Hello, welcome to the DS Smith Q3 Trading Update. My name is Caroline, and I'll be your coordinator for today's event. Please note this call is being recorded, and for the duration of the call, your lines will be on listen-only mode. However, you'll have the opportunity to ask questions at the end of the call. This can be done by pressing star one on your telephone keypad to register your questions. If you require assistance at any point, please press star zero and you will be connected to an operator. I will now hand over the call to your host, Mr. Miles Roberts, Chief Executive Officer, to begin today's conference. Thank you. Good morning, everybody. Firstly, thank you for joining us today. I'm Miles Roberts, the group's chief executive, and I'm joined by Adrian Marsh, our CFO. Our statement today covers trading for the period since the first of November 2022. Firstly, I'd like to start by saying that despite the volatile macroeconomic environment, performance remains in line. I'm really very pleased with the financial performance of the business, with continued very strong profit growth and good cash generation. We did see some destocking in December and January from our customers that resulted in a weaker Q3 in terms of volume than we saw in H1. We have continued to take market share, really driven by our strategic focus on resilient sectors such as food and drink. Our largest customers in particular, continue to see the security of supply, our service, and our rate of innovation as absolutely critical, and our relationships are stronger and deeper as a result. This has meant that whilst volumes have been lower, this has been more than offset by resilient pricing, our robust and flexible supply chain, and ongoing cost management initiatives, driving further margin progression, strong profit growth, and an improvement on the return on capital. We continue to stay very close to our customers. We're in touch with their evolving needs, which I'm confident position us well for the remainder of this year, but also into the next financial year. Thank you. I'd now like to invite questions, which Adrian and myself will answer between us. Thank you very much. If you would like to ask a question, please signal by pressing star one on your telephone keypad. We will take the first question from line Lars from Credit Suisse. The line is open now. Please go ahead. Thank you and good morning. I just wanted to start a bit on volumes. Of course, your prior guidance suggested a bit of a less negative year-on-year comp for H2 versus H1. I mean, Q3 clearly was a weaker quarter than expected in volume terms, and that destocking element, of course, is a factor. If you can share any color now what you're seeing, how we should think about H2 volumes versus H1 and last year, also if you have any color to give on when you see an end to this destocking event, which is clearly weighing quite heavily on volume. The second question is relating to price over cost. Of course, some of the cost elements are now coming down. You know, OCC is clearly lower, energy costs and freight costs, et cetera. Wage costs are moving up, but when should we see, you know, some degree of top-line price erosion and, i.e., the price cost spread starting to narrow again after sort of an expansion we've seen over the last maybe six to 12 months? Those were my questions. Thank you. Yeah, thank you very much. You know, we've seen our volumes over the last couple of years being really very strong overall. There's no doubt that with the challenges to some supply chains, our customers have built some additional stock over the last couple of years just to ensure that their supply mainly into the retailers has remained very strong with high levels of service. You know, inevitably that sort of excess stock will come out, and really pretty much across the board over Christmas and New Year, we saw our customers, instead of perhaps closing for five days or six days, they would close for sort of seven days or eight days, and so you've got an extra couple of days in there of closure. Of course, two days in a month is actually 10% of production time. We have seen that, really over at the end of December and into January. Some of the numbers there in the closure are unusual. We haven't really seen that in the past, but of course, they are responding to what's been quite an unusual time. Our personal view is that the numbers that we've seen recently in volume will improve. That remains very much our view. Exactly when and how is obviously uncertain. But they will certainly improve. It's, you know, That's where, that's where we are. Indeed, that's very much what our customers are telling us. In terms of price and cost, in our Q3 average selling price was actually higher than our Q2 average selling price. We've actually continuously pricing moving up. I think there are a number of things in there, whilst the some of the input costs of things like OCC and energy have come down, that's all fed into the price of paper. Of course, on our index deals, we have not only indices for paper, it's also for other costs as well. Of course, those other costs have continued to go up. We've actually seen the pricing there improve. Therefore, it really depends what happens to the price of paper going forward. I mean, I wouldn't be surprised if some of the falls in paper, you know, they obviously offsetting the going against the increase in indices for other costs. Exactly how it develops, I mean, none of us know. I say I'm very pleased