Huhtamaki Oyj
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Earnings Call Analysis
Q2-2023 Analysis
Huhtamaki Oyj
The company highlighted that the divestment of its Russian operations in 2022 has led to a dilutive effect on EBIT margins. Meanwhile, there has been a notable increase in capital expenditures (CapEx), particularly in Q2, predominantly due to increased fiber product capacity and the nearing completion of a factory project in Hartmann, US. This rise in CapEx is seen as a positive development, setting the stage for commercial production to start in the second half of the year.
On the sustainability front, the company showed progress toward its 2030 targets established in 2020. Noteworthy improvements include increased utilization of renewable electricity, climbing from 0% in 2019 to 36% by the end of June, and advancements in waste recycling and reduction, moving the needle closer to environmental protection goals.
Despite the Russian divestment and slightly lower volumes, the foodservice sector in Europe, Asia, Oceania reported a comparable net sales growth of 5%. This varies by region, with Europe and the Middle East Africa areas showing promise, whereas Asia faces consumption and competition challenges. The EBIT margin performance was strong, with an increase of 0.5 percentage points over last year, standing at 9.2%. North America faced inflationary pressure, with modest net sales growth of 1%, but maintained its EBIT margin at 12% due to operational efficiencies and some pricing impacts.
The demand for flexible packaging declined, chiefly due to inflationary pressures and destocking in the value chain, contributing to a volume decline of about 3% for Q2. This phenomenon was particularly evident in emerging markets such as Latin America. Pre-packed food consumption has decreased in Europe and emerging markets, with a noticeable consumer shift from top brands to retail or local brands, affecting the company's portfolio that has significant exposure to global accounts. Consequently, the adjusted EBIT profit decreased in response to these trends. For fiber packaging, demand stayed relatively stable, but reduced recycled fiber prices and competitive pricing pressures led to a decrease in adjusted EBIT, further compounded by the Russian divestment's dilutive effect.
Financially, the company's EBIT dropped by approximately 10%, half attributed to the divestment from Russia. Finance costs have risen by 24%, partially moderated by lowered debt levels and the absence of currency revaluation impacts. The adjusted tax rate of 23.5% contrasts with a higher reported tax rate resulting from nondeductible items related to the Prague closure. The adverse currency trend is expected to continue and may not be supportive towards the year's end.
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Good morning, everyone, and welcome to Huhtamaki's Investor Call for Second Quarter 2023. My name is Kristian Tammela, VP of IR. Following our normal procedure, we will start off with presentations by our President and CEO, Charles Heaulme; followed by our CFO, Thomas Geust, and after that, we'll have time for some questions.
And with that, let's get started and hand over to Charles.
Thank you, Kristian. Good morning to all of you and welcome to our results presentation for the second quarter and thanks for joining us this morning.
I will start our presentation by giving you a quick snapshot on the market conditions during the second quarter where we consider having delivered a stable performance in overall a challenging market. The market environment remained low, remained muted impacted by continued inflation pressure on consumers and consumption.
The important aspect to highlight is that market studies and including one that I was reading this morning about the first semester is showing that retail, for instance, in Western Europe, have published an analysis of a volume reduction of consumption of 4% to 5% in consumer goods during the first semester in Western Europe. And second aspect in this study published is a very clear down-trading by consumers towards low-cost solutions.
Across all the categories, we see the inflation has been the highest in food products, and that has been across all markets, with an inflation on food products that has been even over 20%. The consumption decline that we see is particularly visible, I mean, across our categories, but particularly visible in the home and personal care products.
In this context, our financial performance is for the second quarter, if we compare it to the first quarter, is stable, suffering the volume tensions or challenges. And we are delivering a comparable sales growth of minus 2%, which is impacted, of course, by the volume, but as well by a slowing down of the positive pricing impact from the price increases that we did in 2022.
With this, our adjusted EBIT profit decreased compared to a strong quarter two, 2022. That's important to always remember the comparability in terms of 2022. We started with a strong quarter one, another very solid quarter two, and then the market conditions deteriorated in the second semester as of July, basically last year. So from a comparability point of view, this is important to remember.
