DS Smith Plc (OTCPK:DITHF) Q2 2023 Earnings Conference Call December 8, 2022 4:00 AM ET
Company Participants
Miles Roberts – Group Chief Executive
Adrian Marsh – Group Finance Director
Conference Call Participants
Cole Hathorn – Jefferies
Andrew Jones – UBS
Detlef Winckelmann – JP Morgan
Lars Kjellberg – Credit Suisse
Kevin Fogarty – Numis
Brian Morgan – Morgan Stanley
David O’Brien – Goodbody
Sean Ungerer – Chronux Research
Miles Roberts
Good morning. Thank you for joining myself, Miles Roberts; and our Group Finance Director, Adrian Marsh, to run through the results for the six months to the end of October 2022. We have a short presentation, after which we’re very happy to take any questions you may have. Well, firstly, during the last six months, we’ve seen high levels of economic volatility but everyone who works in DS Smith has been focused on delivering for our customers. We have responded to our customers’ changing needs with pace and expertise and with high levels of service and product quality and by working together to mitigate as much as possible the rising costs that we’ve experienced. The innovation platform that we have built continues to receive strong take-up and this has been supported by our enhanced capital investment program.
We’re, therefore, pleased with the development of our relationships with our customers and the value we’re able to add. And this has supported a significant rise in our profitability and improvement in our financial ratios, such as the return on average capital employed and leverage over the last six months. And looking forward, we expect the macroeconomic environment to remain challenging but the current momentum in the business, together with our strengthened relationships and our investment plans give us the confidence to expect the performance for the current full year to be ahead of our previous expectations, with the second half performing in line with the first half of this year.
I would now like to hand over to Adrian, who will take us through the detail of the financial results. Thank you.
Adrian Marsh
Thank you, Miles and good morning, everyone. By way of my normal reminder, I’ll describe the performance of the business on a constant currency basis. Here are our financial highlights. Revenue was up 26% despite a small reduction in box volumes reflecting higher sales prices across the whole business which themselves reflect the rising input costs we’ve seen over the last 2 years. Price increases in the half more than offset significant cost increases of nearly £800 million compared with last year alone, with operating profit up 49%.
Return on sales increased 150 basis points which is quite evidently a very strong performance within a highly inflationary environment. As a reminder, in addition to selling packaging, we also buy and sell a large amount of paper OCC and energy, the prices of which, as you’re well aware, have increased dramatically and this increase is both revenues and costs on a gross basis with limited impact on profit, hence, it’s dilutive to reported margin. As last time, I’ll give the breakdowns to calculate underlying margin absent these gross-ups.
Profit growth has flowed strongly through to EPS and cash and I’ll talk more about our continued net debt and leverage reduction shortly. The increased profitability has also allowed for a material increase in our interim dividend and we’ve also taken the decision to bring forward the date which will pay our interim dividend by about 3 months which we trust will be appreciated by our small shareholders during these difficult financial times. Our key metric of ROACE which of course, does not have the same nuance as for margins has improved by 400 basis points, well within our target range. This is a 12-month measure, so the run rate is clearly significantly higher.
I’ll now go through the main moving parts of the usual bridges. We’ve broken out the packaging revenue from the totals and also the price mix to help you understand the impact of the pass-through of external sales of paper recycle and energy on underlying margin. The box volume decline had a slight negative impact on revenues. Other volumes as a mix of increased volumes of recycling offset by less external paper sales as we use more internally. As for last year, the major increase is clearly the sales price increase just over £650 million of the £950 million is packaging pricing, representing average prices of around 25% higher versus the comparative period, the balance made up of external paper, energy and recyclate sales.
Turning to EBITDA. As with revenue, there’s a small negative contribution from the volume decline and a similar story for other volumes with less external paper being sold, although there is a corresponding benefit on the cost side as less is being purchased. Sales price mix dropped straight through to profit and I think we’ve consistently proved the strength of our business model in that we’ve been able to more than offset the very significant cost headwinds as well as managing our cost base through our proactive risk management and procurement processes whilst ensuring security supply at all times for ourselves and as importantly, our customers.
On the cost side, the largest contributing factors were raw materials with external paper purchasing, OCC and other raw materials such as starch, together making up roughly half with other costs such as labor distribution, together with energy making up the other half. As a note, the combination of our energy risk management and our energy sales to local grids across Europe has significantly negated the impact of extremely volatile energy prices in this period. As previously guided, we still expect on a full year basis, around £100 million increase in our net energy costs compared to last year.
