ds-smith-report 14.pdf

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DELIVERING

M REANNUAL REPORT AND ACCOUNTS 2014


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DELIVERING M REOnce we were packaging manufacturers withadditional businesses in paper, plastic and recycling.Today we are bringing our thinking together toform one unified company, focused ondelivering more with less.

TABLE OF CONTENTS

Strategic Report

1 Chairman’s Statement2 Our Business Model6 Our Supply Cycle10 Our Strategy12 Key Performance Indicators14 Chief Executive’s Review17 Operating Review20 Financial Review25 Sustainability28 Environment31 Employees34 Principal Risks

Governance38 Introduction to Corporate Governance40 Board of Directors and Company Secretary42 Directors’ Governance Report

50 Directors’ Responsibilities Statement51 Audit Committee Report56 Nomination Committee Report58 Directors‘ Remuneration Report

60 Policy66 2013/14 Annual Remuneration Report

Financial Statements

75 Independent Auditor’s Report

79 Consolidated Financial Statementsand Notes123 Company Balance Sheet and Notes128 Five-Year Financial Summary

Explore our website www.dssmith.com

p02OUR BUSINESS

MODEL

Delivering

value

p10OUR STRATEGY

Delivering

growth

p06OUR SUPPLY CYCLE

Deliveringmore than a box


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At a glance

DS Smith is a leading provider of corrugatedpackaging in Europe and of specialist plasticpackaging worldwide. We operate across 25countries and employ around 21,500 people.

In order to support our corrugatedpackaging operations, we have a recyclingbusiness that collects used paper andcorrugated cardboard, from which ourpaper manufacturing facilities makethe recycled paper used in corrugatedpackaging. We also design andmanufacture certain types ofplastic packaging.

Our story can be traced back to thebox-making businesses started in the1940s by the Smith brothers in eastLondon. Since then, the Group has grownorganically and through a series ofacquisitions, including Otor in 2010, andSCA Packaging in 2012.

Our customers want broader reachingsolutions to their packaging needs;innovation and processes that will helpthem reduce waste, cost and complexityfrom their supply chains. By using our

KEY FINANCIAL HIGHLIGHTS

Operating prot (£m)1 Return on average

capital employed (%)1

expertise from design to production andsupply to recycling, we can offer highquality, environmentally friendly,innovative solutions and great servicethat looks at the whole of our customers’packaging needs, not just one part.

We call this 'Supply Cycle Thinking'.It is a unified approach to removecomplexity from, and simplify, ourcustomers’ supply chains.

OUR VALUESBe caring

We take pride in what we do and careabout our customers, our people andthe world around us.

Be challenging

We are not afraid to challenge eachother and ourselves constructivelyto find a better way forward.

Be trusted

We can always be trusted to deliveron our promises.

Be responsive

We seek new ideas and understandingand are quick to react to opportunities.

Be tenacious

We get things done.

£307m 13.0%

307

249

141

12/13(2) 13/1411/12(2)

13.012.212.0

12/13(2) 13/1411/12(2)(3)

Earnings per share (p)1

21.4p

21.4

17.1

12.5

12/13(2) 13/1411/12(2)

Balance of our combined businesses

(million tonnes)

Corrugated packaging is our primary output:

5.4

2.2

3.0

Fibre sourcing/Recycling

CorrugatedPapermanufacture

CorrugatedPackaging


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£4,035mRevenue 2013/14

Oversix billioncorrugated boxessold in 2013/14

Over700 millionplastic taps andfitments sold in2013/14

See page 17 for our Operating review.

UNITED KINGDOM

In the UK we have31 corrugatedmanufacturing sites ,13 recycling depots,one large and one smallpaper mill. We are the

largest supplier ofcorrugated packagingin this market.

WESTERN EUROPE

France, Belgium,

Netherlands, Spain

In this region wehave 33 corrugatedmanufacturing sites,one recycling depotand one large and threesmall paper mills. Weare the second largestcorrugated supplier inFrance and Netherlands.

PLASTICS

Our plastics businesscomprises a exiblepackaging anddispensing business,which is global, and areturnable transit

packaging business,which is based inEurope. We have 26manufacturing sites inthe US, Europe, Turkey,Israel, Thailand andNew Zealand.

CENTRAL EUROPE

AND ITALY

Poland, Czech

Republic, Romania,

Hungary, Slovakia,

Latvia, Lithuania,

Estonia, Italy

In this region weoperate 53 corrugatedmanufacturing sitesand one paper mill,which is in Italy. We arethe largest supplier ofcorrugated packaging inItaly, the second largestmarket for corrugatedin Europe.

DACH AND

NORTHERN EUROPE

Germany, Austria,

Switzerland,

Denmark, Sweden,

Finland, Norway

In this region weoperate 46 corrugatedmanufacturing sites andtwo large paper mills.

We also have joint ventures and associate operations in Spain, Greece, Russia, Turkey and Ukraine, in aggregate totalling 18 sites.


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Chairman’s Statement

“A YEAR OF DELIVERY.”

I am very pleased to report that 2013/14 hasbeen another successful year for DS Smith,with the management team deliveringmarket share gains, and significant profit

and earnings per share growth. This hasbeen achieved despite the economicsituation across Europe as a wholeremaining challenging. I am particularlyproud of the way that previous acquisitionsare now fully integrated and the Groupnow moves forward as a unitedorganisation. The re-positioning under asingle and updated DS Smith brand hashelped to underline that transformation.

GOVERNANCE

As announced last year, in September 2013,Adrian Marsh joined the Board as GroupFinance Director, having previouslyundertaken a range of senior finance

roles at Tesco PLC, Astra Zeneca plc andPilkington plc. These are his first set ofresults at DS Smith and his breadth ofexperience, internationally and in retailand manufacturing, is making a positiveimpact across the business.

At the Board level, we have continued torenew our Board to ensure that managementhave the support and challenge needed fora company of our size. Chris Bunker andPhilippe Mellier have both retired from theBoard, as planned, in September 2013 and

February 2014 respectively. I am delightedto welcome Ian Griffiths and Louise Smalleyto the Board, who both joined on 23 June2014. Ian is Finance Director of ITV Plc, thecommercial TV producer and broadcaster.Louise is on the board of Whitbread PLC,the leisure business, as HR Director.

DIVIDEND

The Board considers the dividend to bean important component of shareholderreturns and as such, has a policy to deliver

a progressive dividend, where dividendcover is between 2.0 and 2.5 times throughthe cycle. For the year 2013/14, the Boardrecommends a final dividend of 6.8 pence,which together with the interim dividendof 3.2 pence per share gives a totaldividend for the year of 10.0 pence pershare (2012/13: 8.0 pence per share).This represents an increase of 25 per centon the prior year and a cover of 2.1 timesin relation to adjusted1 earnings per share,in line with our policy.

While the year-on-year dividend is

important, I am particularly pleased whenI look at the total returns delivered toshareholders over the last five years.Total shareholder return is a measurethat combines the benefit of dividendswith share price growth. Taking a fiveyear view, an investment in DS Smith hasoutperformed the FTSE 250 on thismeasure, by over four times.

LOOKING AHEAD

As always, on behalf of the Board, I wouldlike to thank all my colleagues throughoutDS Smith for their relentless hard work,

delivering on their commitments, whichhas combined to produce these excellentresults. We continue to invest in ourbusiness and are confident in theprospects for DS Smith.

Gareth Davis

Chairman

Total shareholder return* Dividend per share

10.0p2013: 8.0p

* This graph shows the value, at 30 April 2014, of£100 invested in DS Smith over the last five financialyears compared with that of £100 invested in theFTSE 250 Index.

DS Smith FTSE 250 Index

+542%

+131%

Source: Thomson Reuters

2009 2010 2011 2012 2013 2014

100

200

300

400

500

600

700

1 Before amortisation and exceptional items.


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2 Strategic Report

Annual Report & Accounts 2014

Delivering value by bringing ourpackaging, paper, recycling andplastics operations together,

letting us see the bigger picture.Our business model is simple –we design and manufacturecorrugated packaging. In orderto support that model, we havea recycling business that collectsused paper and corrugated

cardboard, from which our papermanufacturing facilities make therecycled paper used in corrugatedpackaging. We also design andmanufacture certain types ofplastic packaging, in particular,the plastic bags and taps forbag-in-box packaging and rigidcrates for bottled liquids.

Our Business Model

Balance of our combined businesses(million tonnes)

5.4

2.2

3.0

Fibre sourcing/Recycling

CorrugatedPapermanufacture

CorrugatedPackaging


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OUR BUSINESS MODEL

PAPERPACKAGING

RECYCLING

PLASTICS

CUSTOMER

SUPPLY

CYCLE

See page 4 for an in-depth look

into our business model.

See page 6 for more aboutour Supply Cycle.

.

