TIDMSMDS
RNS Number : 7340V
Smith (DS) PLC
05 December 2019
5 December 2019
DS Smith Plc - 2019/20 HALF YEAR RESULTS
Robust business model driving profitable growth
6 months to 31 October 2019 Change Change
Continuing operations(9) (reported) (constant currency)
------------------------------ ---------- ------------ ---------------------
Revenue GBP3,188m +4% +3%
Adjusted operating profit(1) GBP351m +15% +14%
Profit before tax GBP213m +31% +30%
Adjusted EPS(1) 17.4p +5% +4%
Statutory basic EPS 12.0p +26% +26%
Interim dividend per share 5.4p +4% +4%
Return on sales(4) 11.0% +110bps +110bps
ROACE(5) 11.8% (210bps) (210bps)
See notes to the financial
table below
Highlights
-- Record Group profitability and return on sales despite economic headwinds
o Market share gains driven by multinational FMCG and e-commerce customers
o Customers increasingly valuing our sustainable packaging
solutions, reflected in good pricing and return on sales up 110
basis points
-- Europe - good organic profit growth
-- Europac - excellent progress and strong initial contribution
o Packaging turnaround to profitability
o EUR70m synergy programme fully on track
-- Good US domestic performance offset by impact of export paper pricing
o Indiana greenfield box plant now operational
-- Transforms US capability and customer offering
-- Consistent with strategy to reduce US long paper exposure
-- Strong cashflow and balance sheet
o Plastics disposal (net proceeds c. GBP400m) expected to complete around the calendar year end
o Strong liquidity profile: EUR600m, seven year bond raised at 0.875%
-- Future growth prospects continue to benefit from the
increased customer focus on sustainability (including plastic
replacement) and e-commerce
"Our leadership in e-commerce and sustainable packaging
solutions has enabled us to perform well despite a difficult macro
environment and volatility in paper pricing. The continued growth
in margin and strong pricing discipline has been particularly
pleasing as we deepen our relationships with FMCG customers and
grow market share.
We continue to capitalise on the strong long-term growth drivers
of fibre-based packaging, with our industry-leading innovation
driving differentiation in the market. Assuming current
macro-economic conditions prevail, we anticipate an acceleration of
volume growth in the second half of the year which, together with
the resilience of our business model, supports our expectation of
further growth in the year."
Miles Roberts, Group Chief Executive
Progress against medium-term targets
Medium term targets Delivery in H1 2019/20(8)
Continuing operations(9)
--------------------------------------- --------------------------
Organic volume growth(2) >=GDP(3) +1%
(2.6%) 0.7%
Return on sales(4) 10% - 12% 11.0%
ROACE(5) 12% - 15% 11.8%
Net debt / EBITDA(6) <=2.0x 2.3x
Cash conversion(7) >=100% 103%
--------------------------------------- --------------------------
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
Presentation and dial-in details
A presentation to investors and analysts will be held at 9:00am
today at the London Stock Exchange, 10 Paternoster Square, London
EC4M 7LS. The event is available by webcast by clicking here or by
registering via the link on our website
https://www.dssmith.com/investors/results-and-presentations.
Alternatively, dial-in access for the presentation is available
with details as follows: +44 (0) 20 3003 2666 (standard access) or
0808 109 0700 (UK Toll Free) Password: DS Smith. The slides
accompanying the presentation will be available on our website
shortly before the start of the presentation, as well as on the
webcast.
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 2451936#.
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 16 to the financial statements explains the use of
non-GAAP performance measures and reconciles them to the closest
IFRS measure.
The Group has adopted IFRS 16 Leases from 1 May 2019 and, as
required by the modified retrospective approach, has not restated
comparatives (see note 13 to the financial statements).
(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 = 1.6%. Source:
Eurostat (14 Nov 2019)
(4) Operating profit before adjusting items and amortisation of
intangible assets as a percentage of revenue
(5) 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, intangible assets (including
goodwill), working capital, provisions, capital debtors/creditors
and assets/liabilities held for sale. The impact of IFRS 16 Leases
has been to decrease ROACE by approximately 20 basis points against
the prior period
(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 6 months to 31 October 2019; ROACE
and net debt / EBITDA given for the 12 months to 31 October
2019
(9) References to continuing operations excludes the Plastics
division, which is now presented as a discontinued operation
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 is based on constant currency
performance.
Overview
In the half year to 31 October 2019, DS Smith has continued to
grow well, with corrugated box volume growth of 0.7%, adjusted
operating profit up 14%, profit before tax up 30% and return on
sales up 110 basis points to 11.0%.
Overall, performance has been strong, despite a challenging and
uncertain macro-economic environment. Within Europe, we have
continued to grow market share, with corrugated box volume growth
among multi-national FMCG customers remaining significantly ahead
of the average volume growth rate. The decline in volumes from our
industrial business has had an impact on overall box volume growth,
although this represents only a small part of our business and we
are adjusting our cost base accordingly. Box prices have remained
solid despite the reduction in paper prices as customers recognise
and value our innovation and sustainable packaging solutions.
Integration work of the Europac business has been excellent, with
cost synergies fully on track and good customer engagement.
Within our overall short paper strategy and position, regional
profitability has been impacted by the level of paper integration
of the respective regions. Lower paper prices benefited those
regions where we are "short paper" but have had a negative impact
on those regions where we are currently "long paper". Within North
America, our domestic business has continued to perform well,
offset by the decline in paper prices to the export market. In line
with our strategy to be balanced in relation to paper integration
within North America, the new Indiana corrugated packaging site,
which is now operational, will over time significantly reduce the
degree of our long paper position in that region going forward. In
Europe, our robust performance has proven our business model of
being short paper while providing high quality, value-adding
packaging to resilient FMCG customers both when paper prices rose
and also now that they have fallen. Our review to optimise our
European paper requirements is ongoing, and we continue to target
cost and efficiency improvements.
Performance for six months to 31 October 2019
Unless otherwise noted, this commentary relates to the
continuing operations of the Group, on a constant currency
basis.
Organic corrugated box volume growth of 0.7% builds on the
strong growth in the comparable prior period. While behind our
GDP+1% target, it is ahead of market growth, reflecting continued
gains in market share with our strategic customers. In a
challenging economic environment, our differentiated customer
offering has allowed us to demonstrate good pricing discipline,
despite downward pressure on pricing in the market overall due to
the decline in benchmark paper prices. We saw very good volumes
once again from our multi-national customers, reflecting the demand
for our innovative packaging solutions across Europe and the US. As
a Group, c. 70% of our corrugated box volumes are sold to resilient
FMCG customers, substantially ahead of the industry average.
For the half year period, revenues increased by 3% (4% on a
reported basis), principally reflecting the contribution from
Europac and volume growth in corrugated boxes. This has been
partially offset by a modest reduction in selling prices of
corrugated packaging, together with a more substantial reduction in
revenue from paper and recyclate sales, noticeably from US paper
exports. In addition, we have reduced the volume of paper in Europe
sold externally, as we have increased the level of our own paper
consumed within our packaging businesses.
Our European business is approximately 80% vertically integrated
overall, and hence we have a requirement to buy paper for the
remaining 20% requirement. We nonetheless sell some of our paper
where it is beneficial to do so and buy corresponding volumes in
the open market. Such external paper sales are reported as revenue
and the purchased volumes as cost of sales.
Return on sales for the period was 11.0%, up 110 basis points on
the comparable prior period and at the midpoint of our recently
upgraded target range of 10% - 12%. This reflects the benefit of
our focus on value-added packaging and strong pricing discipline,
together with good progress and synergy delivery from the Europac
acquisition more than offsetting the reduced margin in North
America as a result of lower pricing for paper export.
Adjusted operating profit was up 14% on a constant currency
basis. Growth was driven by the inclusion of a full six months'
contribution from Europac and accompanying synergies of GBP17
million. This was partially offset by the reduction in
profitability from the North America division due to lower prices
realised on paper export sales. The European business continued to
grow organically and the benefits from reduced paper and OCC costs
were only partially offset by reduced box prices in our packaging
business.
Return on average capital employed was down 180 basis points to
11.8% compared to that at 30 April 2019 (13.6%), reflecting an
additional six month inclusion of Europac which is initially
dilutive to Group ROACE. The impact of IFRS 16 Leases has been to
decrease ROACE by approximately 20 basis points against the prior
period, meaning that on a pre-IFRS 16 basis, ROACE would have been
12.0%, within our target range of 12% - 15%.
Balance Sheet
Net debt / EBITDA is stable at 2.3x, compared to that at 30
April 2019. This ratio is not affected by the adoption of IFRS 16
Leases because its effects are excluded under the Group's banking
covenant definitions and the impact would, in any case, be
immaterial.
Operating cashflow and the proceeds of the remedy disposals
(GBP62 million) were largely offset by capex, a small working
capital outflow resulting from the price effect in creditors for
externally sourced paper, and dividend payments. Capex in this
financial year is more weighted towards H1 than is typical,
principally due to expenditure on the new Indiana site. In the
second half of the financial year, we expect the agreed disposal of
the Plastics division to complete resulting in proceeds of c.
GBP400 million (net of tax and expenses) and also expect to
complete our purchase of the 10% stake in Interstate Resources due
to the exercise of the pre-existing put option by the sellers of
that business. The final 10% stake remains subject to the put
option.
In September 2019 we issued an additional bond under our Euro
Medium-Term Notes programme, raising a EUR600m bond for seven years
priced at 0.875%. This provides long-term, attractive financing for
the business and extends the maturity profile of our debt.
Structural drivers for growth
We continue to see three particularly noticeable structural
growth drivers, being e-commerce, the drive for sustainable
solutions to replace plastic packaging and the requirement for more
sophisticated packaging from retailers. In the period, there has
been a substantial increase in the number of public commitments by
our customers on the topic of sustainability and, in particular,
the use of non-plastic packaging. This presents a massive
opportunity for fully recycled and recyclable corrugated packaging
as a substitute for plastic and one which we are well positioned to
maximise due to our scale and customer relationships, and we have
had a high level of customer engagement on. We expect this to be a
continuing trend, with many customer commitments to reduce plastic
spanning to 2025 and beyond. We have developed a large number of
sustainable solutions to replace such plastic packaging and expect
to maintain the development of further solutions through continued
close collaboration with our customers and partners such as the
Ellen MacArthur Foundation.
Operating Review
Unless otherwise noted, the commentary below refers to changes
on a constant currency basis. During the period, the Group changed
its internal reporting structure, reducing the regional segments
from five to four. Consequently, a corresponding change to the
operating segments reported has been made, and the operating
segment analysis for the comparative period has been restated.