Overall group margin has increased significantly, albeit, as I noted before, this is despite the inflationary environment. Regionally, there will always be short-term variations depending on the level of our own paper production. Clearly, we’ve seen some big moves in paper pricing and profitability in the last year and that has an impact before prices are fully reflected in packaging. Eastern Europe is the area where we’re short is paper and until the pass-through to packaging completes, the effect on margin is, therefore, greatest in that region, although profits were nevertheless up a very healthy 27%. Northern Europe has been our toughest region with volume reductions being more than the group average, partly reflecting higher comparators in the prior period but also the general economic environment, not least in the U.K. together with greater cost inflation than other regions.
Despite this, profits were flat, while revenues increased impacted by a greater proportion of recyclate and energy sales, hence, the margin decline. On the positive side in this region, we’ve also the largest proportion of index contracts which only recently reflected previous paper price rises already recovered in other regions. On the other hand, Southern Europe has clearly been the standout performer as profits more than doubled with the clear benefits from the Europac acquisition being demonstrated by very strong performance within both packaging and paper particularly in our Portuguese kraftliner mill [ph]. North America remains a high-margin business despite a challenging overall environment at the moment and we continue to make good progress with our multinational packaging customers as we replicate the offering they receive in Europe. Disappointingly, the availability of manual labor remains a drag on our performance.
Of course, margin is an important metric but as you know, our principal KPI is ROACE [ph]. So whilst not surprising, it’s very pleasing to see our returns back to the levels prior to our 2 significant acquisitions in 2017 and 2019. Our 13.2% is calculated on a 12-month basis. So clearly, the current run rate is higher and towards the top of our medium-term target range of 12% to 15%. And we respect — to expect to remain in this target range going forward.
Returns and profitability have also converted well into cash. Clearly, the main driver is the improved profitability but it’s also been a decent performance on working capital despite the inflationary environment. Within working capital, you may remember at the full year, I described an inflow of £109 million to the risk management of our energy hedges which I said would reverse. That has happened. But as part of that continued counterparty risk management process, we had a net inflow of £197 million from additional margin calls during the period.
As I’ve set out in our technical guidance and absent further margin calls in the second half and we’re expecting around half of this to be an outflow in the second half of the year and the other half in the first half of next year. Just to note, invoice discounting has remained constant at £380 million despite the significantly increased selling prices. So overall, a very strong free cash flow which we can see on the next slide, has been a key driver in reducing our debt and leverage.
Moving to the cash flow bridge. Net debt has reduced by £337 million since April. The picture in the half is relatively straightforward with the improvement driven principally by the strong free cash flow I’ve just described. Clearly, 1 of the highlights of the results is that net debt over EBITDA is now significantly below our target ratio of 2x, driven by both an increasing EBITDA and reducing absolute debt level. And I’ll talk more about that on the next slide.
Just for modeling purposes, you should note the Interstate put option of just over £100 million will go out shortly. If I adjust for this and also ignore the cash received from the hedging collateral, then I calculate our leverage to be closer to 1.3x. Just building on the strong cash flow and deleveraging performance in the first half, despite the many challenges of the last few years, not least Covid, I think it’s worth highlighting the consistently strong cash flow from the business which is a feature not only of our management but also the strong fundamentals of the business we operate in. We’ve generated £2.2 billion of free cash flow since 2019, while continuing to invest in the business well ahead of depreciation. Net debt is roughly halved with our leverage ratio comfortably below our medium-term target. We have an undoubtedly strong balance sheet and remain well placed to continue to deliver excellent results in a highly volatile environment.
Our financial strength is clearly extremely important as it provides the capital to fund both future growth and returns to shareholders. As a reminder, I’ve reset our priorities for our financial metrics and capital allocation. We talked at the full year about the opportunities to invest to support growth with our customers. And principally, we expect that to be via organic investment in our business, investing in projects that give a return on capital over 15%. We’ve also maintained a progressive dividend as can be seen from our announced increase. Considering we’ve built a strong platform over the last 10 years which will be extremely difficult to replicate, any M&A now will most likely be bolt-on in nature, continuing to meet our criteria for strong financial returns. In an uncertain environment, we want to retain financial strength and flexibility, investing to support further growth with our customers while retaining the flexibility to return any surplus cash to shareholders.
Finally, my technical guidance. These are the usual line items you’ve come to expect. There’s very little change since our guidance in June. Amortization now reflects the end of the SCA acquired intangibles within working capital and absent any further risk management, I’d expect the reversal of half the cash benefit of margin calls on energy hedges that I talked about earlier. And if all our input costs remain at prices as of today, then there’ll be a further negative pressure, particularly on creditors, leaving working capital as a small outflow in the full year.