with the pricing. I think that does go to the heart of sort of the issue of what is our relationship with our customers in terms of what we've delivered for them over the last few years, in terms of service and the quality and the security, et cetera, but also what they're looking at going forward. With all the challenges that we face, whether it's on governance, whether it's on innovation, whether it's on sustainability, whatever it is, I think we're in a good place, and we have to continue to earn their trust and respect every day, and that's exactly what we're doing. Thank you. Just a quick follow-up, if I could. Just, you commented specifically about the couple of days, extra, December, January. Can you give any color at all what you've seen in February and the earliest dates of March? Any change to that de-stocking? Yeah. I don't have. I mean, you've got to be careful on the, you know, just looking at any one particular month because days and, you know, as they fall on weekends. We're still actually looking at the February data, but there's no doubt that at the start of February, it really started to come through quite quickly. You know, it was quite an improvement. I would really caution against, you know, looking at, you know, particular months or particular weeks et cetera. I mean, I think, you know, it is a bit bumpy. What is for sure is that it will improve. I mean, you know, we are in food and drink, and looking at the end consumption of consumers, that is much better than the, than the demand from our customers. That shows the de-stocking, and that shows it gives us the confidence that it will improve in the future. Consumers haven't reduced their consumption so much. It's a little bit bumpy, and exactly when and how is difficult to call. I think I'm gonna not give quite so much, you know, we can't give guidance on a monthly basis. Thank you. We will take the next question from line. David O'Brien from Goodbody. The line is open now. Please go ahead. Good morning. Thanks for all of that color to Lars' question. Could I just add to that? Q3, could you just quantify what the like-for-like volume performance was for us, just rather than trying to have us all guess it? Secondly, can you give a sense if there's any regional variations across that piece and how the US is performing as well versus Europe? Finally, you know, you're seeing paper prices come down, OCC prices down, energy's come off. Just wondering how working capital should perform in the second half of the year and what we should be thinking about for net debt as we head into year-end with only whatever it is, eight weeks to go. Absolutely. If I take the first two and then Adrian will talk about the working capital. When we look at our... You know, we don't sort of come in and looking at looking Q1 or the next. I think, you know, looking what other people have been sort of talking about, I don't think we're particularly out of line with, you know, sort of the general commentary. It is only, you know, a stretch, again, just over quite, you know, a short period and a few days of extra closure obviously has quite a sort of an effect, in terms of percentage, that the end consumption by the consumer is much better than what we saw in over Christmas and the New Year. When we look regionally, it's really been right across the estate, because those where are, you know, have a lot of customers that go right across the business. Again, it shows that there's sort of like some central decision-making. Now, markets that have been particularly poor for a while, you know, remain places like the U.K. for, you know, for well-known reasons, and also, places like Germany, again, for well-known reasons. It has been pretty much across the board. Again, this all goes to central decision, taking that out. Obviously we expect to see an improvement in the future. Adrian, would you like to take about working capital? Yeah. Thanks, Miles. I mean, fairly obviously, it's gonna be a little bit of an outflow in the second half now. I mean, we're in the fortunate position where our prices are holding, therefore our receivables balances are remaining pretty constant. Obviously, you know, our payables are getting lower. Yeah, I fully expect an outflow in the second half. I think, you know, from a net debt perspective, you know, we're in a very, very good place. You know, compared to previous years, you know, our leverage will be well within our targets. You know, I'm not concerned on that front. Obviously, you know, it goes without saying that there will be a working capital squeeze at the moment because of the dynamics that we've highlighted with sales prices remaining strong and cost base is coming off. Thank you. We will take the next question from line. Cole Hathorn from Jefferies. The line is open now. Please go ahead. Well, thanks for taking my question. I'd just like to follow up on kind of the theme of industry supply chains. I mean, you're obviously calling out de-stocking by your customers in products, and I imagine everyone's adapting their supply chains for, you know, what should be the appropriate level of inventories to hold going forward. But can you give some color on how DS Smith's managing its inventories and kind of how you're helping the customers with their supply chain? Secondly, how you're optimizing your kind of box plants and paper production? You know, are you, with your short paper position, does it enable you to kind of reduce your purchases from the market, kinda keep your mills running a bit fuller? You know, are you taking any kind of some commercial downtimes to kind of match your supply to demand? Any color on that would be helpful. Look, as I said about staying close to our customers, and I think that's, you know, we're pleased with how we performed there. Obviously our customers are coming to us. We tend to produce for demand. We don't run a stock model ourselves. As customers demand less, then we produce less. We're not gonna have sort of, you know, we don't start building up unnecessary stocks and things like that. That does mean we have to be flexible. When we look at, As you know, we produce less paper than that's used in packaging. As the packaging demand comes down, we just buy less paper. It's one of the reasons, you know, we really like this model. We're really able to adapt to our customers' needs, by flexing our supply chain. I think it gives us a, you know, very resilient, position. Of course we have been doing that. We've also have taken some downtime in our paper mills. It's, you know, inevitably there is, there's been some work, so some downtime there. Again, what we tend to do, because we've got this flexibility with our supply chain, we tend to take some extended, shuts when we are closing for things like Christmas or indeed for maintenance shuts. We'll extend them and just sort of bring forward some other maintenance and other work. On the, on the box plants, there again, it's back to the agreements that we have with, you know, on a country by country basis. Often, you know, we have things like annualized hours, so if we're not working so much, then we bank the hours of our staff that we can call back at a later point. Indeed, in some cases it's about, taking of holiday. We do obviously have temporary staff as well, and we can start to flex there. We have seen a, I think a good response in our production, costs. We try to call that out in this statement when we refer to, you know, our, just our, you know, strength of our supply chain, just how it's been, how it's just adapted to this, different environment. As I said earlier, I think it really is over Christmas and New Year, and we fully expect volumes to recover as we go into 2023. Thank you. We will take the next question from line. Detlef Winckelmann from J.P. Morgan. The line is open now. Please go ahead. Morning, everyone. Maybe just quickly on the volumes again. Obviously when you gave your update early December, de-stocking hadn't really occurred yet, so it would have been hard to take that into expectations. I just wanna find out, if we were to exclude the de-stocking effect, would you say that the volumes have performed in line with your expectations? Yes, I would. Thank you. We will take the next question from line. Kevin Fogarty from Numis. The line is open now. Please go ahead. Morning, everyone, thanks for the call. Just to come back on volumes again, just in terms of the dynamics, I guess you're seeing just by sector, is there a destocking, largely kind of industrial or are you seeing that in the FMCG space? I know you've mentioned kind of retail perhaps as an example, but just any sort of granularity on where that's being felt. Your point of sort of market share gain during the period, I just wondered if you could sort of say a little bit about that in terms of where you've been successful and perhaps why. Secondly, just in terms of your margin guidance previously, obviously at the half year stage, you pointed to the coming in the 10%-12% kinda range by the end of the fiscal year. Just given the dynamics you've seen during Q3, I just wondered if you're kinda any more positive or negative on where you might land within that range. You know, what does the recent few months or so tell you? Absolutely. Thank you. If I take the first then, Adrian, if you'd like to come in on the margin guidance and perhaps also on the return on capital. In terms of the sectors, you know, when we've looked over the last quarter, see leading into it from the first half, where we saw most volatility or most reduction was in things like the industrial sector. There's no doubt in countries like Germany, you know, they've lost a significant export market for them in terms of industrial production, which has been into Russia. Also with the closure, the difficulties in China, again, that those export markets have been more challenging. Therefore, we did see particular weakness out there. Our big sectors where we focus, you know, in food and drink, particularly primary food, that's where we've seen some of the destocking. It is not, it's not in sort of the holding of our packaging, it is in the finished goods of our customers. As I say, when we look at the retailers, the retailer results are much better than the destocking. I said, it's not surprising as, you know, a number of our customers just adapted to, I think, just bring down their holding stock because they probably see that the supply chain is perhaps a little bit more robust than they were during the COVID period. Now, because of our focus in sectors that have, you know, been particularly resilient over many, many years, that has given us a natural market share gain. In addition to that, when we look at the proportion of the business that we have with our customers, we've seen that growth, you know, over many years, but particularly over the last two years. That has been supported with some really quite, you know, really very encouraging contractual wins with a number of customers. We come back to why, you know, what are they after? What are they asking us for? And the, and the, the challenge and their desire on this, on this security so they can take out their stock, plays to the strength of our business model in terms of the number of factories and the spread in our supply chain. How are we gonna meet their future requirements in terms of new product development? The whole environmental debate, you know, the 1.5°C science-based target, this is getting a lot of attention and we're making a lot of good progress. That's why I think, you know, our share has improved again. We can see it quite clearly. Adrian, do you wanna talk about the margin guidance and perhaps returns? Yeah. Yeah. Yeah. Thanks, Miles. In terms of margin, I mean we said we're on an improving trend. You know, that's continued. We've obviously, as Miles was describing earlier, with utilizing some of our own capacity and being flexible on what we buy and what we don't buy in the market, you know, we've had a bit of a reduction in the gross-up effect, which I've described at length in the past. We're on a very strong margin progression at the moment, you know, and comfortably in our range and it's on a positive trajectory. return on capital is as you know, from when we talked about it before, the measure and the metric that we really look at, strongly and that's extremely positive. there's nothing really that I can say. We've had a very good performance in line with what you saw in the first half and what we've described before. I'm, you know, I'm very comfortable about our financial metrics. Thank you. Thank you. We will take the next question from line, Andrew Jones from UBS. The line is open now. Please go ahead. Hi, gents. Just a few questions just on pricing and also just back to the old energy cost issue. How are you seeing the lag now between sort of test liner prices and how it translates into boxes? you know, if we assume now we've got testliner prices, you know, as we see them today, with that lag, what would you expect that to do to box price on average by the end of your financial year and maybe by the end of the Q1 of the next financial year? you know much course that you have there. just secondly, on the energy costs question, you've obviously locked up, you know, your pricing for this year, so you know that. you know, where are we on next year's pricing? I think you were at 80% hedge last time you spoke. Given the pricing that was done at, you know, what sort of cost inflation are you expecting on the energy side if gas prices stay at this sort of level? Thank you. If I take the pricing and Adrian, if you're happy talking about the energy, in terms of the pricing, all I can really say is that, you know, our Q3 pricing average box price was better than Q2, and I think that we're surprised that took that was a surprise to people. That is a consequence, I think, of our increasing value add and also these other indices we put in there. In terms of the specific industry for paper, I mean, it's that is, that will come through, you know, in the normal, in the normal course. There's a little bit in January, in the next indexation. They tend to run it in sort of three, four months. You know, ultimately, that price of paper, as we pay less for the paper we're buying, that is passed back on the index deals to our customers. The other half That's half our contractor are indexed, the other half are non-indexed. You know, as we say, our overall pricing has remained very strong. Adrian, energy. yeah. We've talked obviously a lot about energy in the past. You know, we, our risk management is exactly that. You know, we're trying to smooth between years, you know, one of our most significant costs. You know, I expect again a sort of a smooth transition between this year and next year. You know, we've been in a fortunate position. We have sort of long-term hedging in place. We, you know, it's about our risk management. You know, I don't foresee any significant changes, particularly year- on- year. I mean, where the market is at now, you know, is at a level, you know, we're very comfortable with within our risk management. If it spikes again, you know, we're well protected. No, I think it's, I've been very, very pleased with how we've managed such an extremely volatile part of our cost base. It's a three-year rolling program. It gives us what we desire, which is, as I say, a certainty and a, and a smoothness, to our results. Nothing really to add on that. Edge levels, you're right, it's about 80%. We haven't changed that. In terms of our derivative position, which we talked about in the past, you know, we're very comfortable with that. That's now closer to, the money rather than significantly in the money, which it was before, which is, no great surprise there. It's all about risk management, and we've been very successful on that. Very happy with that position. Thank you. Thank you. We will take the next question from line, James Twyman from Prescient. The line is open now. Please go ahead. Yes, thank you very much for the call. I did miss some of the call. Did you mention what the light volume decline was in Q3? Secondly, the sharp fall in paper prices that we've seen, is that continuing in March? At the end of the day, what is the impact on you of that, given that you are a net buyer of paper? Thank you. We haven't given the guidance for Q3 other than to say that we did see a destocking over a particular period over Christmas and the New Year and some sort of a general industry commentary that's been out there. I mean, we're not over that short period. We're not, you know, we're sort of broadly consistent with that. In terms of paper prices, you're right, they've fallen. As you know, we buy paper, a lot of paper, so the price falls, we just obviously pay less for that paper, and then the indices change to our customers. We obviously pass that through. Our pricing has been falling. We'll wait to see what happens in March, but I wouldn't be surprised if March was a bit lower than February. We'll have to wait and see. I think when you look at the reduction in price of paper, reduction in energy, reduction in starch, reduction in OCC, you know, you can see the lower input costs, you know, really obviously partly mitigating that the lower price of paper. Thank you. Thank you. We will take the next question from line, Justin Jordan from Davy. The line is open now. Please go ahead. Thank you. I've got two quick questions, gentlemen. You talked about, I think it was bumpy, was the phrase you used, box demand in December and January. I'm just wondering if you can give us a little bit more color geographically between, let's say, Southern Europe, Northern Europe and U.S., and clearly any more color you can give us beyond January 2023. Secondly, just on sort of the foreign technical thing and FX, you had a modest FX tailwind in the first six months. Am I right in thinking that should be slightly bigger in the second six months given the weakness we've seen of sterling versus both the euro and the US dollar in recent weeks and months? Thank you. If I take the first mate, and you come on the FX, sir. Look, in terms of the volumes, I mean, it's very difficult sort of getting into, you know, almost sort of weekly basis. We did see really. It actually wasn't even really before Christmas. It was actually some of the our customers that their factories stayed closed for longer into January. This piece is where the effect was. If normally in January, they'd have opened the fifth or something like that, is they've moved to the seventh, well, you've missed two days, and two days on 20 days in the month is obviously 10% just in terms of a in terms of that volume. In terms of regionally, you know, Northern Europe, because the UK and Germany, where I think, you know, there are some other, there are some other issues there. You know, Germany and the export markets and the manufacturing in the UK because, you know, the UK economy is in a particularly challenged place for all the reasons that we know about. You could say Eastern Europe was a little bit stronger. Southern Europe was therefore a little bit stronger during that period. I said earlier, I mean, I've, you know, I'm always very cautious to start, you know, talking about individual months, but, you know. We did start better. I think we are gonna just continue to see some volatility, but it will recover. That's what our customers are telling us. It makes absolute sense. We're in fact we're seeing it in the final consumption by the consumer when we look at all of the sort of the counter data, et cetera, there, we can see the resilience in those sectors. Adrian, on FX? Yeah. Justin, you're absolutely right. FX is a continuing tailwind for us in the second half. There will be a slight improvement on actual when you take the translation into account. Absolutely. Thanks. Thank you. We will take the last question from line Brian Morgan from Morgan Stanley. The line is open now. Please go ahead. Hi. Thanks, guys. Just two questions from my side. Just follow up on the energy question. You guided previously about GBP 100 million higher energy cost in FY2023. Do you have a similar number or a guidance for FY2024? That's the first one. The second one, could you just give us a little bit of commentary around OCC, where you see in the market, particularly interested in if you think that current prices is high enough to incentivize collectors to continue collecting. Adrian, do you want to take the? Yeah. I'll do the first one. On energy, no, we're not giving any guidance for next year yet. It all depends where we see all of our production and what our consumption is gonna be. At this stage, I would just go with, you know, what I said earlier that I don't, I'm not anticipating significant changes year- on- year because of the smoothing effect of our hedging. Thank you. Look, and on OCC, with the reduction in the production of paper in, across Europe and the lower volumes, we're seeing the OCC stocks, on an industry basis obviously, increase. If eight months ago, they were sort of eight days, something like that, they've gone up to more like, you know, 11 or 12 days, and that has had an effect on price. Pricing's actually been reasonably stable for the last few months. Interestingly, we have seen more interest in some of the export markets, that particularly affect places, you know, places like Italy and the UK. We've seen the export market a little bit stronger. That's sort of supported the price. At the moment, it is, it's relatively stable, which is obviously, you know, typically, less than half of where it was, back last, back in last summer. Look, I'd just like to say to everybody, I think that's our last question. Thank you very much for your time. We are overall very pleased with our progress. Trading remains very much in line with our expectations with strong profit growth and strong improvements in our, on our overall financial metrics. Thank you very much for your time. Thank you. 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