Huhtamaki Oyj

OMXH:HUH1V

Earnings Call Transcript 2022-Q1

[Kristian Tammela, executive]

Good morning, ladies and gentlemen, and welcome to the presentation of Huhtamäki's First Quarter 2022 Results. My name is Kristian Tammela, I am the VP of Investor Relations. Today, we will have presentations by our President and CEO, Charles Heaulme as well as CFO, Thomas Geust. And after their presentations, in normal manner, we will have time for a Q&A session.

So without further ado, I'll hand over to Charles.

[Charles Héaulmé, executive]

Thank you, Kristian. Good morning to all of you, and thank you for joining us this morning for the presentation of our results for the first quarter 2022.

As usual, I will start giving you a little bit of a flavor for the business context, in which we have been evolving during the first quarter of this year and explain how we have been supporting the results of the company, which, as you have probably seen, as we released them this morning, are pretty strong.

This being said, obviously, we need to start by reminding that we are operating in a very challenging environment. Reminding to all of us that it's now the third year starting that we are in what, I would call, an external context of high crisis, which started, of course, with the COVID pandemic in 2020. And where for probably better reasons, the COVID-19 pandemic sounds like a little bit life as usual today. It's not because as we are seeing, for instance, in Asia and particularly in China, it's very present and justifies a broad-based lockdown in the country of China.

At the same time, in 2021, started this -- as a result of the pandemic and disruption to the global economy, what we would call, high-end broad-based inflation including disruption to the overall value chain and raw material availability. And this disruption in the supply chain is only amplifying in 2022 as we see it. And then there is the dramatic event that started more than 2 months ago now on the 24th of February with the war in Ukraine. That has been basically the operating environment in which we have been evolving.

This being said and major credit to the entire team of Huhtamäki showing resilience, as usual, but as well agility in managing the business. We have been, in this context, able to deliver a strong performance in the start of the year through strong net sales and as well a strong adjusted EBIT growth.

This is driven by, of course, a positive impact from our 2021 acquisitions, one in China and the one larger in Turkey and Egypt. But we have seen as well volume growth as well as increased operational efficiencies. And in the context of the high inflation, we have been able to show pricing power mitigate the impact of this inflation. That's for the short term in the context of the first quarter.

Now our strategy that, as you remember, our 2030 strategy, we presented 2 years ago, our strategy is obviously evolving according to the context and priorities of the company. And the most important change that we need to mention, which was announced a couple of days ago, is our decision to initiate the process of divesting our operations in Russia as a consequence of the Russian conflict and as -- in Ukraine and as a consequence of the poor outlook that we see from an economic point of view in the country -- in the Russia as well as from a relationship to, what I would call, the Western world.

This being said, this means that we will be reprioritizing our investments but always according to our 2030 growth ambition and strategy, in order to capture all the significant growth opportunities that we see in the rest of the world, and there are many. So it's very much about reprioritizing where the markets and the growth opportunities are fitting our strategy and our values.

And in this context, I would like to say that we continue investing in our fiber capacity and in our sustainability program, particularly in sustainable products innovation. And that is an extremely positive sign in our evolution.

We are increasing our capacity in smooth molded fiber packaging, particularly in Europe, in Germany specifically. We have, as well, signed VPPA agreement in the U.S. after signing one in Europe late last year. And then we are installing solar panels in different factories. And during the first quarter, it was in our factories in China.

So about sustainability, and I'm moving here to the Slide 3, we would like to highlight the acceleration of our innovation for sustainable products. And rather than giving you a catalog of all the different launches, and there are quite a few launches that we have made of new sustainable products, we would like to -- with a little bit of pride, but keeping humility, of course, we would like to present three awarded products that are completely new from the company. They have been awarded in the very demanding Dow Packaging Innovation Awards 2021.

And we have, in particular, this very new fiber Sundae cup and lid made of fiber. It's obviously 100% renewable material. It is recyclable. It is compostable. And that's with all the insulation specification for ice cream packaging. This product has been awarded into the top 10 diamond finalist of this innovation award. So a very important achievement for a fantastic product, very innovative, all made of fiber.

And then in our Flexible Packaging technology, we have two awarded products as well. One is dedicated to instant coffee, and that's the main characteristic of this product is, apart of being fully recyclable, which is #1 objective for us, is -- it's alu-foil free. That's for the brand Nescafe.