We also expect to pay out just over £100 million of the final element of the Interstate put. As I mentioned earlier, the guidance I gave at the full year of year-on-year net energy headwind still remains at around £100 million. As a reminder, approximately 85% of our revenue is non-U.K., so 1% move in sterling equals around £7 million on operating profit. And finally, as of today, other than the small amount associated with the noncash final unwind of the Interstate put discount, I again do not foresee any exceptional or adjusting items at all this year.
I will now hand back to Miles.
Miles Roberts
Thank you, Adrian. Thank you for taking us through such a strong set of results. But turning to a business model, a differentiated business model that’s really driving ongoing success with our customers. And what are those differentiators? Our business model is very clear, consistent and robust. It allows us to be successful with our customers and an ongoing attractive financial returns. Firstly, we have a strong well-invested asset base of real scale based throughout Europe and across the East Coast of the U.S. It’s a solely fiber-based business with no plastics or other formats. It’s focused on the stable and profitable and evolving FMCG sector, where we have exciting state-of-the-art ongoing investments, making good incremental financial returns.
And winning with our customers. We all know that the general economic environment during H1 was worse than we thought it was going to be at the start of the period. And this led to a reduction in our market size by at least 4%. And despite increasing our share, our volumes consequently fell by 3% on a like-for-like basis. And you can see from the graph that the sectors for food and beverage for non-food consumer goods have really been very resilient. These are sectors where we are overweight, whilst the industrial sector has been more adversely affected by some of the economic headwinds. And regionally, the U.K. has been poor due to the general economic manufacturing environment in the U.K. but also along with Germany where the gas situation really has particularly affected some of the industrial sector. There was elsewhere in counts like Italy, Iberia, Eastern Europe have fared much better than the group average.
Our market share gain is partly due to our ongoing relentless focus on our customers, responding really rapidly to their changing requirements, ensuring the highest levels of service, security of supply and of course, our innovation pipeline that continues to solve their problems. Our innovation platform is performing well. For example, in sustainability, we’ve seen an increasing rate of progress in the replacement of plastic format with corrugated. We’ve now replaced over 500 million pieces of plastic packaging since 2020. And this rate of replacement is accelerating and we expect that to continue into the second half.
You may also be aware of the recently proposed EU packaging and packaging waste directive and this inherently recognizes that the value of our closed-loop model that’s operated by the corrugated packaging industry and really does support ongoing further growth of corrugated packaging against other product formats. So looking ahead, we’re pleased with our position, our investment pipeline and consumer relationships. Although the general economic environment is likely to remain difficult, our expectations are currently that in the second half of the year will show an improvement of like-for-like volume performance over that achieved in the first half.
And in the context of plastic replacement, I show here just a couple of examples. First, the Vanish e-commerce pack. This is about the washing tablet in an iconic, well-known brand. And here, we’ve been able to replace virtually all of the plastic that was used in its previous format. And secondly, our ECO Carrier. This is currently being rolled out at scale across Europe by 1 of the world’s largest soft drink companies. As I said, these are just 2 examples of the pipeline coming out of our innovation facilities. And we’ve continued to invest in our business. not only in new capital solutions but also in new products and services. All of these are in support of our customers.
And we’ve created an enhanced group-wide innovation function to take advantage of many of the ongoing opportunities to extend and develop corrugated packaging. This function has a new state-of-the-art development facility as well as the recruitment of over 30 new products and service developers. We’ve seen a meaningful take-up of our new products and services, some of which we’ve already spoken about but also include the circular design metrics that continue to receive strong take-up from many of our customers. Our enhanced capital investment program continues to build new capacity and capability. This is now delivering those — the new packaging plants in Italy and Poland that we previously discussed are now delivering ahead of the original budget.
And we’re also significantly now upgrading some of our largest packaging facilities in Germany as well as investing behind new lightweight paper capacity in Italy. And of course, our environmental performance, our program to meet our net 0 target by 2050, with an interim target in 2030. This is not only about decarbonizing but it’s also about coming away from fossil fuels to drive our longer-term competitiveness Examples of these investments include a new biomass facility in France and also in Portugal but also waste-to-energy plant in Germany. And it’s great to see our overall achievements in ESG being recognized by many of the external agencies. We’re very pleased to see S&P Global increasing our score to 73, putting us in a top decile of all companies and also the MSCI maintaining our AA rating.
And to finish, our outlook. While we’re pleased with the progress to date, we have been and remained [indiscernible] focused on meeting our customers’ rapidly changing requirements. Our cost mitigation and pricing processes have been and remain very effective. And with the new investments backed by our customers with those attractive returns, places us in a great position to continue to gain market share. And so consequently, we are raising our expectations for the current year, where we now expect the second half to continue at the same level of performance as the first half.