Northern Europe
Half year Half year Change Change - constant
ended ended - reported currency
31 October 31 October
2019 2018
Revenue GBP1,227m GBP1,313m (7%) (7%)
Adjusted operating
profit* GBP104m GBP141m (26%) (27%)
Return on sales* 8.5% 10.7% (220bps) (230bps)
*Operating profit before amortisation and adjusting items (refer
to note 3 of the financial statements)
Note: the Northern Europe segment comprises the UK, Germany,
Switzerland, Norway, Sweden, Finland, Denmark and Benelux
In Northern Europe, organic corrugated box volume growth was
mixed, with continued good growth in the UK and the Nordic region
driven by our strong FMCG focus, and somewhat offset by difficult
conditions for our industrial customers in Germany and the
surrounding Benelux region, particularly in the automotive sector.
We are optimising our operational efficiencies to reflect the
challenging environment, have strengthened the management team in
Germany and expect a progressive improvement in this area.
Revenues have decreased by 7% in the region due to a combination
of a modest decline in corrugated box pricing, combined with a
larger impact from a reduced sales price for externally sold paper
and lower volumes sold externally as internal integration has been
increased. Adjusted operating profit fell 27%, principally due to
the level of exposure to paper manufacturing in the region,
particularly in Germany.
Southern Europe
Half year Half year Change Change - constant
ended ended - reported currency
31 October 31 October
2019 2018
Revenue GBP1,175m GBP943m +25% +24%
Adjusted operating
profit* GBP170m GBP67m +154% +154%
Return on sales* 14.5% 7.1% +740bps +740bps
* Operating profit before amortisation and adjusting items
(refer to note 3 of the financial statements)
Note: the Southern Europe segment comprises France, Spain,
Portugal and Italy
Southern Europe has seen organic corrugated box volume growth
broadly in line with that of the overall Group, with a strong
delivery in Italy and Iberia, contrasted with difficult conditions
in France, which also saw some of the weakness in industrial
products as in other parts of Europe. This result includes the
operations acquired from Europac, which increased packaging volumes
ahead of the Group rate of growth. We are delighted with the
profitable turnaround in the Europac packaging operations as the
commercial teams from Europac are now integrated with DS Smith and
operating a common approach to quality, service and pricing.
Revenue increased by 24%, principally due to the contribution
from the Europac assets (GBP297 million), slightly offset by the
assets sold as remedy disposals shortly following completion of
that acquisition. The revenues from the Europac assets had, prior
to our ownership, included a substantial component of external
paper sales and these have reduced due to increased integration
within the enlarged Group's packaging operations.
Adjusted operating profit increased by GBP103 million, up 154%
compared to the prior period, principally reflecting the
contribution from the Europac business (GBP44 million) and related
synergies of EUR19 million (GBP17 million) achieved in the period,
which reflects both the contribution from the paper assets and a
profitable outturn for the Europac packaging business. Our other
packaging operations in the region saw strong profit growth due to
lower input costs and good pricing.
Eastern Europe
Half year Half year Change Change - constant
ended ended - reported currency
31 October 31 October
2019 2018
Revenue GBP469m GBP476m (1%) (1%)
Adjusted operating
profit* GBP47m GBP39m +21% +21%
Return on sales* 10.0% 8.2% +180bps +180bps
* Operating profit before amortisation and adjusting items
(refer to note 3 of the financial statements)
Note: the Eastern Europe segment comprises our remaining
European operations, including Austria, Poland, the Czech Republic,
Hungary, the Baltic states, the Balkan region, Greece and
Turkey
Organic corrugated box volumes in Eastern Europe have been
robust with particularly good volume growth in Poland and the
Baltic region. Revenues have been flat, reflecting a balance
between organic corrugated volume growth and modest box price
pressure. Adjusted operating profit increased 21%, reflecting good
growth in the packaging operations with the benefit of lower input
costs combined with robust pricing, only partially offset by the
paper operations in the region.
North America
Half year Half year Change Change -
ended ended - reported constant currency
31 October 31 October
2019 2018
Revenue GBP317m GBP341m (7%) (11%)
Adjusted operating
profit* GBP30m GBP57m (47%) (50%)
Return on sales* 9.5% 16.7% (720bps) (740bps)
*Operating profit before amortisation and adjusting items (refer
to note 3 of the financial statements)
Corrugated box volumes have been below the Group average volume
growth in the period, principally reflecting the rapid growth last
year causing a level of capacity constraint which we are now able
to address through the opening of our greenfield packaging plant in
Lebanon, Indiana. Revenues decreased by 11%, principally reflecting
the substantial decline in the selling price for the excess paper
manufactured by our operations in the region. The continued good
performance of our domestic business, reflecting the more stable
market conditions, has been offset by weakness in paper prices in
the export market. As a consequence, adjusted operating profit
declined by 50%, also impacted by some start-up costs associated
with the Indiana site.
Our strategy in North America is to be balanced between paper
and packaging. Currently, the region is long paper and is more
exposed to the prevailing paper price, as has been seen in this
period. As we described at the time of acquisition, we are
systematically reducing this long position and in 2018 we began the
process of building a new corrugated packaging site in Indiana to
serve our multinational FMCG customers. As of November 2019, this
site is now operational, on time and to budget. We are delighted
that we have had a high level of customer engagement regarding the
new capability and are now beginning to deliver product to key FMCG
customers from the facility. The capacity of the new plant, once
fully operational, is sufficient to halve the existing long paper
position. The new site will also allow us to reduce bottlenecks at
existing sites and improve our operational efficiency. In this
current financial year, total losses associated with the start-up
of this site are expected to be c. GBP15 million, as previously
announced.
Disposal of Plastics division
On 6 March 2019, DS Smith agreed to dispose of the Plastics
division to Olympus Partners for $585m. We expect net cash proceeds
after taxation, transaction adjustments and expenses of
approximately GBP400 million. This transaction is expected to
complete around the end of 2019.
The Plastics business, which is classified as a discontinued
operation, has continued to trade well with revenues broadly flat,
while adjusted operating profits were up 14%.
Outlook
We continue to capitalise on the strong long-term growth drivers
of fibre-based packaging, with our industry leading innovation
driving differentiation in the market. Assuming current
macro-economic conditions prevail, we anticipate an acceleration of
volume growth in the second half of the year which, together with
the resilience of our business model, supports our expectation of
further growth in the year.
Financial Review
Unless otherwise noted, the following commentary relates to the
continuing operations of the Group.
Group revenue for the half year to 31 October 2019 increased on
an reported basis by 4% to GBP3,188 million (H1 2018/19: GBP3,073
million), principally due to acquisitions, partially offset by
lower volumes and sales prices within the paper and recycling
businesses. External volumes in paper reduced as a result of
increased internal sales and recycling volumes continue to be
impacted by lower export demand from Asian markets. These decreases
were partially offset by modest growth in corrugated box volumes
and robust average sales prices. On a constant currency basis,
revenue increased by 3%.
Operating profit of GBP259 million increased versus the prior
year (H1 2018/19: GBP201 million) principally due to the
contribution from acquisitions, modest growth in corrugated box
volumes, a small gain realised on a remedy disposal and the
recognition of a charge in respect of GMP equalisation in the prior
year. These effects were partially offset by reductions in the
export pricing for North American paper.
Adjusted operating profit increased 15% to GBP351 million (H1
2018/19: GBP304 million), with a GBP4 million tailwind from
currency translation. On a constant currency basis, adjusted
operating profit growth was 14%, benefitting from the contribution
from acquisitions, principally the ownership of Europac for the
period (GBP61 million), and the net impact of corrugated box volume
growth. Robust pricing within the packaging business has helped
offset reducing European paper and recyclate prices, whilst the
North America business has been impacted by significant reductions
in pricing of paper to export markets (GBP29 million).
Free cash flow, being EBITDA plus the cash flow effect of
working capital, pension payments, capital expenditure (net of
proceeds), tax and interest, was GBP178 million (H1 2018/19: GBP209
million). EBITDA of GBP498 million was partially offset by a
reduction in the usage of factoring facilities and the working
capital impact of lower paper and energy prices, capital
expenditure that was higher than the prior year (due to acquisition
and synergy-enabling capital spend and the US greenfield in
Lebanon, Indiana), tax and interest payments. Factoring balances at
the half year for the total Group, were GBP475 million (31 October
2018: GBP550 million, 30 April 2019: GBP525 million).
Net debt movement for the period ended 31 October 2019 for the
total Group, was an increase of GBP167 million, principally due to
the inclusion of lease obligations following the adoption of IFRS
16 Leases of GBP242 million, dividends paid of GBP71 million,
adjusting items of GBP26 million, and fair value adjustments, new
lease obligations and foreign exchange movements of GBP46 million.
These were partially offset by free cash flow and the net proceeds
on the remedy disposals of GBP62 million.
Net capital expenditure was GBP174 million in the period (H1
2018/19: GBP118 million) with c. GBP370 million expected to be
spent in the full financial year (2018/19: GBP289 million). The
year-on-year increase reflects the impact of the Europac
acquisition and the US greenfield packaging plant in Lebanon,
Indiana.
Amortisation for the period was GBP71 million (H1 2018/19: GBP53
million), with c. GBP140 million expected for the full financial
year.
Depreciation for the period was GBP147 million (H1 2018/19:
GBP89 million), with the charge for the full financial year
expected to be c. GBP320 million for continuing operations. The
depreciation charge is impacted by the adoption of IFRS 16 Leases,
which has increased depreciation against the comparative period by
GBP35 million.
Return on average capital employed of 11.8% for the 12 month
period to 31 October 2019 (12 months to 31 October 2018: 13.9%) has
decreased primarily due to the dilutive impact of recently-acquired
businesses. The impact of IFRS 16 Leases has been to decrease ROACE
by approximately 20bps; without this effect the ROACE for the
period would be at the bottom end of the range for our medium-term
target of 12% - 15%.
Adjusting items costs were GBP24 million in the period (H1
2018/19: GBP58 million), being the net of a GBP6 million gain
primarily on the remedy disposals, acquisition-related costs of
GBP7 million, GBP20 million relating to integration and other
restructuring initiatives and GBP3 million of acquisition-related
finance costs.
Net financing costs before adjusting items were GBP44 million
(H1 2018/19: GBP35 million), reflecting the increase in debt over
the period due to consideration paid for acquisitions, as well as
the adoption of IFRS 16 Leases. Adjusting finance costs of GBP3
million relate to the unwind of the discount of the Interstate
Resources redemption liability - a further GBP2 million was charged
to underlying finance costs. The pension interest charge for the
period was GBP2 million, with a charge of GBP4 million expected for
the full year. The interest charge for the year as a whole is
expected to be c. GBP88 million.
Profit before tax increased to GBP213 million (H1 2018/19:
GBP162 million) due to higher operating profit, offset by higher
interest costs and a slightly lower share of results of associates.