And then we are dedicated to a product that is very important in volume in the market of India. It's a coloring shampoo for men. And that, for which we have developed as well a fully recyclable two-sided a flexible membrane packaging for this product. And it has been awarded as well in the first quarter in this award. So very nice achievements, which are just a reflection of the acceleration of our sustainability investments and innovations.

Moving on to our business performance, and I'm now, for the ones following offline with the presentation offline, on Slide 5, showing the sales growth of the first quarter. The sales growth has been 31% in the first quarter of 2022. In this 31% breaks down into a comparable net sales growth of 19%. And that's when we are excluding 8% impact -- positive impact from our acquisition, mainly Elif, accounting for EUR 63 million.

And then a 4% positive currency impact during the first quarter. This positive currency impact, we'll come back to it later on in our financials with the positive trend, particularly of USD. That's for our sales, which are above EUR 1 billion in the first quarter of 2022, which is a never achieved level in the company.

When we break down this growth and the sales on Slide 6 by business segment, then we see that all business segments are growing very nicely. Very nicely compared to the previous quarters, but as well very nicely compared to our long-term ambitions. And this is particularly supported by the continued recovery in the Foodservice demand as well as a continued good demand for the food on-the-shelf products. And then, of course, the pricing impact that was mitigating the impact of the inflation in our input costs.

As you see, Foodservice packaging, growing 18% and North America growing 24%. During the quarter, Flexible Packaging growing 18%. All of the three segments, of course, we need to recognize on the comparison of Q1 2021, which was fairly soft from a growth point of view. And Fiber Packaging, growing 8% compared to last -- the same quarter a year ago, 4% growth. So a very good performance, which -- and those numbers are comparable growth, resulting in a 19% comparable growth.

This translates as well very nicely into the profit and loss in terms of profitability, where we see our adjusted EBIT among Slide 7. Adjusted EBIT in euro terms growing 27% and our adjusted EPS growing 29%. Important to say, and we will see more details on the cash flow, that we are optimistic about the future.

We see a lot of growth opportunities, particularly in strategic areas that we have mentioned before. And that justifies significant investments that we continue to make in order to enable our business expansion and our portfolio transformation in the context of the plastic substitution, particularly, and that is driving the increase of our CapEx during the first quarter of the year.

Let's look now in the Slide 9 at the -- and the following slides into some further detail per segment, starting with the Foodservice segment where we see, as I said before, a continued recovery in the demand. The net sales growth are increasing 23%. That's a comparable growth of 18%. As mentioned, the demand for Foodservice packaging is continuing to improve.

I would say it's globally, overall, at the level of prepandemic now. So it has taken 2 years to get back in terms of demand to that level. However, there are some regional differences. So the net sales have increased in most markets around the world. However, with the exception of China for the reasons mentioned before, due to the continued COVID-19 lockdowns.

When we are thinking about now the profitability compared to the quarter 1 2021, we see that the adjusted EBITDA is increasing 45%. The margin percentage is increasing from 8.5% to 10%. And that's despite the fact that in this quarter, our input costs have been increasing a lot.

Paperboard and polymer prices have increased significantly. And the supply chain continues to be disrupted, including some concerns in terms of availability. So in a way, growth is there -- growth of demand is there and the availability may challenge actually further growth.

The adjusted EBIT is improved mainly by this growth in size volume, but as well by the mix of products, by the mix of products as well from a sustainable product point of view. And it is, of course, improved by the pricing actions, which offset the significant cost inflation.

But I want, in order to give back the full credit to the segment Foodservice, to mention that this improvement of the adjusted EBIT margin is very much linked as well to the continued positive impact that we see from all the productivity actions that we have engaged in 2021. If you remember, we mentioned this program, I believe, in each quarter last year, and this is really showing now a full effect as we have promised, about a year ago. So that's for Foodservice service for the first quarter.

North America is basically in the same range of numbers with a growth of 32%; comparable growth, 24%. And that's very much driven by pricing, of course, but as well by the demand -- the recovery of the demand in Foodservice packaging and continued strong demand in retail tableware.