View our ‘Supply Cycle Thinking’

at www.dssmith.com/company/who-we-are/supply-cycle-strategists


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4 Strategic Report


Our Business Model continued

We work to leverage our scale and geographic footprint to supply our customers with the innovativeproducts they need, with a level of service and quality that they demand, to optimise the efficiency

of their supply chains.

RECYCLING

The collection of old corrugated card (OCC) is partof the waste and recycling industry. In the UK,7.9 million tonnes of used fibre are collectedannually (Source: CPI), of which DS Smith handlesc. 3.1 million tonnes, the largest participant in thispart of the market. In Europe the market size forused fibre is 57 million tonnes (Source: CEPI) ofwhich DS Smith handles 5.4 million tonnes. OCCis traded within Europe and exported around theworld. OCC makes up approximately half of thetotal market volumes for used fibre.

DS Smith’s recycling business sources used paper and OCC directfrom retailers and also from traders. It is primarily used by ourown paper mills to make recycled paper, with the remainder soldto other paper manufacturers or traders. For some recyclingcustomers, we extend our service by also collecting other usedproducts (e.g. glass or food waste) and recycle them inpartnership with subcontractors.

DS Smith is different to other recyclate collectors because wedo not operate landfill sites – we are solely focused on recycling.

PAPER

The European market for corrugated case material(CCM) is c. 26 million tonnes per annum (Source:CEPI) of which 21 million tonnes is testliner (CCMfrom recycled material) and the remainder isprincipally kraftliner (CCM from virgin fibre).DS Smith manufactures 2.2 million tonnes oftestliner per annum. Paper is readily transportableand is traded globally.

DS Smith manufactures recycled paper, primarily CCM whichis the paper grade used to make corrugated board. We alsomanufacture c. 360 thousand tonnes of other paper grades suchas core board and plasterboard liner, which are sold externally.The majority of the recycled CCM we make is used by ourpackaging manufacturing operations with some sold externally.

PACKAGING

The European market for corrugated packaging is22 million tonnes (Source: FEFCO 2012). Germany isthe largest market, at c. 21 per cent of the Europeantotal, followed by Italy, France, Spain and the UK.The market for corrugated packaging is fragmentedwith a large number of local suppliers. Due to the

bulky nature of corrugated packaging and thecustomer requirements for short lead times, it istypically transported no further than 200km.

DS Smith designs and manufactures corrugated packaging forcustomers across Europe. In a fragmented industry, we are ableto offer our customers a pan-European solution for their packagingneeds using our network of 163 manufacturing sites across20 countries. We also have the scale to invest in research anddevelopment, and to support a network of 15 design centres plus

three innovation centres, which we expect to expand to at least 30design centres and 10 innovation centres over the next two years.

PLASTICS

The plastic packaging market is highly fragmented,comprising numerous niche plastic packagingproducts. In our core business of Flexible Packagingand Dispensing we have a particularly strongposition in the US. Plastic packaging is readilytransportable and has a global market.

Our Plastics business comprises two separate businesses:

Flexible Packaging and DispensingWe design and manufacture plastic bags and taps/fitments foruse in bag-in-box packaging for liquids. Our products are usedfor the transportation of beverages, concentrates, chemicalsand pharmaceuticals. Bag-in-box packaging ranges fromindustrial containers, units for dispensing in a retail outlet,to units designed to be purchased by the end consumer.

We also have a modified atmosphere packaging business fortransporting fresh food produce.

Rigid Packaging We design and manufacture a range of rigid plastic packagingtypically used for the transit of beverages, healthcare products,automotive products and in retail. This business is largely basedin Europe.

MARKET CONTEXT OUR BUSINESS


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We add value to our customers by helping them to improve their recycling rates and maximisethe revenue they receive by maintaining clean and well segregated used paper, board and otherrecyclates. This then assists our customers achieve their environmental goals. We make ourprofit through the efficiency and scale of our fibre sourcing operations and value added serviceswe provide to our customers.

In addition to sourcing paper fibre, the Recycling business is important to our Packaging businessbecause it gives us a direct point of contact with retailers, who set the requirements for thepackaging of the products they sell.

Operating inthe UK, France, Germany,Benelux, Poland andCzech Republic

c. 600 employees

We seek to integrate our paper manufacturing operations with our packaging operations asmuch as practicable. We are therefore investing in recycled paper best suited for high qualityrecycled packaging, such as white-top and light-weight CCM grades. Nearly half of our recycledCCM produced is either light-weight, high performance or white-top grades, and production ofvalue-adding grades has increased by 35 per cent versus the prior year. By using this type ofpaper, in combination with design changes, we are able to reduce the amount of virgin fibreused in our corrugated products.

5 major millsin the UK, Netherlands,Germany and Italy

c. 2,000 employees

Good packaging is more than just a box. We work with our customers, analysing every point intheir supply chain touched by packaging. We look at each stage and consider how to maximisethe value for our customer through the design of the packaging. We then manufacture anddeliver the packaging with high quality and service leading standards.

Our customers are principally fast-moving consumer goods companies, who require packaging for

the grocery goods supplied to supermarkets across Europe. We also serve the industrials market,for example, supplying packaging for the transportation of car parts, or for wholesale quantitiesof chemicals.

The customer then sells its product to the retailer, delivered in our packaging. The product isthen either unpacked on to t he retailers shelf immediately, and the packaging recycled, or thepackaging is converted to its retail-ready form on the shelf.

We have a presence in

20 countries and

163manufacturing

sitesc. 16,700employees

Specialist plastic packaging applications are developed in collaboration with our customersand can include significant intellectual property. We own hundreds of patents covering ourplastics products. Where we have a design that fulfils a customer’s particular requirement,we can then roll out across wide geographic areas from our existing manufacturing sites asthe product is easily transported.

26 manufacturing sites 14 countriesc. 2,200employees

HOW WE CREATE VALUE


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6 Strategic Report


Delivering more than a box. Our Supply Cycle touches everypart of our customers’ operations.

Consumer

Recycling

DS Smith

Manufacturer

Logisticsprovider

Regionaldistribution

centres

Shop

PRODUCTSUPPLYCYCLE

Our Supply Cycle

Delivering more...

transport cost

reductions

1

Delivering more...

faster packing

lines

2

Delivering more…

cost savings

3Delivering more…

sales

4

Delivering more…

recycling

5

‘Supply chain’ only tells halfthe story and misses the biggerpicture. For everything that goesone way in the chain, somethingmoves the other way too. It’sa Supply Cycle.


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WE ARE SUPPLY CYCLE

STRATEGISTS

We’re driven by anticipating and solvingour customers’ problems. By using ourexpertise from design to production andsupply to recycling, we can offer highquality, innovative solutions and greatservice that looks at the whole of theirpackaging needs, not just one part.

1Delivering more...transport costreductionsOur customers are looking to DS Smith to suppor t them inreducing freight costs within their increasingly global andcomplex supply cycles. We have developed a packagingmodule for one of the top 10 global automotive part smanufacturers which generates substantial supply chaincost savings. The solution eliminates staples and strappingoperations, reducing injury risks and labour costs, whilstalso reducing recycling costs with a single material design.However, the biggest saving is in transportation costs, withour customer shipping c. 200,000 modules per year fromEurope to Brazil. The packaging solution offers freightsavings amounting to c. 15 per cent of their annual shipmentcosts, with 76 thousand tonnes of packaging materials no

longer being shipped across oceans, and our customer’s CO2 footprint improved at the same time.

15%

saving inshippingcosts

We call this Supply Cycle Thinking.It is a unified approach for every areaof our business. It makes our customers’lives easier by creating simplicity inotherwise complicated supply chains.


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Our Supply Cycle continued

2 Delivering more...faster packing linesThe point at which a box is filled with the primaryproduct on our customers' packing lines can slow upthe packing line process. We have patented technologythat means that our customers’ packing lines run fasterand with fewer breakdowns. One of our largestcustomers finds that this delivers them such benefit s,we now license this technology to manufacturers inthe US and Japan, where we do not operate, so thatour customer benefits globally.

3 Delivering more...cost savingsWe look at the whole supply chain. Onecustomer, Nestlé, was looking for savingsin relation to its display packaging unit fortheir Purina cat-food range. One point ofexpense was co-packing, where the packscoming from the factory were beingmanually unpacked and re-assembled intothe display for the retailer. Working withNestlé, we helped them re-design thepackaging so that the whole process wasautomated. In doing so, our customerachieved savings worth approximately50 per cent of their expenditure on thistype of packaging.

20% fasterpackinglineswith DS Smith technology



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4Delivering more...salesRetail-ready packaging is packaging that serves a dualpurpose, both protecting the product during transportation,then transforming into part of the consumer display at thepoint of sale at the retailer. This saves the retailer time andreduces their costs as the products slide directly onto theshelf rather than requiring unloading and stacking.