Adjusted profit before tax of GBP308 million (H1 2018/19: GBP273
million) was higher due to the growth in adjusted operating
profit.
Tax on adjusted profits has been charged at a rate on continuing
operations before amortisation and adjusting items of 23.0%.
Profit after tax for continuing operations was GBP164 million
(H1 2018/19: GBP122 million). Profit for the period for total
operations was GBP171 million (H1 2018/19: GBP130 million).
Earnings per share for continuing operations before amortisation
and adjusting items increased 5% on an actual basis to 17.4 pence
(H1 2018/19: 16.5 pence), reflecting the growth in operating
profit. Total unadjusted earnings per share for continuing
operations were 12.0 pence (H1 2018/19: 9.5 pence) due to higher
profit from operations, together with lower adjusting items noted
above.
In the second half of the financial year we expect to complete
our purchase of a further 10% stake in Interstate Resources due to
the exercise of the pre-existing put option by the sellers of that
business. The final 10% stake remains subject to the put
option.
Financial position
Total equity increased to GBP3,187 million at 31 October 2019
from GBP3,112 million at 30 April 2019 due to retained profits of
GBP171 million, offset by foreign currency translation losses of
GBP13 million, actuarial losses on employee benefits of GBP7
million, hedging movements of GBP11 million and dividends of GBP71
million.
Net debt at 31 October 2019 was GBP2,444 million (30 April 2019:
GBP2,277 million). Reported net debt has been impacted by the
adoption of IFRS 16, representing GBP242 million of the increase
during the period, although IFRS 16 lease liabilities are excluded
from the definition of adjusted net debt as set out in the Group's
banking covenants. On a covenant basis, adjusted net debt
represents 2.3x EBITDA, calculated over the prior 12 month period,
based on a full year contribution from acquired businesses and
excluding the impact of IFRS 16 Leases. Net debt will benefit by c.
GBP400 million from the disposal of Plastics and be negatively
impacted by c. GBP90 million through the exercise of 50% of the
Interstate put option, which leaves a remaining liability that
could crystallise as debt of c. GBP90 million at the earliest of 12
months' time.
During the half year ended 31 October 2019, the Group launched
and priced EUR600m of notes due 12 September 2026 with a coupon of
0.875% pursuant to its Euro Medium-Term Note programme.
The Group has for many years sold certain trade receivables
without recourse, and on realisation the trade receivable is
de-recognised and proceeds are presented within operating cash
flows. These arrangements have systematically reduced early payment
discounts and have thus provided the Group with more economic
alternatives. The facilities available are generally committed for
three years and are not relied upon by the Group for liquidity.
There has been an underlying reduction in factoring balances of
GBP50 million to GBP475 million (30 April 2019: GBP525 million) or
GBP75 million when compared to H1 2018/19.
IFRS 16 Leases
The Group adopted IFRS 16 Leases, as disclosed in note 13 to the
financial statements.
The impact on implementation of IFRS 16 was to recognise lease
liabilities on continuing operations at 1 May 2019 of GBP242
million, along with a corresponding increase in right-of-use assets
of GBP239 million.
Under the modified retrospective approach adopted by the Group,
the adjustment was only made to the balance sheet at 1 May 2019,
and the comparatives are not restated.
IFRS 16 liabilities are currently excluded from the definition
of net debt as set out in the Group's banking covenant
requirements. EBITDA is also calculated before the effects of IFRS
16, so an adjustment to the previous IAS 17 basis is made in the
calculation of net debt/EBITDA, as detailed in note 16.
For the half year ended 31 October 2019, the operating lease
expense was replaced with the right-of-use depreciation charge of
GBP35 million that was recognised in operating profit and a GBP6
million interest expense that was recognised within finance
costs.
Discontinued operations and disposal group held for sale
The Plastics business is classified as 'held for sale' and
treated as a discontinued operation from the half year ended 31
October 2018.
The condensed consolidated income statement presents the
Plastics business as a discontinued operation. The condensed
consolidated statement of financial position presents the
discontinued assets and liabilities as 'assets held for sale' and
'liabilities held for sale' respectively. The condensed
consolidated statement of cash flows presents a single amount of
net cash flow from discontinued operations. Completion is expected
around the end of the calendar year 2019.
Dividend
The Board considers the dividend to be an important component of
shareholder returns. In considering dividends the Board will be
mindful of the Group's leverage, earnings growth potential and
future expansion plans. 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.
The Board declares an interim dividend for this half year of 5.4
pence per share (H1 2018/19: 5.2 pence per share). This represents
an increase of 4%, demonstrating the confidence of the Board in the
outlook for the Group. The dividend will be paid on 1 May 2020 to
ordinary shareholders on the register at the close of business on
14 April 2020.
Risks and uncertainties
The Board has considered the principal risks and uncertainties
affecting the Group in the second half of the year. The principal
risks and uncertainties discussed on pages 49 to 55 of the 2019
Annual Report, available on the Group's website at www.dssmith.com,
remain relevant.
In summary, the Group's key risks and uncertainties are:
-- Acquisition strategy;
-- Eurozone and macroeconomic markets;
-- Paper supply;
-- Capital markets and liquidity;
-- Disruptive markets;
-- Governance;
-- Changes in shopping habits;
-- Talent barriers;
-- Packaging transformations;
-- Changes in fibre technology;
-- Sustainability; and
-- Margin capture.
Going concern
The Group's recent trading and forecasts, after taking account
of reasonably foreseeable changes in trading performance, shows
that the Group is able to operate within its current debt
facilities. At 31 October 2019 there was significant headroom on
the Group's committed debt facilities of c. GBP1.4 billion. As a
consequence, the Board believes that the Group is well placed to
manage its business risks (as summarised above) successfully
despite the uncertainties inherent in the current economic outlook.
After making enquiries, the Board has formed a judgement 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
4 December 2019
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 2019 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 17. 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.
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 Auditing Practices
Board. 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.
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 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 Auditing Practices Board 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 2019 is not prepared, in all material respects, in
accordance with International Accounting Standard 34 as adopted by
the European Union and the Disclosure and Transparency Rules of the
United Kingdom's Financial Conduct Authority.
Deloitte LLP
Statutory Auditor
London, United Kingdom
4 December 2019
Condensed consolidated income statement
Half year ended Half year ended Year ended
31 October 2019 31 October 2018 30 April 2019
Unaudited Unaudited Audited
Adjusting Adjusting Adjusting
Before items After Before items After Before items After
adjusting (note adjusting adjusting (note adjusting adjusting (note adjusting
Continuing items 3) items items 3) items items 3) items
operations Note GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------ ---- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Revenue 2 3,188 - 3,188 3,073 - 3,073 6,171 - 6,171
Operating costs (2,837) (20) (2,857) (2,769) (24) (2,793) (5,540) (50) (5,590)
------------------ ---- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Operating profit
before
amortisation,
acquisitions,
disposals
and guaranteed
minimum
pension
equalisation 2 351 (20) 331 304 (24) 280 631 (50) 581
------------------ ---- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Amortisation of
intangible
assets;
acquisitions
and disposals 2 (71) (1) (72) (53) (11) (64) (114) (32) (146)
Guaranteed
minimum pension
equalisation - - - - (15) (15) - (8) (8)
------------------ ---- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Operating profit 280 (21) 259 251 (50) 201 517 (90) 427
Finance income 5 - - - 2 - 2 - - -
3,
Finance costs 5 (44) (3) (47) (37) (8) (45) (69) (15) (84)
Employment benefit
net
finance expense (2) - (2) (1) - (1) (2) - (2)
------------------ ---- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Net financing
costs (46) (3) (49) (36) (8) (44) (71) (15) (86)
------------------ ---- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Profit after
financing
costs 234 (24) 210 215 (58) 157 446 (105) 341
Share of profit of
equity
accounted
investments, net
of
tax 3 - 3 5 - 5 9 - 9
------------------ ---- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Profit before
income
tax 237 (24) 213 220 (58) 162 455 (105) 350
Income tax 3,
(expense)/credit 6 (54) 5 (49) (48) 8 (40) (101) 13 (88)
------------------ ---- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Profit for the
period
from
continuing
operations 183 (19) 164 172 (50) 122 354 (92) 262
Discontinued
operations
Profit for the
period
from discontinued
operations,
net of tax 14 9 (2) 7 10 (2) 8 22 (10) 12
------------------ ---- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Profit for the
period 192 (21) 171 182 (52) 130 376 (102) 274
------------------ ---- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Profit for the
period
attributable to:
------------------ ---- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Owners of the
parent 192 (21) 171 182 (52) 130 376 (102) 274
Non-controlling
interests - - - - - - - - -
------------------ ---- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Earnings per share
------------------ ---- --------- --------- --------- --------- --------- --------- --------- --------- ---------
From continuing
operations
Basic 7 12.0p 9.5p 19.7p
Diluted 7 11.9p 9.4p 19.7p
------------------ ---- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Adjusted earnings per share from continuing
operations
Basic 7 17.4p 16.5p 33.3p
Diluted 7 17.3p 16.4p 33.2p
------------------ ---- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Half year Half year
ended ended Year ended
31 October 31 October 30 April
2019 2018 2019
Condensed consolidated statement of comprehensive Unaudited Unaudited Audited
income GBPm GBPm GBPm
----------------------------------------------------- ----------- ----------- ----------
Profit for the period 171 130 274
----------------------------------------------------- ----------- ----------- ----------
Items which will not be reclassified subsequently
to profit or loss
Actuarial loss on employee benefits (7) (24) (62)
Income tax on items which will not be reclassified
subsequently to profit or loss 2 4 11
Items which may be reclassified subsequently
to profit or loss
Foreign currency translation differences (13) 38 (45)
Cash flow hedges fair value changes (21) 72 29
Reclassification from cash flow hedge reserve
to income statement - (39) (37)
Movement on net investment hedge 10 - 17
Income tax on items which may be reclassified
subsequently to profit or loss 2 - 3
----------------------------------------------------- ----------- ----------- ----------
Other comprehensive (expense)/income for the
period, net of tax (27) 51 (84)
----------------------------------------------------- ----------- ----------- ----------
Total comprehensive income for the period 144 181 190
----------------------------------------------------- ----------- ----------- ----------
Total comprehensive income attributable to:
----------------------------------------------------- ----------- ----------- ----------
Owners of the parent 144 181 190
Non-controlling interests - - -
----------------------------------------------------- ----------- ----------- ----------
