditure 99 109 239
-------------------------------------- ----------- ----------- ----------
Total capital expenditure 135 179 376
-------------------------------------- ----------- ----------- ----------
Free cash flow (note 11) 207 178 354
Tax paid (note 11) 30 49 94
Net interest paid (note 11) 52 53 77
Growth capital expenditure 36 70 137
Change in employee benefits (note 11) 10 10 19
-------------------------------------- ----------- ----------- ----------
Adjusted free cash flow 335 360 681
-------------------------------------- ----------- ----------- ----------
Adjusted operating profit 230 351 660
-------------------------------------- ----------- ----------- ----------
Cash conversion 146% 103% 103%
-------------------------------------- ----------- ----------- ----------
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 average 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 and divestment related
debtors and creditors.
Half year Half year
ended ended Year ended
31 October 31 October 30 April
2020 2019 2020
GBPm GBPm GBPm
--------------------------------------------------------------- ----------- ----------- ----------
Inventories 513 541 518
Trade and other receivables 804 807 736
Trade and other payables (1,520) (1,494) (1,419)
Inter-month movements and exclusion of capital and acquisition
and divestment related items 183 175 195
--------------------------------------------------------------- ----------- ----------- ----------
Last 12 months' average working capital (20) 29 30
--------------------------------------------------------------- ----------- ----------- ----------
Last 12 months' revenue 5,744 6,286 6,043
--------------------------------------------------------------- ----------- ----------- ----------
Average working capital to sales (0.3%) 0.5% 0.5%
--------------------------------------------------------------- ----------- ----------- ----------
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 items. Constant currency comparatives recalculate
the prior year revenue and adjusted operating profit as if they had
been generated using the current year exchange rates. In addition,
the Group then separates the incremental effects of acquisitions
made in the current year, and the incremental effects of
acquisitions made in the previous year, to determine underlying
organic growth. The table below shows the calculations:
Adjusted
operating
Revenue profit
GBPm GBPm
--------------------------------------------------------- ------- ----------
Reported basis - comparative half year ended 31 October
2019 3,188 351
Currency effects 11 1
--------------------------------------------------------- ------- ----------
Constant currency basis - comparative half year ended 31
October 2019 3,199 352
Prior year divestments (13) (1)
--------------------------------------------------------- ------- ----------
3,186 351
Synergies - 14
Organic growth (297) (135)
--------------------------------------------------------- ------- ----------
Reported basis - half year ended 31 October 2020 2,889 230
--------------------------------------------------------- ------- ----------
16. Subsequent events
There are no subsequent events after the reporting date which
require disclosure.
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