As I said before, for Foodservice, broad-based cost inflation affecting all input cost, raw material, labor, distribution, energy and everything is involved. But the team in North America is, as well, doing a very good job in anticipating the impact into our P&L and into managing the pricing in the right way as well as continuing to maintain our efforts in operational efficiency. And that enables a pretty strong growth of the adjusted EBIT in euro terms.

I want to make one comment that when you see the margin, the EBIT margin in percentage, it looks like a decline versus Q1 2021, but we need to be very clear, in Q1 2021, the inflation linked to the disruption of the market had not impacted our P&L in North America yet in the first quarter. It started really as of Q2. And therefore, it's not a fair comparison and our margin of 11.5% here is a strong margin in the context.

Moving on to the Slide 11 for Flexible Packaging. We see a strong growth, of course, supported by our Elif acquisition that was -- where we started the integration on the 23rd of September last year. But as well, what I would call, a turnaround in the flexible segment in terms of how to manage the cost inflation and its related mitigation. That results into a sales increase of 41%, a comparable net size growth of 18%. So obviously, when we discount for the Elif acquisition that is playing a full role here.

And then, as I said, the margin increase or the adjusted EBIT margin increase is linked in euro terms to allow to the pricing actions that we have taken in the first quarter. And I think we are very proud about the way the team has been handling both the magnitude of the inflation, but as well the timing of the actions and required pass-through. So that's flexible with a very promising improvement of our P&L overall in that segment.

And then finally, Page 12 is the Fiber Packaging, where we see a reported growth of 16%; comparable growth, 8%, and that's after deducting particularly the currency impact. So the 8% is pricing related, but as well volume related even though in that segment or in that market, I would say, we see a relatively soft continued growth in the market. But let's remember that we're coming from an incredibly high growth of that market in 2020, and therefore, relatively lower growth level in 2021 and 2022 as a consequence of the very high level 2020.

The adjusted EBIT margin of 8.2% may call the attention versus Q1 2021. But here, we need to give a little bit of granularity on the numbers so that it's comparable. Actually, our margin in the conversion business, so the fiber product, the rough molded fiber products, is still above double-digit percentage, very much in line with last year.

So why is the EBIT margin of the segment only 8%? It's not concerning at all. It's only for actually a good reason, which is a mix impact from our growing machine business. You probably know that we are developing and producing manufacturing machines for the molded fiber industry and particularly for our needs in rough molded fiber like smooth molded fiber and the increase of the investments, the increase of the production of these machines has a negative effect or a dilution effect on our percentage of margin, but that's misleading because the business is well profitable as it used to be. So we should not be at all concerned about this 8% margin.

With this, I will hand over to Thomas for further details on the financials.

[Thomas Geust, executive]

Thank you, Charles, and nice to have you back presenting the results.

So from my point of view, first of all, highlighting the very strong growth and the strong EBIT growth as well. I would say from the perspective that normally, I have always said that I would love to see EBIT outgrow net sales. This is, however, the mechanism that we have been communicating ever since Q4 throughout the first quarter.

So the fact that increase in commodity costs will have and actually slightly also has had an effect already in first quarter on the margin development. So you could see it in North America, and you could see it in the flexibles numbers that there's actually a drag on the margins exactly as we have been communicating.

However, considering a good volume growth in line actually with our ambition roughly, we have a really strong absolute EBIT development for the quarter. And that's something we are, of course, very satisfied to see coming through.

Other items to highlight on this one is the net financial items, slightly below previous year. I would say, mainly related to our structure of what kind of financing instruments we have been using in the quarter itself. We have a higher number of short-term debt, which actually is still quite efficient in the market. So commercial papers and similar.

Also highlighting here, the adjusted tax rate. So it's at 24% roughly this year versus 23% previous year, partly driven by the country mix coming through where, U.S., you know we are operating in quite high tax jurisdictions. I would also like to highlight the good growth on EPS, the 29%. And actually, the EPS itself, EUR 0.63. That's actually completely in line with the reported EPS as well.

So our adjusted EPS is, for this quarter, 1:1 with the reported EPS. And that, in my view, is also indicating some stability in our business coming through. Further maybe to highlight that the internal -- sorry, the minority interest is increasing, which is indicating that the India business is also finally improving.

On the currency, the EUR 35 million positive with a 4% contribution to net sales growth coming from many currencies, but as usual, the big mover for our numbers is the USD, which is trending quite favorably compared both to average rates previous years as well as closing rates. You will also see the currency translations in the balance sheet when looking at, for instance, equity.

