Earnings Transcript for SMDS.L - Q2 Fiscal Year 2024

Richard Pike: Thanks Miles and good morning, everyone. As Miles has just mentioned, given the market backdrop, we're very pleased with the results during the period and the financial measures on the summary slide are all in line with our expectations. If we look at the revenue movement first, the overall total is 18% down last year. The vast majority of this is attributable to the fall in paper prices, if you recall these, commenced in September '22 and then in turn, the impact of the paper price reduction feeding into our packaging contracts. I should emphasise though that the team has done a great job in mitigating the impact of the paper price reductions and the majority of our contract negotiations for the current year are now complete. Moving to the profit bridge, you can see that the revenue impact has been mainly offset by cost reduction measures. A large part of this has been lower paper and other raw material prices. There is also a very meaningful contribution from productivity improvements, with around 4% to year-on-year headcount reductions, procurement initiatives and other efficiency measures, all being driven hard. As a result, the main difference of the year-on-year performance is attributable to lower volumes, resulting from the weak demand environment. I thought it was worth expanding on the demand picture. Here, I think it's instructive to look back to what happened over the last few years. In the period immediately prior to COVID, we saw just over 3.84 million square meters of boxes. As you can see from the graph, with benefitted during and post COVID from the consumption of more product to home and our customers stocking up due to concerns around their supply chains. This was then obviously followed over the last 18 months by more returning to workplace, customers regaining confidence in their supply chains, leading to destocking and the compounding recent effects of the weak macro environment. What is encouraging though, despite the recent volatility, is that we're still 2% up on pre-COVID levels and starting to see signs of positive progression as we move into our second half of the year. Turning to segmental performance, the main points of note are that, firstly in the North, despite the UK and German markets continuing to be weak, we've seen strong progress on productivity and efficiency. In addition, the benefits of the Berlin site closure and the UK recycling restructuring are feeding through in the current run rate performance. The south packaging business has held up well, despite lower contributions from paper and energy sales. In the east, we're also benefiting from strong productivity improvement in a lower demand environment and in North America, whilst we've seen a return to positive year-on-year progression in box volumes, paper prices remain weak with approximately 25% of our paper still being sold in the export market present. Cash flow is as predicted with the material working capital outflow arising as a result of lower paper and energy prices leading to material payables reduction. Just to note, we pushed 65 million of our hedge collateralisation maturity back to FY'25, so we're only now expecting circa £115 million of cash out this year. As these factors all materialised during the first half, we would expect improvement during the second half. The negative free cash flow in the half, together with our dividend from final stage payment for the interstate acquisition, have resulted in the previously announced higher debt levels. When we combine this with a slightly lower EBITDA, the half-year leverage is 1.7 times. I would reiterate that we remain very focused on retaining our investment grade credit rating. At our FY'23 results, I said I would spend my initial months spending a fair amount of my time at our sites, with our teams around the world seeking to understand where we are today, what areas we need to focus on to drive our underlying performance forward, and coming back to address capital allocation. The observations I'd make in these regards are, firstly, and as I've said before, this is the most customer centric B2B business I've worked in. This focus on our customer needs is clearly demonstrated by our ever-improving service and quality statistics, together with the innovative solutions we're providing for their ever-changing needs. Miles will bring this more to life in his section. We've pursued a plan since 2010 to grow by serving large, multinational, mainly FMCG customers across Europe, and more laterally established a further presence in the US. We've grown our share of the European corrugated packaging market during this period from around 3% to 17%-18%, and now have a scale pan-European platform, together with an additional platform for future growth in the US. And as I look back over this