DS Smith Plc

Good morning. I'm Miles Roberts, the Group Chief Executive, and I'm joined here this morning by Adrian Marsh, our Group Finance Director.

Firstly, thank you very much for spending the time to listen to our presentation. But I would also like just to acknowledge the huge effort and the commitment shown by so many people be it across DS Smith and in our customers and our supply chain as well that have really enabled us to perform so well during this period.

It's -- I'd just like to really acknowledge that absolutely fantastic performance. Looking at the results for 2019, '20, we've had a resilient performance built on our robust business model.

In Europe, we've seen continued market share gains. We've now built our FMCG and resilient categories to 83% of our overall portfolio, making the business even more resilient.

Europac integration has been excellent. We've upgraded the synergies, and it's delivering fully on track with our expectations.

And despite a difficult economic background and the impact of COVID, we've grown the profits organically. If we look in North America, it had a good domestic performance.

It has been offset by the continued negative export paper pricing. But that's being corrected with the establishment of the new Indiana packaging plant.

It's a state of the art, it's a wonderful facility. It opened on time and budget in November, and we're very pleased with the customer pipeline.

So for 2019, we've had a strong financial performance and despite the generally difficult economic conditions, we've had very strong pricing discipline that has led to that record margin. Operating profits grew by 5%, and that included the impact of about £15 million from COVID.

The organic cash generation was good. Combined with the successful disposal of Plastics, it's meant that the net debt-to-EBITDA has finished the year at 2.1x ratio, but we've also improved our liquidity as well.

And our ESG performance on employees, on communities and the environment, again, we've made some really, really exciting progress there that I'm very pleased with. But let's just turn to COVID and summarize in a way what's happened and how we see the future.

Well, firstly, we've responded very well. And this is really built on the company having a very clear purpose as to what we are, what are we trying to achieve that everybody in the company and our suppliers and our customers understand.

So it doesn't come around that in a time of difficulty. We've got a very clear value proposition to our customers, it is one that they want, and they're increasingly rewarding us because of that.

But most importantly, it's about our internal culture. We've talked about this many times about the values and the way that we operate, and that has enabled an effective and rapid response to this situation.

So we're very proud of everybody who's worked in DS Smith. We've had fantastic support from our communities.

It's been essential to keeping every plant open and our levels of customer service throughout this period have been at an all-time high. We've worked with our supply chain.

Making sure that all of our supplies, including PP, et cetera, have been according to our plans. And you can see on this slide, the like-for-like volume growth, yes, it's fallen.

But down to sort of minus 4.5%, 4.7% in the worst period, and that compares to economies that are down between 20% and 30% in that period. But of course, we've had to respond.

We put an extra focus on cost and cash flow and I said in improving the liquidity of our debt facilities. But ultimately, we had an impact of probably about 6 or 7 weeks into last year.

So it was relatively limited. Turning to the short term, where we are now, we are seeing increased OCC costs directly as a result of COVID, limiting the supply of OCC.

It is starting to soften. We expect it really just to be an impact for the first half.

With our volumes, whilst our FMCG has continued to do very well, we have seen its decline in the industrial sector. And along with everybody, we can all see the significant macroeconomic uncertainty in which we're currently operating.

And on that basis, decided that it will be imprudent to start the dividend payment whilst that uncertainty exists. We are absolutely aware that this is the primary return to shareholders.

And we'll be looking to reinstate the dividend as soon as we can see greater clarity of the economic outlook. But those medium-term opportunities are there for us.

There are still -- the structural growth drivers of our business are still absolutely intact. In fact, a number of them, we believe will be accelerated as a result of the COVID crisis, in particular, e-commerce, whilst it stepped up, we think that's a step change in their performance, similar on sustainability and the use of our digital platforms that we've developed.

And our customers have and are continuing and will continue to consolidate their supply chain and will be major beneficiaries of this. So thank you.

I will now pass over to Adrian, who will take you through the financial results for last year. Adrian?

Thank you, Miles, and good morning, everyone. I will now take you through the financial results for the year.

Unless otherwise stated, I'm referring to the results for the continuing operations of the business and comparisons are on a constant currency basis. This is the first year of adoption of IFRS 16 leases, for which, we have not restated prior year figures, but the impact has been quantified in technical guidance in the financial review published this morning.

COVID-19 has quite obviously had a significant impact in the markets in which we operate and on the customers with which we serve. The effects of the global pandemic are only really reflected in the last 2 months of our financial year to the 30th of April.

Miles will go into more detail in a moment on volumes and current trading through this period and into the new financial year and I'll largely focus on the performance for the year 2020 as a whole. I'd like, though, to say that I've been extremely proud of my colleagues who've kept all of our factories running and providing essential products for our customers to supply their customers during these unprecedented times with lockdowns having an extremely disruptive effect on their supply chains.

The flexibility of our workforce and their commitment to serve our customers has been incredible. Likewise, all our office-based staff have tirelessly worked from home to ensure the business is run as well as could possibly be expected in the circumstances and to ensure all of our regulatory obligations have been met, including the presentation of our results today.

It's been an outstanding performance from everyone who works at DS Smith, and I'm exceptionally proud to have been part of such an effort. So turning to the numbers.

Here are our financial headlines. Revenues down 2% and operating profit up 5%.

I'll take you through bridges for these key line items in a moment. We've achieved a record margin, and Miles will talk more about that later.

Earnings per share is broadly flat. The reason that earnings per share growth is lower than profit is the rights issue that took place in July 2018, ahead of Europac acquisition completing in January 2019, with the result that the average share count this year is greater than last year.

Return on average capital employed is 10.6%, below our target range, but fully consistent with what was expected following the acquisitions of Interstate and Europac and the disposal of Plastics, which had relatively little capital employed. Please note that there's a 30 basis point impact from IFRS 16 and 20 basis points from the £15 million identified cost impact of COVID-19, which I'll talk more about shortly.

