Annual Financial Report and Notice of AGM
DS Smith Plc
Publication of 2020/21 Annual Report and
Notice of Annual General Meeting 2021
The Company's Annual Report for the year ended 30 April 2021 and the Notice of the 2021 Annual General Meeting (to be held at 12 noon on Tuesday, 7 September 2021 at No.4 Hamilton Place London W1J 7BQ) are today published and are available on the Company's website www.dssmith.com. Hard copy documents have been posted to shareholders who have elected to receive them and the documents can also be downloaded in pdf format from the Company's website www.dssmith.com/investors/annual-reports
In compliance with Listing Rule 9.6.1, copies of the following documents will be submitted to the Financial Conduct Authority and will shortly be available for inspection on the National Storage Mechanism website at https://data.fca.org.uk/#/nsm/nationalstoragemechanism
· 2020/21 Annual Report
· Notice of Annual General Meeting 2021
· Form of Proxy for the Annual General Meeting 2021
A condensed set of the Company's financial statements and information on important events that have occurred during the financial year and their impact on the financial statements were included in the 2020/21 full year results announcement released on 22 June 2021. That information, together with the information set out in the Appendix below, which is extracted from the Company's 2020/21 Annual Report, constitutes the material required for the purposes of compliance with DTR 6.3.5R. This announcement is not a substitute for reading the Company's 2020/21 Annual Report.
Group General Counsel and Company Secretary
15 July 2021
The primary purpose of this announcement is to inform the market about the publication of the Company's 2020/21 Annual Report and Notice of Annual General Meeting 2021.
The information below, which is extracted from the Company's 2020/21 Annual Report, is included solely for the purpose of complying with DTR 6.3.5R. It should be read in conjunction with the full year results announcement released on 22 June 2021. That information, together with the information set out below, which is extracted from the Company's 2020/21 Annual Report, constitutes the material required for the purposes of compliance with DTR 6.3.5R. This announcement is not a substitute for reading the Company's 2020/21 Annual Report. Page and note references in the extracted information below refer to, respectively, page numbers and notes in the Company's 2020/21 Annual Report.
Principal risks (pages 47 to 48 and 52 to 55)
Our Group risk policy
Our Group risk policy provides the framework to ensure there is a common understanding of risk management practices across all parts of the Group and is fully integrated with our annual corporate planning process. We use these practices to evaluate and accept those risks that we believe we have the capacity, know-how and experience to manage, or to understand and tolerate those risks that we cannot influence, in order to realise the potential opportunities for growth and development.
Changes in 2020/21
We recognise that risks are evolving rapidly in our changing world and that requires new ways of thinking and working to identify, assess and manage risks effectively. We continue to build on the solid foundation that we have already established. Our preparedness for events such as the Covid-19 pandemic and the resulting consequences enabled the Group to take a more detailed review and further improve the risk process to obtain better quality output from the corporate planning process and year-end risk assessments. Changes included:
· Simplified assessments to clearly make the link between key risks and our Corporate Plan priorities/opportunities
· In-depth reviews of principal and emerging risks with our Group Strategy Committee (GSC), Group Operating Committee (GOC) and Audit Committee
· Surveyed a wide internal audience to rate the severity, likelihood and speed of a large range of relevant risks
· Implemented regular and focused risk reviews within existing management team meetings to assess mitigations
· Stress tested our business continuity strategies in preparation for subsequent waves of Covid-19 following the first wave
· Launched our refreshed 'Management Standards' where governance, risk management and compliance are at the core.
Our governance framework remains robust and largely unchanged in the past year, and has also proven pivotal in managing the business impacts of Covid-19. In summary:
• The Board sets out the Group's risk appetite annually, based on the level of risk it is willing to accept in pursuit of corporate targets
· The risk strategy and setting of objectives is executed by the GOC with oversight from the Audit Committee and Board
· Our GOC, management committees and specialist Group functions provide guidance to the businesses on how to better integrate risk management processes into day-to-day activities.