Yes. The net debt to EBITDA at 3.0. So a slight drop versus end of the year. No real deleveraging from absolute terms. So it's really the EBITDA, which is driving the slightly lower number. And obviously, as I will be highlighting on the next slide, we have some -- have a cash flow, which is still negative. So that's, of course, explaining the continued increase in absolute net debt.

Gearing is at 0.92 and also then slightly down towards the end of the year. Just as a reminder, the key reason for the increase in net debt, the jump from Q2 to Q3, previous year, is obviously the acquisition of Elif.

Looking at loan maturities, we issued a term loan facility of EUR 250 million in the quarter. That's for, of course, financing short term -- more short-term financing. We haven't gone out on the long market at least yet. So we are obviously evaluating how the market is developing currently. But for that reason, then the average maturity is also dropping to 2.6 versus 3.4 previous year. But as said, short-term financing is still quite efficient, and we are utilizing it to the extent possible.

Going for the free cash flow. On the free cash flow, clearly, of course, the increased profits are contributing positively. Capital expenditure, as indicated already by Charles, and always the timing effect as well is a drag for our cash flow generation. On a positive note, it's investments into growth and it's investments into the new capabilities that we have been communicating about.

And then if you look on the change in working capital, there we have the main driver still exactly as in the previous quarter being the impact of the cost inflation, which is driving up, especially the inventory. And the majority of the increase actually is price driven on the working capital side. Although there are, for instance, in Foodservice, also a buildup of stock within these numbers.

Turning to the next slide, which is a bit of a highlight of our balance sheet and key KPIs. Not a major change, except for the Elif acquisition contributed items. Operating working capital for the reasons I explained and for the addition of the acquired units is clearly up.

Net debt, as said, clearly up also versus previous year. But then you see the equity also increasing strongly versus previous year. The return on investments and return on equities are slightly lagging indicators. However, they are, for the return on equity, developing also favorably now in the quarter.

And that's a -- in next slide, we will take the progress towards long-term financial ambitions. We are, of course, clearly outperforming the long-term ambition in the quarter. As said, from a volume point of view, we are more or less in line with the ambition. So that's the most important part for us to look at currently. And of course, the other part is just to make sure we are trailing well also on how we are getting our acquired units contributing and then, of course, the pricing elements.

Profitability wise, on a margin level, for the reasons explained earlier, we are trailing behind the long-term ambition. But also here, you can see that we are on a higher level than where we have been in the history at least on annual level.

And then the net debt is on the high end of the corridor as expressed earlier. And this one is dependent also on positive cash flow development going forward in order to get the deleveraging going. And the dividend payout is proposed to be 45% for the year, and the decision will take place today, I assume, in the AGM.

For the short outlook and short-term risks, outlook is unchanged. However, the short-term risk that we have done, a bit -- some changes to the previous statement, bringing forward really the geopolitical situation as well as the inflation. Of course, COVID is still remaining as a factor to account with especially in, for instance, China at the moment.

And with this one, I would open up for Q&A.

[Kristian Tammela, executive]

Thank you. Thank you, both Charles and Thomas. But before we go to Q&A, I'll still hand over to Charles for a few words.

[Charles Héaulmé, executive]

Thank you, Kristian. Thank you, Thomas, for the presentation. I just wanted to make a small note that, as you know, I have been away for the first quarter for a nice reasons of health issue. I'm fully backed into -- in full swing and very good motivation back into -- in duty. This is not what I want to highlight now.

What I want to highlight is that this first quarter has been -- apart of the external context, my absence was adding an additional pressure to the team. And I wanted to make this comment after you have seen our results in the granularity and with all the explanations to show that I think beyond the results, it's extremely important for me, particularly as the leader of the company, to know by the proof of this absence and of the results driven by the team that we have a very mature organization, very resilient, agile as well, which has been -- it's the best sign for a leader if you can be -- if you have to be absent and unfortunately, for not so nice reasons, that nothing is going to change.

On the contrary, actually, things are going to go well and actually even better than potentially expected by some of you. And the credit goes back to the team for the resilience and for the agility. And particularly, I want to recognize Thomas, who -- Thomas was taking, on top of his CFO job, as you know, he was the interim CEO during that period of 3 months in a very complex external context, which has been very difficult to handle, of course.