We saw a similar ROACE effect when we bought SCA Packaging in 2012 with the ratio dipping and then building again, and we expect a similar trajectory again now. Walking through the revenue.

This is our continuing operations, so it excludes Plastics. I've also split out North America because of the different dynamic in our U.S.

business compared to our European one. In the U.S., we've seen good performance in the underlying packaging operation, but significant challenges in the paper business due to the substantial fall in export paper pricing since acquisition.

The contribution from box volumes was £22 million with a negative balance on other volume, principally from increased integration in paper and recycling and slightly lower sheet volumes. So less external paper and recycled sales and slightly less unprocessed corrugated sheets sold in the market.

The reduction from sales price and mix is split £125 million from the food and packaging prices as the impact of lower paper prices feeds through to box prices, and the remaining £160 million is due to lower paper prices on external paper sales. Turning to EBITA.

We've delivered organic growth in Europe and had a material benefit from the full contribution from Europac and the synergies we've delivered coming through in line with expectations. I've again split out North America to provide better transparency.

In this half year, there was the impact of the Indiana site start-up cost of around £15 million and the impact of COVID-19 in the region, which we estimated another £45 million. Given our business is much smaller in the U.S., we're more exposed to the COVID-19 impacts on specific customers.

Profitability was down similar to half 1 due to low export paper prices, which whilst was beginning to reverse just before COVID-19 struck, quickly has reverted back to the previous negative trend. Clearly, this exposure will lessen as the Indiana packaging plant ramps up over the coming 2 years, increasing our packaging capacity in the U.S.

by 1/3 and helping to reduce the amount of paper that we sell. Taking those effects into account, half 2 was broadly similar in profit to half 1.

The volume contribution you see here is a net of the positive from packaging, which had a similar drop-through to previous periods, offset by the decrease in other volumes that I mentioned before. There is then the direct drop-through from the lower packaging prices and a small mix effect of £120 million for the year and £160 million for paper.

At half one, there was around £100 million total price/mix effect, of which around £80 million related to paper and £20 million to packaging. On the other side, we benefited substantially from lower paper costs and from OCC reaching historic lows in the period.

And on balance, delivered 1.5% organic growth due to our strong commercial approach and quality offering to customers. Overall, we achieved a record margin result in the middle of our target range that we set a year ago, driven by the acquisition of Europac.

Margins have been very strong in Southern Europe with the full integration and synergy delivery in Europac, and remained good in Eastern Europe. In Northern Europe, margins fell 80 basis points driven by paper whilst in North America, the effect of low export paper prices, along with the one-offs already described, have reduced margin substantially in this year.

With regards to COVID-19, as I mentioned in my introduction, we performed admirably through the height of the crisis. Our priority through the crisis was to keep our staff safe and to serve our customers.

We have, of course, incurred additional costs related to hygiene, cleaning and logistics, but also somewhat unexpectedly from a sharp spike in the cost of OCC, which we managed to avoid most of due to our inventory position in March but had an increasing effect through April. We have estimated that these combined cost effects were around £15 million.

Looking into FY '21, there will again be additional costs related to business operations, and there's also the impact of higher OCC costs. As we've seen countries exit lockdown and waste collection begin to normalize, we're now seeing OCC prices begin to revert to more normalized levels.

As a reminder, we consume around 330,000 tonnes of OCC a month. And given paper prices didn't rise to reflect the spike, it has the effect of being an unmitigated margin hit.

The immediate actions we've taken during this pandemic has been, as you'd expect from us, a strict conservation of cash and laser focus on cost. By way of examples, we've reduced CapEx by 1/5, and taken the difficult decision to suspend our dividend.

We've cut back on all areas of discretionary expenditure and canceled the annual management pay review. We're also working closely with our supply chain and procurement functions to address all areas of direct and indirect costs.

Cash flow has improved once again in the year. Working capital whilst an outflow is net of a further reduction in nonrecourse invoice discounting in the year.

We've completed our triennial pension valuation and cash contributions remain unchanged for the next 3 years. CapEx was in line with what I guided to and our tax cost reflects higher profits.

Moving to cash flow. The main inflows were free cash flow and the proceeds of the Plastic disposal.

Dividends were the previous year's final and the impact of not paying this year's interim dividend will be in next year's cash flow. We ended the year at 2.1x leverage, close to our target of 2x.

This ratio is based on our banking covenant calculations, which is on a pre-IFRS 16 basis. Taking into account the full Interstate put option, the ratio would have been around 2.3x.

Our leverage, as noted, sits at 2.1x, and we continue to target 2x as our medium term objective. Liquidity management has always been a focus for us and we have a good balance of public bonds with no meaningful maturities until 2023.

In addition to our range of public bonds and term loans, we have £1.4 billion of undrawn 5-year committed bank facilities. These bank facilities are a key instrument in dealing with any short-term finance needs and provide essential liquidity.

The covenants attached to these facilities were put in place prior to the SCA acquisition, and we felt not appropriate for the group in its current size and form. In discussions with our banking group, we've now permanently changed the key leverage ratio of net debt-to-EBITDA of 3.25x to 3.75x.

Our public debt is rated as investment-grade by Standard & Poor, and we remain committed to retaining this rating. We've reviewed our asset footprint, and a number of assets have been identified as noncore and discussions have taken place with a number of buyers.

Whilst these discussions have paused during the pandemic, we're now reengaging the various processes. The Board considers the dividend to be a very important component to shareholder returns.

On the 8th of April 2020, in light of the unprecedented uncertainty due to the COVID-19 pandemic, we announced that the Board had decided that it would be prudent not to pay the interim dividend due for payment on the 1st of May 2020, despite our strong liquidity profile and resilient trading at that date. The Board has since considered the overall dividend payment for this financial year and taking into consideration the interest of all stakeholders, concluded that the outlook remains too uncertain to commit to a resumption of dividend payments in the short term.

