DS Smith posts strong fiscal year despite challenges

DS Smith, London, has announced that revenue declined 2 percent for its 2019-2020 fiscal year, which ended in April. 

According to the company’s 2019-2020 earnings report, financial performance for the first 10 months of the year was robust. The company had a 15 million pound (or about $18.7 million) impact in the last two months of its fiscal year due to the COVID-19 pandemic. The company also divested its plastic packaging business for 436 million pounds (or about $544 million), reinforcing its focus on sustainable fiber-based packaging. The company also began operations in its new corrugated packaging plant in Indiana. 

DS Smith reports that it stayed focused on its fast-moving consumer goods (FMCG) and e-commerce this fiscal year. This focus helped to ensure it remained open during the COVID-19 crisis and it was able to support customers, keeping essential supplies—particularly food, drink and pharmaceutical products—available. 

“While this pandemic has clearly had an impact on the momentum within the business, it has provided an opportunity to demonstrate both the strength of our business and the resilience of our business model and drive longer term opportunities,” the company says. “The performance of the European operations, including the integration of Europac, was once again strong while our North American business continued to feel the impact of ongoing weakness in the export paper market despite some significant steps taken in the packaging operations, not least the opening, on time and in budget, of our new box plant in Indiana.” 

Corrugated box volumes grew in the first five months of the second half of the fiscal year as anticipated, ahead of the first half of the year. The company delivered return on sales margin of 10.9 percent, which is in the middle of the company’s upgraded target range. On an organic basis, profit increased in Europe by 7 million pounds (or about $8.7 million), which was offset by reduced profit in North America, down 67 million pounds (or about $83.5 million). The business benefited from the acquisition of Europac, which it acquired in January 2019.

Colin McIntyre, head of the paper and recycling divisions at DS Smith, adds that the company is “pleased” with how its recycling division performed in the 2019-2020 fiscal year despite challenging market conditions.

“There has been volatility in all markets with general downward pressure on prices throughout the year, but latterly that was countered by price spikes specifically related to the COVID-19 pandemic. Our recycling network across Europe enabled us to keep materials moving, making sure we could continue to supply papers for recycling to both our own mills and our external customers,” McIntyre says. “We continued to see quality of materials for recycling at the very forefront of the industry, especially as the effects of tighter quality controls in China and other overseas markets continued to bite. Staying close to our customers and understanding their requirements has been key for us. 

“Through our near infrared and Moisture Gate technologies we worked with our customers and suppliers to improve the overall quality of paper for recycling, and that has been a real differentiator for us. We have also been doing some exciting work around artificial intelligence, looking to how we can better use cameras and intelligent learning to improve both collection and processing. As brands look to move away from single-use plastic packaging, being able to manage coated and laminated fibres through the recycling process has, and will be, a huge focus area for us going forward.”

Organic growth

Organic corrugated box volumes have grown about 0.6 percent this fiscal year, reflecting progressive growth in the first half of the year into the second half of the year. Box volumes grew 0.7 percent in the first half of the 2019-2020 fiscal year, 1.5 percent in the first two months of 2020, down 1 percent in March and down 4.5 percent in April due to COVID-19. 

“The progression in the first four months of [the second half of the year] was driven by strong growth from the Europac business in southern Europe, progress versus [the first half of the year] in the North America packaging business, and continued good performance in eastern Europe,” the company states. “Growth once again has been particularly strong from our multinational customers, particularly e-commerce, where we continue to take an increased share of their business.”

In the final month of the fiscal year—ApriL—corrugated box volumes fell 4.5 percent overall relative to the comparable period in the prior year. While FMCG and e-commerce categories grew, the industrial sector fell heavily. On a regional basis, the company’s northern Europe region saw volumes increase by 7 percent in the month as the pandemic hit later there. However, there was negative impact in southern Europe where lockdowns were more extreme, and many customers were closed. Eastern Europe saw volumes fall 8 percent in April as supply chains were emptied and industry was disrupted, although it has been quick to rebound in late May and June. The company also states that it saw many disruptions in North America this spring—while DS Smith factories remained open, there were variations in activity levels between different customers and different states. 

Pandemic response

Since the start of the COVID-19 pandemic, DS Smith’s focus has been on the health and well-being of its 30,000 employees. The company has also focused on maintaining an uninterrupted supply to customers, the majority of whom are FMCG companies, which are essential in the food supply chain. DS Smith factories have been generally classified as essential operations—all of the company’s paper and packaging sites remained operational throughout the pandemic to date. New ways of working have been implemented to reflect the latest guidance on safe operations and changes in demand, which has led to some additional costs. 

In addition, DS Smith reports there was a reduction in overall box volumes during April and May due to weakness in the industrial customer categories when the COVID-19 pandemic was at its peak. 

“We estimate the direct impact to operating profit in 2019-2020 to be in the region of 15 million pounds” or about $18.7 million, the company reports. “In the new financial year, the recent spike in OCC (old corrugated containers) is expected to have the largest ongoing impact.”

In response to the pandemic—and conscious of an expected global recession in the coming months—DS Smith states that it has put measures into place to reinforce its financial position and performance through conserving cash and managing costs. Next year’s capital expenditure will be reduced 20 percent from the last fiscal year, and all nonessential expenditures will be flexed. The company has also postponed payment of dividends until it has a clear economic outlook.