At 31 October At 31 October At 30 April
2019 2018 2019
Condensed consolidated statement of financial Unaudited Unaudited Audited
position Note GBPm GBPm GBPm
---------------------------------------------- ---- ------------- ------------- -----------
Assets
Non-current assets
Intangible assets 3,165 2,059 3,211
Biological assets 9 3 9
Property, plant and equipment 2,989 2,385 2,993
Right-of-use assets 13 223 - -
Equity accounted investments 37 29 33
Other investments 11 11 12
Deferred tax assets 71 51 64
Other receivables 15 8 9
Derivative financial instruments 4 9 12
---------------------------------------------- ---- ------------- ------------- -----------
Total non-current assets 6,524 4,555 6,343
---------------------------------------------- ---- ------------- ------------- -----------
Current assets
Inventories 541 547 584
Biological assets 6 5 6
Other investments 10 - 1,014 -
Income tax receivable 18 10 18
Trade and other receivables 836 891 914
Cash and cash equivalents 10 445 435 382
Derivative financial instruments 21 79 35
Assets classified as held for sale 14 280 223 237
---------------------------------------------- ---- ------------- ------------- -----------
Total current assets 2,147 3,204 2,176
---------------------------------------------- ---- ------------- ------------- -----------
Total assets 8,671 7,759 8,519
---------------------------------------------- ---- ------------- ------------- -----------
Liabilities
Non-current liabilities
Borrowings 10 (2,279) (1,837) (2,385)
Employee benefits 4 (167) (143) (170)
Other payables (15) (14) (16)
Provisions (11) (4) (16)
Lease liabilities 10 (163) (9) (7)
Deferred tax liabilities (302) (197) (323)
Derivative financial instruments (12) (14) (14)
---------------------------------------------- ---- ------------- ------------- -----------
Total non-current liabilities (2,949) (2,218) (2,931)
---------------------------------------------- ---- ------------- ------------- -----------
Current liabilities
Bank overdrafts 10 (130) (191) (129)
Borrowings 10 (291) (108) (230)
Trade and other payables (1,744) (1,778) (1,855)
Income tax liabilities (151) (93) (133)
Provisions (26) (14) (17)
Lease liabilities 10 (72) (2) (3)
Derivative financial instruments (15) (33) (16)
Liabilities classified as held for sale 14 (106) (91) (93)
---------------------------------------------- ---- ------------- ------------- -----------
Total current liabilities (2,535) (2,310) (2,476)
---------------------------------------------- ---- ------------- ------------- -----------
Total liabilities (5,484) (4,528) (5,407)
---------------------------------------------- ---- ------------- ------------- -----------
Net assets 3,187 3,231 3,112
---------------------------------------------- ---- ------------- ------------- -----------
Equity
Issued capital 137 137 137
Share premium 2,238 2,232 2,236
Reserves 811 861 738
---------------------------------------------- ---- ------------- ------------- -----------
Total equity attributable to owners of the
parent 3,186 3,230 3,111
Non-controlling interests 1 1 1
---------------------------------------------- ---- ------------- ------------- -----------
Total equity 3,187 3,231 3,112
---------------------------------------------- ---- ------------- ------------- -----------
Condensed consolidated statement of changes in equity
Total
reserves
attributable
to owners
Share Share Hedging Translation Own Retained of the Non-controlling Total
capital premium reserve reserve shares earnings parent interests equity
GBPm GBPm GBPm GBPm GBPm GBPm1 GBPm GBPm GBPm
----------------- ------- ------- ------- ----------- ------ --------
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 on 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
------------------ ------- ------- ------- ----------- ------ -------- ------------ --------------- -------
At 1 May 2018
(audited) 107 1,260 (7) 49 (1) 701 2,109 1 2,110
Profit for the
period - - - - - 130 130 - 130
Actuarial loss on
employee
benefits - - - - - (24) (24) - (24)
Foreign currency
translation
differences - - - 38 - - 38 - 38
Cash flow hedges
fair
value changes - - 72 - - - 72 - 72
Reclassification
from
cash flow hedge
reserve
to income
statement - - (39) - - - (39) - (39)
Income tax on
other
comprehensive
income - - - - - 4 4 - 4
------------------ ------- ------- ------- ----------- ------ -------- ------------ --------------- -------
Total
comprehensive
income - - 33 38 - 110 181 - 181
------------------ ------- ------- ------- ----------- ------ -------- ------------ --------------- -------
Issue of share
capital 30 972 - - - - 1,002 - 1,002
Employee share
trust - - - - (1) (7) (8) - (8)
Share-based
payment expense
(net of tax) - - - - - (1) (1) - (1)
Dividends paid - - - - - (53) (53) - (53)
Other changes in
equity
in the period 30 972 - - (1) (61) 940 - 940
------------------ ------- ------- ------- ----------- ------
At 31 October 2018
(unaudited) 137 2,232 26 87 (2) 750 3,230 1 3,231
------------------ ------- ------- ------- ----------- ------ -------- ------------ --------------- -------
(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
2019 2018 2019
Unaudited Unaudited Audited
Continuing operations Note GBPm GBPm GBPm
-------------------------------------------------- ---- ----------- ----------- ----------
Operating activities
Cash generated from operations 9 428 380 681
Interest received - 1 1
Interest paid (53) (44) (62)
Tax paid (49) (47) (85)
-------------------------------------------------- ---- ----------- ----------- ----------
Cash flows from operating activities 326 290 535
-------------------------------------------------- ---- ----------- ----------- ----------
Investing activities
Acquisition of subsidiary businesses, net
of cash and cash equivalents 15 (4) (37) (1,498)
Divestment of subsidiary businesses, net
of cash and cash equivalents 15 62 - -
Capital expenditure (179) (121) (303)
Proceeds from sale of property, plant and
equipment and intangible assets 5 3 14
Cash flows from/(used in) restricted cash
and other deposits 49 (1,026) (4)
-------------------------------------------------- ---- ----------- ----------- ----------
Cash flows used in investing activities (67) (1,181) (1,791)
-------------------------------------------------- ---- ----------- ----------- ----------
Financing activities
Proceeds from issue of share capital 2 1,002 1,006
Repayment of borrowings (2,342) (990) (3,335)
Proceeds from borrowings 2,283 926 3,810
Payments in respect of derivative financial
instruments (6) (22) (36)
Repayment of lease liabilities (39) (2) (4)
Dividends paid to Group shareholders 8 (71) (53) (187)
Other (4) - (6)
-------------------------------------------------- ---- ----------- ----------- ----------
Cash flows (used in)/from financing activities (177) 861 1,248
-------------------------------------------------- ---- ----------- ----------- ----------
Increase/(decrease) in cash and cash equivalents
from continuing operations 82 (30) (8)
Discontinued operations
Cash flows (used in)/from discontinued operations 14 (19) 4 (3)
-------------------------------------------------- ---- ----------- ----------- ----------
Increase/(decrease) in cash and cash equivalents 63 (26) (11)
Net cash and cash equivalents at 1 May 253 268 268
Exchange (losses)/gains on cash and cash
equivalents (1) 2 (4)
-------------------------------------------------- ---- ----------- ----------- ----------
Net cash and cash equivalents 10 315 244 253
-------------------------------------------------- ---- ----------- ----------- ----------
1. Basis of preparation
The unaudited condensed consolidated interim financial
statements for the half year ended 31 October 2019 have been
prepared in accordance with IAS 34 Interim Financial Reporting and
the Disclosure 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 2019, 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
2019 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 2019 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 2019, which are prepared in
accordance with IFRSs, apart from as detailed below.
The following new accounting standards, amendments or
interpretations have been adopted by the Group as of 1 May
2019:
-- IFRS 16 Leases;
-- IFRIC Interpretation 23 Uncertainty over Income Tax Treatments;
-- Amendments to IAS 28 Long-term Interests in Associates and Joint Ventures; and
-- Amendments to IAS 19 Plan Amendment, Curtailment or Settlement.
IFRS 16 Leases
The Group adopted IFRS 16 on 1 May 2019 using the modified
retrospective approach and practical expedients available. As per
the specific transitional arrangements in the standard, comparative
information has not been restated and all adjustments were made in
the opening balance sheet as at 1 May 2019. As such, results for
the year ended 30 April 2019 and the half year ended 31 October
2018 continue to be reported under the previous lease accounting
standard, IAS 17 Leases.
IFRS 16 provides a comprehensive model for the identification of
lease arrangements and their treatment in the financial statements
for both lessors and lessees. IFRS 16 supersedes the previous lease
guidance including IAS 17 Leases and the related Interpretations
for accounting periods beginning on or after 1 January 2019.
IFRS 16 prescribes a single lessee accounting model that
requires the recognition of a right-of-use asset and corresponding
liability for all leases with terms over 12 months, unless the
underlying asset is of low value. The liability is initially
measured as the present value of future lease payments for the
lease term. Depreciation of right-of-use assets and interest on the
corresponding lease liabilities are recognised in the income
statement over the lease term. In the cash flow statement, the
total amount of cash paid is separated into a principal portion
(within financing activities) and an interest portion (within
operating activities). In contrast to lessee accounting, IFRS 16
substantially carries forward the lessor accounting requirements in
IAS 17.
The Group has applied the following practical expedients in
adopting IFRS 16:
-- The Group has not reassessed whether transition date
contracts are or contain a lease. Accordingly, the definition of a
lease in accordance with IAS 17 and IFRIC 4 will continue to apply
to those leases entered or modified before 1 May 2019;
-- IFRS 16 has not been applied to low value assets or leases of
less than 12 months in total, which will continue to be expensed to
profit and loss on a straight line basis over the lease term;
-- The Group has placed reliance on previous assessments as to
whether or not leases are onerous. Any onerous lease provisions
were adjusted against the carrying value of the corresponding
right-of-use asset on transition;
-- On transition, all right-of-use assets were measured at an
amount equal to the lease liability;
-- Hindsight has been applied in determining the lease term
where options to extend or terminate exist;
-- For leases classified as finance leases under IAS 17, the
previous carrying amount of the lease asset and liability under IAS
17 was taken as the carrying amount of the right-of-use asset and
corresponding lease liability; and
-- The Group applied a single discount rate to portfolios of leases with reasonably similar characteristics.
On implementation of IFRS 16 there was a material increase in
lease liabilities, along with a corresponding increase in
right-of-use assets. Note 13 details the impact on the Group's
financial statements and Key Performance Indicators of the adoption
of IFRS 16.
Accounting policy under IFRS 16 Leases
After transition, the Group recognises a right-of-use asset and
a lease liability at the lease commencement date.
The right-of-use asset is initially measured at cost, being the
initial amount of the lease liability adjusted for any lease
payments made at or before commencement date, plus any initial
direct costs incurred and an estimate of end of lease dismantling
or restoration costs, less any incentives received and related
provisions.
Lease liabilities are recorded at the present value of lease
payments, which include:
-- Fixed lease payments;
-- Variable payments that depend on an index or rate, initially
measured using the commencement date index or rate;
-- Any amounts expected to be payable under residual value guarantees; and
-- The exercise price of purchase options, if it is reasonably
certain they will be exercised.