Recognizing the importance of dividends to all shareholders, the Board will actively consider the resumption of dividend payment when we have greater clarity over outlook. These are the usual line items you've come to expect, and I've attempted this time to estimate the cost impact of COVID-19, but you'll appreciate that I'm not the best person to give a view on how long it will continue and what, if any, additional burdens will be added to the business.

My planning assumption is that it will be a half 1 impact for us, and there'll be no significant second wave impacts, but I'm fully aware that this may or may not be the case. Whilst the spike in OCC cost is now turning down from its peak, there is a £20 million a month impact based on 330,000 tonnes of consumption per month.

As noted before the current spike in OCC prices, this has not been mitigated with increases in paper prices, although this may not be the case going forward. For adjusting items, which I currently anticipate to be around £50 million, I've included the final Europac integration costs, the normal Interstate put option unwind, which is noncash, and around £20 million, which I'm anticipating for COVID-related restructuring activities.

Stepping back from the results for the last 12 months. Our margin achievement should be considered in the context of the journey that DS Smith has been on for the last decade.

These are the margins as reported each of those years, and you can see that the effect of both the acquisitions and disposals, synergy delivery and organic growth combined over the period has driven us to more than double the margin. This has been due to focusing on high-quality value-adding packaging that customers will pay for along with the benefits of scale of a Pan-European organization and hard 1 synergies delivered.

Clearly, the level of internal paper capacity in any year can have a positive or negative impact and it remains our objective to reduce over time our paper capacity, which will have the effect of reducing margin volatility. So as my wrap, it's been another year of progress in delivering against our targets.

Volume continues to be ahead of the market, albeit we did see some weakness in industrial volumes before and during the COVID-19 crisis. Our main exposure in Germany was showing the positive effects of actions taken during the year, and Miles will describe our view on this once COVID is subsided and economic stimuli methods get taken in Europe.

I've already described our margin development and Meraki is now reset and expected to return to our medium-term target of 12% to 15% following the 2 recent large acquisitions and the disposal of Plastics. Net debt-to-EBITDA is 2.1x, just above our target range and better than we anticipated at the time of announcing the Europac acquisition.

I will now hand over to Miles to talk more about the business in general, and our response to the current economic environment in particular.

Thank you, Adrian. Our business is built on a clear purpose, a clear value proposition and clear values in the way that we work with each other, with our suppliers, with our communities and with our customers.

This is what's enabled us to adapt so quickly to the changing environment. And whilst when we come out of COVID, we'll continue to thrive and develop as a company.

If I look at our European performance, despite the challenging economic background and the impact of COVID, we achieved organic profit growth and a record margin. We saw our volumes really increasing throughout the period until the final 6, 7 weeks of the year when COVID struck.

And this was built on our growth in the FMCG and e-commerce sectors, and particularly with our large customers, where we've seen another high single-digit like-for-like growth with those customers as they've been consolidating their supply chain, and we've been a major beneficiary of that. But our commercial excellence last year, whilst we saw a significant decrease in the price of paper, for our packaging business, that translated into really quite a modest reduction in the end prices or maybe more between the 3% and 4%, absolutely demonstrating the value that we're adding to our customers and the differentiated offering that we provide.

Our paper optimization, currently about 80% of the paper we use in Europe is -- we have the capacity, the internal capacity to supply that. And we have an ambition to reduce that to 60%.

The review of those assets has been completed. But the delivery of that plan has been slightly held back because of COVID.

But it remains our ambition still to get to 60%. If I look at the U.S.

performance, the underlying position is stable. It's a good domestic performance.

The export prices have remained weak in half 2. We have seen quite an impact of COVID in April in the U.S., particularly with our protein-based customers.

These are customers processing chicken and beef. They're working in cold temperature environments.

We have seen a number of those customers close their operations due to the occurrence of COVID within their workplace. However, we are now seeing that starting to improve quite significantly.

On the Indiana packaging plant, we had the £15 million of start-up costs all happened on time, on budget. And the main purpose of this is obviously to supply our customers.

We haven't been able to keep up with customer demand, until we have this new capacity, it's now coming online, but it does significantly reduce our long paper position in the U.S. to come away from the weak export market onto the domestic market where the prices of paper are much, much higher, and we should get a significant benefit from that, as I say, the pipeline of opportunities with our customers.

And indeed, the customers we've actually secured, particularly in the last customers have been very, very encouraging. I'm very pleased with that.

Now given the impact of COVID, I think it's right that we give you more detail, and I show on this slide about how our volumes have been developing throughout the year and indeed in the final months on a monthly basis. Clearly, one month to the next, things can move quite significantly.

So if you look in half 1, we grew organically at 0.7%. Again, it was ahead of the market.

But during the second half, as we expected, we saw quite a noticeable increase in the rate of like-for-like volume growth. It was improving throughout the period.

The average for the first 4 months of the second half was 1.5%. But then it started to fall back in March, really as the impact of COVID started to be felt in some regions, particularly in Southern Europe, such as Italy.

And also into Iberia. And we saw that trend continue into April.

And then by May, we -- most of the regions were sort of feeling the worst effect of COVID. And in that period, we saw that our volumes declined by 4.7% on a like-for-like basis with May last year.

We've seen June, our estimate for June, we don't have the final numbers. It's just our estimate.

We're seeing an improvement in that trend, really as the lockdown starts to ease in many regions. To say throughout the whole period, we saw the FMCG and e-commerce grow throughout.

So even in May, we are seeing a like-for-like increase in FMCG e-commerce. So all of the reduction has really come from the industrial sector, particularly in automotive, particularly in heavy manufacturing.

Looking at further detail about our FMCG and e-commerce customer base. I said I'm very pleased that this now represents a greater proportion of our overall box volumes.

If I go back to last year, it was about 80%, but it's now improved to 83%, and that is on an average for the last year. So in the final period of last year is actually even greater than that.