And I think it says a lot about the maturity of the team and the leadership of Thomas and of the entire executive team. So I wanted to make that mention because I think it's as well important to know this context in order to gauge and evaluate the preparedness of the company to face difficult times as we are going through. So thanks for making the space for this comment. Thank you.

[Kristian Tammela, executive]

All right. Then we are ready for some questions. So operator, if you could please?

[Operator]

[Operator Instructions] Our first question is from Justin Jordan.

[Justin Jordan, analyst]

And firstly, Charles, I just want to say welcome back. Well done on your speedy recovery. Great to have you back.

Just two quick questions, if I may? Firstly, just on the obvious cost inflation, you called out clearly raw materials freight, energy and labor. Can you give us some sense as best you can, are we at the sort of peak of cost inflation? Or should we expect further cost inflation in Q2, Q3 and therefore, further pricing actions to offset that? And then clearly, I have to say, extremely well done on the pricing action you've done in Q1.

And just given the exceptional cost inflation that we're seeing, can you give us some split of the 19% comparable revenue growth? Just how much of that is price increases versus [ bollinger ]? I appreciate you don't normally do that, but we're not in normal times.

And then secondly, just on working capital. I appreciate the working capital outflow in Q1. Can you just give us some sense of you've called out some supply chain issues. Should we think about working capital sales being structurally higher in 2022 than a normal year because of those issues? And just Thomas, can you [indiscernible] remind us just your thinking on your guidance on CapEx for '22?

[Thomas Geust, executive]

So maybe, Charles, you comment on the cost inflation to begin with, or do you want me to take that one there? I can take the two other ones.

[Charles Héaulmé, executive]

So the cost inflation -- Justin, to your question, and thank you for welcoming me back, the cost inflation is -- it's a very -- very difficult to predict. The world is in a huge turmoil situation. And there is one thing that is -- so there are several, let's say, factors creating the broad-based and high cost inflation. This has been first, the disruption from the COVID pandemic that has created different types of demands across the world. That's the first disruption.

This has created the second COVID pandemic at a certain time as in 2020, made many companies make arbitration in terms of capacity and capacity reduction at the time. And those capacity reduction takes time to rebuild as the demand is increasing a lot now. There is the huge disruption linked to the war in Ukraine. So when you take all these factors, it's very difficult to predict what's going to happen.

But it's -- to us, it's pretty clear that when you take the P&L of 2022, it's going to be impacted during the entire year because there is a time lag as well into the way it impacts the P&L, of course, for the value chain stocks and so forth.

So we anticipate a relatively, let's say, stable impact or continued impact quarter after quarter in our P&L. And therefore, the importance of the process we have in place in order to mitigate this cost inflation, we believe we are very well prepared. And the Q1 is there to demonstrate that we have the processes in place and the organization is ready to face those issues. Thomas?

[Thomas Geust, executive]

Yes, I think that's my key points also around the inflation that the most important thing is that we still believe that there will be a challenging environment, which needs to be monitored and therefore, we need to take actions accordingly.

On the comparable growth, as we have been saying, we will be giving more insight to the volumes this year than we would do under normal circumstances. And I mentioned it already during my presentation, but I can say it more clearly here now that our volume growth was roughly in line with our long-term ambition on net sales. So that as a soft guidance on where we are with regards to the volume and the other elements you have available in the presentation.

On the working capital side, so structurally higher. I wouldn't say that there's a reason, actually, in many cases, we are still almost hunting for raw materials and our -- from a volume point of view, in some categories actually on a low level when it comes to inventory levels in our stock.

And for that reason, we have then, in other areas where we have had the opportunity to get access of material, taken some forward-looking stance and taken in material. But as said earlier, it's not really the volume, which is the key driver for the inventory increase of our numbers. It's really the prices that come through.

Then you had a question, I think, on guidance. On CapEx as well. We don't -- it's actually quite difficult to forecast the absolute landing point of CapEx this year because what we have seen is that there is a delay in the supply chain of CapEx. It's also a delay in getting people available for installations and so on. So I think what we are seeing is the overall catch-up of the supply chain still from the COVID side.

