Industrial weakness set to weigh on DS Smith

Still, adjusted operating profit rose by 4 per cent at constant currencies, to £660m, thanks to a 0.7 percentage point margin expansion to a record 10.9 per cent. This came despite a £67m drop in profit from North America on the back of weak export paper prices. The margin improvement was driven by the contribution of Spanish packaging business Europac, which was acquired in January 2019.

Covid-19 triggered an estimated £15m hit to operating profit across March and April. Corrugated box volumes dropped by 4.5 per cent year-on-year as demand from industrial customers fell away during the lockdown – in North America, packaging volumes declined by 16 per cent. The collapse in industrial demand outweighed the boost to e-commerce and FMCG volumes from consumers turning to online shopping and stockpiling. There were also higher costs such as paying for employee overtime and a spike in input prices. This centres around the pricing of old corrugated containers (OCC) which are the raw material used to make paper. Waste management companies have collected lower volumes of OCC during this crisis causing prices to rise.

The pandemic is guided to impact the current financial year, too, amid continued weakness from the industrial sector and higher operating costs. In response – and in preparation of a likely global recession – DS Smith is cutting its capital expenditure by 20 per cent to £300m this year. The interim dividend was cancelled in April, and management believes it is too early to resume the payout at this stage.

Excluding lease liabilities, net debt came down by almost a fifth last year, to £1.85bn, benefitting from the £484m proceeds from the sale of its plastics business. Equivalent to 2.1 times cash profits (Ebitda), this is closer to the group’s target of net debt being no more than two times cash profits.

Analyst consensus compiled by FactSet anticipates adjusted EPS will fall from 33.2p to 26.4p this year.