DS Smith Plc
(the "Company")
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Publication of 2019/20 Annual Report and
Notice of Annual General Meeting 2020
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The Company's Annual Report for the year ended 30 April 2020 and the Notice of the 2020 Annual General Meeting 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.
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The Company's 2020 Annual General Meeting will be held at 9 a.m. on Tuesday, 8 September 2020 at 350 Euston Road London NW1 3AX.
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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
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���������������������2019/20 Annual Report
���������������������Notice of Annual General Meeting 2020
���������������������Form of Proxy for the Annual General Meeting 2020
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In compliance with rule 6.3.5 of the Disclosure Guidance and Transparency Rules the documents can also be downloaded in pdf format from the Company's website www.dssmith.com/investors/annual-reports
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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 2019/20 full year results announcement released on 2 July 2020.��That information, together with the information set out in the Appendix below, which is extracted from the Company's 2019/20 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 2019/20 Annual Report.��
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Iain Simm
Group General Counsel and Company Secretary
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22 July 2020
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APPENDIX
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The primary purpose of this announcement is to inform the market about the publication of the Company's 2019/20 Annual Report and Notice of Annual General Meeting 2020.
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The information below, which is extracted from the Company's 2019/20 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 2 July 2020. �That information, together with the information set out below, which is extracted from the Company's 2019/20 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 2019/20 Annual Report. �Page and note references in the extracted information below refer to, respectively, page numbers and notes in the Company's 2019/20 Annual Report.
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Principal risks (pages 51 to 52 and 56 to 59)
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Our Group risk policy
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Our Group risk policy continues to provide the framework to ensure there is a common understanding of risk management practices across all divisions within the Group. It ensures we identify, measure and make informed decisions to manage the specified risks as part of our annual corporate planning process. The policy also provides our management executive team assurance that there is a robust process 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.
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Changes in 2019/20
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With member changes to the composition of the Board, Audit Committee and Group Operating Committee (GOC) during 2019/20, the opportunity has been taken to review and further improve the risk process to obtain better quality output from the corporate planning process and year-end risk assessments. Changes include:
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�������Simplified assessment of downside risk and associated controls
������Greater focus on the risk reward assessment of key initiatives that are set out in the corporate plan
�������Stronger emphasis on identifying the specifics of key risk factors, including improved descriptions of key risks
���� ��Additional training of our governance and compliance teams on business risk management.
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Risk governance
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The Group continues to strengthen the relationship between its strategic priorities and day-to-day risk management activities. It does this through a governance framework that remains robust and unchanged in the past year, which has also proven pivotal in managing the business impacts of the unprecedented Covid-19 pandemic. In summary:
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The Group's risk policy sets out how this translates into the annual governance cycle and couples with our internal audit cycle.
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Report on our principal risks
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2019/20 was a year where our confidence in the fundamentals of our Group's portfolio remained strong, with opportunities arising from the innate circularity of our operations, growing interest in plastic-substitution packaging, our design-led value creation and ability to simplify the way our customers engage with us throughout our network. Our ability to continue to operate and serve our customers during the Covid-19 pandemic also provided reassurance that our corporate plan is resilient and our operations have a strong and relevant purpose to meet customer needs. Despite these positives, we have recognised the external challenges that exist in key risk areas that can disrupt or delay the results of our efforts and our ability to remain on our strategic path. One example is the negative impact the pandemic has had, and continues to have, on industrial production and therefore demand for our industrial packaging solutions. We continue to assess the short and longer-term impacts of Covid-19 to ensure our risk management efforts are supported with appropriate and timely levels of investment.
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Like many other businesses we are subject to general risks such as changes in socio-economic conditions, 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 on a net risk basis. They have been discussed at Audit Committee meetings during 2019/20. They are summarised with details of our key mitigating activities on pages 56 to 59.
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Risks identified
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Our risks continue to follow a similar theme to previous years, with 13 principal risks being identified across strategic, operational, financial, legal, technology and talent risk categories. Changes compared to 2018/19 are focused around the following risk areas:
����������� Structural governance and organisation flexibility
����������� Skills and capabilities of our workforce
����������� Implications of cyber attacks on our information technology and operational technology systems
����������� Reduction in acquisition activity, demoting the risk
����������� A closer focus on the implications of the cyclical nature of paper prices (paper for recycling and corrugated case material)
����������� Increased regulatory risk and scrutiny.