We have outperformed the market. I said previously, the opportunity with our multinational companies remains significant.

We work for all the large multinational companies across Europe. We've seen our share of their business grow steadily year-on-year over the last 10 years.

We've seen it grow further into this year, and we believe there is more opportunity to grow a greater share of their business over the coming year and years. And as I said, the industrial sector was really heavily impacted by COVID, and we have seen reductions of between 20% and 30% on a year-on-year basis, although, there are some signs of improvement in June, and the outlook is for some further recovery.

If we look at it on a regional basis, again, for each month, we show here that Northern Europe has remained very, very resilient. Here, e-commerce represents a greater proportion of goods sold than elsewhere in our business.

But we have seen Southern Europe suffer heavily as the lockdown has been extensive there in all countries, in Iberia, France and Italy. They've had a lower tourist season as well, particularly in May.

But we're now seeing the lockdown ease, and in Southern Europe, we're expecting June to show quite a good meaningful improvement on that position. And as I said, previously, North America has really been hit by some large customers that we have in the food processing in chilled environments where they've closed their operations.

Sometimes quite extensive periods of time due to a breakout of COVID in their employees. But again, I'm pleased to see that in June, the North American position is recovering quite strongly as well.

So the effect of COVID on the medium-term, we believe that COVID will accelerate a number of the structural changes we've seen in our marketplace over a number of years. The obvious element is e-commerce.

We've seen an absolute boom in e-commerce business. In fact, if we just take the example of the U.K., we've seen the last 8 weeks of our e-commerce business has been busier than the busiest week, leading up to Christmas last year.

We've seen a near doubling of the volumes there. But we're also seeing -- when we look at other regions across the world that have come out of COVID, they've all seen this pickup in e-commerce.

But what's important is that post-lockdown, e-commerce has not lost the share of the market that it has gained. People have become more used to ordering online, it could be groceries or other goods, and the e-commerce hasn't lost its position.

Very importantly, we've got a number of customers who we've been talking to about having a direct-to-consumer offering. And a number of those customers have really suffered during the lockdown where their outlet stores, if they've been predominantly sitting just through bricks-and-mortar, that's obviously had a dreadful effect on their sales.

So they're now coming to us and looking to develop their own platform, direct-to-consumer subscription models, and we think that is something that they will not let go of going forward. When we come to our customers, this whole issue of security of supply, we've demonstrated again to our customers even in regions where there are lockdowns, our factories have remained open.

Where there have been supply issues in various regions, we can supply into that region from outside of the region with all of the -- with our network of plants, and they've rewarded us with more business as a consequence. But they're also looking to work differently.

And our digital platforms that we've developed over many years of how we can communicate with customers, communicate internally and communicate with our supply base, lining up, improving that flexibility, improving the efficiency of way we work has proved invaluable during the lockdown and we believe those -- our customers will want to continue working along that same trend in the future. So all of this gives us some grounds for real optimism that we can continue to grow our business, grow our share of the market, building more resilience into our business going forward.

As we all know, sustainability has been at the heart of DS Smith's business model for many, many years. It's driven into the way we work, internally with our supply base and with our customers.

We see it not only as the right thing to do, but a real driver of growth. Customers increasingly talk about circularity of products, not just how they're picked up and processed and recycled, but how recyclability is designed into the product from the start about plastic replacement.

And we're very pleased with the progress and our real leadership in this area. If we look at our ESG performance overall, I think it's been a year of real good further improvement.

Even at one of our key measures about CO2 emissions. Since 2015, over the last 4 years, we've improved our CO2 per tonne of production by 11%, and last year, we improved by 3%, maintaining that trend well on track to hit our target of less than 30% reduction by 2030.

Working with our employees, our performance on health and safety, we've seen significant improvements each and every year over the last 10, 12 years. And we've finished with an AFR, Accident Frequency Rate, of about 2 at the end of the period.

Still too many accidents, but a very -- comparatively, a very good and consistent improvement. If we look at our sites, they're all engaged in community programs.

Every site with more than 50 people has a community engagement, working with the communities in which they operate, often they can be the largest employer in that region, and that's really helped us during this COVID crisis. Our plants are being classified as essential businesses.

They've all been -- remained open, and we've really enjoyed some super support from the communities in which we operate. As you know, we have an excellent relationship with the Ellen MacArthur Foundation about the Circulytics, in particular, using the business tool.

We're very pleased with the results we've been getting from that and the classification we've received. One of the very leading companies here, all about the continued plastic replacement, innovation and designing recyclability into the packaging in the first place.

Looking at the current year, we have the current impact of COVID. And we have demonstrated how we can very effectively deal with this.

By focusing on our customers, continuing to deliver for them, our service levels today are the highest they have ever been, and we're being rewarded for that with growing market share and a growing proportion of their business. We do have to deal with some of the short-term increase in costs, such as the OCC impact.

But we're dealing with this by continuing to drive cost efficiency throughout the organization. And of course, cash generation, aided with our increased liquidity.

In the medium term, there are real opportunities for us to continue to develop and grow our business. That resilient FMCG e-commerce platform that we've built is growing and we believe that COVID will further enhance the attractiveness of that to the end consumer.

The fundamental growth drivers of corrugated remains strong. On the sustainability agenda, the way people are living and changing their lives all plays to the strength of corrugated.

We will continue to optimize our paper position, our internal supply of paper, again, making our business model more resilient for the future. So with all of that, we believe we're in a good position to deal with the current uncertainty to benefit from the long-term opportunity.

Thank you. I'll now hand over to the operator, who will organize your questions.

Just firstly, and I suppose, predictably, just on the increase in OCC prices. I wonder if you can give us some color as to why you believe there hasn't been a response in terms of box prices so far?

Secondly, on e-commerce. So I just wondered if you can quantify the proportion of volumes or revenue that is now attributed to e-commerce?

And where you think that goes in the current year? And finally, just interested in your strategy around industrial packaging, I wonder if there's still a role for industrial packaging in the business as you see it now?