The Group's risk policy sets out how this governance framework translates into the annual risk reporting cycle, which links with our internal audit cycle (see page 77) and informs our management and governance processes specifically for climate related risks (see pages 56 to 58).
Report on our principal risks
Like many other businesses we are subject to general risks such as changes in social, political, financial, regulatory and legislative changes. Our principal risks and uncertainties are those that may have the greatest impact on our key priorities when assessed by considering our controls and other mitigating factors on a net risk basis. These risks have been discussed at Audit Committee meetings during 2020/21. They are summarised with details of our key mitigating activities on pages 52 to 55.
Our key risks continue to follow similar themes to those in previous years but they evolved over the past year, mainly due to the impacts and learnings from the Covid-19 pandemic. 12 principal risks have been identified in our latest assessment across strategic, market, operational, financial, geopolitical and technological risk categories. The changes compared to 2019/20 include:
• The risk of fibre packaging being substituted by non-fibre based materials has returned to the top 12
• A new demand-led principal risk reflects the need to satisfy significant packaging volume growth with limited production capacity
• The recognition of increasing digitalisation risk, or missed digital opportunities, within our operations and supply chain
• Cyber risk was previously split between a) ransomware and b) phishing, but they are now treated on a combined basis
• Two talent-related risks have been combined and redefined to focus on the organisation capability of our people and assets
• Sustainability risk has been redefined to be more specific about our carbon and circular economy commitments (i.e. climate-related 'transition' risks)
• Disruptive markets risk has been redefined to focus on specific and potentially highly damaging strategies of major players, compared to a general view of market-place activity
• Recent and projected changes in shopping habits are now more likely to present opportunities for our business than risks
• Increased confidence of liquidity risk mitigation has regraded the risk to outside of the principal risk level.
There are four risks that are considered to be the most disruptive to our plans. These have been placed in the highest priority category. These four risks are:
• Macro-economic and political environments in Europe, the US and broader world economies, given the international nature of our supply chain, the competitive nature of the markets within which we operate, and weakening major economies impacting the level of consumer spend and demand for our packaging products
• Volatile paper/fibre price cycles continue to put pressure on our integrated paper and packaging business model and our ability to capture appropriate margins
• Cyber attacks targeting business' informational or operational technologies are becoming more frequent and increasingly sophisticated and, despite our defences, we and our suppliers and customers cannot be complacent
• Sustainability has remained at the forefront throughout the pandemic and expectations on large organisations to transition to a low-carbon circular economy have continued to accelerate, and present our manufacturing operations with a variety of challenges as well as significant opportunities.
Our risk management programme includes a formal review of emerging risks. We define emerging risks as those which take the form of a systemic issue or business practice that has either not previously been identified, has been identified but has remained dormant, or has yet to rise to an area of significant concern. The impacts of the pandemic and 'what if' scenario discussions over the past year have created a heightened awareness of new and emerging risks that could impact the Group, our suppliers and customers; for example, post-pandemic ways of working and longer-term skill requirements may emerge as workforce planning risks. Furthermore, scenario work to follow the TCFD guidelines has also focused the identification and assessment of potential short to longer-term emerging risks linked with climate change. The Group continues to develop a more detailed understanding of this specific area of risk management.
Prioritising our risk management effort
Mitigating and/or preventing the effect of risk on our Corporate Plan remains a cornerstone of our Executive and operational management team efforts. Our risk heat map provides a summary of how we assess and evaluate the relationship between the likelihood and severity of our principal risks and uncertainties, taking into account the effectiveness of current mitigations, and informs where the Group should prioritise investments to manage them.
Risk Priority Classification
Key Mitigating Actions
Perceived Covid-19 Impact
Key Risk Indicator
1. Eurozone and macro-economic impacts
Multiple political/economic factors from Brexit, foreign exchange/interest rates, to weakening major economies significantly impact the level of consumer spend and customer demand for our packaging products.
Focus remains on supplying packaging to fast moving consumer goods (FMCG) customers with a constant focus on quality, service and volume growth, as these customers tend to show greatest resilience against GDP volatility
Investments in cost base and production efficiencies and working capital initiatives to balance macro-economic trends with sustainable growth priorities
Procurement transformations and new supply chain flows due to Brexit are helping to evolve our operating model.