period, we've deployed a significant amount of discretionary capital in buying businesses. Obviously, this was necessary pathway in order to build a platform of scale in a finite timescale. If I look at our track record at deploying capital in terms of the strength of the businesses acquired and the quality of asset base, I think it's appropriate to look not only at the return on average capital employed, but also the return on our operating assets. In my view, this stands up well and gives me confidence that we have a solid platform to build from. It's also worth noting that the asset values in many cases have been uplifted from historic cost, as we have fair-valued our assets when we bought the businesses and in addition, our capital employed includes £600 million of assets under construction in multi-year capital projects, which will then enhance our future returns. So in summary, the combination of customer focus, the sustained and ongoing capital deployment, together with operational improvement, are all captured in the profit progression slide. And you can see, after a dip in performance post-COVID, we believe the last few years have significantly tested the relationships between our customers and their suppliers, and that we are encouraged to have come out of it with deeply entrenched relationships. We've built a resilient and more agile model through being short paper. It is less volatile than the broader sector, and we've continued to raise our peak and trough earning levels and as a reminder, we believe we will generate our second best level of profit ever this year, against what continues to be an extremely challenging market backdrop. Now switching to our future, we believe we now have the opportunity to drive further improvement from the platforms that we've put in place. We no longer need to deploy capital to broaden our geographic reach in Europe, as we have the scale footprint to service our customer base. That's not to say we won't do any further M&A, as there may well be compelling opportunities as we move forward, but in the near term, the next stage of our journey is to maximise the returns from this footprint and this is why we're focused on organic improvement and growth. This is about being better, rather than just bigger. Some of this will be driven by customer-orientated activity, growing our volumes, providing new solutions and developing our margins. Some will be through deployment of capital investment, and some of it will be from driving continuous cost and efficiency improvement across our 270 operating sites. By the end of this financial year, we'll have deployed £500 million of discretionary capital over a three-year timeframe. This involves a combination of growth-orientated capital, which often takes several years to deploy, and as a result, is coming online in a phased fashion over the next few years, together with efficiency improvement, cost reduction and innovation. Over the next couple of years, we can see attractive opportunities for at least a further £300 million of discretionary capital investment. In Miles' section, we'll draw out examples of why we're confident of delivering on our 15% to 20% return on capital promises across this £800 million investment basket, which spans FY'22 to FY'26. As I mentioned earlier, the delayed phasing reflects the fact that there are a number of multi-year projects, which Miles will talk about in his section. There is of course some benefit this year and next from recent investments in our greenfield investments in Italy and Poland, but the main benefits will start to come through from FY'26 onwards. If I can help put more detail on this, I'm happy to take questions after. Finally, I'll now turn to what this all means for free cash flow generation. As you're all aware, we'll generate less free cash flow than normal this year, primarily due to the working capital cycle and other point-in-time payments, but if you look back over time, you can see we've consistently spent more than depreciation on CapEx. We also have working capital swings through the cycle, but fundamentally, we generate about 100% free cash flow to PBT on average through the cycle, and as a result, we expect to have the options around enhanced returns to shareholders or further investment in the business as we look forward. So to reiterate what we've previously said on capital allocation, we see significant opportunity to drive greater underlying performance from our existing platforms. We're committed to the income returns, particularly given how important this is to a significant portion of our shareholder base. We will continue to look at acquisitions where strategically important and compelling, and then as we return to normalised free cash flow levels, we'll look again at other returns to shareholders. That's the end of my section. I'll hand back to Miles.