The interest rate implicit in the lease is used to discount
lease payments, or, if that rate cannot be determined, the Group's
incremental borrowing rate is used, being the rate that the Group
would have to pay to borrow the funds necessary to obtain an asset
of similar value in a similar economic environment with similar
terms and conditions.
Right-of-use assets are depreciated on a straight-line basis
over the lease term, or the useful life if shorter.
Interest is recognised on the lease liability, resulting in a
higher finance cost in the earlier years of the lease term.
IFRIC Interpretation 23 Uncertainty over Income Tax
Treatments
IFRIC Interpretation 23 clarifies how to apply the recognition
and measurement requirements in IAS 12 when there is uncertainty
over income tax treatments. In particular, this Interpretation
addresses whether uncertain tax treatments should be considered
separately or together with one or more other uncertain tax
treatments, addresses the assumptions an entity makes about the
examination of tax treatment by taxation authorities and harmonises
the methodology for measurement of uncertain tax treatments in both
binary or a range of possible outcomes.
The Group adopted IFRIC Interpretation 23 as at 1 May 2019, with
no material impact on the Group's financial statements.
The adoption of the remaining standards, amendments and
interpretations has not had a material effect on the results for
the period.
Foreign exchange rates
The Group's main currency exposures are to the euro and the US
dollar. The following significant exchange rates applied during the
periods:
Half year ended Half year ended Year ended
31 October 2019 31 October 2018 30 April 2019
Average Closing Average Closing Average Closing
----------- --------- -------- --------- -------- -------- --------
Euro 1.124 1.161 1.129 1.125 1.135 1.159
US dollar 1.253 1.295 1.311 1.274 1.304 1.301
----------- --------- -------- --------- -------- -------- --------
Going concern
As explained in the narrative section of this half year
financial report under the heading 'Going concern', the financial
statements are prepared on the going concern basis. This is
considered appropriate given that the Directors believe that the
Group has adequate resources to continue in operational existence
for the foreseeable future.
Estimates and judgements
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 critical accounting judgement were the same as
those that applied to the Group's consolidated financial statements
for the year ended 30 April 2019. Key estimates were taxation,
acquisitions and impairments. The critical accounting judgement is
applying the adjusting items policy.
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 16.
2. Segment reporting - continuing operations
Operating segments
The Plastics segment was classified as a discontinued operation
during the half year ended 31 October 2018. Segmental reporting for
the Plastics segment is set out in note 14.
During the period, the Group changed its internal reporting
structure, reducing the regional segments from five regional
segments to four. Consequently, a corresponding change to the
operating segments reported has been made, and the operating
segment analysis for the comparative period has been restated.
Total
Northern Southern Eastern North continuing
Europe Europe Europe America 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
investments, net of tax 3
------------------------------------------------ -------- -------- ------- -------- -----------
Profit before income tax 213
Income tax expense (49)
------------------------------------------------ -------- -------- ------- -------- -----------
Profit for the period (continuing operations) 164
------------------------------------------------ -------- -------- ------- -------- -----------
Total
Northern Southern Eastern North continuing
Europe Europe Europe America operations
Half year ended 31 October 2018 (restated) GBPm GBPm GBPm GBPm GBPm
----------------------------------------------- -------- -------- ------- -------- -----------
External revenue 1,313 943 476 341 3,073
------------------------------------------------ -------- -------- ------- -------- -----------
Adjusted operating profit(1) 141 67 39 57 304
------------------------------------------------ -------- -------- ------- -------- -----------
Unallocated items:
Amortisation (53)
Adjusting items in operating profit (50)
------------------------------------------------ -------- -------- ------- -------- -----------
Total operating profit (continuing operations) 201
------------------------------------------------ -------- -------- ------- -------- -----------
Unallocated items:
Net financing costs (44)
Share of profit of equity accounted
investment, net of tax 5
------------------------------------------------ -------- -------- ------- -------- -----------
Profit before income tax 162
Income tax expense (40)
------------------------------------------------ -------- -------- ------- -------- -----------
Profit for the period (continuing operations) 122
------------------------------------------------ -------- -------- ------- -------- -----------
(1) Adjusted to exclude amortisation and adjusting items.
3. Adjusting items - continuing operations
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 Year ended
ended ended 30 April
31 October 31 October 2019
2019 2018 GBPm
Continuing operations GBPm GBPm
--------------------------------------------- ----------- ----------- ----------
Acquisition related costs (7) (11) (32)
Gains on acquisitions and disposals 6 - -
Acquisitions and disposals (1) (11) (32)
Integration costs (12) (8) (27)
Other restructuring costs (8) (2) (3)
Guaranteed minimum pension equalisation - (15) (8)
Other - (14) (20)
--------------------------------------------- ----------- ----------- ----------
Total pre-tax adjusting items (recognised in
operating profit) (21) (50) (90)
Finance costs adjusting items (3) (8) (15)
Adjusting tax items - (1) (1)
Current tax credit on adjusting items 5 6 14
Deferred tax credit on adjusting items - 3 -
--------------------------------------------- ----------- ----------- ----------
Total post-tax adjusting items (19) (50) (92)
--------------------------------------------- ----------- ----------- ----------
Half year ended 31 October 2019
Acquisition related costs of GBP7m relate to professional
advisory, legal and consultancy fees on acquisitions, deferred
consideration and retention bonuses.
The remedy disposal of legacy Group sites (see note 15),
required as part of the Europac acquisition, comprise the majority
of the gains on acquisitions and disposals of GBP6m.
Integration costs relate to integration projects underway,
primarily to achieve cost synergies from the major acquisitions
made in the previous financial years (of which GBP10m relates to
Europac and GBP2m relates to Interstate Resources). They include
redundancies, professional fees, IT costs and directly attributable
internal salary costs which would otherwise not be incurred.
Other restructuring costs of GBP8m relate to a reorganisation
and restructuring project across the Packaging business.
Finance costs adjusting items relate to the unwind of the
discount on the redemption liability put option related to the
purchase of Interstate Resources.
The current tax credit on adjusting items of GBP5m for the six
months to 31 October 2019 is the tax effect at the local applicable
tax rate of adjusting items that are subject to tax which includes
the Europac remedy disposals. This excludes non-tax deductible deal
related advisory fees in relation to acquisitions and
disposals.
3. Adjusting items - continuing operations (continued)
Year ended 30 April 2019 and half year ended 31 October 2018
Acquisition related costs of GBP32m related to professional
advisory, legal and consultancy fees and directly attributable
internal salary costs relating to the review of potential deals,
and deals completed during the periods. Of the total, GBP22m in the
year ended 30 April 2019 and GBP6m in the half year ended 31
October 2018 related to the acquisition of Europac, with the most
significant components being transaction and sponsor fees, legal
costs and financial and tax due diligence and advice costs.
Integration costs related to integration projects underway,
primarily to achieve cost synergies from the major acquisitions
made in the current periods and previous financial years. For the
year ended 30 April 2019, GBP14m related to Europac (half year
ended 31 October 2018: nil), and GBP9m related to Interstate
Resources (half year ended 31 October 2018: GBP4m). They included
those directly attributable internal salary costs which would
otherwise not be incurred.
Other restructuring costs included reorganisation and
restructuring in Southern and Northern Europe and various projects
commenced in the previous year.
On 26 October 2018, the High Court issued a judgement with
respect to the equalisation between men and women of guaranteed
minimum pension (GMP) benefits accrued between 1990 and 1997, in
order to comply with sex discrimination legislation. A preliminary
estimate of the adjustment for the UK defined benefit scheme of
GBP15m was charged to the income statement as an adjusting item for
the half year ended 31 October 2018. A detailed calculation was
performed in the second half of the year, resulting in a reduced
final full year charge of GBP8m.
Other adjusting items of GBP20m (half year ended 31 October
2018: GBP14m) principally related to a significant multi-year major
IT project which was substantially completed in the year ended 30
April 2019. The costs of this project extended over several years
and, as well as adjusting items, included capitalisation of
intangible assets, particularly in the case of IT systems. Those
costs are primarily as a result of the Group's acquisition
activity, where the businesses acquired typically have a limited IT
and financial infrastructure.
Finance costs adjusting items related to financing costs
incurred in the acquisition of Europac of GBP7m (half year ended 31
October 2018: GBP3m), with the remainder relating to the unwind of
the discount on the redemption liability related to the purchase of
Interstate Resources.
Adjusting tax items included the release of a provision of
GBP32m in relation to the closure of a business in Denmark by SCA
Packaging prior to ownership by the Group, offset by a provision of
GBP33m which represents the maximum potential tax exposure which
could arise in connection with the recent decision by the EU
Commission on State Aid in relation to the UK Controlled Foreign
Company regime.
On 25 April 2019, the EU Commission released its final decision
which concluded that up until 31 December 2018, the UK Controlled
Foreign Company legislation partially represents State Aid.
There is significant uncertainty surrounding the quantum of the
additional tax exposure due to a number of different factors which
are likely to impact the overall State Aid collection process. To
date, no formal guidance has been issued by the UK Government in
relation to their likely approach to identifying and recovering any
State Aid. The potential additional liability ranges from nil to
GBP33 million depending upon the method of calculation. In view of
the significant uncertainty and the broad range of possible
outcomes, the Group recognised a provision for the maximum
potential exposure of GBP33 million at 30 April 2019, which
included an estimate of GBP2 million for interest on overdue
tax.
The current tax credit on adjusting items was the tax effect at
the local applicable tax rate of adjusting items that are subject
to tax. This excluded non-tax deductible deal related advisory fees
in relation to acquisitions and disposals.
4. Employee benefits
Movements in the net employee benefit deficit recognised in the
Condensed consolidated statement of financial position:
Half year Half year Year ended
ended ended 30 April
31 October 31 October 2019
2019 2018 GBPm
GBPm GBPm
-------------------------------------------------- ----------- ----------- ----------
Opening employee benefit deficit (170) (106) (106)
Acquisitions - - (12)
Divestments 2 - -
Expense recognised in operating profit (4) (4) (6)
Curtailment - - 2
Past service cost recognised in adjusting items
(GMP equalisation) - (15) (8)
Employment benefit net finance expense (excluding
Pension Protection Fund levy) (1) (1) (2)
Employer contributions 11 10 20
Other payments and contributions 3 (2) -
Actuarial losses (7) (24) (62)
Currency translation (1) (3) 2
Reclassification - 2 2
-------------------------------------------------- ----------- ----------- ----------
Employee benefit deficit (167) (143) (170)
Deferred tax asset 38 40 37
-------------------------------------------------- ----------- ----------- ----------
Employee benefit deficit after tax (129) (103) (133)
-------------------------------------------------- ----------- ----------- ----------
5. Finance income and costs - continuing operations
Half year Half year Year ended
ended ended 30 April
31 October 31 October 2019
2019 2018 GBPm
Continuing operations GBPm GBPm
-------------------------------------- ----------- ----------- ----------
Interest income from financial assets - (2) -
-------------------------------------- ----------- ----------- ----------
Finance income - (2) -
-------------------------------------- ----------- ----------- ----------
Interest on borrowings and overdrafts 36 31 62
Interest on lease liabilities 6 - -
Other 2 6 7
-------------------------------------- ----------- ----------- ----------
Finance costs before adjusting items 44 37 69
Finance costs adjusting items 3 8 15
-------------------------------------- ----------- ----------- ----------
Finance costs 47 45 84
-------------------------------------- ----------- ----------- ----------
6. Income tax expense - continuing operations
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 2018: 22.8%), being the expected full
year rate.