Prolonged challenging economic conditions
Eurozone GDP growth rate
Ability to reposition our business model outside of our traditional geographic markets and sources of supply.
2. Paper / fibre price volatility
Volatile commodity pricing for recovered paper (including old corrugated cases (OCC)) and containerboard grades can create significant short-term challenges to capture appropriate margins by aligning raw material costs to packaging sales revenues.
Our focus is to provide sufficient paper from internal paper manufacturing operations to support our Packaging division, whilst determining the optimal integration level, to ensure that we can balance the external effects of paper price volatility over the long term
Initiatives to implement productivity improvements, demand forecasting improvements and the development of skills and tools in our sales and paper sourcing teams
Continual focus on contract management to fully recover input costs.
Supply / demand dynamics affected by changes in FMCG and industrial markets
Paper / recovered fibre market price and box selling price
Accelerate improvements in commercial awareness and expertise of pricing fluctuations and strengthen the effectiveness of fibre and efficiency programmes.
3. Cyber attacks
A major cyber incident on our information or operational technology (i.e. ransomware) and/or a failure to stop/identify sophisticated malicious cyber intruders on our IT infrastructure (i.e. phishing attacks) resulting in short-term trading impacts, financial losses and reputational harm - impacting us, our suppliers and customers.
Regular awareness training to better equip our employees with the knowledge to identify potential phishing/other social engineering techniques, supported by our Group Head of IT Security and expanding internal resourcing as well as external expert advice
Investments in specific IT security controls to improve our capability to detect, respond to, and prevent cyber attacks, such as tools and services to monitor the IT estate
Regular improvements in, and testing of, IT disaster recovery planning, including penetration/vulnerability testing, to ensure the Group's ability to recover from outages, identify gaps and progress along our risk remediation roadmap.
Increased threat potential of infiltrating IT security controls given remote working
IT security phishing campaign statistics
Accelerated investments to strengthen our technology infrastructure and operational resilience to prevent losses and enhance business continuity credentials.
4. Sustainability commitments
Our efforts to decarbonise and transition our supply chain to a circular, low carbon economy are not enough or are too slow against the growing expectations of the Group to play a positive role in society and address global climate change and related environmental, social and business challenges.
Deploying our roadmap of carbon reduction investments, focused on energy efficiency, plant upgrades and switching to alternative energy sources across our production sites, whilst monitoring and adapting to regulatory changes in carbon taxes and resource extraction
Ensuring we meet the growing consumer and investor demand for sustainable packaging through a focus on packaging design, use and disposal of our products for a circular economy
Regular review, update and reporting on our sustainability priorities to ensure they align with the expectations of stakeholders, wider society and scientific climate projections, as well as implementing the TCFD recommendations and submission to ESG ratings such as CDP.
Delays to certain sustainability projects due to government / site safety restrictions
Reduction of CO2e per tonne of production
Capitalise on efficiencies in energy upgrade projects and meet the growing societal demand for sustainable products in a circular economy.
5. Regulation and governance
Our governance model fails to support the way we are organised and our geographical spread, resulting in unauthorised, illegal, unethical or inappropriate actions (including breach of anti-bribery, data privacy, etc.).
The Group continues to maintain detailed and extensive arrangements for the management of standards, domestic and international compliance rules and new regulations with clearly defined divisional reviews including health, safety, environment, supply chain and product integrity/safety
Training employees on a variety of compliance modules including antitrust, anti-bribery and corruption, and modern slavery to ensure full understanding of the applicable laws and high standards expected
The Group operates a workplace malpractice helpline ('Speak Up!'), providing a confidential route for employees to report perceived malpractice of any type.
Additional requirements to meet, and demonstrate compliance with, new and changing regulations
Group and divisional compliance training reviews
Ability to demonstrate a standard of ethics and behaviours beyond the standards requested of us and potentially influence how the regulatory landscape changes.