Thank you very much, Alex. You're absolutely right.

The OCC costs have increased in the short term, really as a result of the limited actual recycling of the material. We see that the capacity is now coming back on stream.

So we're seeing the prices fall back. I think the only reason why the paper price hasn't responded is because it is seen as a relatively short-term issue and really coming out over the -- certainly within our first half.

You mentioned about e-commerce. You're right, it's been extremely, extremely busy, where e-commerce is a major proportion of that country's retail outlets.

I mean, for us, it's now representing, obviously, a greater proportion. I think we've -- it's always slightly difficult to know exactly what our customers are using the packaging for, but from all our surveys, it looks like it's now in the sort of the mid-teens, probably about 14%, something like that of our business, and it continues to grow very nicely.

With the industrial side, this is known that we haven't been investing behind. We do have a business there.

It's getting a smaller and smaller part of our business. Really as our growth in FMCG e-commerce, other categories moves forward.

Some of the facilities are shared facilities, so it's difficult to sort of pop them out and say, well, we're just not going to do that, it does provide marginal volume. But I think you can see in our results, when the whole market is down significantly in packaging, and we are outperforming that.

Then that is showing that we've got the right in customer mix. I think, ultimately, where do we get to, we'll probably get to about 90%, something like that on FMCG e-commerce.

But there will always be some industrial in there as we seek to optimize the use of our assets.

Could you just walk me through the U.S. division in a little bit more detail?

Can you walk through how the integration of that paper volumes in your U.S. business should benefit profitability into next year?

And then talk a little bit more about the weakness you saw in those protein customers and what you're seeing now on that side of the business? And then secondly, on the dividend, could you give us your initial thoughts what you're potentially proposing to the Board when you get to your 1H results in December?

Are you thinking you're going to go in line with your kind of 2 to 2.5x coverage range?

Okay. Let's just take the dividend question first, because this is a really, really tough decision.

And I'm quite prepared to be accused of being over cautious. And it is just caution over the general economic outlook and some of the cost increases that we've seen on OCC, we expect them to come off.

And therefore, as soon as we can see some clarity, we will return to the dividend discussion. We are very clear on our policy of 2 to 2.5, we think that's the right policy.

And we will be looking to recommence dividends with that policy in mind. I can't predict the -- what the Board will be looking at.

But as I said, I think you can probably -- maybe we've been -- we've just been cautious because of the current environment. But as I said, it will be fully reviewed as soon as we get more clarity as to how the end markets [indiscernible] will be.

In the U.S., we -- I said we have about 200,000 tonnes of paper that goes for export. That has been -- the prices there have been very low.

If you exclude that, we're actually pleased with the performance. Lebanon is about 130,000 tonnes of capacity.

So it takes out about 2/3 of that paper capacity, plus there are some other growth opportunities for us coming along as well. In terms of Lebanon, it did start-up at the end of November.

It started producing more in -- when the main assets came on in January. Our expectation is that we're going to have -- within those first 5, 6 months, we should have at least 15% of that capacity.

All the orders we've received, et cetera, and the work we've taken on is fully in line with that. But towards the end of our financial year, if you look at Indianapolis where it is, that was quite a hotspot for factory close, et cetera, with the coronavirus issue.

That -- our factory remained open there. As we said, all our factories have been, but a number of our clients held back production, even if they're operating at a much reduced level.

As I said, we -- the pipeline is very good with our customer base. And if we look at -- as we're sort of coming out of the coronavirus issue, we're starting to see the volumes out of Lebanon increase towards the line that we expected.

We're not quite there yet. We wouldn't expect to be there.

But we're absolutely confident that they will come back because we have the orders, it's more our customers just not being able either not operating or operating below capacity. But the -- so as I said, the pipeline and the actual -- what we've received is good.

We're pleased with that. We're confident this is going to take out about 2/3 of that excess paper capacity.

Does that answer your question? I took them in rounds.

Does that answer your question?

It does. Just one follow-up on the dividend.

I mean, if you go back to that 2 to 3x cover, can you -- I understand this year, you're going to be impacted by higher costs, et cetera, which is impacting profitability. But looking out into FY beyond this year into 2022 and 2023, what are your priorities for the capital allocation going forward?

How do you see DS Smith moving forward beyond 2021 into CapEx, potential M&A, et cetera?

Absolutely. Look, we have a very clear dividend policy.

We feel that dividend policy of a cover between 2 and 2.5 is the right policy for us. We've had it for many years, and that's enabled us to grow and develop at the same time.

As I said, we just have this particular uncertainty, and our priority must be to secure the company until we can see that clarity. Now moving forward, we expect to come out of this.

As I said, I think, actually, there's some quite encouraging signs. In terms of capital allocation, we do have that dividend policy.

It is the primary return to shareholders. We're absolutely aware of that.

On a personal basis, I'm a large shareholder in terms of my shareholding, I can tell you that, not getting a dividend, it hurts. But then in terms of future capital allocation, we do have a number of organic projects.

We still have -- we have a lot of demand coming in the U.S. We feel quite positive about that.

We have further opportunities in Europe as well to grow, particularly our packaging business. And at the same time, we're looking at some of our noncore assets.

You've seen us dispose off Plastics last year. But there need to be -- there's some other assets, particularly on the paper side, we've talked about that we'll be seeking to exit, as we've described previously.

Would you say anything else on that, Adrian?

No, I think that's a fair reflection, Miles. I think the -- if we look out in our corporate planning horizon, you can still see some significant opportunities, particularly on -- within the business we've already got.

Clearly, we're not looking at any M&A now as you'd expect. But I dare say, as we go -- as we work through the next 18 to 24 months, there'll be companies that have decided that they don't want to carry on operating anymore in independent ownership.