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Risks assessed
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This year's risk assessment highlighted that despite a growing number of strategic priorities targeted at mitigating the effects of our principal risks, four risks remain most severe or most likely to disrupt our plans. This is where we have an increasing area of focus to ensure our corporate plan remains robust and that our mitigation efforts remain effective:
���������Macro-economic and political environments in Europe and the broader world economies continue to be a prominent risk given the international nature of our supply chain, the competitive nature of the markets within which we operate and the effects of Covid-19 with the expected contraction of many economies over the short-term
���������Volatile paper price cycles continue to put pressure on our integrated paper and packaging business model and our ability to recover input costs at appropriate margins
���������Disruptive behaviours in our chosen markets can materially affect the supply of critical materials and create step changes in the demand for our products and services
���������Changes in our ability to minimise the effect of liquidity constraints on our business are of increased concern.
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Prioritising our risk management effort
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Mitigating and/or preventing the effect of risk on our corporate plans remains a cornerstone of our Executive management and operational management teams' 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 and informs where the Group should prioritise investments to manage them. In this uncertain time and as a result of Covid-19, additional detail on the downside assessment of risks has been disclosed, as shown in the risk heat map, as we continue to evaluate the implications of Covid-19 on our business strategy.
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Emerging risks update
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Our risk management process includes a formal review of emerging risks. Our aim is to identify those risks that are not meaningfully impacting the Group's strategy today but are highly uncertain because their evolution is either rapid or complex and the implications are unclear. Noting this and given the varying implications of Covid-19 on our workforce and critical supply chains this year, we have treated Covid-19 as a trigger event that affects many of our existing risks or creates a heightened awareness of new/emerging risks, rather than as a separate emerging risk. Our Group strategy team has been working with our Group functions and divisions to produce new 'what if' scenarios of what a post Covid-19 future might look like for DS Smith, our customers and suppliers; these scenarios are informing our ongoing evaluation of a new range of emerging risks.
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Principal risks
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| Risk | Risk Priority Classification � | Key Mitigating Actions | Perceived Covid-19 Impact | Key Risk Indicator | Opportunity Examples |
| 1.Eurozone and Macroeconomic Multiple political/economic factors from Brexit to foreign exchange/interest rates significantly impact the level of consumer spend and customer demand for our packaging products | 1 | Focus remains on supplying packaging to fast moving consumer goods (FMCG) customers with a constant focus on quality and service, as these customers tend to show greatest resilience against GDP volatility. � Investments in cost base efficiencies and working capital initiatives to balance macroeconomic trends with sustainable growth priorities. � Divisional technical excellence and procurement transformations are creating a new operating model to meet efficiency and productivity requirements. | More challenging economic conditions after pandemic | Eurozone GDP growth rate | Ability to reposition our business model outside of our traditional geographic markets and sources of supply |
| 2. Paper Price Volatility Volatile commodity pricing for recovered paper and paper grades can create significant short-term challenges to capture appropriate margins by aligning raw material cost to packaging sales revenues | 1 | We operate sufficient paper manufacturing operations to support our packaging operations to ensure that we can balance the external effects of paper price volatility over the long term whilst being a net purchaser of paper for recycling. � Initiatives to implement productivity improvements and emphasise customer differentiation through services, quality and innovation. � Continual focus on contract management to fully recover input costs. | Supply/demand dynamics affected by changes to FMCG and Industrial markets | Paper and paper for recycling market prices | Accelerated improvement in commercial awareness and expertise of pricing fluctuations and strengthen the effectiveness of fibre and efficiency programmes |
| 3. Disruptive Markets Disruptive behaviours from competition/new entrants in our key markets creates a vulnerable dependence on critical suppliers and an inability to manage material changes in sales volume and pricing strategies | 1 | Activities broadened to develop long-standing relationships and embed a differentiated competitive position across our large FMCG, regional and local packaging customers. � Projects to strengthen our current geographical footprint, improve procurement and supply chain processes for all paper grades and critical raw materials. | Many businesses in survival/recovery mode | Sales (organic) growth and volumes | Investments in cost optimisation and footprint realignment in key markets to support volume growth in FMCG sector |
| 4. Liquidity Financial market conditions have an adverse effect on our ability to finance the strategy for our supply cycle business through debt on attractive terms, impacting operating profit and cash flow flexibility | 1 | Maintain focus on cash generation across the Group as a priority, such as through our continuous working capital focus. � Reducing acquisition activity and taking other strategic actions to reduce the use of debt and drive down debt levels as a per cent of total assets, reduce cost of borrowing and extending tenor of debt. � Group Treasury team ensures that the Group has a range of different providers of liquidity and maturity profiles to avoid refinancing risks. | After-effects of financial markets ability to support businesses | Amount of headroom under committed facilities | Ability to secure access to suitable sources of debt capital through effective management of our core banking partners to support strategic investment opportunities |