7. Earnings per share
Basic earnings per share from continuing operations
Half year Half year
ended ended Year ended
31 October 31 October 30 April
2019 2018 2019
----------------------------------------------------------- ----------- ----------- ----------
Profit from continuing operations attributable to ordinary
shareholders GBP164m GBP122m GBP262m
----------------------------------------------------------- ----------- ----------- ----------
Weighted average number of ordinary shares 1,371m 1,286m 1,327m
----------------------------------------------------------- ----------- ----------- ----------
Basic earnings per share 12.0p 9.5p 19.7p
----------------------------------------------------------- ----------- ----------- ----------
Diluted earnings per share from continuing operations
Half year Half year
ended ended Year ended
31 October 31 October 30 April
2019 2018 2019
------------------------------------------------------- ----------- ----------- ----------
Profit from continuing operations attributable
to ordinary shareholders GBP164m GBP122m GBP262m
------------------------------------------------------- ----------- ----------- ----------
Weighted average number of ordinary shares 1,371m 1,286m 1,327m
Potentially dilutive shares issuable under share-based
payment arrangements 4m 6m 6m
------------------------------------------------------- ----------- ----------- ----------
Weighted average number of ordinary shares (diluted) 1,375m 1,292m 1,333m
------------------------------------------------------- ----------- ----------- ----------
Diluted earnings per share 11.9p 9.4p 19.7p
------------------------------------------------------- ----------- ----------- ----------
The number of shares excludes the weighted average number of the
Company's own shares held as treasury shares during the period of
nil (half year ended 31 October 2018: 1m; year ended 30 April 2019:
1m).
Adjusted earnings per share from continuing operations
Adjusted earnings per share is a key performance measure for
management of 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
16.
A reconciliation of basic to adjusted earnings per share is as
follows:
Half year ended Half year ended Year ended
31 October 2019 31 October 2018 30 April 2019
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 164 12.0p 11.9p 122 9.5p 9.4p 262 19.7p 19.7p
Add back:
Amortisation of intangible
assets 71 5.2p 5.2p 53 4.1p 4.1p 114 8.7p 8.6p
Tax credit on amortisation (16) (1.2p) (1.2p) (13) (1.0p) (1.0p) (26) (2.0p) (2.0p)
Adjusting items,
before tax 24 1.8p 1.8p 58 4.5p 4.5p 105 7.9p 7.9p
Tax on adjusting
items and adjusting
tax items (5) (0.4p) (0.4p) (8) (0.6p) (0.6p) (13) (1.0p) (1.0p)
----------------------------- ----- ------- -------- ----- ------ ------- ---- ------ --------
Adjusted earnings 238 17.4p 17.3p 212 16.5p 16.4p 442 33.3p 33.2p
----------------------------- ----- ------- -------- ----- ------ ------- ---- ------ --------
8. Dividends proposed and paid
Pence Pence
per share GBPm per share GBPm
---------------------------------------------- ---------- ---- ---------- ----
2017/18 interim dividend - paid (restated)(1) - - 4.6p 53
2017/18 final dividend - paid - - 9.8p 134
2018/19 interim dividend - paid 5.2p 71 - -
2018/19 final dividend - paid 11.0p 151 - -
2019/20 interim dividend - proposed 5.4p 74 - -
---------------------------------------------- ---------- ---- ---------- ----
(1) Restated for 2018/19 3 for 11 rights issue. 2017/18 interim
dividend restated to 4.56 pence per share.
Half year Half year Year ended
ended ended 30 April
31 October 31 October 2019
2019 2018 GBPm
GBPm GBPm
----------------------- ----------- ----------- ----------
Paid during the period 71 53 187
----------------------- ----------- ----------- ----------
The final dividend in respect of 2018/19 of 11.0 pence per share
(GBP151m) was paid after the half year end on 1 November 2019. The
2018/19 interim dividend of 5.2 pence per share (GBP71m) was paid
during the half year ended 31 October 2019. An interim dividend in
respect of the half year ended 31 October 2019 of 5.4p per share
(GBP74m) has been proposed by the Directors after the reporting
date.
9. Cash generated from operations
Half year Half year Year ended
ended ended 30 April
31 October 31 October 2019
2019 2018 GBPm
Continuing operations GBPm GBPm
--------------------------------------------------- ----------- ----------- ----------
Profit for the period 164 122 262
Adjustments for:
Pre-tax integration costs and other adjusting
items 20 24 50
Amortisation of intangible assets; acquisitions
and disposals 72 64 146
Guaranteed minimum pension equalisation - 15 8
Cash outflow for adjusting items (26) (37) (93)
Depreciation 147 89 189
Profit on sale of non-current assets (2) (1) (4)
Share of profit of equity accounted investments,
net of tax (3) (5) (9)
Employment benefit net finance expense 2 1 2
Share-based payment expense 3 4 7
Finance income - (2) -
Finance costs 47 45 84
Other non-cash items - - (1)
Income tax expense 49 40 88
Change in provisions 1 (2) (19)
Change in employee benefits (10) (5) (17)
--------------------------------------------------- ----------- ----------- ----------
Cash generation before working capital movement 464 352 693
--------------------------------------------------- ----------- ----------- ----------
Changes in:
Inventories 23 (24) (7)
Trade and other receivables 10 (52) 3
Trade and other payables (69) 104 (8)
--------------------------------------------------- ----------- ----------- ----------
Working capital movement (36) 28 (12)
--------------------------------------------------- ----------- ----------- ----------
Cash generated from continuing operations 428 380 681
--------------------------------------------------- ----------- ----------- ----------
10. Net debt
Half year Half year
ended ended Year ended
31 October 31 October 30 April
2019 2018 2019
GBPm GBPm GBPm
-------------------------------------------------- ----------- ----------- ----------
Cash and cash equivalents 445 435 382
Bank overdrafts (130) (191) (129)
-------------------------------------------------- ----------- ----------- ----------
Net cash and cash equivalents 315 244 253
-------------------------------------------------- ----------- ----------- ----------
Other investments - restricted cash 3 3 3
Other investments - restricted cash (rights issue
proceeds) - 1,014 -
Other deposits 41 55 89
Borrowings due - after one year (2,279) (1,837) (2,385)
Borrowings due - within one year (291) (108) (230)
Lease liabilities (235) (11) (10)
Derivative financial instruments
assets 4 7 12
liabilities (2) (15) (9)
-------------------------------------------------- ----------- ----------- ----------
(2,759) (892) (2,530)
-------------------------------------------------- ----------- ----------- ----------
Net debt - reported basis (2,444) (648) (2,277)
-------------------------------------------------- ----------- ----------- ----------
Net debt excluding IFRS 16 liabilities (2,218) (648) (2,277)
-------------------------------------------------- ----------- ----------- ----------
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 at 31 October 2019 are GBP226m of IFRS 16 lease
liabilities and GBP9m of finance lease liabilities.
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
16.
Derivative financial instruments above relate to forward foreign
exchange contracts and cross-currency interest rate swaps used to
hedge the Group's borrowings and the net assets of foreign
operations. 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 16.
The difference between the amounts shown above and the total
derivative financial instrument assets and liabilities in the
consolidated statement of financial position relates to derivative
financial instruments that hedge forecast foreign currency
transactions and the Group's purchases of energy.
Other deposits are included, as these short-term receivables
have the characteristics of net debt.
The rights issue proceeds were held at 31 October 2018 in order
to finance the Group's acquisition of Europac (see note 15).
During the half year ended 31 October 2019, the Group launched
and priced EUR600m of notes due 12 September 2026 with a coupon of
0.875% pursuant to its Euro Medium Term Note program.
11. Reconciliation of net cash flow to movement in net debt
Half year
Half year ended Year ended
ended 31 31 October 30 April
October 2019 2018 2019
GBPm GBPm GBPm
---------------------------------------------------- ------------- ----------- ----------
Profit for the period 164 122 262
Income tax expense 49 40 88
Share of profit of equity accounted investments,
net of tax (3) (5) (9)
Net financing costs 49 44 86
Amortisation of intangible assets; acquisitions
and disposals 72 64 146
Guaranteed minimum pension equalisation - 15 8
Adjusting items 20 24 50
---------------------------------------------------- ------------- ----------- ----------
Adjusted operating profit 351 304 631
Depreciation 147 89 189
---------------------------------------------------- ------------- ----------- ----------
Adjusted EBITDA 498 393 820
Working capital movement (36) 28 (12)
Change in provisions 1 (2) (19)
Change in employee benefits (10) (5) (17)
Other 1 3 2
---------------------------------------------------- ------------- ----------- ----------
Cash generated from operations before adjusting
cash items 454 417 774
Capital expenditure (179) (121) (303)
Proceeds from sale of property, plant and equipment
and other investments 5 3 14
Tax paid (49) (47) (85)
Net interest paid (53) (43) (61)
---------------------------------------------------- ------------- ----------- ----------
Free cash flow 178 209 339
Cash outflow for adjusting items (26) (37) (93)
Dividends paid (71) (53) (187)
Acquisition of subsidiary businesses, net of
cash and cash equivalents (4) (37) (1,498)
Divestment of subsidiary businesses, net of cash
and cash equivalent 62 - -
Other (4) (5) (6)
---------------------------------------------------- ------------- ----------- ----------
Net cash flow 135 77 (1,445)
Proceeds from issue of share capital 2 1,002 1,006
Borrowings divested/(acquired) 3 (4) (204)
---------------------------------------------------- ------------- ----------- ----------
Net movement on debt 140 1,075 (643)
Foreign exchange, fair value and other non-cash
movements (46) (47) 49
---------------------------------------------------- ------------- ----------- ----------
Net debt movement - continuing operations 94 1,028 (594)
Net debt movement - discontinued operations (19) 4 (3)
Opening net debt (2,277) (1,680) (1,680)
Transition to IFRS 16 (note 13) (242) - -
---------------------------------------------------- ------------- ----------- ----------
Closing net debt (2,444) (648) (2,277)
---------------------------------------------------- ------------- ----------- ----------
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:
31 October 2019 30 April 2019
----------------------------------- ------------------------- ------------------- -----------------
Category Carrying Fair Carrying Fair
amount value amount value
GBPm GBPm GBPm GBPm
----------------------------------- ------------------------- ---------- ------- -------- -------
Financial assets
Cash and cash equivalents Amortised cost 445 445 382 382
Available for sale - other Fair value through other
investments comprehensive income 11 11 12 12
Trade and other receivables Amortised cost 851 851 923 923
Fair value through other
Derivative financial instruments comprehensive income 25 25 47 47
----------------------------------- ------------------------- ---------- ------- -------- -------
Total financial assets 1,332 1,332 1,364 1,364
-------------------------------------------------------------- ---------- ------- -------- -------
Financial liabilities
Trade and other payables Amortised cost (1,759) (1,759) (1,871) (1,871)
Bank and other loans Amortised cost (16) (16) (448) (448)
Commercial paper Amortised cost (220) (220) (148) (148)
Medium-term notes and other
fixed-term debt Amortised cost (2,334) (2,400) (2,019) (2,069)
Lease liabilities Amortised cost (235) (235) (10) (10)
Bank overdrafts Amortised cost (130) (130) (129) (129)
Fair value through other
Derivative financial instruments comprehensive income (27) (27) (30) (30)
Total financial liabilities (4,721) (4,787) (4,655) (4,705)
-------------------------------------------------------------- ---------- ------- -------- -------
The fair value is the amount for which an asset or liability
could be exchanged or settled on an arm's-length basis. For
financial instruments carried at fair value, market prices or rates
are used to determine fair value where an active market exists. The
Group uses forward prices for valuing forward foreign exchange and
commodity contracts and uses valuation models with present value
calculations based on market yield curves to value note purchase
agreements, the medium-term note, cross-currency swaps and interest
rate swaps. All derivative financial instruments are shown at fair
value in the Condensed consolidated statement of financial
position.
