Huhtamaki Oyj
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Good afternoon, and welcome to Huhtamäki Quarter 1 Earnings Call. Without further delay, I'll hand over to our CFO, Thomas Geust, who will present today. Go ahead, Thomas.
Good afternoon from my side as well. So I'll start off immediately on Slide #2, which states total -- strong total net sales growth indicating on the 11% growth, which is growing in all elements or all categories.So we have 5% coming from organic growth, with all segments contributing 5% comparable growth for total level where we ended up on full year basis 2018. So growth is continuing strongly. We have an additional 3% growth coming from acquisitions. You recall that, we -- in 2018, we acquired 3 new businesses. So it's Tailored Packaging in Australia, CupPrint in Ireland and Ajanta for the Flexible segment in India. The 2 first ones was -- were invested into foodservice.And then the currency has a consolidated positive impact of EUR 19 million, maybe coming from U.S. dollars, more details on that later on. And emerging market growth at 7%.Turning to the next slide, these are more details on the comparable growth per segment. So looking at Flexible Packaging, where we had strong growth in the emerging markets: Africa, Middle East, India, all of them contributing nicely to the growth. So a good demand continuing in that segment.Then we have a volume growth of 5% in North America, where especially the private label tableware part contributed, but also successful pricing actions then delivering growth. What can be said about North America really at this point of time is that the [indiscernible] in the delayed Easter season as seen in the profile, which also applies for Foodservice E-A-O, where the growth was 4%, mainly driven by QSR and included a -- including folded carton and ice cream packaging as well.Growth was good across the -- across Europe and continues to look favorable going forward as well.Solid growth in Fiber Packaging. We have Oceania, Central Europe and Africa delivering steady growth and the normal onboarding of businesses in this segment.If we go to Slide #4, we have some details here, starting off actually by highlighting that we are now reporting IFRS 16 numbers, which are reflected in the -- all the key figures for return on investments and return on equity as well as for RONA when we go into the other segments, there the comparison for Q1 2018 is not restated. All the other numbers have been restated. Reason for not restating those numbers are that they are 12-month rolling basis, and we did not reallocate earlier than 2018 numbers.So what you see from this one is that net sales have now also been well converted into profitability. So you can see that the productivity part is what visible in the EBITDA. So we are growing also on profit in the same pace as net sales. And as said, it's mainly coming from productivity improvements. Earnings led by Flexible Packaging and North America also improving.Free cash flow was at EUR 18 million compared to EUR 13.5 million in 2018. You will get more details on that as we go further into the presentation.Next, we'll go segment-by-segment, go to Slide #6. So we have Foodservice E-A-O stating solid comparable net sales growth and further boosted by acquisitions. So here, the acquisitions contributed by EUR 23 million in sales. As I stated already earlier, we had good growth in the QSR segment and ice cream in Europe. However, we saw some softer sales in non-European markets.In U.K., we saw some headwinds, mainly coming from the mix as well as season -- seasonality. If we look at the CapEx, you see that CapEx is up to 13.6 compared to 9.8 previous year. This is, of course, partly a timing issue, so CapEx is always timing related. However, we also have a feasible part here coming from investments done in the substitution of plastics going first papers straws.Turning to Slide #7. North America improving to -- compared to previous rate of EBIT margin of 8% versus 7.2% in previous year. RONA still reflecting the higher assets following the investments, down also throughout last year. And then the capital expenditure on the previous year has leveled approximately. Cash flow improved though there is still quite a lot of tied up capital following -- giving up for the Easter season, which, as stated earlier, is later this year. The last year, it was end of March, early April, while we now had Easter towards the end of April. And that is in especially in our branded sales in North America.So going to Flexible Packaging next. Flexible Packaging, we already highlighted that the emerging market sales was -- were good. India delivered growth, good top line development, but then also improved clearly on profitability, and that as a follow-up -- following both successful [indiscernible] activities as well as better mix and tight cost control. So the main profit improvement in this segment came actually out of India. A good recovery following the headwinds we saw in 2018.The CapEx, early part of the year, still a lot of that one is related to the startup of the prestigious factory where -- of which you can see a few pictures on the next slide, so I'm turning to Slide #9.Yes, so we had our first commercial deliveries in Q1. We started to ramp up in Q1 but it would continue during this year. And we estimate that the EUR 23 million investments in the first phase will bring some EUR 20 million of sales in -- going forward. And it has then follow up, of course, opportunity to expand further. It's a joint venture where Huhtamäki get 75% share, and we have the joint venture partnership with our long-term partner who is also participating on the Fiber Packaging side in each. And in the picture, you actually see our new CEO, Charles Héaulmé, who took over after Jukka Moisio today -- officially tomorrow as stated here.So Fiber Packaging was burdened by investments into the new ready meal tray, which will be used in Fresh ready meals, especially in U.K. We are now in a phase where we are still in a pilot phase, expanding the pilot phase, making more and more deliveries into retail sourcing in the U.K. And so far, the feedback from the market has been positive on that front. And we are, therefore, putting more efforts into the development and also into investments into this category. The impact of Fresh was roughly EUR 1 million, so the burden on from the result is if EBITDA comes [indiscernible]And then, as we said here, you'll recall that we have a line coming up in Russia later on this year, and that is partly burdening the growth in this segment. But once the line is on, then we are all going back to being able to deliver more growth in East Europe.So turning to financial review, going into the Slide #12. I captured already basically the productivity and EBIT improvement. So really, the EBIT and EBITDA improvement, as I said already earlier, comes to a large extent from conversion improvements but also then from some of the cost-out actions we took in 2018 to move some benefit into the profit as well.Net financial items on a slightly higher level compared to previous year, mainly coming, of course, from higher net debt levels, but from monetary terms, noticing the significant deviation. The tax rate is at 21%, so slightly higher than previous year. And then EPS, you can see, it's up 10% at EUR 0.44 versus EUR 0.40 previous year. In the quarter, we had only EUR 0.1 million of items affecting comparability in the results.Next, going to the currency. I stated already earlier that the EUR 19 million positive came mainly out of U.S. dollars. You can see that the average rate for U.S. dollars in the first quarter '19 was 1.14, while in 2018 was 1.23. So we get a 7% approximate benefit out of that one. The closing rate in Q1 was 1.12. So currently, looking at the U.S. dollar a few hours ago, it still seem like the trend is favorable for us. But then, the other currencies there, we basically, in other words, have a big double wash. So some of them trending favorably. Some of them trending more negatively and ultimately, then bringing basically 0 benefit [indiscernible] negative into the translation.The raw material slide, Slide #14. The indexes have some movement in then -- also in Q1. However, we do not currently see the same kind of very strong fluctuations that we were seeing throughout 2018. And I think the stability in the commodity is more likely at the current level compared to where we were in 2018. And when we have stability, then, obviously, everything related to pricing and managing the business is easier.Slide #16. Some details on the impact of the restatement of IFRS 16. So we have adapted IFRS 16 with a full retrospective transition method, which, as stated earlier, means that all our balance sheet and results have been restated to reflect the new standard, but as stated some of the alternative KPIs like return on investments, return on equity and the net debt to EBITDA are impacted by the 12-month rolling of the impact. So not fully comparable on those parameters.Main impact comes from leases, warehouses, plants, land and office buildings. And they are mainly in the Foodservice and -- Foodservice E-A-O and North American segments. EBITDA impacted EUR 25 million while -- than on EBIT, so the impact is minor.We also see an increase in net debt of approximately EUR 120 million, this is referring to 2018 originally reported versus 2018 restated numbers and then noncurrent liabilities. Noncurrent and interest-bearing liabilities increased approximately by EUR 120 million, of course, as well on noncurrent and EUR 19 million on interest-bearing liabilities.On Slide #16, you can see an attempt to highlight how we -- it will reflect our KPIs last year and going forward. So you can see it as an example of that. Q4 gearing was 0.63 with the previous standards and the changes now leads to beyond to 0.73. So -- and then the -- if you look at net debt to EBITDA, we reported 2.2 at the end of 2018. With the restatement, we land at 2.3. And then gearing for Q1 is -- remains at 0.73. And then net debt to EBITDA increases slightly to 2.4. And the main reason this time for the net debt increase comes from the buildup of the working capital to be able to deliver the demand in Q2.So turning to Slide #17. Slide #17 indicates -- gives some details on our loan maturities. Our average maturity is 3.5. We have unused committed credit facilities of EUR 300 million approximately and maturity of this is in 2022. We will monitor the situation going forward. We expect to release more money out of the working capital, so cash flow improvement is what we look to achieve later on in this year. And depending on that one, we will then have a look on -- depending on the successful of that one, we will then follow up on how we proceed with potential to refinancing. Another aspect also, of course, relating to the