On CapEx is what we have been saying is that we see that we have a continued increase in CapEx also this year. First quarter, obviously, a timing thing as well, but I think that's also indicative for the fact that we are running a higher CapEx program, especially related to fiber, but also in the other businesses when it comes to some, let's say, more innovative new type of products, new technical solutions.

[Operator]

Our next question is from Robin Santavirta.

[Robin Santavirta, analyst]

Now trying a bit sort of the same question related to input costs as Justin, but the point I would like to hear your view on is -- I mean, if we look at the margin now in Q1 is actually to me, surprisingly strong in the current environment with quite significant input cost inflation.

Is there something sort of extraordinary sort of good in Q1 that we should be aware of when it comes to the margin and Q2 and Q3 development? Or is this roughly an indication of what the next quarters will bring if we would see input costs remain roughly at this level? Just trying just to understand the sort of the outlook for the sales margin ahead. I appreciate it's very difficult, but you see it better than we do. So any color on that would be appreciated.

[Thomas Geust, executive]

Yes, Robin. So as I have been communicating the -- from my point of view, the mechanism of price increases and the margin drag is there and it's evident. I think what we have in the first quarter, first of all, no, we did not have any one-timers that would have boosted the results. So it's really an operational result that you are seeing.

So from that perspective, looking at the EBITDA development from -- EBIT and EBITDA development from absolute point of view is what you see from the company. So that's the really positive news out of it.

What -- how we look at the operating environment currently. We see that the operating environment is currently pretty much the same. It has the same disruptive elements that we unfortunately have had to live with since 2020.

I have said earlier that we came out pretty good out of the 2020, which was a drop in demand. We managed quite well the fluctuating recovery of 2021 with a good result, and we also were able to start to mitigate the costs in a more active way than what we have had in history. And I would say the first quarter is now reflective of our reactiveness and awakeness on what's happening in the market.

The real challenge in my view, will be the supply chain. So what will happen to the supply chain going forward. But as said, currently, the environment looks quite the same as what we have seen in Q1. So with continued price increases, however, and as anticipated.

[Robin Santavirta, analyst]

And can I just ask on Asia and related to India. I know you have had some struggles in the past 2 years there. It's a big market for you in India. How is that developing now in terms of volumes, margins? And operationally, what is the outlook?

And also related to Asia, what is going on in other parts now with the COVID and what do you see?

[Thomas Geust, executive]

So I can take on -- first of all, on India, which is, as you know, has been the monitoring part. And I gave us a bit of a hint that the minority impact on our EPS is slightly coming through. So we have performance improvement in India. We have been focusing really on the profitability in India and mainly maybe then with a bit of volume softness, however, good growth in India in any case. So double -- clear double-digit growth also in India and then a profit improvement clearly up from previous year.

And remembering that actually Q1 last year was not a complete disaster when it comes to the India performance. It was more towards the end of the year when we started to see the performance going down. So India clearly improved versus Q1. And they, I would say, even more clearly improved versus the full year performance 2021. So talking about relative performance.

Then otherwise, Asia is, of course, still a bit of a disruptive market. But here, I would especially highlight China, which has been a country of lockdown, we have all read the news on Shanghai, complete lockdown. If you think about 25 million, 28 million people in city, which you completely [ lockdown ]. So of course, it has an impact on our customers and through that one indirectly also on us. So we have a negative organic growth in China for the first quarter.

[Charles Héaulmé, executive]

Yes. Maybe to summarize the outlook in three words is India, we are positive about turning around profitable growth. Southeast Asia, as well. I mean, there, it's not a turnaround we need because we've been developing and growing profitably in the recent past, but that will continue. The main risk in the whole area you were questioning, Robin, is very clear in China for the reasons explained. And there, we don't have answers on a short-term perspective.

[Robin Santavirta, analyst]

I understand. And well done in Q1, and welcome back Charles.

[Operator]

Our next question is from Jutta Rahikainen.

[Jutta Rahikainen, analyst]

Good. And I echo Robin on that, welcome back, Charles. A lot of my questions were covered already, but I'll give one or third try on the gross margin topic here, framing it slightly differently. Now you said that the impact from input costs will probably remain the same as in Q1 or currently, it's trending at that magnitude. At some point, you did speak about the sort of net impact of input costs and price increases. So is it fair to say that also that net impact is pretty much stable for this quarter and maybe for Q2 and the quarters to come?