6. Security of paper/fibre supply
Large fluctuations in the availability of recovered paper (including OCC) and containerboard adversely affect our performance, as the Group remains a net purchaser of specific grades of paper and faces recycling collection/segregation challenges.
Optimising the level of integration of all our paper mills for internal supply and committed external supplies using open market purchases, to deliver the 'best fit' alignment between paper production, quality fibre sourcing and performance packaging demand
Footprint alignment and capex investments for our mill network to optimise internal paper supplies against forecasted packaging needs
Focus on re-balancing and de-risking fibre sourcing strategies in our Recycling division as well as technology investments for reject solutions and recovered fibre quality testing.
Heightened demand for key paper grades and disrupted supply chains
Paper/recovered fibre supply volumes
Our closed loop model and paper sourcing strategy offer significant customer opportunities and ability to generate a 'best fit' cost and quality solution.
7. Packaging capacity limits to growth
Our performance and volume growth expectations, and an increasing demand for packaging, is limited by our production capacity and ability to grow organically at the pace required.
Targeted organic growth in our existing key markets from strategic investments in new greenfield packaging manufacturing sites, including our operational start-up in Indiana (USA), and new builds commencing in Poland and Italy
Further expansions/developments of our current packaging sites through multi-year capital plans, enhancing equipment utilisation and efficiency, whilst improving the customer-production footprint alignment
Developing clusters of production sites to improve capacity loading, and sales and operational performance programmes to optimise a full system of supply/demand loading, inventory and logistics planning.
Record volume demand for certain customers and/or markets
Packaging demand and production volumes
Develop and grow our own business in line with our customers' growth, working together to serve the changing consumer demand, whilst maintaining high quality and service offering.
8. Organisation capability
Our management approach to our people and assets, including succession planning, talent retention and development, and strategy for ageing assets, fails to identify and resource for future capability needs, resulting in critical gaps in skills, knowledge and equipment, limiting productivity gains across key
People performance, potential and succession management is formally reviewed and subject to calibration by senior management, and core skills gaps are identified to inform clear action plans and address key talent retention or attraction risks, including a diversity and inclusion action plan
Annual senior talent reviews address strategic workforce questions, and evaluate the capability profile of the senior leadership population, the bench strength of the talent pipeline, and actions progressed throughout the following year
Our HR and operational leaders collaborate to prioritise key business transformation activities aimed at new and foreseeable work realities and operating models, to work to deliver a step change in organisation flexibility and productivity.
Potential opportunities to secure critical talent but challenges our skills development and culture
Employee turnover including external/internal hiring ratios and diversity and inclusion metrics
Our HR and operational priorities focused on improving processes, productivity and ways of working to capture and enhance people and equipment capabilities.
9. Substitution of fibre packaging
Fibre-based packaging loses its credentials as a sustainable product of choice against developments in plastic packaging or other materials that can be reused and recycled, resulting in our products being substituted and/or replaced by competitor products.
Collaboration between our Paper and Packaging divisions and research and development teams to deliver innovative papers and corrugated products, and develop new materials with our suppliers and partners for barrier/lamination concepts and plastic replacements
Our Recycling division uses commercial insights and works to create pan-European alignment in our services, including providing our key packaging customers with closed loop opportunities
Focused communication strategies to maintain and build the reputation of fibre-based materials in terms of recyclability, innovations and sustainability credentials, and working with the industry to develop quality standards.
Heightened interest for hygienic packaging but not to the detriment of sustainable solutions
Fibre packaging volume and market share growth
Accelerated research, development and investment into new and enhanced fibre-based products to serve the sustainable packaging demand and grow our reputation.
10. Disruptive market players
Disruptive behaviours in our key markets, should significant suppliers or competitors combine, reduces our capability to purchase paper or restricts our ability to compete more effectively, and these larger combined groups could also dispose of assets leading to new market entrants, increasing competition and causing loss in market share.
Focused on further developing long-standing and strong relationships with all of our existing customers, across large FMCG, regional and local customers, whilst providing a differentiated position from our competitors to attract new business
Continuous improvement of our procurement and supply chain processes for all paper grades and critical raw materials, including enhanced contingency plans if critical suppliers were to be disrupted
Industry body memberships allow for monitoring of market conditions, building our influence and brand reputation, and ensuring we can remain competitive with our pricing models.