Miles Roberts: So thank you, Richard, for taking us through the detail of the results for the last six months. I would now like to spend some time exploring three areas in more detail; the challenging market backdrop, our customer centricity and our margins, and then the detail of some of our most important investments. So firstly, with the markets, the market has been one of the most difficult that we've seen and as a result of this, our volumes were down 4.7% despite us increasing our market share, but pleasingly, Q2 was better than Q1 on a like-for-like basis. Our FMCG, our core part of our business, performed much better than the industrial market, which was down 9%, but within our FMCG business, our food and drink was down by just over 2%, which was a modest outperformance of the market and reflected the supply of a number of new awards. It reflected a difficult FMCG market, but also that some of our larger branded customers have been focusing primarily on pricing, which was at the expense of volume, but our numerous discussions with many of our large branded customers highlight their intention, now that inflation is more constrained, to start regaining share in 2024 through a combination of new product launches and some promotional activity. So turning next to our customer centricity, our continual focus on our customer and Richard has talked about our profit performance and how margins have been maintained as we have mitigated packaging price reductions with cost reductions and the good news is we're really starting to see the packaging pricing levelling off at current paper prices and it's been quite clear that our customers have been valuing our added value services and relationship more highly than in the past and this is playing into pricing. We've always been focused on the customer and continue to invest behind further improvements so that we perform strongly, not just at the moment, but also as we exit these challenging markets. Our key measures of our customer centricity are measured first in our service and levels of product quality that have improved significantly over the last few years, but also in our customer satisfaction scores and the graph here shows the results of our annual customer survey of all of our customers and has shown further improvement, taking us deeper into the advocate zone, the highest ranking in our customer service survey. And when looking further ahead, not just to our existing customers, but to potential new customers, we measure their perception of us through a brand survey and here I show this survey across a number of criteria from the latest results in 2023, but also measure back to where we were in 2017 and this shows a significant improvement such that we're now in a clear leadership position in the industry as defined by our customers and our potential customers and this is also shown in our investment in new products and services. These new products and services solving our customer's problems are built heavily on the circular agenda. Customers are coming to us, particularly the challenges around replacing plastic and reducing carbon and the solutions we're developing are expanding the size of the corrugated market using bespoke solutions with a higher value added content. We've spoken before about targeting to replace a billion pieces of plastic packaging with corrugated by 2025. Now we're approaching the billion mark a year earlier. So we will be upgrading that time and these new innovations, you have a target of an additional £200 million pounds of revenue in the next year. And turning to these different solutions, I've highlighted here three particular areas of plastic replacement. The first is into the takeaway food category, a growing category with a lot of added value and here we managed to replace plastic packaging with fibre-based packaging, but with a recyclable printable barrier that contains the oil in the product and of course, we have our lift up, DS Smith lift up. We were approached by Coke with a challenge to replace their plastic top packaging and the plastic film around their larger bottles and we developed a corrugated fibre-based solution, bringing in with us a machine supplier where the machines will be installed throughout Coke's bottling facilities. We trialed it in Austria. The consumer feedback was absolutely terrific. They're rolling it out through Austria and their plan is to roll this product out right across Europe and in the pharmaceutical industry. Here it's about controlling the temperature of drugs that are being distributed to the user. So the user needs to be able to dispose of the packaging in a sustainable way. So it needs to be recyclable, but it needs the thermal insulation properties to maintain the condition of the drug. Not only does it perform as well as the plastic, current plastic offer, it's actually at a lower cost than the plastic. These are just three examples of the many solutions that we are working on with our customers and I have here a short video just to give you a flavor of the newly opened innovation hub together with a number of other products that we are currently working on. And now I'd like to talk about the investments that we're making for the future. Richard has already outlined our £800 million of discretionary CapEx investments. We're already more than halfway through that and I would just like to outline some of the specific projects. Now those projects are in three categories. There is some about additional capacity where we are constrained and it's about efficiency, but it's also about sustainability. So firstly, some of our recently completed projects. Two new packaging box plants. We've talked about these previously, but during the year they've started very well with high levels of service and product quality, but the efficiency is everything that we expected. Highly efficient producing for our customers and the expected financial returns on these investments remain as per the original case with a return of capital employed in excess of 20% as those plants reach over 80% utilization in their third year of operation for year '26, '27. And secondly, how we're targeting high returns from our essential replacement cap and firstly, is an example of the Lucca paper mill in Italy. Here we're replacing an old mill with a new lightweight machine with much greater efficiency, not only in energy, but also in output. So the whole investment of €250 million, which will be completed in the financial year '25, '26 is expected to make a return on capital of between 15% and 20% and with the Viana, our craft mill in Portugal, it's an outstanding asset and here we're replacing an end of life boiler, but we're taking the opportunity to upgrade the paper line with €45 million euros of additional investments. We're adding 30,000 tons of extra craft paper capacity and the return on that incremental investment is between 15% and 20% and with sustainability, we're focused on carbon reduction as part of our science-based target, the one and a half degree target we have achieving net zero by 2050 and a 46% reduction in carbon by 2030 and firstly, the investment in a new biomass in rural, our French paper mill producing lightweight paper supplying our French and Spanish businesses. The gross cost of the investment was €90 million, but the French Government have given us a grant of €15 million towards that and in addition to that, we have agreed electricity take-off and biomass supply contracts at really quite advantageous prices. Now, this will be completed during '24, '25 and our view on the return on capital employed in the first year of operation will be in excess of 20%, but we're not only using our own balance sheet to solve our sustainability challenges, we're using third party capital where it's appropriate, where it's part of a wider local solution. Firstly, we have the Aschaffenburg paper mill in Germany. We're working in partnership with E.ON to create a waste to energy and combine heat and power plant. It is financed and operated by E.ON, but it gives us significant energy cost and CapEx saving as well as reducing CO2 emissions by about 50,000 tons per annum and similarly, solar electric working with third parties, where we're looking to install solar panels across 54 sites, it's all part of local supply arrangements with a significant reduction in the energy costs and volatility, but also with the CO2 reduction of over 10,500 tons. So turning to the outlook; for the current year, our expectations are unchanged. It's built on an expectation that our like-for-like volume performance will continue to improve into the second half over the first half and that our pricing remains resilient, but also we deliver on targeted cost reductions, but looking further ahead beyond the current year, we've continued to invest in our business, investing behind our customers in new products and in capital solutions and the structural drivers of our industry remain strong and we continue to take market share. So our expectation, our confidence is that we will build a structurally stronger business with high levels of return. So thank you. Myself and Richard will be very happy to take any questions you may have.