Again, I'm just looking for if there's a rhythm mismatch somehow in the price increases you have made and the cost inflation you've seen. So it's really, the other way -- the easier way to ask is maybe that is the Q1 gross margin somehow exceptionally good? Or is it sort of a semi good proxy of coming quarters?

[Thomas Geust, executive]

So the gross margin in relative terms is quite similar to previous years. So from that perspective, or actually down, in my view, with regards to roughly the pricing impact that I have been talking about earlier. So we have a actually dilution on margin -- on gross margin level if you take a clean gross margin.

So similar things are likely to happen going forward. The difference is that we have -- most of the businesses having full demand coming through and operating result is -- the operating result is, therefore, also benefiting from the operational performance in a greater extent than what we saw last year.

[Charles Héaulmé, executive]

Maybe one -- sorry Jutta to complement is last year was, of course, impacted by the timing of some -- you know that some of our sales and contract with customers have a timing embedding into the pass-through. And that was one of the, let's say, two drawbacks for us into 2021.

The second one was the preparedness of the organization in face of a [indiscernible] and saw significant inflation. The thing is we have the organization and the processes in place now reacting extremely well. And we don't have, of course, the timing effect anymore or the timing negative impact because it's an ongoing -- over 2 years. It's an ongoing process.

And therefore, that's where you find the positive impact, which should remain for the rest of the year. From that point of view, it's not exceptional in Q1, but it's better than last year for those reasons.

[Jutta Rahikainen, analyst]

Okay. And then similar question relating to EBIT margin for North America. It did come down a bit, but it was still at very good levels, I would say. You had the COVID effect on the mix in the past few years. Is this now sort of, how should I put it, normal non-COVID quarter in North America? So should we think that, assuming COVID doesn't strike back in the U.S., this is kind of a proxy of the profitability in the quarters to come?

[Charles Héaulmé, executive]

If I may, and you complement, Thomas, on North America. So first of all, on the lower margin, I think I mentioned it very quickly when presenting is last year, we didn't have the inflation negative impact into the P&L in Q1 2021. It was already in the value chain, but it was hitting our P&L in the second quarter. At the same time, we have started -- we have very well anticipated, if you remember the comments a year ago with very well anticipated the pricing actions in North America in the first quarter of last year.

So that explains that Q1 last year was relatively high as a comparison base versus this year where it's -- the margin is a more, let's say, ongoing level that you may consider as a good reference for that segment.

And from a COVID point of view, what we see is -- so certain positive effects of the COVID, if I may say, like the retail tableware business that has been growing a lot, thanks to, if I may say, thanks to the pandemic at the time, it remain -- that market remains higher. It remained high in 2021 and continues to remain high. So there is something structural that we had predicted and we have said last year, we believe it will remain like this in changing, therefore, or amplifying the culture of convenience of home consumption in the U.S.

And on what was negatively affected, so the Foodservice, to your question, yes, we believe we are back into relative normal prepandemic conditions, particularly -- so in the QSR segment in the food delivery as well as all the consumption that goes into schools with the food trays, into stadiums as well with cup carriers and food trays. So all of this is back to basically what we would call normal. So that's a positive aspect of the Q1 and then the outlook we see in North America.

[Jutta Rahikainen, analyst]

Okay. That is very clear. One more. This is a more general question on demand. I know you've stated many times already that Q1 was really strong for you and also on the volume side, good. Did you see any changes in the consumer -- customer behavior during the quarter? After the war?

And also if you want to or can any comments on sort of [ April ] also would be of interest. I'm just thinking about the sort of cyclicality or the consumer getting spooked and obviously not maybe having as much money to spend as they used to. So have you seen any -- have you seen negative impacts for your business from the war on the demand side?

[Charles Héaulmé, executive]

No, we haven't seen any negative impact specifically from the war. That, let's be clear, affects only, if I may say, a small part in the world. So we don't see a major -- we don't see any impact of significance.

Yes, the demand is strong, but we don't believe that the demand is exceptionally strong. We believe that this is the new normal. So this is the -- probably, it looks very strong because we're coming from 2 years, 2020 and 2021, which were heavily disrupted. But the demand now is back to what, I would call, the new normal.