In this context, we are obviously not standing still since the beginning of the year, since the end of last year when there was a confirmation of the market condition and the pressure on volume. We started addressing our competitiveness, productivity, but as well focusing on our initiatives for profitable growth as we continue to see a good projection of our underlying market for the next couple of years.
So in the second slide, so slide number three, actually, we want to highlight a little bit what we are doing in terms of addressing the competitiveness, improving our productivity and at the same time, in line with our strategy, scaling up our profitable core business.
On the competitiveness, we are actively addressing productivity in all matters, so what we call the three Ms, man, machine and material and that's very systematic methodologies. It is important to say that we do that in all our factories across the world on each factory efficiency. Second, we are working, of course, on structural efficiency, on our overall structure and as well our manufacturing footprint to give an illustration of our situation at the end of the second quarter 2023.
We have decreased when we compare year-over-year to 12 months ago. We have decreased our headcount by 1,700 positions, whereof it's important to remind that Russia divestments accounts for 724 in this 1,700. And as a matter of giving a comparatibility our headcount at the end June 2023 was 18,320 people.
Second aspect in the structural efficiency, that's the consolidation of our footprint. We have announced earlier in the quarter two, the decision to close our manufacturing operations for the Flexibles segment in Prague, Czech Republic.
This is not a downsizing of our capacity. We are utilizing the capacity that we have in Europe, in Ronsberg, in particular in Germany, but as well in Turkey with the Elif capacity that we have acquired back in 2021. This decision will affect, which is not accounted for in the headcount, I was mentioning before, this will result in a reduction of our workforce by 198 employees and the completion will be by the end of this year towards the first quarter of 2024. So we will see the benefits in '24.
Another point we have initiated, the consolidation of our small labels manufacturing sites in India. And, of course, we're continuing to look at our entire manufacturing footprint. Now on the core business, growth and all the projects that we have invested for back in 2022.
There are basically five projects that are coming online for commercial productions during 2023. Some have already started. Some are coming -- most of them are coming in the second semester to production.
Five projects, it has to do with the retail tableware capacity in North America, both on the press plates, but as well on the smooth-molded fiber. Then we have the fiber lids expansion in Europe in the factory Alf in Germany where we are almost at full utilization by now, end of June, and we will be at full utilization by the end of the year.
Eggs packaging in North America and South Africa. Two new factories. South Africa is already in commercial production ramping up in the second quarter. So we'll be further growing in the second semester. And then the egg packaging in North America in Hartmann near Chicago will start in the later part of this year, early Q4 end of Q3.
And then finally, we have, as you may remember, started the commercial production of our Nespresso home compostable coffee capsules. And these products were launched in the market, in the pilot market in France by Nespresso in the middle of June. So early days, but now this is live commercially.
And then a final point, which will not have an impact on our P&L in 2023, but which is, as well, extremely positive is about scaling up further our profitable core business in North America. We will see that North America continues to deliver very solid performance and profitability.
Therefore, we are very pleased to continue investing in North America in a market that is growing, particularly the foodservice market. And more specifically, in this case, in the factory in Paris, in Texas. This is a folding carton factory where we are in a market that is expanding a good 4% per year in average. And therefore, we want to take opportunity of this growth and further scale our profitable core business.
This will mean an investment in CapEx of $30 million. And then the facilities will be on the same site, so there won't be additional structures and teams for this -- from a fixed cost perspective for this facility because it's an expansion of the existing factory with leasing of the facilities. And we expect the ramp-up of commercial production to start in Q1 2025. From a variable point of view, we estimate to increase our headcount, our resources, our variable resources on the shop floor by up to 80 people.
That's for a bit of a snapshot on the strategic aspect. Now let's go into the business performance for the second quarter on slide five. On the second quarter sales, where we see that our reported net sales decreased by 8% in the quarter. Very important to slice it in the right items.
First of all, identifying that we have a 3% decline, which is purely linked to the divestment of Russia back in September 2022. And then minus 3%, which is linked to a negative currency impact, particularly coming from the US devolution. This leaves a comparable net sales growth of 2%. We're coming back to, of course, more details on this. So, minus 2% comparable net sales growth.
And when we look at the first semester overall, without repeating myself, the same aspect with the divestment of Russia and the currency then we are flat in terms of comparable net sales growth, which means that Q1 was slightly higher than Q2 in terms of growth and I'll come back to now this in a bit more detail.