The Group's medium-term notes and other fixed-term debt are in
effective cash flow and net investment hedges and are therefore
held at amortised cost. The fair values of financial assets and
liabilities which bear floating rates of interest are estimated to
be equivalent to their carrying amounts.
IFRS 7 Financial Instruments: Disclosures requires the
classification of fair value measurements using the fair value
hierarchy that reflects the significance of the inputs used in
making the assessments.
All of the Group's financial instruments are Level 2 financial
instruments in accordance with the fair value hierarchy, meaning
although the instruments are not traded in an active market, inputs
to fair value are observable for the asset and liability, either
directly (i.e. quoted market prices) or indirectly (i.e. derived
from prices).
13. Adoption of IFRS 16 Leases
As detailed in note 1, the Group adopted IFRS 16 on 1 May 2019
using the modified retrospective approach.
On implementation of IFRS 16, the Group recognised right-of-use
assets within property, plant and equipment of GBP239m and
corresponding lease liabilities of GBP242m, with the difference
related to the transfer of onerous lease provisions at 1 May 2019
to right-of-use assets. There was no impact on the Group's opening
equity as a result of adopting IFRS 16.
The indicative impact of the adoption of IFRS 16 disclosed in
the pre-transition 30 April 2019 Annual Report was a right-of-use
asset and corresponding lease liability of c. GBP235m. As a result
of the implementation finalisation, particularly in newly acquired
businesses, and regarding the accounting judgements around lease
term, final adjustments to the right-of-use assets and
corresponding liabilities have been made as detailed in the
reconciliation below.
The following table reconciles the difference between the
operating lease commitments under IAS 17 at 30 April 2019 and the
lease liability recognised on adoption of IFRS 16 at 1 May
2019:
GBPm
----------------------------------------------------------- ----
Non-cancellable operating lease rentals reported
as at 30 April 2019 259
Additional commitments recognised in final implementation,
including extension options reasonably certain to
be exercised (undiscounted) 30
Other, including leases outside the scope of IFRS
16 (undiscounted) (7)
Impact of discounting liability under IFRS 16 (40)
------------------------------------------------------------- ----
Lease liability recognised on transition to IFRS
16 at 1 May 2019 242
------------------------------------------------------------- ----
The Group's most significant leases relate to property and
production equipment.
The weighted average incremental borrowing rate applied to the
Group's lease liabilities on transition at 1 May 2019 was 4.9%.
At 31 October 2019, the right-of-use assets within property,
plant and equipment were GBP223m, with a corresponding lease
liability of GBP226m.
The adoption of IFRS 16 does not have a material impact on the
Group's current accounting for finance leases, which represent a
lease liability of GBP9m at 31 October 2019.
The impact on the consolidated income statement was:
Half
year
ended
31 October
2019
GBPm
-------------------------------- -----------
Operating lease rentals removed 40
Depreciation (35)
-------------------------------- -----------
Operating profit 5
Finance costs (6)
-------------------------------- -----------
Profit before tax (1)
-------------------------------- -----------
The impact on the Group's Key Performance Indicators at 31
October 2019 was:
Reported net debt Increase GBP226m
EBITDA Increase GBP40m
Return on average capital employed Decrease 20bps
---------------------------------- -------- -------
On a cash flow basis, the impact of transition to IFRS 16 and
free cash flow is nil. However, the cash flow statement
presentation has changed - repayments of the principal of lease
liabilities are included within financing activities and interest
is presented in operating activities whereas operating lease
rentals were presented in operating activities. In comparison to
previous presentation under IAS 17, net cash inflows from operating
activities increase, offset by an increase in net cash outflows
from financing activities due to the interest paid.
IFRS 16 liabilities are currently excluded from the definition
of net debt as set out in the Group's banking covenant
requirements, and as such are removed from the calculation of
adjusted net debt for the purposes of the Group's net debt to
EBITDA ratio (see note 16).
The adoption of IFRS 16 has not had a material effect on the
Group's effective tax rate.
14. Discontinued operations and disposal group held for sale
The Plastics segment has been classified as 'held for sale' and
treated as a discontinued operation following announcement on 6
March 2019 of an agreement to sell the Plastics division.
After regulatory approvals are finalised, sale is currently
expected to complete at around the end of December 2019.
Plastics principally comprises flexible packaging and dispensing
solutions, extruded and injection moulded products and foam
products. The Condensed consolidated income statement presents the
Plastics segment as a discontinued operation. The Condensed
consolidated statement of financial position presents the
discontinued assets and liabilities as 'assets held for sale' and
'liabilities held for sale' respectively. The Condensed
consolidated statement of cash flows presents a single amount of
net cash flow from discontinued operations.
(a) Condensed consolidated income statement - discontinued
operations
Half year Year ended
Half year ended 30 April
ended 31 31 October 2019
October 2019 2018 GBPm
GBPm GBPm
--------------------------------------------------- ------------- ----------- ----------
Revenue 178 182 352
Operating costs (162) (168) (324)
--------------------------------------------------- ------------- ----------- ----------
Operating profit before amortisation and adjusting
items 16 14 28
Amortisation of intangible assets (1) (1) (1)
Pre-tax adjusting items (2) (2) (10)
Net finance (cost)/income (1) 1 1
Profit before income tax 12 12 18
Income tax expense (5) (4) (6)
--------------------------------------------------- ------------- ----------- ----------
Profit for the period from discontinued operations 7 8 12
--------------------------------------------------- ------------- ----------- ----------
The income tax expense is net of a tax credit on adjusting items
of nil (31 October 2018: nil, 30 April 2019: nil).
Basic earnings per share from discontinued operations
Half year Half year
ended ended Year ended
31 October 31 October 30 April
2019 2018 2019
------------------------------------------------------------- ----------- ----------- ----------
Profit from discontinued operations attributable to ordinary
shareholders GBP7m GBP8m GBP12m
------------------------------------------------------------- ----------- ----------- ----------
Weighted average number of ordinary shares 1,371m 1,286m 1,327m
------------------------------------------------------------- ----------- ----------- ----------
Basic earnings per share 0.5p 0.6p 0.9p
------------------------------------------------------------- ----------- ----------- ----------
Diluted earnings per share from discontinued operations
Half year Half year
ended ended Year ended
31 October 31 October 30 April
2019 2018 2019
------------------------------------------------------- ----------- ----------- ----------
Profit from discontinued operations attributable
to ordinary shareholders GBP7m GBP8m GBP12m
------------------------------------------------------- ----------- ----------- ----------
Weighted average number of ordinary shares 1,371m 1,286m 1,327m
Potentially dilutive shares issuable under share-based
payment arrangements 4m 6m 6m
------------------------------------------------------- ----------- ----------- ----------
Weighted average number of ordinary shares (diluted) 1,375m 1,292m 1,333m
------------------------------------------------------- ----------- ----------- ----------
Diluted earnings per share 0.5p 0.6p 0.9p
------------------------------------------------------- ----------- ----------- ----------
The number of shares excludes the weighted average number of the
Company's own shares held as treasury shares during the period of
nil (half year ended 31 October 2018: 1m; year ended 30 April 2019:
1m).
Adjusted earnings per share from discontinued operations for the
year were 0.8p (31 October 2018: 0.9p; 30 April 2019: 1.7p).
(b) Assets and liabilities held for sale
At 31 October
2019
GBPm
------------------------------ -------------
Intangible assets 73
Property, plant and equipment 74
Right-of-use assets 18
Deferred tax assets 4
Inventories 32
Income tax receivable 6
Trade and other receivables 73
Assets held for sale 280
-------------------------------- -------------
Employee benefits (2)
Trade and other payables (67)
Lease liabilities (18)
Deferred tax liabilities (5)
Income tax liabilities (14)
-------------------------------- -------------
Liabilities held for sale (106)
-------------------------------- -------------
(c) Cash flows from discontinued operations
Half year Year ended
Half year ended 30 April
ended 31 31 October 2019
October 2019 2018 GBPm
GBPm GBPm
--------------------------------------------- ------------- ----------- ----------
Net cash (used in)/from operating activities (9) 9 16
Net cash used in investing activities (7) (5) (19)
Net cash used in financing activities (3) - -
Net cash flows for the period (19) 4 (3)
--------------------------------------------- ------------- ----------- ----------
Net cash flows from operating activities are stated after cash
outflows in respect of adjusting items of GBP2m (31 October 2018:
GBP1m; 30 April 2019: GBP10m).
15. Acquisitions and disposals
(a) 19/20 acquisitions and disposals
In June 2019, DS Smith 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 GBP65m. Acquisition of subsidiary businesses, net of
cash and cash equivalents of GBP4m in the statement of cash flows
relates to completion accounts adjustments on prior year
acquisitions. Neither the disposals or the acquisition adjustments
were material to the Group individually or in aggregate.