So there, we are optimistic that it will remain like this where our big question is, and I think Thomas underlined it earlier is on availability of basically of raw materials. Some of the raw materials for different reasons, but particularly, this high demand but as well the arbitration on capacities that were made by some suppliers in the world, for instance, in paper production in 2020, the availability of raw material is the biggest question mark at this point.

Not that it would drive to a decline. Not at all. But that, unfortunately, it may drive to a limited -- a more limited growth versus what we could be delivering if there was no limitation in raw material availability.

[Jutta Rahikainen, analyst]

Okay. Good. That's all for me.

[Operator]

Our next question is from Cole Hathorn.

[Cole Hathorn, analyst]

Two from my side. I'll start with one by one. Just on North America, we've heard about availability of packaging being quite tight. And I'd just like to hear a bit more color around your discussions with customers and how that availability or limited availability of packaging is driving through the price increases.

And what are some of your competitors doing? Is it the whole market tightened the full focus on availability more than pricing? That's the first question. And just a little bit more color of how that FX might impact or support the business through the year?

[Charles Héaulmé, executive]

So I'll take maybe the first one and Thomas, you take the second one. Availability, I think you made the question and the answer, you're completely right in your analysis. Availability is indeed the main concern of the value chain versus pricing. .

So, in a way -- back to what Jutta and Robin as well as Justin were asking before, yes, the pricing or the pass-through, how was it possible? Well, part of it was clearly possible because there is high demand and at the same time, availability constraints. And therefore, it's a context where passing through becomes slightly not easy but slightly easier to manage.

This availability is, as I said before, is remaining a high concern. It's particularly the case in North America, for instance, on paper. Paper is the -- probably where we see the main constraints. Why? Because it takes a lot of time to build capacity. It takes about 2 to 3 years to build a capacity -- a new capacity in paper production. So that's where we see the main constraints.

[Thomas Geust, executive]

So for the second part, I didn't quite get the difference between the first and second part, but I would maybe continue on the availability and quality and so on. I think this is the time when the customer goes back to the fundamentals of what is most important to them for getting their revenue stream done, and that is to have suppliers who have enough scale and enough global presence in order to be able to as well as possible, manage the full supply chain in a disrupted market. So that, in my view, the global players are the multinationals, like us, have a preferred situation currently versus some of the local players for the reason of availability.

I might have missed the other part of the question.

[Cole Hathorn, analyst]

Thomas, just on FX. I mean, the beginning of the year, you mentioned that on an absolute EBIT basis, you're looking at North America and growing year-on-year. And I was just wondering, should we think about it as North America growing year-on-year in absolute EBIT, but then with obviously the benefit on top of that of positive FX translation?

[Thomas Geust, executive]

Yes. So -- okay. So first of all, basically, the numbers you have been seeing is impacted, as you say, by -- the statutory numbers are impacted by the FX. However, that's the translational part that we have always been talking about. I think the highlight to look is at the organic growth of -- or comparable growth of the segment. And as you can see from that one, that's quite buoyant.

[Cole Hathorn, analyst]

I mean you called out operational efficiencies in your release, and I know you've been doing work on this since the start of the pandemic to kind of rightsize your footprint and align where you think there's better growth. Can you talk about how that operational efficiency is now leading to higher profitability and as you're reaping some of the rewards from that work?

[Thomas Geust, executive]

Sorry, in -- you mean in North America or in the group? I don't know, for some reason...

[Cole Hathorn, analyst]

Sorry, in the group for the Foodservice business and you did a number of actions to improve your operational footprints and going into the right segments that you're looking to focus on in growth. And I'm just wondering how that's delivering kind of incremental EBIT now that you are kind of a year down the line with that program?

[Thomas Geust, executive]

Well, first of all, I think one of the things is that we took out -- we optimized our resourcing back in 2020 during the COVID situation. And we had then continued high investments in the segment throughout 2021, which, to some extent, offset the benefits of the profitability already then coming through of the segment.

But the real key driver here is that we have been able to keep the cost levels and thereby getting better productivity now when the top line is starting to grow in Foodservice. So the optimization of the production was done in order to deal with a normal situation in a very efficient way, and that one is now bearing fruit. The top line is also there.

[Kristian Tammela, executive]

This is all the time that we had for today. If you still have questions, you can reach out to me directly. And with that, I'd like to thank both Thomas and Charles and wish you a great day. Thank you.

[Charles Héaulmé, executive]

Thank you all.