So that's on the slide seven, breaking down by business segments where we see that the foodservice global business is up 5% in comparable growth for the second quarter. North America up 1%; flexible packaging, minus 11%; and fiber packaging, plus 7%. And I will come to this in much more granularity by segment to explain the variability between the different segments.
But you may wonder about the minus 2% in Q2 versus the 0%, so the flat comparable net sales growth of the first semester, which means Q1 looks like better with plus 2%. Actually, it is not linked to suggesting lower volumes in Q2 versus Q1. The point here in the comparability between Q1 and Q2 is actually the lower pricing impact that is of course slowing down as we go in through in 2023 compared to 2022.
So that's I'm going to now spend a bit more time on the, of course, by segment. But before that, we go of course through the P&L itself to say that our EBIT margin, sorry, our EBIT in euro terms, first of all, decreased by 10%. However, it's maintained compared to Q1 at 8.8% in terms of adjusted EBIT margin.
And it's important to remember that there is a dilutive effect when you compare to 2022 linked to the divestment of our Russian operations, which we have cited many times. But I think it's always worth reminding that this divestment was obviously dilutive from an EBIT margin point of view.
The lower EPS, Thomas may come back, of course, on this a bit later, the slightly lower EPS evolution is linked to the higher financing cost in between EBIT and EPS. And then we see a CapEx increase that in percentage in Q2 may look relatively high. This is all linked to fiber product capacity and particularly the factory that I was mentioning in Hartmann in the US. So it's, if I may say, it's good to see this CapEx increasing for Q2 because it's the finalization of that project, which will come to commercial production pretty soon in the second semester.
Then moving to the slide nine, the nonfinancial, so now focusing on the sustainability results. We are giving you a transparent and comprehensive view of our sustainability performance every semester. So that's for the results for the first semester. And you may see that basically, all our sustainability indicators are in green progressing, progressing versus last year, but progressing as well in line with our 2030, in line with the trajectory towards our 2030 targets that we have established back in 2020.
So this is a very conscious, very systematic work that is being done. I won't go through the eight indicators, but maybe highlight a couple of them that are, I think, quite remarkable in terms of improvement. Renewable electricity. If we remind ourselves that when we started with this strategy 2019, we were at 0% renewable electricity, 25% last year, end of last year, and we are at 36% end of June.
So really steady an important progression. As well, waste recycling, industrial waste recycling, we are progressing 75% last year, now three points more in six months. Waste to landfill, which is something extremely important from a planet protection point of view. We are as well reducing this waste to landfill.
I remember, I think two years ago or three years ago, was at 17%, 12% last year, 9% now. So we continue to drive tangible and quite substantial progress on our sustainability targets.
Now quickly breaking down the financial performance. So I'm on slide 11 for the ones following offline. Slide 11 starting with foodservice Europe, Asia, Oceania, where our comparable net sales growth for the quarter is plus 5%. And that's, of course, excluding the impact of Russia. That's why you see the reported net sales growth being minus 6%, but excluding it, then it's plus 5%.
What I would say about the market itself is that the demand for foodservice packaging has softened slightly, but it's not the category where we see the biggest concern in terms of a pressure from inflation and from a consumption reduction. What is important to mention is that the evolution of the sales growth is relatively different depending on the regions. It's pretty positive in Europe and Middle East Africa, while in the whole of Asia is still very challenging region from a consumption point of view and from competitive arbitrations.
Last point is probably important to remind that and I'm going to repeat myself, but with the dilutive divestment effect of the -- of not having Russia anymore and with the impact of having slightly lower volumes than last year, then our EBIT margin performance is really solid at 9.2%, which is a 0.5 points increase versus last year. So that's pretty solid in the second quarter of this year.
Moving onto North America, where from a sales point of view we are suffering like in the rest of the business, the pressure of inflation on consumption, but we're not suffering across all categories. So there are some categories like foodservice, for instance, or retail tableware, where the market is still relatively positive in the context.
However, consumer goods products, the products that consumers tend to down trade like ice cream have suffered a lot across the first semester, and that's the relatively negative part we see in our volumes as well as the lower pricing impact as we advance in the year, meaning that our comparable net sales growth is only 1%, which for US is very modest. But we're not -- we're concerned about when the consumption will restart. However, we have all in place to grow further the business according to what I said at the beginning with the project.