Advanced retail-ready packaging may also feature “selfmerchandising” mechanisms that push product to the frontof the display, which are shown to improve the rate of sales.Once used, retailers then collect the corrugated packagingused in store which can then be recycled.

5 Delivering more...recyclingIn Poland, Tesco uses its logistics network to return usedcardboard from stores to their distribution centres, whereDS Smith have installed balers to facilitate the collectionof baled material to be delivered into DS Smith Paper millsin Germany and local Polish partner mills. This has resultedin 67 per cent of cardboard being sent direct to the mill.

Similarly, in the Czech Republic DS Smith worked withTesco to improve the efficiency of used cardboardcollection, using the retailer’s own delivery vehicles totake recyclate to its purpose built recycling facility.Since October 2013 over 83 per cent of cardboardcollected has gone direct to mill.

By joining up processes and adopting DS Smith’sSupply Cycle Thinking, this has resulted in asignificant uplift in income from waste acrossTesco’s estate in Poland and Czech Republic.

5.4 milliontonnes recovered fibrehandled by DS Smith perannum

#1packagingsupplier toNestlé 2013

2.2%

volumegrowthin corrugated boxsales 2013/14


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Our Strategy

Delivering growth throughoffering great service, quality,innovation and environmental

solutions to our customers.Building a sustainable businessmodel to deliver sustainablereturns is core to our strategy –what do we mean by this?

A sustainable business is one thatconsistently delivers returns on capitalabove its cost of capital year-in, year-out.That is why return on average capitalemployed (ROACE) is our most importantkey performance indicator. ROACE abovethe cost of capital means that a businessis able to pay for its capital expenditure,service its debt and deliver acceptablereturns to equity providers. If ROACE fallsbeneath the cost of capital then, medium-term, there will be pressure on these areasand the business would not be sustainable.In a capital-intensive business such as themanufacture of paper and packaging,return on capital is, therefore, key.

What does that mean in practice? First, we

focus on where we have the opportunityto deliver good returns on capital. Second,we focus on businesses where the returnsare consistent – because it is not enoughto deliver on our targets some yearsand not others.

Our Recycling, Packaging and Plasticsbusinesses deliver higher returns on capitalon a more consistent basis compared to themanufacture of paper and, therefore, it ispart of our strategy to be a net purchaser ofpaper rather than a fully integrated operator.

Within our packaging business, we focusin particular on fast-moving consumergoods (FMCG) customers – businessesthat produce everyday consumer goodssuch as food, drink and household products.The demand for these products is relativelyconsistent, even in difficult economic times,which means that the demand for packagingfor these products is also steady. It is astrategic aim to increase our proportionof revenue from FMCG customers in themedium-term.

By focusing on our strategic goals, as setout in more detail on the following pages,we are confident we will build a successfuland sustainable business.

Miles Roberts

Group Chief Executive

Miles Roberts



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See pages 12-13 to see how we measure our performance against each of our strategic goals.

Germany,Central& EasternEurope

We expect these regions to delivervolume growth in excess of the Groupgrowth rate by organic growth, drivenby the opportunity to serve customerson a pan-European basis and, in thecase of Central and Eastern Europe,strong market growth.

Pan-Europeanand FMCGcustomers

We plan to grow our revenues frompan-European customers and fromFMCG customers. We expect to growwith our pan-European customers, whoare predominantly FMCG businesses,by expanding our service to thesecustomers across their European base,with consistent high standards ofservice, quality and innovation.

Service andproductinnovation

We invest significantly in research anddevelopment, with substantial furtherinvestment at the product design anddevelopment level which takes placethroughout the business. We areinvesting in our network of designcentres, where our packaging technicianswork with customers to design packaging,using our technical database of designsin conjunction with retail simulation tools.We are extending our network of designcentres from 15 to 30 and impact and

innovation centres, from three to 10,by the end of 2015.

OUR VISION

To become the leader in recycled packaging for consumer goods.

OUR STRATEGIC GOALS

To delight ourcustomers by:

• Delivering on all ourcommitments

• Further improving ourquality standards

• Driving innovation

• Building industry-leadingcustomer services

To lead the wayin recycling by:

• Building sustainabilityinto our decisions

• Growing our recyclingplatform across Europe

To deliver consistentshareholder value by:

• Winning market shareand expanding intonew markets

• Building a resilient andsustainable business model

To realise thepotential of ourpeople by:

• Creating a place wherepeople are proud to workand give their best

• Building a common culture

• Ensuring the safety of all

STRATEGIC GROWTH AREAS


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To delight ourcustomers

To realise the potentialof our people To deliver consistent shareholder value

On-time, in-full delivery Acc ident Fr equency Ra te

(AFR)

Like-for-like corrugated

volume growth

Return on sales

1 Not pro forma therefore does notinclude a full 12 month contributionfrom SCA Packaging.

Weighted GDP+1% target. 1 Restated for IAS 19 (Revised 2011).

2 Pro forma for SCA Packaging acquisition.

Target

97%DenitionProportion of orders fulfilled on-time,in-full, across all businesses.

Why is it a KPI?This measures our commitmentto high standards of service tocustomers. It is part of our aimto provide “more than a box”.

PerformanceService levels have remained relativelyat year-on-year. Quality, measured bydefects parts per million, has improvedby 19 per cent. We are committed tocontinuing improvement in our serviceand quality.

Target

NilDenitionThe number of lost time accidentsper million hours worked.

Why is it a KPI?Safety is our highest priorit y. We aimto provide employees with a safe,productive and rewarding workplace.

PerformanceWe are very pleased to have reducedAFR by a furt her 22 per cent this year.Any accident is one too many, and weare pleased that 70 per cent of oursites had no lost time accidents inthe year. We continue to strive toachieve our target of no accidents,across the entire Group.

Target

GDP+1%DenitionVolume of corrugated box products sold(excluding the effect of acquisitions anddisposals) measured by area.

Why is it a KPI?We target volume growth above GDPbecause we expect the market tofavour recycled packaging andbecause we aim to win market shareby delivering value to our customersacross their supply chain.

PerformanceFor 2013/14, GDP for our regions,weighted by our sales in thoseregions, is estimated at 0.9 per cent(Source: Eurostat).

Volume growth in 2013/14 hasexceeded our target of GDP+1 percent, driven particularly by growth inGermany and eastern Europe, bothareas identified as strategic priorities.

Target

7-9%DenitionEarnings before interest, tax,amortisation and exceptional itemsas a percentage of revenue.

Why is it a KPI?The margin we achieve is a reect ionof the value we deliver to ourcustomers and our ability to chargefor that value. It is also driven by ourscale. We aim to maintain our marginin this range at all points in theeconomic cycle, not only on average.

PerformanceOur margin has improved year-on-yearreecting the benefit of synergies andthe value delivered to customers. Thishas been achieved despite a headwindfrom rising input costs.

Link to our Values

Be trustedBe responsiveBe tenacious

Link to our Values

Be caringBe challengingBe trusted

Link to our Values

Be responsiveBe tenacious

Link to our Values

Be challengingBe trustedBe responsiveBe tenacious

We have identified a number of key performance indicators to measure value creation, quantify our socialimpact and benchmark customer service. We have set testing medium-term targets. We aim to satisfy our

four key stakeholders – customers, employees, shareholders and the environment – because we believethat this is the way to build a sustainable business.

Key Performance Indicators

See page 58 to read more about how our Executive Directors are

rewarded against our nancial performance.

7.6%

6.8%6.6%

12/13(1) 13/1411/12(1)(2)

+2.2%+2.2%

+0.6%

12/13 13/1411/12

+1.8%

+0.5%

+1.9%

12/13 13/1411/12

4.8

6.2

6.9

12/13(1) 13/1411/12(1)

93%94%97%


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To lead the wayin recycling

Return on average

capital employed (ROACE)

Net debt/EBITDA Cash conversion CO2 emissions

1 Restated for IAS 19 (Revised 2011).

2 Pro forma for SCA Packaging acquisition.

Target

12-15%DenitionEarnings before interest, tax,amortisation and exceptional itemsas a percentage of average capit alemployed over the 12 month period.

Why is it a KPI?ROACE is our key measure of financialsuccess and sustainability. With a costof capital of c. 9.5 per cent, our targetof 12–15 per cent throughout theeconomic cycle is above this. Seepage 10 for further explanation.

PerformanceThis year we have sustained ourfocus on ROACE which has benefitedboth from synergies driving ourprofitability, but also continuedreductions in our working capital,which liberates capital to be usedelsewhere in the business.

Target

2.0xDenitionNet debt at the period end, overearnings before interest, tax,depreciation, amortisation andexceptional items for the preceding12 month period.

Why is it a KPI?Net debt/EBITDA is a key measureof balance sheet strength andfinancial stability.

PerformanceOur net debt/EBITDA ratio is inour target range.

Target

120%DenitionFree cash ow before tax, netinterest, growth capex, pensionpayments and exceptional cashows as a percentage of earningsbefore interest, tax, amortisationand exceptional items.

Why is it a KPI?We focus on cash conversion becausethis ensures we are able to sustainour progressive dividend policy.

PerformanceCash conversion remains our targetreecting fur ther year-on-yearimprovement in working capital.

Target

20%reduction over the10 years to 2020

DenitionTotal CO

2 emissions per tonne of

production (ktonnes).

Why is it a KPI?We actively play our part in the driveto reduce CO

2 emissions through

investment in energy and materialefficiency projects.

PerformanceIncreased production volumes andeven greater efficiency in ourprocesses per unit of energy input haresulted in a reduction in our intensitratio of CO

2

per tonne of production.This trend has also been aided byinvestments in fuel switching andcombined heat and power technologincreasing the energy yield per tonneof CO

2 emitted.

Link to our Values

Be challengingBe trustedBe tenacious

Link to our Values

Be challengingBe tenacious

Link to our Values

Be challengingBe tenacious

Link to our Values

Be caringBe tenaciousBe challenging

13.0%12.2%12.0%

12/13(1) 13/1411/12(1)(2)

1.96x1.97x

NetCash

12/13 13/1411/12

120%

171%

139%

12/13 13/1411/12

269.6284.4

308.1

12/13 13/1411/12


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A trusted and strategic partner to our customers, deliveringinnovative packaging solutions

for all their needs.

Chief Executive’s Review

OVERVIEW

The financial year 2013/14 has been a yearin which DS Smith has delivered on itstargets, with strong growth in profits,returns and dividends. Integration of thebusiness acquired from SCA, in the first fullyear of ownership, is now well establishedand we continue to be extremely excitedby the opportunities for the combined

business. We have delivered on our synergytargets for the year and on our broader keyperformance indicators, which apply to thewhole business. We have gained marketshare, further improved our health andsafety performance and continued toreduce our environmental impact. We areinvesting further in the business tounderpin future growth.

In 2013/14 the Group’s corrugated boxvolumes grew 2.2 per cent, ahead of thecorrugated packaging market and aheadof our target of volume growth of GDP+1 per

cent. Volume growth has been particularlystrong in our Central Europe and Italy region,benefiting from new customer wins andexpanded service to existing customers, infast-moving consumer goods (FMCG), on-lineretail and the automotive sectors. Our DACHand Northern Europe region has also shownstrong growth as we have been able to offercustomers a wider geographic reach, withvolume growth across a range of sectors.

Miles Roberts



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All numbers within this review are based oncontinuing operations before amortisationand exceptional items, unless otherwisestated. Comparatives have been restatedfor the impact of IAS 19 Employee Benefits (Revised 2011).

Revenues grew by 10 per cent, due toorganic growth and the contribution fromthe legacy SCA Packaging business for a full

12 months in this year versus 10 months inthe prior year. Operating profit increased23 per cent to £307 million (2012/13: £249million), including the benefit of €40 millionof cost synergies, which we have deliveredas expected. A further €40 million benefitis expected from synergies in 2014/15, aspreviously announced, completing theoverall three year cost synergy programme.Earnings per share increased 25 per cent to21.4 pence (2012/13: 17.1 pence), buildingon the substantial growth of the prior twoyears of 37 per cent and of 29 per cent.

These results have been achieved despiteeconomic conditions across Europeremaining challenging, with the significantpressure on household budgets impactingthe entire supply chain. Paper costs compriseapproximately half the total cost ofcorrugated packaging, and paper prices haveincreased substantially over the period,requiring us to recover those costs from our

customers. Our focus on innovation and,in particular, performance packaging, hasput us in a good position to help mitigatethe impact for our customers, deliveringpackaging solutions with the performancequalities that they need, while using smartdesign to reduce the cost of materials used.

Sustainability is at the heart of ourbusiness model, meaning that not onlyis our product fully recyclable, but thatour financial performance is equally

sustainable. During the year we havetaken action to make the business moreefficient and able to take advantage ofa range of commercial opportunities thatare now open to our pan-Europeanbusiness. We expect the benefits ofthis work to underpin future growth.

DELIVERING ON OUR KEY

PERFORMANCE INDICATORS

Our performance this year has deliveredprogress on our key performance indicators.As set out above, corrugated box volumesgrew by 2.2 per cent. This exceeded our

target of GDP+1 per cent, with year-on-yearGDP growth, weighted by our sales in themarkets in which we operate, estimated at0.9 per cent (Source: Eurostat). DS Smithhas been gaining market share across ourregions, where the overall corrugatedpackaging market has shown volumegrowth of 1.2 per cent (Source: FEFCO, April2013 – March 2014). These gains have beendriven by the success of our commercialoffering, in particular our ability to servecustomers across Europe and to offer highstandards of service, quality and innovation.

In the year 2013/14, we owned SCAPackaging for a full 12 months comparedto 10 months in the prior year. Theimprovements made in our key performanceindicators this year has therefore been

achieved despite owning SCA Packagingfor an additional two months compared tothe prior period. This would have had anunderlying negative impact, given therelatively poor historic performance ofSCA Packaging compared to DS Smith.

Return on sales has increased by 80 basispoints to 7.6 per cent (2012/13: 6.8 percent), within our target range of 7 to 9per cent, reecting the improvement inprofitability driven by our strong focus on

costs and the on-going delivery of plannedsynergies. This margin increase has beenachieved despite the substantial short-termheadwind on operating profit presented bythe continued lack of growth in Europeanconsumer spending and a significantincrease in input costs due to r ising paperprices which, as expected, have beenpartially recovered in the financial year.

Return on average capital employed hasimproved by 80 basis points to 13.0 per cent(2012/13: 12.2 per cent), within our medium-term target range of 12 to 15 per cent andwell above our cost of capital of c. 9.5 per

cent. The improvement is driven by ourimproved profitability and continual focuson capital allocation within the business,including working capital, which has againshown further improvement this year.Return on average capital employed is ourprimary financial measure of success, withall senior management having part of theirremuneration package linked to this measure

Net debt/EBITDA (calculated in accordancewith our banking covenant requirements)was 1.96x (2012/13: 1.97x), in line with ourtarget of a ratio of 2.0x or below.

During the year the Group generated freecash ow of £140 million (2012/13: £270million). Our underlying cash ow remainsstrong with further good management ofworking capital, following the exceptionalperformance in the prior year. Cashconversion was 120 per cent, in line withour target.

Average working capitalto revenue

3.4%2012/13: 4.5%

Earnings per share

21.4p2012/13: 17.1p

See pages 10–13 for more information on our

strategy and key performance indicators.


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Chief Executive’s Review continued

The Group has a target for customer serviceof 97 per cent on-time, in-full deliveries.In the year we achieved 93.1 per cent, whichwas adversely impacted by the inclusionof a full 12 month contribution from SCAPackaging. At the same time, our qualitymeasure (defects parts per million) hasimproved by 19 per cent. These measuresare critical to us as they reect ourcommitment to be a trusted businesspartner and are part of our overall visionto deliver high standards of service, qualityand innovation in packaging solutions for

our customers. Our service levels remaina strategic priority and a clear area ofdifferentiation in a very fragmented market.

DS Smith is committed to providing allemployees with a safe and productiveworking environment. We are pleased toreport a further substantial improvementin our safety record, with our accidentfrequency rate reduced a further 22 percent from 6.2 to 4.8. This reects theon-going commitment to best practice inhealth and safety, which is supported byinvestment. Our target is for zero accidents,which we are proud to report that 70 percent of sites achieved this year. We continueto strive to achieve zero accidents for theGroup as a whole.

DS Smith is part of the sustainable economy,with our principal product of corrugatedpackaging fully recyclable, from recycledmaterial. Our Recycling business worksuniquely with customers across Europeto improve their recycling operations andoverall environmental performance. During2013/14 we have implemented significantnew systems to track our own environmentalperformance. We are pleased to say that weestimate that our CO2 emissions, relative toproduction, have reduced a further 5 per

cent, meaning that we are well on target toachieve our 2010 commitment to a 20 percent reduction by 2020.

INVESTING IN THE BUSINESS

Alongside on-going delivery of operatingperformance, we continue to invest in thebusiness. Net capital expenditure of £156million has been spent in the year, of which 74per cent has been spent within the corrugatedpackaging side of the business, reecting awide range of opportunities for growth in thisbusiness. When considering growth capitalexpenditure and restructuring expenditure,

our primary measures of return are cashpayback, and a return on capital well in excessof the Group target. Specific returns are variedaccording to the risk profile of the investment.

We have now owned the SCA Packagingbusiness for about two years and theintegration programmes are now businessas usual. We continually seek to optimisethe business for both future growth andcompetitiveness. As a result, a number ofrestructuring exercises are taking placeacross the business. We are implementingthis investment which, combined with our

targeted capital expenditure programme,is designed to optimise our footprint, drivegreater efficiency and further improveour customer offering. The total cost of

these investments is expected to beapproximately £60 million, of which £29million has been incurred in 2013/14. Thebenefits from the investment will beprogressively realised, substantially from2015/16 and underpin our confidence inour financial performance and supportour future growth expectations.