So there could well be opportunities at a point in time in the future. But at the moment, the focus has to be and the focus that we -- that you would expect, I'm sure, is absolutely on cash, conserving it and managing our cost base until we just get that level of visibility.

And I'm sure we'll get it. I mean, we're already seeing some positive trends.

But as I said in my words, we don't know what we don't know. And at the moment, you can get up on any given day and feel very positive.

And you can get up in any given day and hear some pretty sort of negative news again. So I think we just have to steer through the next few months, get through the half year and then take a good long look at what we want to allocate capital going forward.

It's Mikael Doepel with UBS. Just a couple of questions.

First, in terms of the volumes, I appreciate you putting out the monthly trends there. That's very helpful.

So thanks for that. But I just wanted to ask, in terms of the visibility for July volumes, I assume you have some sort of visibility there, what are you seeing in the market right now?

We expect to see -- I mean, our worst period we've shown -- we've put a lot of detail there. We've shown at minus 4.7%.

That we are pretty -- that seems to be our worst period when the whole -- everywhere was sort of in lockdown. We're seeing quite a good improvement in June.

I don't have the final figures, but that looks pretty positive, and we expect that trend to continue. It really is on the continuing growth of the FMCG, et cetera, but also the industrial is not coming back strongly, but it's lifting up a little bit, but we are seeing good share gains, et cetera, from our big customers on the FMCG side.

So we expect ongoing improvement. Did you have another question as well?

Yes. I have another one.

On the containerboard pricing, I just wanted to ask what you're seeing on that market right now? I mean we do see the OCC reversing.

There is some supply coming on in Europe. What are you seeing in terms of the containerboard pricing right now?

And what's your expectations going forward there?

Yes. I mean, look, we've -- last year, we saw paper prices come down and go up.

We saw a softening towards the end of last year. I mean, at the moment, it's stable.

It really does depend on how -- on the general recovery. As I say, we're seeing our volumes improve.

It just depends on the outlook. If the outlook gets worse the general economy is then -- that's not going to bode well.

If it continues to improve, then hopefully, there will be -- the stability will continue.

Yes. I mean, the reality is it doesn't take much positive or negative to have an impact.

I mean it's -- we're in a reasonably fragile environment at the moment. As Miles said, if demand becomes stronger, you can see a different set of outcomes.

But if it's weaker, overall for corrugated globally, then it's putting pressure on prices for sure.

I mean, maybe on just a packaging price. I mean, they've stayed very stable now for a while.

So the volatility in paper, we're still seeing quite a bit of stability in packaging. As you saw last year, we're very pleased with that.

Three questions for me. Just a follow-on the pricing side, Miles and Adrian.

I think, Miles, you mentioned on the call, and maybe correct me if I'm wrong, that prices on packaging were down 3% to 4%. You might just give us a sense as to what the scale of decline in corrugated prices has been from the peak, let's say, of the start of last year?

Secondly, on Europac, could you just help us to understand the profitability of Europac and how that's progressed over the year? I mean just -- I mean, on my basic math, you did £100 million or you did £35 million of profits last year in FY '19, you've done £50 million underlying in -- or incremental in FY '20.

And if I strip out the first half numbers, it looks like there was a further deterioration in profitability in Europac in the second half of your calendar '20 or your fiscal 2020. So you might just help us to understand that and the impact of the lower containerboard prices on that business?

The last question, just going back to the U.S. and I suppose really trying to understand that the deterioration in profitability, I mean at what point do you consider impairing that business?

And what's the process that you have to go through or that you went through in terms of deciding not to impair the goodwill in that business?

Thank you, Barry. So just on the pricing, as I said, we've -- during -- we exited last year, the last financial year, packaging prices were between 3% and 4% below where they were at the start of the year.

And I think the price of paper was down, it depends what grade, but sort of in the 20% to 25%. Interesting that 3% to 4%, I mean, we're pretty consistent during the last few months, hence my previous comment on stability of pricing.

We're very pleased with the retention. There's no doubt about that, I think, and even in this -- the current environment, we've seen customers very, very focused on service and quality, the security of that supply, and we've been able to offer them that.

So it's been -- we're very pleased with that performance. I'm sure Adrian may [indiscernible], but on Europac, I think you're missing the synergies on those numbers, Barry.

I think if you add in the synergies, you'll see quite a good improvement coming through there.

Last year, it was £35 million plus £6 million synergies. This year, it's £50 million plus £35 million.

I mean I can take the impairment question as well, Barry. In terms of impairment, obviously, you have to go through a process each year in your -- at your financial year-end, which we've just gone through, where they look at the asset values and they look at future potential -- the future revenue and the future profitability.

Clearly, we have Indiana coming into play within our numbers. And as you work through that, there's no indication to impair.

At the half year, again, you look at triggers for impairment and the auditors would again review the numbers, but it's been through, clearly, with a significant reduction in profitability, which we've had this year. Then you're in a different position than you were the year before.

However, it's not a single year that gets looked at. You look at the business as a whole going forward for that cash-generating unit that it's within, and you model it on that basis, and that gets fully audited.

So no issue to impair. Your question is, could there be a trigger in the future?

But the trigger in the future would be significant sustained reduction in pricing or volume that has to be predicted to continue for a significant period and/or as first failing to manage the long paper position. But at the moment, you don't -- it's never 1-year in isolation.

You look at it over the round. And if your future cash flows can't support your asset valuation, you have no option but to impair.

First, I guess, I'm sorry to bring you back to dividend. What -- you've talked about OCC starting to turn back down again, which will help reduce cost pressures.

And you're seeing improvement in volume performance in Europe and you expect Indiana to improve as well. So it seems like the outlook is getting a little bit better for you.

And I'm just struggling to reconcile that with the caution on the dividend. So I just -- I wonder could you give us some lines to understand as external observers of the company to say when a dividend could be reinstated?

And any further color on what underpins your caution? And also, I guess, against that backdrop or your description of the robust business model and the resilience in the model.