What is remarkable is that we continue to deliver a consistent and even increasing profitability level despite these market conditions with an EBIT margin that is maintained at 12% overall on the first semester and even 12.2% in the second quarter on the back of operational efficiencies and still some pricing impact.
Then flexible packaging, slide 13, the overall demand for flexible packaging has declined and that's mainly due to the inflationary pressure on consumption, but as well of further destocking in the value chain. There was some uncertainty at the end of Q1. How long the destocking would take place, and actually, we have now the very clear understanding that in Q2, the destocking or the overstocking in 2022 when in some markets, particularly in emerging markets.
To give an example, Latin America completely overstock in some cases for one year. We have very clear proof of that, that we have suffered this until the end of the second quarter. However, we see the orders restarting in those categories from those markets, indicating that likely the destocking is coming to a phase out, which is good news.
Because in this destocking, we have evaluated with a pretty detailed analysis that this destocking accounts for about 3% of volume decline in the second quarter. So it's quite sizable.
Second point to say is the consumption of pre-packed food and everyday necessities is going down in Europe in emerging markets. I mentioned at the beginning, what retail is seeing and explaining for the first semester. And in addition, there has been some down-trading very clearly.
It is pronounced in developed markets from consumers going very clearly from main brands, national brands or global brands to retail brands. In emerging markets, it's from -- going from global account brands to local products. And of course, as you know, based on the positioning of our portfolio, where a major part of our business is done with our customers, global accounts customers and brands, that makes us, of course, affected by this what we believe temporary evolution, but of course, impacting us in the first semester.
In this context, the adjusted EBIT profit decreased, obviously, impacted by the lower sales volume and as well the negative sales mix because there is a sizable decrease of the volume in Europe. We are, of course, taking decisive actions as I mentioned at the beginning in the introduction across the group, but particularly in Flexibles in order to improve our competitiveness going forward.
Lastly, fiber packaging, the overall demand for fiber egg packaging and food on-the-go products remain relatively stable in most markets if we compare to the first quarter. The prices of recycled fiber were lower than in Q2 a year ago.
This is important to understand between Q2 and Q1 this year is that the there is no difference of volume, but that the pricing impact is much lower in Q2 as we advance in the year, and there is much more competitive pressure when raw material prices are decreasing, there is much more pressure on a competitive pricing.
And lastly, on the adjusted EBIT, which decreased due to lower sales volume as well as the divestment of Russia, which is particularly dilutive in the fiber packaging where we were highly profitable in Russia in fiber packaging.
With this, handing over to Thomas for further details on the financials.
Thank you, Charles. On the further details on this part, I will focus on things not yet touched by Charles, maybe starting off, though on the effect of the volume decline and so on.
As you can see, we have a drop of roughly 10% of the -- in the EBIT in the quarter here again, if I would adjust for this Russia that we are highlighting, we have said it many times now in this call, and I want to bring some further clarity to it. Roughly half of that 10% drop comes from the Russia divestment. Same goes for the year-to-date numbers.
Other items to highlight here is that we are still increasing on the finance cost. You can see that we are 24% above previous year level, while year-to-date numbers are significantly higher. Obviously, this is coming from two things.
First of all, we started to have higher finance cost already in the second quarter last year following the higher debt levels and then the higher finance costs. But in the quarter alone, the increase has actually moderated. So we are now on the roughly EUR5 million per month rate that I have been highlighting earlier. That's on the back of slightly lower debt level and then not having impacts from currency revaluations.
Adjusted tax rate is 23.5%, but you will find that the reported tax rate is higher. The reason for that one is that IAC of the Prague closure is a nondeductible item. And from that perspective, it affects the ETR accordingly.
Going to the currency rates. Here on the right side, you see that the impact for the quarter is strongly negative, while we in the first quarter had a positive -- had a slightly negative on sales and a EUR1 million positive on EBIT.
From the table on the left side, you see that the trend is trending negative to us. So we expect the translation part of currency to continue negative towards the back end of the year as well. So we are not getting support currently out of how the currencies are trading.
