Boxing clever
DS Smith’s chief opens the lid on the challenges of Brexit
It’s not often you see the boss of a FTSE 100 firm doing an impression of the Trade Secretary as an open-mouthed goldfish. But it’s a measure of the exasperation Miles Roberts, chief executive of DS Smith, feels about the Government’s lack of clarity on Britain’s future trading relationship with the EU.
“We said to Liz Truss, ‘The opportunities – please, where are they?’ She said, ‘There are lots.’
“I said, ‘Fantastic. Please, where? Please, because we want to invest.’ “‘Yes, there are lots,’ she said.” Cue his take on the goldfish. “What do you mean by lots?” “‘Many.’ ”
Founded in 1940 as a carton manufacturer by David Solomon Smith, the London-based paper and packaging group has ridden the waves of ecommerce and sustainability, supplying billions of recycled boxes a year to the likes of Amazon.
It took the bold decision to sell its plastics business last year to boost its green credentials and has multiplied its operating profits by about 10 over the past decade to an expected £705m for 2019-2020.
However, since the 2016 referendum only £30m of the company’s £4.5bn investment in capital expenditure and takeovers has been in the UK.
In a climate of uncertainty over Britain’s future trading relationship with the EU, that figure is likely to shrink further.
“When you’re looking at assets and somebody says, ‘One of these is £800m-£900m, are you going to build another?’ the first question is, ‘Who are we going to trade with?’,” Roberts, 55, says.
“If it’s the US, that’s thousands of miles away – and we’ve got big reels of paper. Is it going to be Europe, which is 20 miles away? If it is, tell us. Without that [knowledge], it does rather cause us to hesitate.”
DS Smith’s paper mill at Kemsley, Kent, is one of Europe’s largest, producing about 820,000 tons a year. It is where the company develops its technologies to recycle waste and harness the heat produced in the process to create paper for packaging. This innovation is then replicated at DS Smith’s 15 other plants across Europe and the US.
The UK market is not big enough to sustain the business, Roberts says, and the cost of transporting its products means it is more economical for DS Smith to manufacture near its customers, 80pc of whom are in the food and drinks industry.
If the next 11 months of negotiations result in significant obstacles to exports from the UK, the company will have even less reason to invest at home, even though it repatriates its profits back to – and pays corporation tax in – Britain. Of its 32,000 employees, only 4,900 were in the UK at the time of its 2019 annual report.
Roberts is adamant, though, that DS Smith will remain a British company. “The UK is our home,” he says. “It’s where we started, it’s where we developed from. We’re sitting here – not in Paris. So let’s work together.”
But many of DS Smith’s customers export to Europe so regulatory divergence, on which Boris Johnson has insisted, would be another reason for the company to focus investment elsewhere.
“If we supply to a biscuit manufacturer in the UK and that is exported … even if it’s compliant in Europe … the danger is it’s classified as a British product and is therefore non-compliant,” Roberts says. DS Smith spent £30m building stock ahead of the postponed Oct 31 Brexit deadline, at a cost of £5m-6m, but if strict checks are introduced at the border this could increase significantly. “At its worst, you could be talking about another £100m of working capital,” Roberts says.
“That’s in debtors, creditors, additional taxation that you may have to pay back and get refunded, contingency stock and stock held up in ports.
“These are huge flows, and we don’t even know what France is going to do.”
For all that the company has prepared, it is still reliant on the companies it supplies.
“I was with a small business that sells gin the other day,” Roberts says. “Ask them about Europe, where a lot of their sales go, and they’ll say, ‘We’ll just have to wait and see.’”
What frustrates Roberts most is the contrast in approach between the May and Johnson governments.
“We’ve heard a lot of very different things. We were with Michael Gove last year. He said, ‘Without question, there will be regulatory alignment, believe me.’ You had the chancellor, the business secretary and the prime minister saying that. But now we’re in a different environment.”
Asked what he wants from the Government, Roberts’ answer is simple: “To engage.”