Thank you very much. Myself and Adrian are now happy to take any questions you may have. Good morning.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from James [ph] from Resistant.
Unidentified Analyst
Yes. I’ve got 2 questions. The first 1 is given the volatility in gas prices, what is your view on the outlook for [indiscernible] prices now? And how important is that gas price move? And sort of aligned to that, your energy hedging is clearly very high. Given that it’s been going on for a year or so now, what’s your adjustment on how other companies are hedged and therefore we placed in the current situation.
Miles Roberts
Thank you, James. If I just lead on with the first part and Adrian can come to the second on the hedging. So just in terms of volatility, you’re absolutely right. The gas price of gas, you look at TTF gas, it is very — remains volatile. And we’ve seen paper prices really respond to that. And I think in terms of future paper prices, I have no doubt that this ongoing volatility at the moment is increasing price of gas will ultimately feed into those into price of paper. Exactly when and how, obviously, it’s always more difficult to know but we — the higher rate of gas, we expect to feed through those prices [ph].
Adrian Marsh
I mean on the second question, it’s obviously quite hard to answer what other companies are doing. So maybe it’s easier to talk about what we do which is we have a 3-year program. It’s rolling. So we’re always looking forward 3 years. I think gas prices came off a bit recently. They seem to be up again now as winter starts to bite. Really, if I was looking forward, is less about this winter that I think the concern is, it’s what about next winter and where gas supplies and where pricing is going to be there. And again, we’re sort of very well managed against that. It’s difficult for me to say what other companies do. I have no idea but we’ve always had our 3-year program. So by constantly looking out 3 years, we’re always exploiting that 3-year forward curve which is obviously materially different from where spot prices are.
Operator
Our next question comes from Cole Hathorn from Jefferies.
Cole Hathorn
I’ve got 3 on my side. I’ll take them 1 by one, if you don’t mind. Just the first 1 is on capital allocation and it’s a bit of a longer question but I’d like to understand how you’re thinking about this now because, Miles, you talked about your CapEx projects, you continue to invest ahead of the depreciation there. Your dividend, it’s a good 5% yield at a sustainable level. M&A, you talked about bolt-ons. But when I look at your net debt to EBITDA at 1.3x, debt is fixed. Are we starting to think about buybacks potentially moving up the agenda because I do understand on a cautious macro environment, maybe you — it’s no longer below 2x net debt-to-EBITDA, maybe it’s below 1.5x net debt to EBITDA. But just wanting to understand how you’re thinking about cash deployment with a strong balance sheet. That’s the first question and then I’ll come back to the other two.
Adrian Marsh
Yes. I mean I can answer that, Cole, to some extent and then sure, Miles chip in if I miss anything. In terms of the priority, I mean, it’s been a priority for me since we made the big acquisitions to get our leverage down to restore our balance sheet and to give us optionality going forward. Obviously, someone else will be coming in, in the summer and can take — have their views going forward. But my priority has always been about getting us through that deleveraging to give us the optionality looking forward.
Anything we do on — in terms of returning capital, clearly, it’s a board decision taken in context with looking at our 3-year plans, what it is we’re looking to invest in organic growth and if there are any inorganic opportunities. In the current climate, obviously, the waiter feeling is much more around a cautious approach, at least again, over the next 6 months. But you’re right. I mean going forward, we set out our framework and it’s quite clear that absent anything else, then we do start to look at how we return capital for sure. I mean, absolutely. And it will be wrong for me not to suggest that the Board don’t regularly discuss that.
Cole Hathorn
And then maybe coming back to your guidance, you talked about volumes sequentially better. Should we be thinking about this just a function of you are relatively more food and FMCG, so you should be more resilient versus some other players? And then also easier comparators versus last year and the fact that you’re benefiting from the ramp-up of 2 new box plants. So just wanting to understand that sequential guidance in the second half. And then the third question is on energy. You are well hedged 80% at what’s likely to be attractive levels versus the current forward price into 2023. How are you thinking about that hedging further out? Do you have flexibility to pull back on your hedging because I imagine in your position, you don’t want to hedge at the wrong rate into the following year because at the moment, you are, I imagine, a very good net winner.
Miles Roberts
Look, just on the volumes. You’re absolutely right, Cole, in everything that you said about our being overweight in the FMCG, we can see the resilience of that. I mean it continues to give us a very solid platform. You’re right about the comparators. You’re right about the new investments. What I would add is we’re also very pleased with where we are with our customers and about some of our ongoing contract and market share gains that we’ve seen coming through in the half year, particularly with the volatility and the — and issues with supply chains, we’ve demonstrated how we can continue to support our customers and that has resulted in some further awards and that’s the only thing I’d add to what — to the issues that you said. But Adrian, on the hedging.