Turning to the net debt level, net debt is slightly up from previous quarter. That's the normal pattern. If you look on the left side, Q1, Q2 '22, it's the effect of paying the dividend in the quarter while we, as I will be highlighting later on, have been generating quite nice cash flow in the quarter.
Cash and cash equivalents are on a good level, EUR334 million. So, in that sense, indicating that we have funds available. And then the net debt level is at EUR1.453 billion. And from that perspective, it gives a gearing of 79 and a net debt to EBITDA level of 2.5. So nothing very dramatic on the net debt level, very much in line with how we expect -- have been expected to be trending.
And if you look on a maturity point of view, what I have been highlighting earlier is that we do have items also coming up for maturity. We did for that reason a sustainability linked to EUR125 million term loan. We prefer to do that route rather than going for long-term bond financing as we believe that cash flow generation will help us easing our net debt levels going forward. And only after that, we want to secure the long-term funding.
Looking at the free cash flow level, obviously, in the reported EBITDA, you will have the burden of the IAC, so that's booked in there. But otherwise the positive trend in working capital helping us now to generate a strong EUR71 million year-to-date cash flow despite being slightly higher from a timing point of view on the capital side, capital expenditure side, and the net financial costs and taxes, both of them burdening. So as predicted and as also communicated, the burden we had on cash from networking -- operating working capital is now easing.
Here on the right side, we are claiming that operating working capital decreased, thanks to higher inventories. That's obviously a typo. So from lower inventories, it should say, and you can see here that we are roughly EUR60 million below previous year's level on that item. Other items trending basically mainly from currency revaluations.
And then if we turn to the long-term ambition, on the long-term ambition, we are as evident trending below on -- currently on both growth as well as the margin ambition. Also, the return on investments as the invested capital hasn't yet materialized is lagging behind.
Remember that the return parameters are quite lagging indicators as they have several quarters in there. And then the dividend ratio, so the dividend decision taken in the AGM of 40% payout ratio is now materializing with having had the first instalment paid in May this year and the second one coming up in October.
On the outlook and short-term risks, we remain with the statement from previous quarters. So no changes on this one.
So that's all from my part. And with that, I will be handing over for questions and answers.
[Operator Instructions] The next question comes from Calle Loikkanen from Danske Bank. Please go ahead.
Yes. Good morning and thank you for taking my question. I have a few questions. Maybe we'll take them one by one. To start off, can you elaborate on the price versus volume growth in Q2? I guess volume was probably down some mid-single digits, but is that a fair assumption?
Good morning, Calle. Yes, so your assumption is perfectly correct. Basically in the second quarter, we have said minus 2% comparable net sales growth. Volume at group level with some differences between segments is overall mid-single digit down and the pricing is a little bit more than mid-single digit up. And that's the one variation. The pricing is the one variation versus Q1 where it was still higher than this.
Okay. Good. Thank you. Then on the competitiveness actions you mentioned in the beginning, first of all, are these kind of new actions that you've kind of looked at in the past few months? Or are they the same that you kind of hinted or talked about at the Capital Markets Day. And then secondly, what size of savings are you expecting from these actions?
So the first question, which is, is this new? So your question was versus CMD. So at the CMD, we knew already -- we were already into the planning of a number of things. Now is it new versus what we are doing in the previous years? Yes and no. A part is no because we continue a systematic approach of manufacturing efficiency through our world-class operations program based on the TPM Japanese methodology, proven methodology going factory through factory shop floor.
So basically making the factories much more efficient at shop floor at every single machine and operate on basis on the waste and on OE to just name the main two indicators. That's the systematic approach. We have years working on this and we have accelerated over the last three years. That's the -- where I'm saying, no, it's not new.
Where it is new is we have decided since January, a number of specific productivity initiatives, not across the group as an average, but where we believe we have possibilities without affecting our capacity for the future, for the future growth, where we have possibilities to drive the structure to be more efficient.
And that results into the headcount reduction I was mentioning is basically linked to these new initiatives and some have to do with structure. So indirect employment, some of it has to do with manufacturing footprint, which is not yet accounted for, as I said before, in the headcount because decisions made, obviously, will take a couple of months to implement completely.