Growth capital expenditure in 2014/15is focused on our market leading displaypackaging business, particularly in Germany,

where our pan-European customersboth demand and reward innovation. Wecontinue to invest in digital printing tooffer high quality packaging that helps ourcustomers to differentiate their productsand explore further developments in shelfready packaging.

FOREIGN EXCHANGE TRANSLATION

Approximately 65 per cent of the Group’sEBITA is earned in euros. The results for theyear 2014/15 will be inuenced by foreignexchange translation, where the euro iscurrently weaker than the average rate over

2013/14 of 1.19. A change of 1c impacts EBITAby approximately £1.6 million and profitbefore tax by approximately £1.2 million.

OUTLOOK

The current year has started well and is inline with our expectations. While we expecta difficult consumer economic environmentto remain, our focus on delivery, capitaldiscipline and continued investment in thebusiness provides us with confidence inthe sustainability of our business model.Looking ahead we remain excited aboutfurther growth opport unities for the Group.

Miles Roberts


“ While we expect a difficult

consumer economic environment

to remain, our focus on delivery,

capital discipline and continued

investment in the business

provides us with condence

in the sustainability of our

business model.”


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Delivering innovativepackaging products andservices in 25 countries.

Operating Review

Revenues, which have fallen by 3 per cent,have been impacted by the sale of non-corbusinesses. Profitability has improved dueto the benefit of cost synergies, and animproved performance from the Kemsleymill in Kent. Here, management hasbenefited from applying best practicefrom mills acquired from SCA, resultingin a significant improvement in efficiencyand profitability at this site. The Recyclingbusiness has continued to grow in line withour strategy to expand our service offeringto more European customers, with

additional business won in France,Germany and Poland. At the same time,we have rationalised our recycling depotnetwork in the UK from 23 to 13, benefitingfrom the sites acquired with the SCAPackaging acquisition and resulting in abetter geographic spread across the UK.

UK

The UK has seen good volume growth,broadly consistent with that of theGroup as a whole, as the corrugatedpackaging business has led the moveto per formance-driven specification.

Year ended30 April

2014

Year ended30 April2013**

(restated)

Revenue – £m 929 961

Operating

profit* – £m 64 46Return on sales* – % 6.9 4.8

* before amortis ation and exceptional items.

** prior year restate d for the impact of IAS 19 (Revised 2011).

The business has succeeded in generatingincreased sales by offering innovativecorrugated packaging solutions for productspreviously packaged in other materials. Wehave also gained sales through our retail-ready packaging focus, designed to drivemore sales for both the FMCG customer andthe retailer. At the same time, the packagingbusiness has worked consistently to recover

rising input costs driven by paper prices.

The divisional results set outbelow include a full 12 monthcontribution from the SCAPackaging business versus 10months in the comparative priorperiod. The revenue and operatingprofit uplift from this acquisitioneffect is most pronounced in DACHand Northern Europe, whereDS Smith previously had relatively

little operational presence, andalso in Western Europe and inCentral Europe and Italy, wherethe acquired business hasmaterially expanded ourpresence in these regions.


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18 Strategic Report


WESTERN EUROPE

Revenue has increased 5 per cent, reectingthe additional two month contribution fromthe acquired business and a slight benefitfrom foreign exchange translation.

Year ended30 April

2014


(restated)

Revenue – £m 1,017 966

Operatingprofit* – £m 67 73

Return on sales* – % 6.6 7.6

* before amortisation and exceptional items.


Market conditions in this region have beenvery challenging with volume growth lowerthan the Group average. Operating profithas fallen 8 per cent and return on saleshas decreased 100 basis points, reectingthe difficult economic and trading conditionsin the region. The region has benefited fromthe combined business being able to offera wider product range to its customers.

DACH AND NORTHERN EUROPE

DACH and Northern Europe, which is aregion that DS Smith’s corrugatedbusinesses did not operate in prior toacquiring the SCA Packaging business, hasgrown revenue 23 per cent and operatingprofit by 52 per cent, with the growth drivenby the full 12 month contribution from theacquired business and organic growth.

Year ended

30 April2014

Year ended30 April

2013**(restated)

Revenue – £m 1,029 836




** prior year restated for the impact of IAS 19 (Revised 2011).

The growth in margin of 180 basis pointsprincipally reects the benefit of synergiesbeing realised, together with the organicgrowth within the region and the strongpaper pricing benefiting the two mills.

Volumes have been strong as a result of agood performance, particularly in Germany.DS Smith was the clear innovation leaderin the region, winning six Design Awards,two World Star awards, two GermanPackaging Prizes, one Superstar and onePopai Award. DS Smith Germany also wonthe Nestlé Supplier Award in Gold foroutstanding customer service, out of16,000 suppliers.

CENTRAL EUROPE AND ITALY

Revenue and operating profit haveincreased by 23 per cent and 29 per centrespectively, reecting the full 12 monthcontribution from the acquired businessand some benefit from organic growth.

Year ended30 April

2014


(restated)






As described in the Financial Review,towards the end of the financial year, thepower plant adjacent to the paper millin Italy was acquired. Volumes in thecorrugated packaging business havebeen excellent, driven by Central Europe,substantially above the Group average.This reects the benefit of developing sales

with existing strategic FMCG and industrialcustomers and new large and medium sizeaccounts, with a large part of this growthsupported by our strength in innovationas well as our enhanced footprint.

+80 basis pointsimprovement in Groupreturn on sales

Operating Review continued


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PLASTICS

Plastics has delivered revenue growth of5 per cent and operating profit growth of4 per cent, resulting in a modest reductionin operating margin of 10 basis points.

Year ended30 April

2014


(restated)






The Plastics business comprises twoelements, exible packaging and dispensing(FP&D) and returnable transit packaging(RTP). The FP&D business in the US hashad a very good year, delivering good profitgrowth as the business has seen continuedsuccess of its Trutap product and of tea-urnliners. In the European FP&D business, ithas been a year of investment, with a

substantial reorganisation in our Europeanoperations. Manufacturing has beentransferred to eastern Europe, to sites withgreater efficiency and with scope forincreased production and which are closerto the customers they serve. There hasbeen disruption to the business duringthis transfer, which is on track to besubstantially completed by December, andthis has limited the growth from thisbusiness during the year.

The RTP business, which is based in Europe,has had a very strong year, driven by theimprovement in the market for transitpackaging for automotive parts and alsoplastic board for display. In our cratesbusiness, we have won a significantcontract in eastern Europe with a majorbrewer, driven by our “soft touch” cratedesign, which incorporates the strengthof rigid plastic with a softer polymer inthe handle and the scope for high qualityprinting onto the crate. This makes the

crate usable both in the supply chain andalso in the retail store. The crate is t henre-used multiple times and, at the end ofits useful life, can be recycled. The plasticis ground up by a specialist mobile unit thatDS Smith provides, and the material thenreturned to our site for re-use. We haveinvested in additional capacity behind thisbusiness in order to fulfil existing demandfor these products.

+80 basis pointsimprovement inGroup ROACE


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20 Strategic Report


Delivering strongfinancial performance.

Financial Review

• Return on average capital employed2 of 13.0 per cent (2012/13: 12.2 per cent)

• Net debt/EBITDA of 1.96x(2012/13: 1.97x).

TRADING RESULTS

All numbers within this review are based oncontinuing operations before amortisationand exceptional items, unless otherwisestated. Comparatives have been restatedfor the impact of IAS 19 Employee Benefits(Revised 2011).

Revenue of £4,035 million representsan increase of 10 per cent (2012/13:£3,669 million).

The growth in revenue includes the effectof a full year of SCA Packaging (comparedto ten months in 2012/13) and wasunderpinned by corrugated box volume

OVERVIEW

The Group’s strong performance in 2013/14was achieved against a continuing backdropof challenging economic and marketconditions. Good progress has been madeintegrating SCA Packaging and the businesshas continued to focus on the restructuringnecessary to prepare for the next stageof development.