In the half year ended 30 April 2020, the Group expects to
complete the purchase of a further 10% stake in Interstate
Resources due to exercise of the pre-existing put option by the
sellers of that business. As a substantial shareholder of the
Group, the seller met the definition of a related party. The final
10% stake remains subject to the put option.
(b) 2018/19 acquisitions and disposals
On 22 January 2019, the Group completed the acquisition of a
100% interest in Europac (Papeles y Cartones de Europa. S.A). The
acquisition was funded by the rights issue of 3 for 11 ordinary
shares at 350 pence per share on 25 July 2018 and a new committed
debt facility entered into on 20 November 2018.
In addition to the acquisition of Europac, in the year ended 30
April 2019, the Group also made various other business acquisitions
and disposals, which are not considered material to the Group
individually or in aggregate. In total during the year ended 30
April 2019, cash consideration for acquisition of subsidiary
businesses, net of cash and cash equivalents, was GBP1,498m, and
borrowings acquired, including deposits, were GBP204m, giving a
total impact on net debt from acquisitions of GBP1,702m.
For various business combinations completed in the year ended 30
April 2019, certain fair values assigned to the net assets at the
date of acquisition were provisional and, in accordance with IFRS 3
Business Combinations, the Group has provisionally adjusted the
fair values attributable to these acquisitions during the half year
ended 31 October 2019, resulting in a net increase in goodwill of
GBP18m. The increase in goodwill primarily related to Europac, with
the main components corresponding to a decrease in fair value of
property, plant and equipment and right-of-use assets of GBP33m, an
increase in fair value of remedy disposal sites as described in
note 15(a) above of GBP25m, a decrease in the fair value of
intangible assets of GBP4m and a decrease in deferred tax
liabilities of GBP7m. Other adjustments primarily related to
inventory and other liabilities and totalled GBP13m.
(c) Acquisition related costs
The Group incurred acquisition related costs in the half year
ended 31 October 2019 of GBP7m (half year ended 31 October 2018:
GBP11m; year ended 30 April 2019: GBP32m). In the prior year,
acquisition costs primarily related to the acquisition of
Europac.
16. 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 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 an
understanding of the key trends and position. These unusual or
non-operational items include business disposals, restructuring and
optimisation project costs, acquisition related and integration
costs, and impairments. Restructuring and optimisation items
treated as adjusting items are major programmes usually spanning
more than one year, with uneven impact on the profit and loss for
those years affected. Other adjusting items, such as business
disposals, impairments, integration and acquisition costs, which
are by nature highly variable or can also have a similar distorting
effect. Therefore, the Directors consider that presenting non-GAAP
measures which exclude adjusting items enable comparability of the
recurring core business, complementing the IFRS measures
presented.
Amortisation relates primarily to customer contracts and
relationships arising from business combinations. Significant costs
are incurred in maintaining, developing and increasing the value of
such intangibles, costs which are charged in determining adjusted
profit. Exclusion of amortisation remedies this double count, as
well as providing comparability over the accounting treatment of
customer contracts and relationships arising from the acquisition
of businesses and those generated internally.
The Group's key non-GAAP measures are used both internally and
externally to evaluate business performance against the Group's
KPIs and banking and debt covenants, as a key constituent of the
Group's planning process, as well as comprising targets against
which compensation is determined.
Certain non-GAAP performance measures can be, and are,
reconciled to information presented in the financial statements.
Other financial key performance measures are calculated using
information which is not presented in the financial statements and
is based on, for example, average 12 month balances or average
exchange rates.
The key non-GAAP performance measures used by the Group and
their calculation methods are as follows:
Adjusted operating profit
Adjusted operating profit is operating profit excluding the
pre-tax effects of both amortisation and adjusting items. Adjusting
items include business disposal gains and losses, restructuring and
optimisation costs, acquisition related and integration costs and
impairments.
A reconciliation between reported and adjusted operating profit
is set out on the face of the consolidated income statement.
Operating profit before adjusting items
A reconciliation between operating profit and operating profit
before adjusting items is set out on the face of the consolidated
income statement.
Other similar profit measures before adjusting items are quoted,
such as profit before income tax and adjusting items, and are
directly derived from the consolidated income statement, from which
they can be directly reconciled.
Return on sales
Return on sales is adjusted operating profit measured as a
percentage of revenue and can be derived directly from the face of
the consolidated income statement. Return on sales is used to
measure the value we deliver to customers and the Group's ability
to charge for that value.
Half year
Half year ended Year ended
ended 31 31 October 30 April
October 2019 2018 2019
Continuing operations GBPm GBPm GBPm
-------------------------- ------------- ----------- ----------
Adjusted operating profit 351 304 631
Revenue 3,188 3,073 6,171
-------------------------- ------------- ----------- ----------
Return on sales 11.0% 9.9% 10.2%
-------------------------- ------------- ----------- ----------
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 of long-term remuneration and is widely used
by the Group's shareholders.
A reconciliation between basic and adjusted earnings per share
is provided in note 7.
Adjusted return on average capital employed (ROACE)
ROACE is the last 12 months' adjusted operating profit as a
percentage of the average monthly capital employed over the
previous 12 month period. Capital employed is the sum of property,
plant and equipment, 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 discontinued operations are excluded.
Half year
Half year ended Year ended
ended 31 31 October 30 April
October 2019 2018 2019
GBPm GBPm GBPm
------------------------------------------------ ------------- ----------- ----------
Capital employed 5,988 4,053 5,674
Currency, inter-month and acquisition movements (224) 25 (1,022)
------------------------------------------------ ------------- ----------- ----------
Last 12 months' average capital employed 5,764 4,078 4,652
------------------------------------------------ ------------- ----------- ----------
Last 12 months' adjusted operating profit 678 568 631
------------------------------------------------ ------------- ----------- ----------
Adjusted return on average capital employed 11.8% 13.9% 13.6%
------------------------------------------------ ------------- ----------- ----------
Adjusted EBITDA
Earnings before interest, tax, depreciation and amortisation
(Adjusted EBITDA) is adjusted operating profit excluding
depreciation. A reconciliation from adjusted operating profit to
adjusted EBITDA is provided in note 11.
Net debt and net debt/EBITDA
Net debt is the measure by which the Group assesses its level of
overall indebtedness within its financial position. A split showing
the components of net debt is provided 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 the statement of
financial position 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 disposals in
the period, and to adjust to an IAS 17 basis.
Half year Half year
ended ended Year ended
31 October 31 October 30 April
2019 2018 2019
GBPm GBPm GBPm
------------------------------------------------- ----------- ----------- ----------
Net debt - reported basis (see note 10) 2,444 648 2,277
IFRS 16 lease liabilities (226) - -
Currency effects 47 (1) 41
------------------------------------------------- ----------- ----------- ----------
Net debt - adjusted basis 2,265 647 2,318
------------------------------------------------- ----------- ----------- ----------
Adjusted EBITDA - last 12 months' reported basis
(continuing operations) 921 735 820
Adjust to IAS 17 basis (40) - -
Acquisition and divestment effects 39 6 136
Add back of discontinued operations 47 43 40
------------------------------------------------- ----------- ----------- ----------
Adjusted EBITDA - banking covenant basis 967 784 996
------------------------------------------------- ----------- ----------- ----------
Net debt/EBITDA 2.3x 0.8x 2.3x
------------------------------------------------- ----------- ----------- ----------
Free cash flow
Free cash flow is the net movement on debt before cash outflow
for adjusting items, dividends paid, acquisition and disposal of
subsidiary businesses (including borrowings acquired), and proceeds
from issue of share capital.
A reconciliation of 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 Year ended
ended 31 31 October 30 April
October 2019 2018 2019
GBPm GBPm GBPm
-------------------------------------- ------------- ----------- ----------
Growth capital expenditure 70 44 140
Non-growth capital expenditure 109 77 163
-------------------------------------- ------------- ----------- ----------
Total capital expenditure 179 121 303
-------------------------------------- ------------- ----------- ----------
Free cash flow (note 11) 178 209 339
Tax paid (note 11) 49 47 85
Net interest paid (note 11) 53 43 61
Growth capital expenditure 70 44 140
Change in employee benefits (note 11) 10 5 17
-------------------------------------- ------------- ----------- ----------
Adjusted free cash flow 360 348 642
-------------------------------------- ------------- ----------- ----------
Adjusted operating profit 351 304 631
-------------------------------------- ------------- ----------- ----------
Cash conversion 103% 114% 102%
-------------------------------------- ------------- ----------- ----------
Average working capital to sales
Average working capital to sales measures the level of
investment the Group makes in working capital to conduct its
operations. It is measured by comparing the monthly working capital
balances for the previous 12 months as a percentage of revenue over
the same period. Working capital is the sum of inventories, trade
and other receivables, and trade and other payables, excluding
capital and acquisition related debtors and creditors.
Half year Half year
ended ended Year ended
31 October 31 October 30 April
2019 2018 2019
GBPm GBPm GBPm
----------------------------------------------- ----------- ----------- ----------
Inventories 541 547 584
Trade and other receivables 807 845 833
Trade and other payables (1,494) (1,546) (1,587)
Inter-month movements and exclusion of capital
and acquisition related items 175 155 174
----------------------------------------------- ----------- ----------- ----------
Last 12 months' average working capital 29 1 4
----------------------------------------------- ----------- ----------- ----------
Last 12 months' revenue 6,286 5,928 6,171
----------------------------------------------- ----------- ----------- ----------
Average working capital to sales 0.5% 0.0% 0.1%
----------------------------------------------- ----------- ----------- ----------
Constant currency and organic growth
The Group presents commentary on both reported and constant
currency revenue and adjusted operating profit comparatives in
order to explain the impact of exchange rates on the Group's key
income statement captions. Constant currency comparatives
recalculate the prior period revenue and adjusted operating profit
as if they had been generated at the current year exchange rates.
In addition, the Group then separates the first full year effects
of acquisitions to determine underlying organic growth. The table
below shows the calculations:
Adjusted
operating
Revenue profit
Continuing operations GBPm GBPm
-------------------------------------------------------- ------- ----------
Reported basis - comparative half year ended 31 October
2018 3,073 304
Currency effects 26 4
-------------------------------------------------------- ------- ----------
Constant currency basis- comparative half year ended
31 October 2018 3,099 308
Acquisitions 258 15
Synergies - 17
Organic growth (169) 11
-------------------------------------------------------- ------- ----------
Reported basis - half year ended 31 October 2019 3,188 351
-------------------------------------------------------- ------- ----------
17. Subsequent events
There are no subsequent events after the reporting date which
require disclosure.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
IR TIBBTMBAMTLL
(END) Dow Jones Newswires
December 05, 2019 02:00 ET (07:00 GMT)
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