Adrian Marsh
So on the hedging, just to be super, super clear, we look at it entirely as risk management. We have a 3-year program. It allows us to maintain a constant dialogue with our customers around a relatively secure cost base despite other volatile inflationary costs at the moment. So we haven’t had to go back and discuss energy surcharges. We haven’t had to go back and discuss anything to do with production impacts. We’ve been able to manage the business stably through and that’s what we do the risk management for. So as we look forward to 3 years, is less about do we think there’s going to be any opportunistic benefits or not. It’s really what does that do in terms of giving us stability over our cost base, removing a level of volatility and how we can manage it. I mean for what it’s worth, the 3-year forward on energy at the moment, I think, is around about €50 a megawatt hour, I think, something like that compared to peaks in the highest part of the volatility we saw over the summer of €300.
So even if you locked out everything 3 years forward, you’re then locking that against a long-term average of around about €25 but it’s still materially lower than where you are today. So we don’t look at it in terms of how opportunistic we can be. We look at it in terms of what it does in terms of the split [ph] of our cost base and the conversations you need to then have with customers.
Operator
Our next question comes from Detlef Winckelmann from JP Morgan.
Detlef Winckelmann
Well done. Just very quickly, firstly, on the volumes. You guided obviously sequentially higher up half-on-half. Just in terms of the industrial focus, obviously, that collapsed quite a bit, seeming in the last couple of months. Have you — do you expect that to bottom a little bit? Have you seen any improvement more recently in the last, I don’t know, a couple of weeks or so? And then secondly, just on your full year guidance, of roughly, call it, £840 million, if I read it quite simplistically. Just if you could highlight your level of confidence around that. I mean you do have box pricing relatively locked in, energy costs relatively locked in. Volumes could be maybe a risk but that seems higher. Yes, just your thoughts on that, please.
Miles Roberts
Yes. Just on the on the volumes. The industrial was weaker. And what we saw in that peaking of the energy costs, particularly during the summer, when you look at the gas curves, you can see it sort of shooting up in the summer and then coming right back down again. Whilst we were very much protected there, we did see some of the big industrial clients ceasing, curtailing production in the light of those very high costs and also the request really across the EU about conserving gas for the winter. We have seen those gas prices come off. We have seen storage rates and perhaps confidence about the availability of gas over the winter returning. So we have seen some recent stability in that market.
Now it’s very difficult to forecast towards. But at the moment is much more stable than it was a few months ago. And that’s partly behind our sort of H1, H2 being greater than H1. But on the full year, I mean, you’re right.
Adrian Marsh
Yes. I mean, I was just going to say, I mean put it this way. In my 10 years, this is the first time we’ve given firm half year guidance for full year. So you can read into that, the level of confidence we’ve got.
Miles Roberts
Absolutely right. We won’t be saying that and this we’re feeling very confident about that. Thank you.
Operator
I will now take our next question from Lars Kjellberg from Credit Suisse.
Lars Kjellberg
A couple of questions from me as well. The first one, I just wanted to understand exactly what you’re saying. In terms of the volume component, is that sequentially that year-on-year, we’re talking because to me, it doesn’t necessarily feel like the levels of activity will be up in the second half versus what you’ve seen in H1, given the sort of sequential contraction of volumes as we go from kind of the Q2 into Q3 and Q4. But just to get a clarification on what the comparable is.
The other component then, I guess, we are starting to see some material contraction on the paper side. And obviously, the normal dynamics would suggest that it’s going to be leading to some sort of box price contraction going forward. So just your thoughts on — well, at the same time as costs are coming down, of course, right? So you call that energy full year hundreds versus the 158 OCC [ph] is, of course, off in your net short papers. So there’s a number of cost items that are coming down. So how should we think about price over cost in the second half of the current year? And again, just a clarification on the volume component, what is our number.
Adrian Marsh
Yes. Thank you, Lars. We’re saying that whilst volumes fell in H1 against the previous H1 by 3% in the second half compared to the second half of last year, we’re expecting the volume performance on a like-for-like basis to be better than we saw in the — than in the first half. So therefore, for the full year, we’re expecting on a like-for-like basis to be better than the minus 3% that we saw in the first half. And again, for the reasons that we outlined previously.
On the box side, we are — the price of paper, you’re right, has come off a little bit recently. Where we have our index deals, typically, we have a paper component and we have a non-paper component in our pricing. So at the moment, our prices generally are still rising despite the lower paper price. Now clearly, there gets a point if paper then falls heavily, when does that start to weight? We just don’t know. But we can see how — and we are seeing our box prices still rise. In terms of paper, we’ve seen energy costs come off from the summer highs going up a little bit. We see OCC coming down. So as always, the price of paper remains volatile but I do feel it’s linked much more to the underlying costs. And if those costs come off, then I think we’ll see some paper weakness. If they increase, then I think we’ll see the price of paper respond.
As a company, as you all know, we have extensive paper facilities but we try to limit our exposure to the German market. We have much less of our own capacity there, simply because it’s so oversupplied. The cost of OCC are generally higher there. They’ve got the gas situation. So as a company, if the prices are moving down there and out of line with the cost, then clearly, we don’t face that exposure. And that goes into some way as to the confidence that we have in the second half of this year despite that volatility in paper prices. Thank you.
Operator
Our next question comes from Andrew Jones from UBS.
Andrew Jones
I’ve got a few. I’ll start with the first one which is a big picture; this EU reuse and Cycling directive. I’m wondering how it changes your views on the overall market growth over the long term. I mean we’ve generally sort of thought about this market as potentially that CAGR increasing as a result of plastic paper substitution but if this is obviously also aimed at lowering overall use of new packaging through the whole use dynamic, clearly, that probably reduces that overall growth in packaging. So how do you see that impacting corrugated? I mean do you have any expectations for what the long-term growth rate should be in that market. I’ll come back to my other.
Miles Roberts
So we’ve — so the EU recently had their draft directive for the packaging and packaging waste directive. So it’s out there. It has to be implemented nationally and clearly, there are a few rounds of it but it does broadly follow our sort of expectations. And that is about the inherent value of the closed-loop solution operated by corrugated against other formats, principally but not only but principally on plastics. And therefore, in the secondary packaging, etcetera, where we operate, it’s been large, largely left out. We’re not subject to these requirements that the packaging you make will have to be actually reused, i.e., return by the recipient package of the package back to the producer of the packaging. So we’re exempt from that. And I think the important thing is it really does recognize the value of the recycling model that corrugated uses.
What we have seen from our customers is an increasing take-up of corrugated against packaging — against plastic. We can see we’re moving into a number of areas that were as before where plastic has enjoyed just a cost benefit because it wasn’t recycled and it ended up in landfill, etcetera, that it’s no longer able to exploit. So whilst total packaging use in the future, I think will come down because of this requirement to reuse, I think that corrugated will ultimately benefit from and continue to grow and develop into where is that plastic is there. And we can see it today. We can sit with a rate of replacement. We can see it with the take-up of our new products. Yes, thank you.
Andrew Jones
Just to clarify on that. I mean, do you think that the substitution effect is greater than the loss of overall packaging volume effect? I mean if you — I mean do you have any feeling for a number in terms of what sort of CAGR we could expect if it was sort of 2% to 3% growth in the past, is that still sustainable in the future? Or could it be high or low?
Miles Roberts
I can really talk about corrugated. We think this is a driver of growth for corrugated. What it does to other formats is really up to them. No surprise. I think broadly, it will mean a reduction but for corrugated, I think will be a growth. Now previously, we’ve talked about this at previous Capital Markets Day. And we concluded that our growth will be greater going forward than it has been in the past. Typically, in the past, we’ve grown between sort of 2% to 3% per annum and we’ve estimated that we should be at least 1% ahead of that. On a sort of an ongoing basis, not nearly sort of 1-, 6-month period as the environmental debate in packaging continues to develop. So we’re not surprised by its legislation at all. And we think in terms of taxation and other things, there should be further support for our — for the — effectively for the corrugated and the fiber-based businesses.
Andrew Jones
Understood. And just another question on the energy costs. I mean you’ve said recently that you were 80% hedged for the following fiscal year. On that 80% of volume, could you give us an idea that the energy cost headwind that you’ve actually sort of locked in so far. Clearly, you can’t go do the other 20% but can you give us some…
Adrian Marsh
We’ve guided at the full year.
Andrew Jones
Okay. Okay. Just 1 point of clarity. You said the working capital, you should see a small build for this year. So previously, I think you were talking about just over £100 million [ph] bill because of the — we did reverse the items last year. So we’re talking just that expectation is just that it’s going to be a much smaller build than you were previously expecting.
Adrian Marsh
But I think you have to strip out the reversal of the margin calls on the energy derivatives which is just a timing difference. You get the cash in before the cost impact in the following period. So it’s a timing difference and that reverses as such. And then on overall working capital, absent that, I expect there to be pressure to the negative this year, particularly if paper prices come off a bit, that has an impact on our creditor levels. We’re still increasing, as Miles said, pricing, so on revenue and receivables, that will be — it will still be a negative on that, i.e., those balances will be getting slightly bigger. And we’ll probably get a small benefit on inventory as — with the paper price reduction.
So all of which, as of crisis today and that’s all I can really go on, I would expect a small working capital outflow on the underlying business, so absent the reversal of the energy margin calls.
Operator
Our next question comes from Kevin Fogarty from Numis.
Kevin Fogarty
The first 1 is we are on pricing. And in terms of box pricing, do you think at this stage, all our full sort of box price increase sort of implemented by the end of this financial year, i.e., sort of nothing rolling into the next financial year? And just sort of following on from that, could you help us think — how should we think about how the metrics now included in index contracts might be different compared to previous cycles? I appreciate there may be elements of sort of gas pricing, etcetera, in there. But just how should we think about sort of those dynamics are the drivers of pricing as we go into 2024.
And just secondly, in terms of M&A thoughts now, you flagged in the presentation that you’re thinking more around bolt-ons. I just wondered sort of the profile of assets that might be attractive to the group now? And how much does the kind of sustainability initiatives drive your thinking on that?
Miles Roberts
No. Thank you. So on the pricing, we’ve seen during H1, we saw quite a significant increase in prices compared to H2 of last financial year and of course, H1 of the previous financial year. And what we’re seeing in H2, we expect prices to increase again but not of the rate that they increased in H1. And this reflects a moderation in paper prices. As I said, our indexes aren’t only on paper, they’re on non-paper inflation as well which, of course, we’re still seeing coming through. So is the balance of that’s why we expect H2 price to be better than H1. And therefore, when you look into the following financial year, everything else staying the same which clearly won’t happen but if it was to, you would see the full year effect of the higher prices, therefore, coming into the following year because that rate of increase during this year. I said that does depend on paper pricing and lots of other things but everything is staying the same. That’s how we see that. We’ve been very pleased with our progress on pricing.
On the M&A side, there are a number of opportunities there. As Adrian said, there are bolt-ons. It’s nothing heroic at all. It’s where it really gives us a particular sort of capacity, building our market share, particular sort of assets that we want. It’s in Europe, U.S., it’s paper packaging and there were no — it was all in our core business, nothing outside of that. What we have found is that the quality of assets that we are looking for if they’re available on bolt-ons, then we’re happy to look at them. But we have found that the solutions that we are developing in terms of new capital, work with our supply base. We can create assets frankly, just aren’t out there in the marketplace today. Those 2 new builds that we have recent — 2 new packaging plants, [indiscernible] open are just — it’s just way ahead of anything else out there. These new expansions that we are investing in as part of our capital, again, it’s using technology that just isn’t out there, much, much more efficient, lower energy usage, higher labor productivity, quality control, that’s giving us, I think, a real competitive advantage in the market and we expect that to continue.
Operator
We’ll now take our next question from Brian Morgan from Morgan Stanley.
Brian Morgan
Just following on the paper price questioning. Can I just — on the containable price up cycle, you were looking to shorten the lags between the containerboard price increases and the paper price increases. Presumably now you’d be looking to lengthen those legs, can you touch on that a little bit?
Miles Roberts
I mean, half our customer base is indexed and the half is fully negotiated. And I think we’ve really demonstrated over the last couple of years where we’ve had a lot of inflation, how we’ve been able to really effectively manage that in mitigation and pass through to our customers. And now — and going forward, I think, with our service, our quality, we’re very happy with the relationships that we have. In terms of our sort of our pricing, we’re feeling that we’re in a very good position, supported by the types of contracts that we have. And in the index contracts, it’s not just paper, it’s also non-paper as well. So we’re feeling in a good position.
Adrian Marsh
And then particularly on the unindexed contracts, it’s very much looking at what the overall inflation environment is as well. So yes. I mean, it’s — I don’t think anyone is expecting anything to fall off a cliff. Clearly, when you get into a deflationary environment, if that happens, then there’s pressure on the down on price. There’s no 2 ways about it but we’re not expecting anything significant in the medium term.
Miles Roberts
We’re not expecting a deflation environment in the medium term. Thank you.
Operator
We’ll now take our next question from David O’Brien from Goodbody.
David O’brien
Three, if that’s okay, please. Firstly, just on energy, again, if we step away from FY ’23 as a whole, what will energy hedges have saved you for the full year? Secondly, inability and again, up to the 520 million [ph] pieces of plastic replaced. Can you give us a feel for what that equates to as a percentage of your total volumes, maybe talk around what the experience has been in converting those customers, are there differences in contract duration, what they’re willing to pay for product or anything interesting that’s kind of transpired? And then finally, on the guidance and look maybe a little bit unfair but I’m just trying to piece together everything you’re saying, box volumes in the second half to be better sequentially pricing — box pricing continues to rise, paper prices are down ever so slightly but it is a little bit of a saving and OCC [ph]. Would it not be fair to say that H2 is really well underpinned actually but calling it consistent with the first half but actually there’s quite a bit of upside to maybe to that number? Or what should I be thinking to offset that optimism?
Miles Roberts
Yes. I’ll take the first and you can take the rest. Makes sense?
Adrian Marsh
Absolutely.
Miles Roberts
I mean in terms of the first question, it’s genuinely impossible to say and it’s not something we look at because in order to say — we don’t look at it in those terms anyway. We look at it at the risk that’s been managed but if you were to make an assumption, you would only ever buy at the highest market price, then clearly, being managed against that, there’s been a good benefit. But that’s never the case. We’ve also got energy sales. said, we supply electricity where the markets are sensible across Europe to local grids. So we only ever look at things in the round. And I’ll go back to — at the year-end, we said our cost base would have a headwind of around about £100 million due to energy. That’s what’s happened. So anything else, it’s really impossible for me to say.
Adrian Marsh
And on the plastic replacement, I mean, it’s representing around about sort of 2% to 3% over that period of our annual volumes. In terms of revenue, the plastic is actually quite a plastic placement. It’s actually quite a bit better. It’s attracting the innovation in there. It’s attracting a premium. It’s a new product, etcetera and it is accelerating. That doesn’t think that the numbers that we’ve given actually doesn’t include some of the very latest obviously, products that are out there. We talked about the ECO carrier for the soft drinks industry. I mean that is looking like a very significant development and also in things like laundry liquid, etcetera.
Now you’re starting to see a number of replacement always plastic tubes and we’re very pleased with the developments there. And these are all around products that packaging of — of ultimate or liquids in there and the way our barrier technology in products, in packaging that’s going be sort of in a high humidity environment. We’re really pleased with the development there, the number of units but more importantly, the margin. And I think in terms of our guidance for the full year, all I can say is we wouldn’t be so explicit this year unless we were feeling as we’re feeling very confident about that.
That is not dependent on a big move forward in volumes or anything like that. This is about the value added in our products, about our service, the overall added value we’re able to give to our customers. And the margins were able to earn on that gives us really gives us an underpin on the confidence. Now obviously, we’ll come back during the year as things develop. But sitting here today, we feel in a good position with our customers. Thank you.
Operator
We’ll now take our next question from Sean Ungerer from Chronux Research.
Sean Ungerer
I don’t know if you could maybe comment to provide any insights into the mean spots here on €20 a tonne. I think it’s obviously great for margins. I don’t know, maybe competing has reached the floor or perhaps where you’re going from here? And then sort of linked to this, as you mentioned earlier, there’s been some light pressure on tailable pressures as owned comparables. Just looking again back on your comments on medium term, not expecting medium-term deflation, not see a sharp correction in H1. And then just thirdly, around the Germany and U.K. You can maybe comment if it’s [indiscernible] I think there’s more downside on the reason and more down — top [ph] in your H2 outlook.
Miles Roberts
Look, thank you. In terms of the price of OCC, it has come down quite significantly. We’ve seen the export markets really sort of dry up for this. We’ve seen consumption of paper production of paper fall as well in Europe and that’s led to a significant reduction in the price of OCC and I think is currently running about sort of 11, 12 days of stock across the industry which historically — that that’s a very high figure. Seems to be sort of at the moment, it seems to be reasonably stable where it is but it is a volatile market.
In terms of paper, we’ve seen a lot of downtime there. That’s partly why the OCC has gone up but the stocks have gone up. There have been a lot of downtime there. Industry stocks seem to be pretty stable at the moment. And the price, the fall in the price of paper, I think going back to what I said earlier, it probably has more to do with the change in the underlying cost base. But I think it will — our expectation but this is a volatile market. Our expectation is if gas prices go up, I think you’ll see some strengthening of the paper price. If they come down, maybe it causes some weakness. It’s very difficult to call. But I do think it’s responding to the costs rather than anything than else. But I do note the considerable downtime has been taken across the industry.
And therefore, the stocks have been on paper relatively stable. No, thanks. I think if we just take 1 last question and just consent time. No? Great. Well, look, thank you very much, everybody, for your time today. As I said at the start, we’re very pleased with the start of the year, the first 6 months and we’re feeling good about the — about our market position and the prospects for the remainder of the year. But thank you for your time. And yes, I look forward to the next update.
Thank you, everybody.
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