refinancing is potential acquisitions also in Europe.Next slide, free cash flow. So improving approximately EUR 11 million on profit. However, being EUR 4 million below on free cash flow, really coming from the working capital, which I already highlighted the reasons for, and then the CapEx mainly related to timing of CapEx is not anything else.Slide #19. The higher -- the dividend proposal was approved today in the AGM. So the dividend to be paid is EUR 0.84 per share. That gives a payout ratio of 49% and a yield of approximately 3.1%, of course looking at [indiscernible] numbers. And then the payout of the dividend is EUR 88 million, which is, of course, then burdening again the net debt for Q2. This is nothing different compared to previous years, so same procedure.Total assets were at EUR 3.4 billion. Year-end was EUR 3.2 billion. And compared to previous year, they're up roughly EUR 400 million on total assets. Equity at EUR 1.345 billion, and that's to be compared to previous year's EUR 1.2 billion approximately.So next, Slide 20, progress towards long-term ambitions. Now we move to take into account here that, yes, [indiscernible] 2017, so '14, '15, '16 and '17 reported are according to the old standard was in full year 2018 or to the extent possible reported in the new IFRS 16 methodology. And then, Q1 2019 is, obviously, also according to the new standard. Regardless of this, we are seeing some [ way of way ] from most of the ambition target. However, we also need to recall that Q1 is basically our lowest quarter, despite the fact that it was our strongest Q1 Easter -- through Easter when it comes to top line and the EBIT in absolute terms.With this one, we're basically covering still the outlook. The outlook is unchanged, and that's Slide #22. Outlook is unchanged. When it comes to the capital expenditure, we still keep it unchanged as we will be looking into the progress here depending on how and with what timing we are putting more efforts to this sustainability-related CapEx's growth forward. The legacy business is such, so like-for-like businesses should be now out of the highest investment -- of the investment cycle, and therefore, beyond a lower CapEx spend compared to previous years. So still we keep the CapEx estimate unchanged at this point of time.
Well, thank you, Thomas. We are open for questions now. And the operator will give you instructions.
[Operator Instructions] The first question today is from the line of Anders Knudsen.
Just wondering, in terms of Foodservice, you say there is an increased preference for sustainable packaging across your markets, which is translating into growing demand. Could you elaborate a bit more on the statements? What you're actually seeing here?
Yes, I think, basically, across all categories, there's, of course, a lot of discussions on -- first of all, the plastics theme, but then also all in all on how to in an efficient way enable the disposables to be disposed in a good way. So recyclability and reusability are, of course, high themes in this category.
Also, as we highlighted in the Q1 report, we've seen good growth in paper food containers and folded carton packaging. And in real practical terms, this is, for example, paper ice cream containers.
Yes.
So has this impacted you in a positive way? So we can actually see it in the growth trends?
Yes. So from our point of view, we consider the trend moving into more fiber-based solutions to be a positive development for us. We are experts in converting anything related to fiber-based products. And for -- just as an example, we took the opportunity when there was this ban of plastic straws to introduce our own paper straws in the system.
Yes, but it's not something we can actually see on group numbers or anything?
I mean -- you mean in a -- as a clear step up to the growth or...
Yes, exactly. Yes.
I think I -- well, for sure, it will be contributing both growth as well as profit. However, if we think about converting into completing new products, so taking the, as an example, the paper straws. If you convert one product line into something new in an industrial setup, it means that you need to add machines. And adding machines always take some time. So it's not like if you think about the segment, which is close to EUR 900 million, that starting to sell paper straws will heavily move the needle at the first phase.
But how capital intensive is this? As you say is that your CapEx is up 39% year-over-year in Foodservice. How much is this contributable to conversion basically?
Sorry, I didn't get. You said -- was it CapEx related?
Yes, exactly. So how much of the CapEx you're spending is related to converting from plastic to fiber?
I don't have an exact number on that one, but the majority of all that, all the -- well, first of all, the majority -- clearly, the majority of all the CapExs put into Foodservice in Q1 are paper related. And then pure conversion from plastics to fiber are really the ones which are straw related. And for that one, we don't disclose the exact number on how one -- how much we have invested.
And even though we have not disclosed exact numbers, then already today, majority of our Foodservice E-A-O, our items and capacities are in paper items.
Yes.
[Operator Instructions] There are no other questions coming through, so I'll hand back to the speakers.
Very good. Thank you so much. And we wish you a good continuation of the day. Thank you. Goodbye.
Thank you.