Operator: [Operator instructions] The first question comes from Cole Hathorn from Jefferies. Please go ahead.

Cole Hathorn: Good morning, Richard, morning Myles. Thanks for taking my question. I'd like to focus on kind of the discretionary CapEx programme to start. Firstly, could you give me an estimate of the planned phasing of the incremental, £120 million, £160 million earnings you expect over the next few years if you take 15%, 20% return on capital on that £800 million. And then secondly, I want to try and understand the risk to delivery, if any, to that 15%, 20% return number. Looking at the projects, they don't look like huge greenfield projects reliant on any major pricing or volume recovery at all. Rather, the new box plants or labour efficiency, have already started then, they're ramping up and the upstream container board projects are, cost, brownfield, energy and labour and efficiency improvement. So overall, am I right to assume that the risk to delivery is lower and you can deliver these returns without any heroic pricing or volume recovery assumptions of the cycle? Thank you.

Richard Pike: Thanks, Cole. So, if we look at that £800 million, as Myles has just described, he's talked to sort of over €500 million of that discretionary capital in the different chunks that he's focused on and over and above that, what you'll see is lots of smaller capitals, spread across our packaging plants, which are again a mix of sort of growth and efficiency and productivity in the main. So I think we've got, as Myles described, some really large projects where we think the project is strong and actually lots of small things. Quite often where we've got cost reductions, where you'd expect sort of shorter payback and actually an even stronger returns. So that's what gives us confidence around the overall mix and 15% to 20% obviously translates into £120 million to £160 million. We think we're probably looking, over a period between now and FY'27 into FY'28 at around about £150 million of performance improvements in our numbers. Because of the phasing that Myles talked about, actually, we've got some benefits already coming through from Belchatow and Castelfranco, but over and above that, you'd expect most of the phasing to come through in FY'26 and '27 and trying to give you a little bit of a steer into things, I'd probably phase that about half in '26 and half in '27 in terms of when you're looking at your numbers moving forward. On your last point about, actually, can we be confident that we don't need any price and volume. Some of these CapEx's are growth related and therefore, it will be about volume coming through and filling capacity, but as the actual, plants are sort of delivered in '26 and '27, we're pretty confident about what we can already see in terms of customer demand. What we can actually see, therefore, in terms, our box volume in the jurisdictions that is pulling off on the paper side and a lot of our plans are actually underlying energy improvement and efficiency improvement where we're not reliant on price things. So we're very confident about £150 million over the next three to four years.

Cole Hathorn: Thanks very much. And then if you allow me a follow up, Miles, you made a comment that, container board prices have been low for a while. You're seeing box pricing levelling off. Where we are now versus six months ago? Are you feeling a lot more comfortable around your pricing negotiations effectively done? Where pricing is going to go into the next financial year and are you seeing the start of potential promotional activity from some of your customers effectively wanting to know if we're calling the bottom here on the pricing? Thank you.

Miles Roberts: As you said, Cole, the price of paper has been sort of bumping along the bottom. It may sort of some small movements are sort of maybe coming through, but I think it's really bumping along the bottom and we never know, really know exactly where it's going to go in the future, but it does feel that we're at the pretty much at the at the bottom, but as I said, none of us exactly know that. And our pricing with our packaging is really reflects current paper prices. I think, we have been through the indexation or all the negotiations and we're now starting to see, that the pricing really sort of level off. Now, what we are pleased about is our margins on our products. As I've tried to outline the value that we I think we're creating for our customers, the coming through COVID, the strength of our supply chain, the strength innovation, the strength of the relationship has left us in a position where our margins in the packaging are showing real strength against previous cycles. Now, look, we have seen an improving trend in our customers with the volumes and we're expecting that to continue into H2. As I said, we've had a lot of discussions with our customers, particularly the large ones, about how they are going to regain share during 2024 and beyond and they have outlined a number of fairly consistently how they're going to do that. Now, obviously, that's for next year and nothing certain, but it is giving us some confidence in the pricing and also the outlook on volume. We expect it to start to improve as it has been during the year to date.

Operator: Charlie Muir-Sands of BNP Paribas Exane. Please go ahead. Your line is open.

Charlie Muir-Sands: Good morning, gentlemen. Thank you for taking my questions. The first was just to clarify the answer to a previous question that the line broke just. Did you say you saw an incremental £150 million of returns not yet in the current run rate when you were talking about the split between '26 and '27?

Miles Roberts: That's correct, Charlie.

Charlie Muir-Sands: To elaborate on that, today, we've got £500 million is in is in our analysts forecast as we look forward. So when I talk about £800 million discretionary capital, you're talking about the £500 million of discretionary that's been spent across FY'22, '23 and the amount that we're spending this year. We're factoring in another £300 million over the next couple of years. Actually, that combined £800 million we expect to see, further £150 million of improving to our underlying performance spread across probably slightly delayed because of the phasing, but spread across FY'26 and '27.

Operator: Thank you. We will move on now to our next question from David O'Brien of Goodbody. Please go ahead. Your line is open.

David O'Brien: Good morning, guys. Thanks for taking my questions. Just two for me, please. Miles, you talked about the centric approach and how it's been valued more by customers now, and you can see that in a structural uptick in margins and returns. Richard, you've outlined the CapEx plan. I'm just wondering, with the CapEx plan coming in cycle looking like it should, please, God, have an upturn. Could we be expecting your return on sales targets or your return on capital targets to increase in due course? And second question, I guess, big news for the sector in North America and Europe over the last few months is the merger between Smurfit Kappa and WestRock. How do you think that impacts on a competitive point of view for you guys? And, what measures do you think you have to take maybe to counteract or is there any?

Miles Roberts: Thank you. You've seen how are in quite a severe downturn for the price of paper and consumer consumption. You've seen actually our return on sales things actually ticked up a bit and that gives us some real confidence. Similarly, our return on capital as well is in our medium term targets and that's where we -- and that's where and that's where we currently target the business. Let's see how things go for the next one or two years and let's see if we can get to the very top of the medium term targets and we'll be working extremely diligently to do that. It's interesting about, the Smurfit Kappa and WestRock acquisition joining. Firstly, we're not surprised. We think that consolidation is has been part of the industry and this obviously takes it just is further on that is further. It's just, further evidence of that. I think if I look at our business, we're very focused on our customers in the markets in which we serve them. That's different from this transaction, Smurf at WestRock transaction, which is obviously bringing different geographies and certainly when talking with our customers about, our future work plan, what they're expecting from us. It really is very much about how we service them in the markets that that we're in. And I say we see real opportunity for us there. We've talked about our market share improvement following a number of new contract awards. And I think that that plays to the strength of our of our business and our relationship. So I don't see any particular threat from it, but obviously, it's part of that ongoing consolidation story.

Operator: We will now take our next question from Andrew Jones from UBS. Please go ahead.

Andrew Jones: Hi, gents. Thanks for the great disclosure. Just a philosophical question on the whole, the latest proposals from the PPWR. I think it's probably a bit more complex for business like yours in terms of the potential implications and given the need for kind of more minimising packaging volumes, do you think this feeds into your skill set in terms of greater box complexity possibly means higher box margins in the longer term? And can you just talk us through like your high level thoughts on the implications for the corrugated market from this latest draft, please? Thank you.

Miles Roberts: No, thank you for the question. So the PPWR packaging and packaging waste directive part of the EU legislation. It's still going through the various challenges with the Parliament, the Council, etcetera and we don't have final legislation. What I would say is that just generally where across the EU and in parts of the US, we are seeing legislation that is supporting the use of fully recyclable, sustainable packaging and that plays to fibre. It's the question then is about the amount of material in there, about the products that is being used to package and there is an element of reuse. The draft legislation, I have to say, is quite a support, a further support to fibre-based packaging in that it recognises the inherent strength of that whole recycling model that exists across Europe, where so much of the packaging that's already been made is picked up and is fully recycled, but I do think as we look further forward, the opportunities to replace plastic, I think, are increasing. I think we're seeing that in our results. We're seeing it in our forward agenda with our customers. It is backed by the legislation. There's taxation that's coming in as well, which I think will further support it and I think just looking even further ahead, the need to have packaging for perhaps the primary and the secondary packers, one, the Omni packaging, plays again to corrugate it. So I do think there are a number of challenges there, but, as always, we've got to provide those solutions to our customers. It's up to us to go and present to them and show them how they can meet this new legislation, but also their own environmental standards, working with them to achieve them and I have to say, as I said many times, that there's real momentum behind this. I know it's a very difficult economic environment, but our customers want it. The legislators want it and the final consumer wants it as well. So lots to do, but overall, it's a I think it just goes to support our business. Thank you.

Operator: Our next question comes from Kevin Fogarty from Numis. Please go ahead.

Kevin Fogarty: Great, thanks very much and thanks for the extra disclosures this morning, guys, on the particularly on the capital projects. And if I think about perhaps some of the pricing dynamics just in the next couple of quarters, I just wondered if you could sort of help us with what you're thinking is there currently. Just obviously in the US, we've had recent sort of positive kind of pricing announcements, which obviously will take time to sort of feed through, but given your comments in terms of pricing resilience, in terms of box pricing, just your sort of thoughts for the next couple of quarters ahead relative to the second half of last year, or should we think about it sort of sequentially flat as we go into the next couple of quarters? And then the second question was really on the demand environment. You pointed to a sort of better second half from a volume perspective, but I just wondered, is it possible to sort of pick through how much of that is sort of destocking coming to an end? How much of it is customers being more front footed and sort of getting back to growth? If you could sort of just help us with those dynamics, that would be quite useful, please.

Miles Roberts: Just in terms of pricing, if we look in our Q2, and we just look at the current sort of negotiations that have recently concluded, then we have seen really the pricing of the packaging really reflecting the current price of paper and that's pretty much levelled off. I think we've renegotiated agreed pricing for nearly 90% of our contracts now and as I said previously, we're pleased that the added value we're creating is being recognised in those discussions. So if the price of paper stays as it is, then we expect that pricing to be resilient in the second half of this year and that's one of the things that builds up our confidence in our four-year expectations. Now, where does the price of paper go? None of us know. We have seen the increase in the price of the US market. It's been announced. We'll see if that's all goes through into the pricing, but I do think that the current level of profitability in paper across the European industry, I think, is not at a sustainable level. I think it's more likely than not that the next move will be upwards, but I stress, none of us know. I think it does depend on consumer demand. We are seeing an improving trend there. We track and talk to our customers about the destocking. I think that is really -- that has been at an end for the last few months. They are being cautious over Christmas, there's no doubt, just seeing where the consumer is, but we do expect, with the destocking ending, we do expect the like for likes just mathematically to start to improve. Now, the big question is then is how does the consumer behave? There are some things that are positive and some things that aren't positive. There's still, I think, a lot of concern in consumers' minds over this state of the economy across Europe, but equally, interest rates seem to have plateaued, seem to have and about the ECB here, it seems to have plateaued. Inflation has come down and wages are higher, are running on average higher than inflation now. So there is some further support to future consumption and for ourselves, we have been taking a bit of share as well and some of these new contracts will be coming in during next year and that all gives us that -- that's what underpins our expectation for the full year. Thank you.

Operator: We're going to take a follow-up question from Charlie Muir-Sands from BNP Pariba Exane. Please go ahead.

Charlie Muir-Sands: Yes, thanks very much. Sorry, I think I got cut off before. Firstly had a question about your comment about some of your bigger FMCG customers aiming to regain share. Do I take from your comment that you are effectively sort of overweight the branded companies and underweight on private label? Or should we not really see that as being something that would lift your volumes in particular? And then the second question related to your comment about £200 million revenue opportunity from plastic replacement. Can you just clarify, is that incremental on top of what plastic replacement you already have in the base today and over what time frame are you talking about aiming to achieve that? Thank you.

Miles Roberts: So with the FMCG, I think there are a number of things at play there. Firstly, the consumer is consuming less. So consumer consumption, when you look at the retailers across Europe, is negative. It's particularly in consumer durables. That's very noticeable, but in everyday consumption, it's also come down and within there, you're absolutely right. Private label has in some markets taken some share. You hear a lot in the UK about the growth of the hard discounters, but the hard discounters have already been more established really pretty much across Europe already. So they have got quite the same momentum as in the UK. But we are slightly underweight in private label and we are slightly overweight with the branded companies and we believe that this is where the innovation is. This is what drives the margin. They're the category captain. They're the one who set the agenda on the category and then private label follows sometime afterwards. You have to have a strong branded lead and that's what we focus on. So, yes, there can be some short-term changes, but the innovation and the drive in the categories of the branders, and that's really where a lot of our focus is and that innovation is coming through. We have targeted for next year from the new innovations that we're bringing in, £200 million of additional revenue. We are expecting that to come in, in our next financial year. Thank you.

Operator: We will now take our next follow-up question from Andrew Ian Jones from UBS. Please go ahead.

Andrew Jones: I was also cut off for a task. Just on the long-term corrugated growth targets, when you talk about it being in line with GDP, if we follow through those waste reduction targets of 15% by 2040, even if you strip out the plastic effect, you're probably talking about somewhere between 0.5% and 1% per annum of headwinds. How do you square those two off? How do you see the GDP growth coming through exactly?

Miles Roberts: Over many years, so we've set a target for ourselves just to grow our volume at GDP plus 1% and that plus 1% reflects the environmental credentials and the growth of fibre against plastics, but it also is part of our continual taking of market share and that's where we've been for many years. I have to say we've had a bit of a disconnect during COVID where we grew significantly more than that and equally now as our customers have taken a lot of those, the additional stock out, the destocking, we've been trading behind GDP. But I do think, if you look at the pre-year, we were growing the 10-year pre-COVID about 2.5% per annum, about 1% ahead of GDP. And we do expect that to be our, I'll say probably our, if anything post-COVID, we would expect to outperform that with all the new legislation coming in, etcetera. There are quite a few demographics in here as well. This is about box volumes, people are buying smaller pack sizes, demographic changes, smaller households, smaller kitchens, storage facilities for food, etcetera in housing, that drives a smaller average pack size which obviously drives consumption as well. So that sort of underpins our confidence in that target. Thank you.

Operator: We will now take our next question from Pallav Mittal from Barclays. Please go ahead.

Pallav Mittal: Thank you. I have a couple. Firstly, can you quantify the earnings impact from the economic downturn or the capacity underutilisation that you have seen this year? And secondly, it's a follow-up. The returns on discretionary CapEx are between 15% to 20%, but with risk-free rates now versus where it was two years ago, shouldn't these return thresholds be higher?

Richard Pike: I didn't hear you perfectly, but I think you said for the first question, what was the impact of the economic environment on our results? If that was correct, and by all means ask me another question afterwards, as I showed in the profit bridge, basically we have offset price reductions through costs reductions and therefore the main impact has been a result of the demand environment in our volumes. So you can see that direct impact in the profit bridge. In terms of returns, they are what they are. Basically, we are investing in these assets. We expect to achieve between 15% and 20% returns and we will deliver on those returns and I have quantified what we expect those returns to be. The actual economic environment will go up and down over the next few years, but we are very confident that we can deliver, whatever we have articulated. That's nearly a 19% return across our discretionary investment bucket, which we think is a pretty positive return.

Miles Roberts: I would just like to -- we have been on for nearly an hour, I would just like to thank everybody for being part of this call. So reiterate, we are pleased with the performance in the first half. It is fully in line with our expectations. We are maintaining our expectations for the full year and we can see that is based on the resilient pricing, good cost control, but also an expected volume improvement H2 versus H1. And I look forward to being on the next call. Thank you very much indeed, everybody. Thank you. Thank you for your time.