| 5. Shopping Habits We fail to match expected growth 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 | 2 | Trend and Insight team working on understanding consumers' habits and behavioural changes. � We are working on understanding key customers' needs and exploring business opportunities such as e-commerce, plastic replacements, social distancing essential solutions and end-to-end services. � Applying a clear sales platform to serve new/different customer categories. | Change in shopping habits inevitable after prolonged restrictions | Reduction of CO2e per tonne of production | Changes in consumer needs and behaviours (fight plastic waste; social distancing) are leading to new opportunities for customers to actively engage on cardboard packaging solutions |
| 6. Organisation Flexibility Our organisation is not fit for purpose and programmes to restructure could be disruptive, take too long to adapt or fail, resulting in a compromised or broken organisational model if not governed appropriately | 2 | Human resources (HR) and other business transformation activities aim to consider new and foreseeable work realities, and HR and Operations leaders consider different types of support and non-traditional work options to deliver a step change in organisation flexibility. � Technology investments assist in supporting employees and the way we are organised to enable more effective communication and flexible working patterns. � Divisional and Group protocols operate to manage organisation changes to support cost/sales improvements and enhance the level of resilience to material changes in production requirements. | Many businesses will question their business as usual model given home/remote working | Employee Survey results | Builds operational and internal reporting efficiencies that allow employees and the business to quickly adapt to changing environments and working practices |
| 7. 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 | 2 | 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 and product integrity/safety. � Training of our employees on variety of compliance modules including anti-trust and anti-bribery and corruption to ensure that they fully understand 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 resourcing needed to demonstrate compliance with business continuity from customers and suppliers | Group and Divisions 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 |
| 8. Sustainability Promise We fail to deliver against growing expectations on large organisations to play a positive role in society, balancing the needs of our business, our environment and our people | 2 | Focused action to reduce carbon emissions across all sites through our sophisticated project roadmap, ensuring we meet European and national legislation for disclosing greenhouse gas emissions and support our existing reporting to organisations such as the Carbon Disclosure Project. � Managing supply chain risk in relation to forestry by ensuring we use recycled papers wherever possible and only source virgin papers derived from responsibly managed forests using credible chain of custody certification programmes. � Ensuring we meet the growing consumer demand for sustainable packaging through a focus on packaging designed for the circular economy, and continually reviewing our sustainability priorities to ensure they align with the expectations of stakeholders and wider society. | Available investments are reduced potentially leading to delays in sustainability projects | Reduction of CO2e per tonne of production | Capitalise on efficiencies in energy upgrade projects and growing societal demand for sustainable products in a circular economy |
| 9. Security of Paper Supply Large fluctuations in the cost and availability of fibre and paper can adversely affect our performance as the Group remains a net purchaser of specific grades of paper | 2 | Optimisation and integration for all paper mills and committed/ contractual supplies with open market purchases, reflecting the economic supply radius of our mills to deliver the 'best fit' alignment between paper production, quality fibre sourcing and performance packaging demand. � Footprint alignment and capex investments for internal mill network to optimise internal supplies against forecasted future packaging needs. | Likely more restricted supplier base for key paper grades | Paper for recycling volumes | Our closed loop model and paper sourcing strategy offer significant customer opportunities and ability to generate a 'best fit' cost and quality solution |
| 10. Cyber a) A major cyber incident on our information or operational technology (i.e. ransomware) impacting short-term trading; and/or b) A failure to stop/identify sophisticated malicious cyber intruders on our IT infrastructure (i.e. phishing attacks) resulting in financial losses impacting us, our suppliers and customers. Both scenarios result in reputational harm | 2 | Investments in specific IT Security controls including regular employee training as part of the Group's broader IT transformation plan improve our capability to detect, respond and prevent cyber attacks. � Progress the maturity of Business Continuity/Disaster Recovery planning and testing to ensure operations' ability to recover from cyber incidents. � A security baseline standard established for operational technology environments to identify gaps and implement a long-term improvement roadmap. | Increased threat potential given remote working and use of Covid-19 phishing attempts to infiltrate IT security controls | IT security phishing campaign statistics | Strengthen technology infrastructure and operational resilience to enhance business continuity credentials for customer service excellence |
| 11. Workforce Capability Our internal strategic workforce planning process and talent and succession management approach fails to identify and resource for future capability needs, resulting in critical gaps in skills and knowledge across key business areas | 3 | Performance, potential and succession management is formally reviewed and subject to calibration by senior management, and our divisional talent and learning and development community supports the identification of core skills gaps to inform a clear action plan to address key talent retention or attraction risks. � Senior Talent Review takes place annually to address strategic workforce questions, review the capability profile of the senior leadership talent population and the bench-strength of the talent pipeline. � Diversity and Inclusion (D&I) action plan in place and subject to regular GOC review on progress. | Potential opportunities to secure critical talent but disruption challenges our resilience and adaptability in terms of skills, culture and ways of working | Employee turnover including external/internal hiring ratios and D&I metrics | Focuses our HR priorities in improving processes, productivity and ways of working to capture and enhance people skills/experience |
| 12. Packaging Transformation We fail to dedicate adequate research and development (R&D) resources and/or gain customer interests towards higher value packaging products and service innovations to drive further integration between our customer products, developments in e-commerce and the growing demand for eco-friendly products | 3 | Sales, marketing and innovation organisation ensures our packaging services support customer brands behind the goods inside. Optimising how our packaging can influence both on the shelf, through e-retail and in the hands of the consumer is paramount. � We adapt packaging solutions by combining resources and expertise to accelerate a positive contribution to the environment through better use of raw materials and processes as demand for, and the benefits of using, more eco-conscious products grows. � We never lose sight that protecting the goods inside and the brand reputation of our customers is our number one priority. | No perceived direct impact on packaging innovations post Covid-19 pandemic | PackRight Centre and Impact Centre metrics | Increasing benefits from resource allocation to build capability and capacity in e-commerce and digital technology to support long-term customer partnerships and specific FMCG segments |
| 13. Fibre Technology Changes Inability to exploit major developments in the use of alternative types/sources of fibre for products or capitalise on breakthrough technology in fibre development and recovery for quality recycling | 3 | Fibre yield efficiencies and fibre recovery optimisation activities using technical know-how and expertise. � Specific project activities to evaluate the use of new fibre technology where there is an identified need and the cost is compatible with the potential volume of fibre. � Exploration of alternative fibre sources based on clear criteria as 'useable with recipe/process change' and 'usable with technology change'. | Lack of investments in our own and competitor R&D | Paper performance metrics | Enables early identification of technology to support paper fibre efficiency improvements, including innovations for kraft substitute top products, quality fibre recovery, papermaking and performance packaging |
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Related Party Transactions (page 179)
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Note 32 Related parties
Identity of related parties
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In the normal course of business, the Group undertakes a wide variety of transactions between its subsidiaries and equity accounted investments.
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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 (2018/19: �2m) relating to key management personnel.
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Transactions with pension trustees are disclosed in note 25.
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Other related party transactions
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| � | 2020 �m | 2019 �m |
| Sales to equity accounted investees | 6 | 8 � |
| Sales to other investees | 4 | 4 � |
| Purchases from equity accounted investees | 4 | 3 � |
| Purchases from other investees | 8 | 8 � |
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Directors' Responsibilities (page 114)
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The Directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations.
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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 Financial Reporting Standards (IFRSs) as adopted by the European Union and Article 4 of the IAS Regulation and 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.
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In preparing the parent Company financial statements, the Directors are required to:
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�������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.
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In preparing the Group financial statements, International Accounting Standard 1 requires that Directors:
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�������properly select and apply accounting policies;
�������present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
�������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.
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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.
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The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
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Directors' responsibility statement
We confirm that to the best of our knowledge:
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�������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.
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This responsibility statement was approved by the Board of Directors on 1 July 2020 and is signed on its behalf by Miles Roberts, Group Chief Executive and Adrian Marsh, Group Finance Director.
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