And the size of the savings, I don't think we are guiding on this. However, what we can say is, of course, each action, every single project is decided based on the business case. And basically, the payback is a year or less.
Okay. Thank you. And then my final question before handing over to the others. Could you elaborate a bit on what's going on in India. Sales was down some 10% in Q1 and then 20% in Q2. And I guess some of it is coming from kind of trading down. But can you elaborate a bit more on what's going on there? And when do you think or when you expect things to change?
Well, things are changing in the sense of things are improving, okay, when you look at India on its own, however, we are still in the market that is depressed. India, we have to put things in perspective.
India has been -- was a growth engine as a market, has been incredibly disrupted since the COVID started and didn't recover that yet. So, however, when we think about the perspective, even the macroeconomic perspective of India, they are looking relatively positive, actually. So there is not, now this is not Huhtamaki's voice, but there is a clear view from analysts around the world that India is going to re-pump some growth going forward.
Now for us, why am I saying we're suffering the market conditions, meaning lower consumption, very clearly down trading, which is a negative impact to us. That's very clear because the down trading means it's favorable to local small producers.
However, we are recovering in the sense that our profitability is actually higher in this quarter versus a year ago.
Yes, absolutely, absolutely. And that's, of course, positive. But on the demand side and the sales side, do you think that the second half will be as challenging as the first half? Or could things improve already in terms of sales already in the second half?
So I would make -- on this, I would make the same answer not just on India, but like on flexible overall. We have three elements. One is the destocking I was talking about. There is a solid hope that the destocking -- that stocks are -- there is no substantial stocks anymore in the value chain that -- so therefore we would not be suffering in the second semester from destocking.
Second, the consumption aspect that it would be highly presumptuous to make any projection because the question -- to me, it's not if the consumption will come back, it's when is it going to restart? And it's not very clear that it will restart early in Q3, for instance. And then the third element which has to do with the down trading in India, particularly, which is negative to us.
That means sometimes accepting some volume losses to not accept categories and customers that would drive you to nonprofitable business. So that part is going to be recovered with the market. It will take a bit more time than just the second half of 2023.
Okay. Thank you. That's very helpful. Thank you. And maybe then just one last. You mentioned destocking and -- has destocking been an issue mainly in flexible packaging or has it been an issue also in foodservice and the other segments?
Let's put it like this. We think that there has been some destocking everywhere, some overstocking in '22 everywhere. However, we don't speak about it in other segments than flexibles because in flexibles, it is very sizable, it is very substantial. And we see it because of the structure, I think, there we are suffering the structure of selling a lot to emerging markets, which from a growth point of view in normal days is very good.
But in this context, has meant -- what I would call erratic behavior in the order process of customers. I think the example of Latin America, Africa, for instance, we have very clearly market, which have in '22 in the second quarter -- first and second quarter of '22, purchased for one year of stock and didn't order since then. So didn't order since -- in the second semester, didn't order in the first semester this year.
But now we are seeing the orders in our system. So meaning -- these businesses are not lost. They are suffering an overstocking in 2022. So we speak about it in flexibles because it's sizable. I talked about potentially a good 3% impact.
Maybe to continue on that one. So as you understand, Calle, in foodservice, the type of products we have there, the customer cannot their stock -- warehouses are not as big so that they could store a full year of stocks in flexibles where you store flat products? And especially then in emerging markets where we can play with the same type of packaging for a longer period.
You can actually afford going for excessive stock for a time. It's not the same pattern in the more mature markets because there you will also be shifting the packaging type and the print more frequently than in the mature emerging markets.
Absolutely, absolutely. Thank you. That's very helpful and that's all for me. So let's get the others on to ask questions as well. Thank you.
The next question comes from Jutta Rahikainen from SEB. Please go ahead.
Hello? Good morning. I have a few questions in addition to those Calle already covered. If we look at the second half of this year, two-folded question. First of all, on the price mix, is it fair to assume that the price mix will turn negative in Q3 or Q4 and negative year-on-year now? And the second part of the question is the volume development. Now you had a mid-single-digit decline in Q1 and Q2. So do you expect the same decline base to continue in the latter half of this year or is it less of a decline year-on-year or perhaps more of a decline year-on-year? So that's the first one. Thank you.
Good morning, