DS Smith has just recorded a huge £701m operating profit – but still down on last year. Waqas Qureshi met the UK and Ireland Packaging Division MD to discuss a volatile market.
DS Smith says the corrugated packaging market is both challenging but also has opportunities, according to its managing director for UK and Ireland Packaging Division.
Paul Clarke was appointed 12 months ago, and was formerly operations director for the Packaging Division.
He manages 26 sites and 3,500 staff – with a busy in-tray.
The division supplies paper-based packaging various markets, including FMCG, bricks mortar – big super markets such as Tesco & Sainsburys, e-commerce channels and POS.
Visiting the main Belper site in the Midlands, Packaging News saw work on retail, confectionary, and a strong focus on FMCG work.
“Two-thirds of our business is FMCG – it’s the biggest part of our business. E-commerce grows bigger and bigger as well as online market,” said Clarke, while leading a tour at the site.
DS Smith has just recorded £701m operating profit in its 2023/2024 full-year results – impressive although this is a drop from 2022/2023 of £861m, against weak consumer demand and high inflation.
There was a decline in like for like b ox volumes of 2%, although the corrugated giant said there is an improving momentum across the year with like for like growth of 2% in Q4 2023/24 vs Q4 2022/2023.
The group added that the £5.8bn sale agreed with International Paper is ‘an attractive opportunity’.
It said strong customer relationships, innovation and high service levels, together with strong cost management, have partially offset downward pricing pressure, and a 2.1x net debt/EBITDA compared to 1.3x last year.
On Northern Europe performance, Clarke said: “In our Northern European business, return on sales for 2023/2024 were 7.7%, up from 6.8% in 2022/2023.”
He said the market overall has been challenging: “We have been trading in line with expectations, I think it’s been a volatile year. Everybody knows paper prices have been lower and volumes have been lower right across the industry. Costs and inflation are still on-going. Even though inflation has come down it is still relatively high. We have had to adjust our cost base accordingly.”
With volumes down across the board, he attributed this to VUCA – volatile, uncertain, complex, ambiguous.
This details the macroeconomic factors leading to challenging market conditions, including:
– Cost of living crisis is a driver for consumer behaviour
– Energy supply & cost has been affected by the Ukraine war which has also led to inflation
– Positive drivers include new legislation, and consumer opinion and behaviour around sustainability
The labour market post covid has been an industry issue, but at DS Smith he said they do attract and retain quality staff.
“The general macro-economic environment has been volatile. For us, with such a large proportion being FMCG, cost of living is a big driver for consumer behaviour, which in turn will influence our business as well. From coming out of covid, to the Ukrainian war, supply chain issues, the energy cost issues, it really has impacted that inflationary number and GDP numbers in some negative ways. And supply chains may be affected with the situation in the Middle East.
“We see other drivers too – legislation such as recycling and packaging laws coming in, as well as consumer behaviour around sustainability and environmentally friendly packaging. That starts to impact volumes as well.”
He said e-commerce may grow 20%+ each year but it still takes time to reach bricks and mortar levels of business: “We are also seeing shoppers and customers that have gone back to brick and mortar after the pandemic.
“And we help brands and retailers with the transition; if you are a traditional bricks and mortar business going into online that’s a change, and if you are a start-up e-commerce going into bricks and mortar it can also be a difficult task for them.”
He pointed to opportunities too, and the evolving market demands: “There are also opportunities in the market. Our market used to be driven by general economic drivers. Now we see things like innovation and sustainability as the two big drivers in our industry and on our top line moving forward as well. That helps us to mitigate some of those volatile cost inputs.”
Clarke said DS Smith’s focus on innovation, plastic replacement sustainability and driving towards packaging solutions that support a circular economy means it can offer customers a ‘complete service’ that supports their business ‘beyond a transactional price’.
He said he was grateful about good staff retention rates in the group: “A lot of staff work for years at these plants. We are lucky to work in an industry that 20 years ago people would call boring but now with sustainability and circularity, e-commerce where consumers see and feel cardboard boxes being delivered, suddenly it is a little more interesting than it was – that gets attraction into the industry as well.”
Strategy for 2024
Clarke said the big drivers in 2024 are innovation and sustainability – ‘plastic substitution comes up again and again’.
“Things like fruit and veg punnets, it’s a relatively straight forward change for brands and consumers like to see that change. This contributes to carbon footprint reduction and commitments to science-based targets.”
He gave another example of a project with retailer Premier Foods.
“We have worked on making their retail POS displays plastic free. For a recent Batchelors and Aquaman promotional display, our designers created a 100% cardboard display, replacing 11,900 plastic rivets with recycled brown liners. As a result, the displays were fully recyclable at the end of the promotion, and also over 200g lighter.”
Cardboard recycling rates
The recycling rates of cardboard has fallen slightly in the last few years to 74%, and this is where the legislation and local authority collections should come into play: “We feel a separate collection system for paper and cardboard is the best way to get the quality of the fibre through the system and get those recycling rates up.
“We are in favour of making things as easy and efficient as we can, and this should be standardised if at all possible. However, on balance, source separated collections give the best quality of fibre throughout the circular model of paper packaging.”
He said DS Smith wants as much cardboard as possible to come back the system and as good quality as possible.
And while there are always questions about consumers trusting in the recycling process, to the point of ‘wish-cycling’, he pointed out that DS Smith recycles 950,000 tons of paper and cardboard annually at its huge Kemsley facility.
Asked what his message is for the corrugated packaging sector, Clarke said: “Our industry needs to take more of a leadership role, like DS Smith have. As a sector we don’t shout about how good we are, we are not boring and we can be an integral part of a circular economy.” News Courtesy : Packaging News UK.