Despite these challenges, the Group againdelivered against its financial measures:

• Earnings before interest, tax exceptionalsand amortisation up 23 per cent at £307million (2012/13: £249 million)

• Like-for-like corrugated box volume

growth of 2.2 per cent• Return on sales2 of 7.6 per cent

(2012/13: 6.8 per cent)

Adrian MarshGroup Finance Director

Income statement

2013/14£m

2012/13£m1

Revenue 4,035 3,669

Operating profit2 307 249

Return on sales2 7.6% 6.8%

Net financing costs (48) (44)

Profit before tax2

259 205Share of profit/(loss) of equity accounted investees, net of tax – 1

Income tax expense2 (59) (48)

Profit after tax2 200 158

Minority interest (1) –

Adjusted earnings2 199 158

Basic adjusted earnings per share2 21.4p 17.1p

Amortisation of intangible assets, before tax (51) (45)

Exceptional items, before tax (41) (79)

1 Restated for IAS 19 (Revised 2011) (note 1a, page 84).

2 Adjust ed for amortis ation and exceptional items.

3 P ro forma for SCA Packaging acquisition.

Operating prot2

11/12(1) £141m

12/13(1) £249m

13/14 £307m

Return on sales2

11/12(3) 6.6%

12/13(1) 6.8%

13/14 7.6%

ROACE2

11/12(3)

12/13(1) 12.2%

12.0%

13/14 13.0%


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growth across Europe of 2.2 per cent.Plastics delivered revenue growth of 5per cent whilst implementing a significantprogramme of restructuring.

Adjusted operating profit rose by 23per cent to £307 million (2012/13: £249million). The improvement in profit reectsthe additional two months of SCA Packaging,together with synergy benefits of £33 million(€40 million) arising from the integration.

In the prior year, the Group’s measures of

return on sales and return on average capitalemployed were both negatively impacted bythe acquisition of SCA Packaging, but haveseen improvements in the current year as thebenefits of the combined businesses owthrough. Return on sales of 7.6 per cent isback within the target range of 7-9 per cent,whilst return on average capital employed of13.0 per cent in 2013/14 strengthened withinthe range of 12-15 per cent and is significantlyabove the Group’s cost of capital.

EXCEPTIONAL ITEMS

Exceptional items before tax and share

of results of associates were £38 million(2012/13: £79 million).

The major exceptional costs associated withthe SCA Packaging integration programmehave now been incurred. The total costs ofthe programme are in line with originalestimates of £100 million with £42 millionin 2013/14. The business is now operating asa pan-European supplier with consistentmessaging and common customer interfaceswhich creates an excellent platform forgrowth. Having successfully completed thebusiness integration the business is now

focusing on the next stage of the processwhich is to rationalise the asset footprintand ensure the cost base is fit for the future.The Plastics business in Europe commencedan ambitious restructuring plan involving adetailed analysis of both its cost base andfuture opportunities. This review resulted inthe closure of a number of sites in the moreestablished parts of Europe and investmentin new facilities in higher growth marketsin eastern Europe and an optimisation ofthe remaining asset base. This methodology

has also been applied to Recycling andPackaging divisions and furtherinvestments are planned for 2014/15.The exceptional charge for 2013/14 forthis rationalisation programme was£29 million and there are plans for asimilar level of investment in 2014/15.

Following the conclusion of theSCA Packaging completion process inDecember the Group acquired the Luccapower plant in Italy. This resulted in a

detailed balance sheet review and anexceptional credit was released whichincluded amounts for an onerous energycontract in Italy.

Profits on sales of businesses amounted to£4 million and other exceptionals, includingemployee compensation and pensionsettlements, offset by the set up costs ofthe UK shared service program, benefitedincome by £3 million.

INTEREST, TAX AND E ARNINGS

PER SHARE

Net interest expense increased from £37million in 2012/13 to £41 million in 2013/14,principally due to the interest payable on thefinancing of the SCA Packaging acquisition.

The employment benefit net financeexpense was £7 million (2012/13: £7 million)The adoption of the revisions to IAS 19Employee Benefits increased this cost by£3 million; the prior year has been restated.

Profit before tax (excluding amortisation,exceptional items and share of profit ofassociates) was £259 million (2012/13:£205 million), an increase of 26 per cent.

The share of the results of equityaccounted investments includes an

exceptional exchange loss of £3 millionon US dollar denominated debt in theUkrainian associate.

The Group’s effective tax rate fromcontinuing operations, excludingamortisation, exceptional items andassociates was 23.0 per cent, compared toa rate in the previous year of 23.6 per cent.The reduction in the effective tax ratereects a further reduc tion in the UK rateof corporate income ta x (2013/14: 22.8 percent, 2012/13: 23.8 per cent) and changesin the mix of taxable profits and tax rates

across the regions in which the enlargedGroup holds its subsidiaries and operatesits businesses. The exceptional tax creditwas £22 million.

Cash ow

2013/14£m

2012/1£m

Cash generated from operations before exceptional cash items 394 504

Capital expenditure (net of disposal of fixed assets) (156) (15

Tax paid (55) (4

Interest paid (43) (3

Free cash ow 140 270

Cash outow for exceptional items (78) (11

Dividends (74) (3Acquisition/divestments of subsidiary and associate businesses (15) (1,230

Net cash ow (27) (1,10

Other movements 21 (3

Net debt movement – continuing operations (6) (1,14

Net debt movement – discontinued operations (4)

Opening net (debt)/cash (817) 32

Closing net debt (827) (81


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22 Strategic Report


Financial Review continued

challenging market conditions, growth inrevenues, higher paper prices throughoutthe year and an exceptional performancein the prior year following the acquisitionof SCA Packaging. Cash generated fromoperations at £394 million was £110 millionlower than 2012/13 (£504 million) given thesignificant one off improvement in workingcapital the previous year. In total, interestand tax payments were £21 million higherthan the prior year. Net capital expenditurewas broadly at to the prior year and was

balanced to allow significant investmentsin growth and efficiency projects, as wellas recurring renewal and maintenance.

The cash costs of the integrationprogramme (£43 million) and therestructuring programme (£26 million)are reected as exceptional cash ows.

Acquisitions and divestments comprise thepurchase of the power plant adjacent to thepaper mill in Italy, less the receipts from thedisposals of non-core businesses.

The dividend payout has doubled year

on year to £74 million, reecting thepayment in 2013/14 of the interim andfinal dividend for 2012/13, versus, in theprior year, the payment in year of thefinal dividend for 2011/12.

STATEMENT OF

FINANCIAL POSITION

Shareholders’ funds of £1,131 million at30 April 2014 have increased from £1,085million at 30 April 2013, principally dueto retained profit for the year. Profitattributable to shareholders (includingdiscontinued operations) was £141 million

(2012/13: £74 million) and dividends of £74million (2012/13: £37 million) were paidduring the year. In addition, ac tuarial gainsof £57 million from the Group’s employeebenefit schemes were credited to reserves.Other items recognised directly in reserves

pence). Dividend cover before amortisationand exceptional items was 2.1 times in2013/14 (2012/13: 2.1 times).

CASH FLOW

Net debt ended the year broadly similaryear-on-year as we sought to balancethe use of the free cash that the Groupgenerated between acceleratinginvestment in restructuring within theGroup earlier than originally planned,continuing to invest in fixed assets to

grow the business, and providing returnsto shareholders.

Management of working capital remained apriority, with a further benefit of £3 millionbeing realised in the year. This continuedimprovement was achieved despite the

Reported profit after tax from continuingoperations after amortisation andexceptional items was £144 million(2012/13: £67 million).

Adjusted earnings per share were 21.4pence (2012/13: 17.1 pence), an increaseof 25 per cent. Total earnings per sharewere 15.0 pence (2012/13: 8.0 pence).

Discontinued operations in the currentand prior year represent tax and the finalsettlement, respectively, in respect of the

Office Products Wholesaling Division soldin December 2011.

DIVIDEND

The proposed final dividend is 6.8 pence(2012/13: 5.5 pence), giving a total dividendfor the year of 10.0 pence (2012/13: 8.0

Statement of nancial position

2013/14£m

2012/13£m

Intangible assets 961 1,044

Property, plant and equipment 1,372 1,371

Inventories 272 285

Trade and other receivables 653 647

Cash and cash equivalents 98 116

Other 179 143

Total assets 3,535 3,606

Bank overdrafts (34) (38)

Interest bearing loans and borrowings (882) (924)

Trade and other payables (934) (966)

Provisions (72) (93)

Employee benefits (151) (214)

Other (331) (286)

Total liabilities (2,404) (2,521)

Shareholders’ funds 1,131 1,085

Net debt (827) (817)

Net debt to EBITDA ratio 1.96x 1.97x


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maintain a strong balance sheet and toprovide continuity of financing by havinga range of maturities and borrowings froma variety of sources.

The Group’s overall treasury objectives areto ensure sufficient funds are available forthe Group to carry out its strategy and tomanage certain financial risks to whichthe Group is exposed, details of whichare provided in note 21 to the financialstatements. The Group’s treasury strategy

is controlled through the Balance SheetCommittee, which meets regularly and ischaired by the Group Finance Director andincludes the Group General Counsel andCompany Secretary, the Group FinancialController, the Group Treasurer and theGroup Head of Tax. The Group Treasuryfunction operates in accordance withpolicies and procedures approved by theBoard and controlled by the GroupTreasurer. The function arranges fundingfor the Group, provides a service tooperations and implements strategiesfor financial risk management.