I guess we're seeing that to an extent in the volume side of the business, but it isn't really transferring into the profit performance of the business with organic profits down like double digits in the second half and consensus looking for like north of 20% of a decline in 2021, I'm just wondering what levers can you pull to maybe improved resilience of earnings in the company in the near term? And you've referenced cost savings in the presentation, is there an actual cost saving number you can share with us?

I mean just taking the dividend. And as I said, you can accuse us of being over prudent and you're right in a lot of things that you say.

We have had a big hit on OCC, and we see the cost coming off, but it is a hit in the short term. We can see the volumes improving, and they are, but we can -- but we do have a volume decline.

You can see Indiana coming on as well, so that's absolutely right. The U.S.

has been held back again because of those issues. So there's a long discussion about this.

And given that sort of just general uncertainty, we can commence paying dividends again at sort of any time. We just want to see that our expectations are actually paying out, they're actually coming as we expect, and then we'll recommit.

We fully understand this is the primary return. Look at our liquidity profile, et cetera, it's just that caution.

It's only a few months since we made the decision to not pay the interim decision. It's 3 months ago, and we're just looking for more clarity.

In terms of on the organic side, on the organic profitability. So just on the organic profitability...

Yes. In the terms of -- you've talked about the robust business model and to an extent we can see it actually in your volume performance, albeit, it's weakened a little bit.

But the earnings number for the company has gone in a little bit of pressure in the second half. And it looks like consensus and our own expectation is of a further deterioration.

What are the leverage you guys can pull to offset that because it seems like there's a pretty sharp decline in organic profits?

Yes. I mean, look, David, I mean, we wouldn't put out a specific target, but there are a number of -- as you would expect, a number of initiatives ongoing at the moment, not least, but just in straight procurement.

What we're buying, how we're operating. Whilst the environment is uncertain, we do have opportunities to rationalize and manage our cost base.

And we are -- we will -- we are and we will take all of those. Likewise, we're looking at flexibility of labor, where we're operating, how we're operating.

And we've got -- there's some significant COVID impacts in next year. But in terms of the absolute cost lines that we're taking, it's -- they're all being played.

They're all being pulled. It's no different to be fair than we've had each and every year.

I don't know if you've got anything to add on that, Miles?

Yes. I think if you look at the second half performance, we have had the Lebanon start-up, 15 plus COVID, which is 30 plus the impact of those lower volumes.

If you adjust for those, recognizing that there's a lot of one-off with COVID in there, I think you see the underlying performance actually a lot -- is quite a bit better than that because the volumes were actually increasing and our margin retention was good as well. So on an adjusted basis, actually, it's quite a good basis.

Great. Can I just add one extra question.

Just working capital finance has been reduced to £428 million. I think previously, Adrian, you said, just around £500 million was the level you're happy with?

Can you just give us some color on what's changed and where you see the comfort level now?

Yes. Look, somewhere between £400 million and £500 million.

I mean, clearly, we've always said we look at things on an economic basis. And if we can manage to cover a reduction in factoring, if it's more economic to do it, to use an alternative method, we will do that.

And we have done. We have now got access to extremely cheap European commercial paper, and we've been using that to finance.

I mean everything in the end, as we said before, becomes a sort of a decision around economics and a decision around cost. And I've said I'd be comfortable around the £500 million, I am comfortable around £500 million, have I taken a conscious effort to put it to £428 million versus just under £500 million, no, not at all.

But the economics of the flows of our working capital and alternative cheap financing have been compelling, and we continue to look at that. I mean it won't go above £500 million.

Do I think it will go below £400 million, probably not. But it's impossible to say.

I mean, we've made -- we've been running for the last 18 months. I think I've talked about it at the last year-end and probably the half year, a significant program around how we manage working capital with our business, whether it's collections, whether it's insuring.

We've got effective procurement with all of our suppliers or it's particularly inventory and spare part, engineering spare parts. And we continue to drive at that.

Thank you for the color you've given us on COVID-19. Delighted to see the modest recovery you've seen in recent weeks.

Can I just concentrate on more longer-term strategy, please? I appreciate.

There's various issues at play today. But can we just return to, clearly, over the last decade, Miles as CEO, you've completed, I think it's 20 acquisitions and M&A has been a very important driver of the expansion of the group over the last decade.

But if we think specifically on Interstate, you've now owned it for almost 3 years. And you very publicly in repeat sort of talked about a 12% to 15% return hurdle for M&A.

On Interstate, including the minority, including the M&A and restructuring costs, the acquisition of CCC, the Indiana box plants, you've spent around £1.1 billion to deliver £39 million of EBIT. That's a sub-4% return in capital employed on that U.S.

expansion. Can you please explain to us what's gone wrong, frankly?

And what you as CEO will do to improve the performance of that business going forward?

Absolutely. Well, I think you've seen the returns that we have been making.

If we look at the U.S., when we bought it, I think in the first full year, we made over 13% return, 13.2% from memory, something like that, I remember discussing it obviously with yourself. And we've always said that the exposure of this business has done very well.

The returns are very good. The exposure is on the export price of paper.

All the reduction comes from that export price. We identified that risk.

This is a -- certainly a sort of a medium-term asset. We have to bring that paper back onshore domestically, and then we'll get the returns.

If you adjust for the change in the price of paper, that we'll get from bringing this volume back onshore, then you start to get the returns much more in line with our range of 12% to 15%. That is what we set out.

That is what we're doing. And we're pleased with that progress.

But we have been hit by the export market.

And to get to 12% to 15% return on the U.S. [indiscernible], Miles?

We were 13.2% in the year before last. We set the deterioration, you've got the cost of opening Lebanon, plus you've got the export market.

We bring the export market back onshore, plus you get the return from the packaging side on Lebanon, you get back into that 12% to 15%, which is where we were. It's just a point in time that you're choosing.

Okay. But if you take a step back and just look at group return on capital employed, Miles, it's excluding Plastics because clearly discontinued business you've excluded from your own historical return on capital employed.

Your group return on capital employed was 14.7% in fiscal '16, it's now fallen for 4 straight years. In the same 4-year period, industry peers such as Smurfit Kappa have seen improving return on capital employed.

Now unfortunately, that is an indication that your M&A is just not delivering, whether it's Interstate or whether it's Europac, it's just not delivering on the 12% to 15% return hurdles.

No, look, we're very confident about the acquisitions we made. If you look at the history, when we bought SCA Packaging, we made a very modest return there in the first year, you don't earn 14% to 15% in the first year of any acquisition.

If you look at the Europac acquisition, the return on capital employed there last year, with all the reduction in paper was just below 9%, and that's with all the reduction in paper. We said when we bought it, the target was to be 9% in the first full year.

So we're on line with that. We have to recognize, if you sell your highest return on capital employed assets, plastics, and invest in new assets, you don't make the same return in the short term.

But we're confident of getting back into that range exactly as we have done before. There's -- you look at the forward projections, and we can absolutely see that, most certainly.

Okay. Can you give us a time line then, please, to get group return on capital employed back to your 12% to 15% range?

Yes, we've all -- we've talked about that being in the medium term. That's absolutely right.

We can't -- we don't -- COVID has come at us. We didn't know about that.

We're looking for a recovery in these markets. But look at the history, look at what's happened, that 14.7%, it was with all those other acquisitions in there.

It shows what we can do. You can see the synergies coming through.

It explained the program of improvement. I mean, look at how we're performing on the front line as well.

I've really -- these -- they're all in strategy, and it's purely a consequence of old and new and the goodwill there and the time for the synergies to come through, et cetera. That's all it is.

Okay. Miles, look, we're personal friends.

So I don't want to get personal things in the way of accountability. But one suggestion I'd make to you personally is when with the interim results in December.

Can you give us the returns analysis of recent M&A from Interstate, from EcoPaper, Europac, et cetera? Prove to us that you can deliver 12% to 15% returns on those acquisitions?

And if you're unwilling to do that, please don't do future M&A. Clearly, it is very worrying...

Justin, Justin, we set all this out.

4 to 5 years. Miles, the...

Justin, Justin, Justin, we have set that all out when we announced the acquisitions, it's all been there, you can't seriously expect us to make an acquisition that gives us a 15% return on capital in the first year, the acquisition. Justin, I don't understand what you're saying.

You are positive on recognizing that it's a lower return on capital in the first full year. So go back to the acquisition case, that is what we stand by, that is what we've always delivered in, and we will in the future.

It's all there already.

Just a couple of questions, just asking for some elaboration around comments you've made. When you talk about optimizing the paper manufacturing, if you could elaborate a little bit on that?

I'd be most grateful. Also, when you refer to service levels being the highest they've been, what's the measure there?

And finally, just a question around U.S. lockdowns reestablished.

Just if you could help us understand or me understand a bit more about your exposure to the south and western markets in the U.S.?

Yes. Look, on the paper manufacturing, I said we have about 80% -- or roughly about 80% of the paper we need is manufactured, and our target is to get that to 60%.

The way of getting there, we're really looking at getting around about 10% of our paper capacity out. We've completed that review of that work.

And indeed, we have -- we've been discussing with a number of parties about those assets. Actually prior to this whole sort of COVID, we're actually making quite reasonable progress.

But the COVID situation just in terms of getting people together in transactions, et cetera, it has just slowed it. But that is still our intention.

We know exactly what we want to do. We've got a good idea of where it's going to go to and it's about executing on that strategy.

When we talk about our customer service levels, we talk about on-time, in full delivery. You can see that the group performance has been improving steadily over the years.

And that's despite bringing in a number of acquisitions. In fact, all the acquisitions we've ever made have always had a lower customer service level than ours.

It's one of the reasons, that focus on that service, how we're able to grow and take share consistently. That's on time, in full, that's within the delivery window.

So some of our biggest customers, we could have a window to deliver within 0.5 hour. And at that measure, last year, we finished over 95%.

I have to say the Europac acquisition was -- we started with that. It was more in the sort of the early 80%.

That number is in there. And today, we're seeing our performance is up around about the 97%, something like that.

So it's the highest it's been. And that's sort of an industry that is on time in full.

That is if they order everything, they get exactly what they've ordered, not with the lowest turns up, and it could be a little bit short. So we are pleased that is recognized as an absolutely industry-leading standard.

If we look down into the U.S., we have had the various lockdowns. In terms of our business, it's sort of up and down the east.

It's up and down the East Coast. The issues that we've had are not so much around the individual states and being a part of it.

It's just being some of the customers. We focus in the food and drink area.

It's been very good for us. But as I said in my -- in the transcript, a number of these customers operating low-temperature environments, and that seems to have caused a spike in the instance of COVID in their workforce.

And once they get an outbreak, then they have basically been forced to close. Now we are seeing them coming back with increased hygiene standards, et cetera.

We've seen quite an improvement coming back in June. So that's really been that issue rather than being exposed to any particular southern states.

In fact, the Texas or the other ones we've heard, we don't have anything there.

To some extent, you partially answered this in your previous reply. But I was wondering with regards to your strategy to reduce your long paper position if it's something that we could see happening this fiscal year?

Or you see that more likely flat than later on. So there, if you could just tell us a little bit more about the -- what's the ideal time line and likely time line for, due to the consideration?

In terms of the actual paper assets, we certainly hope to get that completed as soon as possible. And certainly in this current year, we had hoped that it will be completed around about now, but it's just been -- it just has been delayed.

That's what we're looking for, obviously, subject to ongoing discussions.

Well, thank you very much, everybody, for your time in today's presentation. As I said, we're pleased with the performance from last year.

I think we're dealing with the COVID outbreak well. And we see some good medium-term opportunities for further growth and development of the group.

Thank you very much.