Erratic fluctuations in business activity and heightened competition
Proportion of market share
Strengthen our differentiation and reputation, and capture additional market share during times of disruption amongst key competitors.
Digital transformation initiatives, from point-of-sale through to manufacture and delivery to customers, are too slow or the investments required too high to adequately adapt our ways of working or we miss the opportunity to meet the demand for smart products, including customer ease of access to our products and services.
The DS Smith ePack webshop is expanding to meet small and medium sized business's packaging needs, providing a wide product range online, including bespoke design offers through digital printing, and a complete online ordering experience and fast delivery
Transitioned our Impact Centre experience and other customer and investor interactions online due to Covid-19 restrictions, setting the foundation for continuing to better utilise and trial different technologies going forward
Expanding the use of systems and tracking technology in logistics to provide enhanced transport market intelligence, transport order management, route planning and real time visibility of our vehicles.
Accelerated the move to online purchasing and instant virtual interactions
Customer satisfaction surveys and website visitor traffic
Capitalise on digital investments which build our reputation as an easy and accessible business to work with and buy from.
12. Shopping habits
We fail to match or adapt our offer to the pace and direction of change in consumer spending across the full retail FMCG spectrum, from the mega-large brands, micro-brands and omni-channel distribution networks of the big box superstores and discounters, to the rise in e-commerce and importance of the consumer's values.
Focused on growing e-commerce packaging volumes, including bespoke offers and product innovations, and continuing to explore business opportunities such as plastic replacements, point-of-sale packaging, social distancing essential solutions and end-to-end services
Trend and insights teams working on understanding customer and consumer habits, needs and behavioural changes to inform research and development options and operational capabilities
Applying a clear sales platform to serve new/different customer categories, including the development of technology for customer interactions with our Impact Centres.
Accelerated the existing trend of changes in shopping habits
Revenue growth from FMCG sector
Changes in consumer needs and behaviours lead to new opportunities to actively engage customers on cardboard packaging solutions.
Related Party Transactions (page 173)
Note 31 Related parties
Identity of related parties
In the normal course of business, the Group undertakes a wide variety of transactions between its subsidiaries and equity accounted investments.
The key management personnel of the Company comprise the Chairman, Executive Directors and non-Executive Directors. The compensation of key management personnel can be found in the single total figure remuneration table in the Remuneration Committee report. Certain key management personnel also participate in the Group's share-based incentive programme (note 26). Included within the share-based payment expense, and detailed in the Remuneration Committee report, is a charge of £1m (2019/20: £1m) relating to key management personnel.
Transactions with pension trustees are disclosed in note 25.
Other related party transactions
Sales to equity accounted investees
Sales to other investees
Purchases from equity accounted investees
Purchases from other investees
Directors' Responsibilities (page 110)
The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare such financial statements for each financial year. Under that law the Directors are required to prepare the Group financial statements in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and International Financial Reporting Standards (IFRSs) adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. The Group financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board ( IASB). The Directors have also chosen to prepare the parent Company financial statements in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.
In preparing the parent Company financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and accounting estimates that are reasonable and prudent;
• state whether Financial Reporting Standard 101 Reduced Disclosure Framework has been followed, subject to any material departures disclosed and explained in the financial statements; and
• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
In preparing the Group financial statements, International Accounting Standard 1 requires that Directors:
• properly select and apply accounting policies;
• present information, including accounting policies, in a manner that provides relevant, reliable, comparable and
• provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance; and
• make an assessment of the Company's ability to continue as a going concern.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006.They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Directors' responsibility statement
We confirm that to the best of our knowledge:
• the financial statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole;
• the Strategic Report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and
• the Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's position, performance, business model and strategy.
This responsibility statement was approved by the Board of Directors on 21 June 2021 and is signed on its behalf by Miles Roberts, Group Chief Executive and Adrian Marsh, Group Finance Director.