The Group regularly reviews the level ofcash and debt facilities required to fundits activities. This involves preparing abusiness plan, determining the level ofdebt facilities required to fund the businessplanning for repayments of debt at maturitand identifying an appropriate amount ofheadroom to provide a reserve againstunexpected funding requirements. TheGroup’s borrowing facilities are shown hereAt 30 April 2014, the Group’s committedborrowing facilities totalled c. £1.4 billionof which £496 million were undrawn.Total gross borrowings at 30 April 2014were £882 million. At 30 April 2014, theGroup’s committed borrowing facilitieshad a weighted-average maturity of3.3 years (30 April 2013: 4.4 years).

subject to working capital adjustments andcompetition clearance. No material gain orloss is expected to arise.

ENERGY COSTS

Energy continued to be a significant costfor the Group in 2013/14. The Group’stotal costs for gas, electricity and dieseldecreased slightly from £248 million in2012/13 to £241 million in 2013/14 througha combination of risk management activitiesand energy efficiency programmes and

incentives. The Group manages the risksassociated with its purchases of energythrough its Energy Procurement Group.By hedging energy costs with suppliersand financial institutions we aim to reducethe volatility of energy costs and to providethe Group with a degree of certainty overfuture energy costs.

CAPITAL STRUCTURE AND

TREASURY MANAGEMENT

The Group funds its operations from thefollowing sources of capital: operating cashow, borrowings, shareholders’ equity and,where appropriate, disposals of non-corebusinesses. The Group’s objective is toachieve a capital structure that results in anappropriate cost of capital whilst providingexibility in short and medium-term fundingso as to accommodate material investmentsor acquisitions. The Group also aims to

include currency translation losses of £55million, adverse movements on cash owhedges of £16 million and the related taxcharge of £22 million.

At 30 April 2014, the Group’s net debt was£827 million (2012/13: £817 million). TheGroup improved its net debt to earningsbefore interest, tax, depreciation andamortisation (EBITDA), ratio from 1.97times at 30 April 2013 to 1.96 times at30 April 2014 and complied with all the

covenants in its financing agreements.The Group’s financial covenants for thesyndicated committed bank facilitiesspecify an EBITDA to net interest payableratio of not less than 4.5 times, a maximumratio of net debt to EBITDA of 3.25 timesand net assets to exceed £360 million.The covenant calculations exclude fromthe income statement exceptional itemsand any interest arising from the definedbenefit pension schemes. The calculationof net assets excludes the net asset orliability arising from the defined benefitpension schemes. At 30 April 2014, the

Group had substantial headroom under itscovenants; the most sensitive covenant isnet debt to EBITDA and this had an EBITDAheadroom of £171 million.

Subsequent to the year end, we havereached agreement to dispose of ourScandinavian foam business for £24 million,

Borrowing facilities at 30 April 2014

Facility

Committedfunds

million Maturity£ million

equivalent

Syndicated bank loan facility €380 2016 313

Syndicated revolving credit facility £610 2016 610

Private placement US$200 2014-16 126

Private placement €118 2018-20 97

Private placement US$400 2017-22 262

1,408


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24 Strategic Report


30 April 2014 were £1,059 million, resultingin the recognition of a gross balance sheetdeficit of £151 million (30 April 2013: £214million), a net deficit of £111 million (30 April2013: £158 million) after a deferred tax assetof £40 million (30 April 2013: £56 million).

A triennial valuation of the main UKscheme was carried out at 30 April 2010 atwhich point the Group agreed that cashcontributions would be £14.8 million perannum, rising by 2 per cent per annum for

the remaining 10 years, with a view toclosing the deficit within a 10 year recoveryperiod. Cash contributions into the Grouppension schemes were £19 million in2013/14 (2012/13: £23 million), principallycomprising £15.1 million in respect of theagreed contributions to the pension schemedeficit (for the future financing of thepension scheme) and are included in cashgenerated from operations.

The process of completing the 30 April 2013triennial is ongoing and is expected toconclude in July 2014.

The decrease in the gross balance sheetdeficit of £63 million is principally attributableto an increase in the discount rate. The mainfactor behind this increase is the rise incorporate bond yields over the period.

Adrian Marsh

Group Finance Director

IMPAIRMENT

When applying IAS 36 Impairment of Assets , the Group compares the carrying amountsof goodwill and intangible assets with thehigher of their net realisable value and theirvalue-in-use to determine whether animpairment exists. The value-in-use iscalculated by discounting the future cashows expected to be generated by theassets or group of assets being tested forimpairment. During April 2014 tests wereundertaken to determine whether therehad been any impairment to the balancesheet carrying values of goodwill and otherintangible assets. The key assumptionsbehind the calculations are based on theregional long-term growth rates and apre-tax discount rate of 9.5 per centcombined with the appropriate countryrisk premiums. No impairments wereidentified as a result of the testing.

The net book value of goodwill and otherintangibles at 30 April 2014 was £961million (30 April 2013: £1,044 million).

PENSIONSIAS 19 Employee Benefits , requires theGroup to make assumptions including,but not limited to, rates of ination,discount rates and current and future lifeexpectancies. The use of differentassumptions could have a material effecton the accounting values of the relevantassets and liabilities, which in turn couldresult in a change to the cost of suchliabilities as recognised in the incomestatement over time. The assumptionsinvolved are subject to periodic review.

The Group’s principal funded, defined benefitpension scheme is in the UK and is nowclosed to future accrual. The Group alsooperates various local post-retirement andother employee benefit arrangements foroverseas operations, as well as a small UKunfunded scheme. The aggregate grossassets of the schemes at 30 April 2014were £908 million and the gross liabilities at

Since the year end, the Group has refinancedits committed bank borrowing facilitieswhich were put in place to finance theacquisition of SCA Packaging. Thesyndicated bank loan facility, under which€380 million was outstanding at 30 April2014, was repaid on 23 May 2014, andreplaced with a €300 million syndicatedbank term loan facility maturing in May 2017.In addition, on the same date, the £610million syndicated revolving credit facilitywas also repaid and replaced with an £800

million syndicated bank revolving creditfacility maturing in 2019, but with optionsto extend to 2021. The increase in theamount of borrowing facilities providesadditional headroom to cover the scheduledmaturity of private placement debt inAugust 2014, US$ 105 million (£63 millionas at 30 April 2014). The new facilities willprovide interest cost savings in 2014/15,notwithstanding the exceptional write-offof £4 million of the remaining unamortisedarrangement fees in connection with theold facilities.

Following the acquisition of SCA Packaging,the Group has substantial investments inforeign currency assets of its subsidiarycompanies based overseas, a large proportionof whose functional currency is the euro. Inaddition, the Group’s financial covenant ratiosare exposed to the extent that earnings inforeign currency contribute to the Group’stotal EBITDA. In order to manage theseexposures, the Group’s policy is to hedge itsEBITDA with proportionally a similar amountof net debt held in foreign currencies.

The Group’s foreign currency debt may beheld either in the currency itself or throughthe use of cross-currency swaps. The Groupapplies hedge accounting under IAS 39Financial Instruments: Recognition and

Measurement , to its hedges of its netinvestment of foreign currency subsidiariesand records exchange differences arising onthe net investments and the related foreigncurrency borrowing directly in equity.

Financial Review continued


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Sustainability

The DS Smith business model isbased on providing inherently

sustainable packaging solutionsfor our customers. Our corporatevision, to become the leader inrecycled packaging for consumergoods, has at its heart a socialpurpose which emphasises therole that recycling has to playwithin a sustainable supply cycle,the leadership position thatDS Smith has the opportunity totake, and the development of a

comprehensive understandingof the issues that matter toconsumers and the communities in which we operate.

Our core business is the design andmanufacture of recycled packaging forconsumer goods. We recognise that our

factories and production facilities have adirect environmental impact through therunning of our operations, but also thatour business has an indirect impactupstream through our sourcing activities,and downstream in the way our customersuse and dispose of our products. However,corrugated packaging has many beneficialenvironmental characteristics. All the paperwe make is made from recycled materials andall our packaging products are fully recyclable.

We work closely with our customers, notonly to reduce the carbon footprint of the

packaging they use, but also to help themreduce the carbon footprint of theirproducts by ensuring the right packagingsolution is provided.

We look at the cost and carbon impac tof the whole supply cycle, taking intoconsideration the demands of the packingline, loading, transport, distribution,warehousing and the ‘last five yards’ asgoods arrive in the back of store, as wellas the consumer experience in store.We optimise the materials used in eachpackaging solution in order to achieve thebest outcomes at each stage in the supplycycle, thus minimising the overallenvironmental impacts.

DS Smith has been developing lightweightpackaging solutions for a long time. Forexample, we developed R-Flute®, a typeof corrugated board which significantlyimproved the carbon footprint of corrugatedpackaging and it continues to be anindustry-leading product. We continue toinnovate in this area and are constantlyimproving the performance of ourpackaging, delivering more with less.

