Market Data 
Investing.com — Shares of DS Smith Plc (LON:) dropped over 1% after the packaging group posted a sharp contraction in first-half earnings, reflecting declining box prices and rising input costs.
The company reported an adjusted EBITA of £221 million, down 39% year-on-year and 34% sequentially, with margins shrinking by 380 basis points.
While this result aligned with consensus estimates, it followed a reduction in forecasts over the past two weeks, as per analysts at Morgan Stanley (NYSE:) and Stifel.
Revenue for the period fell by 4% year-on-year to £3.37 billion, slightly below consensus of £3.41 billion, with lower selling prices (£124 million) driving the decline.
Box volumes grew by 2%, adding £51 million to revenue, but this was not enough to offset the combined impact of lower box prices and rising input costs, particularly for fibre and containerboard.
Stifel noted that despite sequential price increases during the first half, box prices were about £160 million lower than in the same period last year, a decline of around 4%.
The regional breakdown showed a consistent pattern of earnings pressure. EBITA in Northern and Eastern Europe contracted by 61% and 49% year-on-year on a constant currency basis, respectively, while North America saw a 53% decline.
Southern Europe fared slightly better, with a 20% year-on-year drop. Although North America and Eastern Europe recorded stronger volume growth, subdued market demand in Northern and Southern Europe weighed on the overall performance.
Cash flow concerns added to investor unease. DS Smith reported negative free cash flow of £85 million, driven by working capital outflows of £55 million and higher-than-expected capital expenditure of £247 million, above consensus estimates of £212 million.
Net debt rose to £2.47 billion, resulting in a net debt-to-EBITDA ratio of 2.8x, up from 2.2x at the end of FY24.
The company declared an interim dividend of 6.2p, a modest increase from 6.0p in the prior year, but this failed to alleviate broader concerns about its financial position.
DS Smith’s outlook for the second half suggests modest volume growth and further box price recovery to offset higher input costs, despite recent containerboard price softness.
However, management flagged continued market weakness from the second quarter carrying into the current period, creating uncertainty about the pace of recovery.
The backdrop of deteriorating earnings comes as the company prepares for its merger with International Paper, expected to close in the first quarter of 2025.
While shareholders of both companies have approved the all-share deal, analysts point to DS Smith’s weakening financial performance as a potential overhang on near-term share price movements.