In our recycling operations we are the onlyintegrated provider to pledge zero waste.We stay true to the waste hierarchy withthe aim of making 100 per cent of resourceinto something useful once more.

We do not invest in landfill – only in innovativbusiness processes that promote the Poweof Less®, a mantra that helps our customers

achieve more with minimal impact to theenvironment, while realising maximumefficiency and cost benefits.

Our plastics products are reusable andrecyclable and only require small amounts ofenergy and raw material to be manufactureOur portfolio includes lightweight andspace-efficient products and solutions suchas bag-in-box packaging, reusable containerand plastics components with greencredentials that include improved fuelefficiency and reduced carbon emissions.

Our Approach to Sustainability.

PAPER PACKAGING

RECYCLING

PLASTICS

CUSTOMERSUPPLYCYCLE

OUR BUSINESS MODEL


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Sustainability continued

OUR PRINCIPLES

At DS Smith we are committed to conductingour business in a responsible manner. That isthe foundation of a sustainable company,and it is an essential component of ourlicence to operate.

We believe that delighting our customersand ensuring our employees operate ina safe and productive workplace is theonly sustainable route to the long-termcreation of value for our shareholders.

DS Smith subscribes to a number ofinternational standards and guidelinesrelevant to corporate responsibilityand business conduct, including:

• United Nations Global Compact;

• United Nations Declaration of HumanRights and the Convention on the Rightsof the Child;

• International Labour Organisation (ILO)eight Fundamental Conventions; and

• Organisation for Economic Co-operationand Development Guidelines forMultinational Enterprises.

SUSTAINABILITY GOVERNANCE

The Board considers risks arising fromsustainability issues as part of it s regularreview of the key risks to the Group’soperations. It ensures that the Grouphas in place effective policies andprocedures for managing any significantsustainability risks and it receives regularreports on performance.

The Group Chief Executive is the ExecutiveDirector responsible for sustainability issuesand he regularly reviews potential risks.Through the Group Management Team, hecommunicates and cascades the Group’ssustainability policies, procedures andobjectives to the heads of each businessunit, and he monitors compliance throughregular trading meetings.

The Group Sustainability Committeeoversees the management processes,

targets and strategies designed to manageenvironmental and social risks andopportunities, and to ensure compliancewith the Group’s environmental and socialresponsibilities and commitments.

Supporting the Group SustainabilityCommittee are two working groupswith representation from across thebusiness. These working groups coverenvironmental technical issues andsocial responsibility issues.

See page 38 for more about Governance.

OUR POLICIES

Following a review during 2013, the Boarddirected that our approach to sustainabilityshould be focused on the following areas:

• our impact on the natural environment;

• our economic relationships; and

• social responsibility as expressedthrough our relationships with peopleand communities.

During 2013, DS Smith published a series ofGroup-wide policies to support its objectivesin the sphere of corporate responsibility:

The Operating Framework

Our Operating Framework sets out theway DS Smith is governed and managed.It describes the Group’s values, strategy,and structure and explains the role of thecorporate functions and the associatedcompany policies and levels of authoritythat apply across the Group. It is a valuable

resource for managers and is compulsoryreading for new joiners.

The Code of Conduct

Through our Code of Conduct we setthe standards for the ethical behaviourswe expect from all our managers andemployees. This document was translatedinto 22 languages and distributed to all sitesacross the Group. It is also available via theGroup intranet, and a summary has beenpublished on the Group’s website.

View a summary of our Code of Conduct

at www.dssmith.com/people/culture/code-of-conduct

In addition, the Group has a WorkplaceMalpractice Policy, “Speak Up!”, underwhich employees may report in confidenceany perceived wrongdoing within theGroup on matters relating to safety, theenvironment, unethical business conductor breaches of Group policies, the law orother regulations. This policy is reinforcedby a confidential Employee Concern Helplineand e-mail facility. Any concerns reportedare appropriately investigated.

FTSE Group confirms that DS Smith has been independentlyassessed according to the FTSE4Good criteria, and hassatisfied the requirements to become a constituent ofthe FTSE4Good Index Series. Created by the global indexcompany FTSE Group, FTSE4Good is an equity index seriesthat is designed to facilitate investment in companies thatmeet globally recognised corporate responsibility standards.Companies in the FTSE4Good Index Series have metstringent environmental, social and governance criteria,and are positioned to capitalise on the benefits ofresponsible business practice.


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THE MATERIAL ISSUES

Sustainability is a large and varied field with many agendas competing for primacy. We conducted a formal materiality analysis during 2013,facilitated with external expertise. From this the Group Sustainability Committee decided that our approach to sustainability should befocused on the following areas of greatest impact, risk or opportunity:

See page 34 for more about Risk.

Issue Description More information

Packaging

reputation

Our customers will demand greater integration of sustainability indicators with their ownagendas and reporting requirements, and specifically they will require evidence andexamples of the positive role packaging can play in reducing waste and damage in order to

inform and inuence public perceptions on a wide variety of issues, from litter to landfill.

Read more in our 2014Sustainability Review.

Carbon

footprint

The direct correlation between energy usage, cost and carbon emissions continues todrive a focus on energy efficiency, which also delivers improvements in the carbonfootprint of our products. Investment and innovation by manufacturers of capitalequipment, plant and machinery continues to provide opportunities to improve.Nevertheless, other factors such as greater automation in our factories, light-weightingand our performance packaging programme, and a more specialised product mix in ourpaper mills will all increase energy inputs per tonne of product, resulting in a potentialworsening of the intensity ratios that are commonly used in our sector. In keeping withour values and our commitment to transparency, we will continue to submit ourperformance in this area to the Carbon Disclosure Project.

Read more in our Environmentsection on page 28.

Raw materials We will need to invest in and manage an enhanced level of engagement with our ownsuppliers in order to better understand and explain the impacts of our upstream sourcingactivities. This area is assessed as likely to come under increasing scrutiny by legislators

and campaigners. Responsible fibre sourcing is already well established and chain ofcustody certification is mandated by EU legislation.

Read more in our 2014Sustainability Review.

Employees Our employees have a twofold role to play. Through their daily actions and behaviours,they are the custodians of our ability to deliver on our promise to be the most sustainable,innovative, and commercially successful recycled packaging company in each of our markets.But they are also an ambassador for our values, and their interaction with customers,suppliers, and the wider community is just as significant as their work in our factories andmills. In order to fulfil their potential, we must continue to invest in training and engagement.

Read more in our Employees

section on page 31.

Recycling

and waste

The ability to deliver a zero-waste solution to major retailers is a significant competitiveadvantage. Our closed loop recycling model is at the core of this strategy. But, havinggrown substantially as a business, our manufacturing operations in absolute termsgenerate substantial volumes of waste. We must ensure that each of our factoriesdemonstrably and transparently delivers best-in-class management and handling ofwaste and that we continue to reduce the materials we cannot recycle ourselves tothe absolute minimum level achievable.

Read more in our Environmentsection on page 28.

Sus tainabili t y Re vie w201

4

THE BALANCE

OF SU S TAINABILI T Y

Find out more about sustainability at DS Smithand download our 2014 Sustainability Review

at www.dssmith.com/company/sustainability

N

Su

CE

us tainabili t y Re vie w 1


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We acknowledge the impact ouractivities have on the environment

through the use of resources suchas fibre, energy, water and thegeneration and disposal of wastematerials. Our aim is to reducethese impacts relative to ourproduction. We are very pleasedto have delivered another yearof progress, with relative CO2 emissions down 5.2 per cent in2013 versus the previous yearand water discharge down 8.3 per

cent. Through our environmentalmanagement systems, we identifyand reduce the risks and impactsof environmental incidents, andwe have continued to ensure thatall employees have the appropriateknowledge and competencies tofulfil their responsibilities.

ENVIRONMENTAL MANAGEMENT

AND REGULATION

The Group’s management of environmentalmatters is through the EnvironmentalTechnical Working Group, which reports tothe Group Sustainability Committee onissues pertaining to carbon emissions,energy usage, water consumption andquality, waste and product responsibility.

We also have a policy that each of oursites implements an environmentalmanagement system (EMS) which isappropriate to its activity.

For those sites where we have assessedthe activity as material, we have pursuedexternal certification to the ISO 14001

standard. For lower impact sites, we adopta simplified EMS, appropriate to their lowerlevel of potential environmental impact.

Many sites are pursuing the ISO 50001 forenergy management, and our DACH regionwill become the first fully compliant regionby the end of 2014.

With the exception of one spillage of dieselfuel at our Clay Cross site on 28 March 2014,which resulted in a warning letter from theUnited Kingdom Environment Agency on28 April 2014, no other major environmentalincidents or incidents of significant impact

reportable to local or national authorities,or incidents potentially resulting in legalprosecution have been reported for theperiod of this report.

CERTUS

During the year,

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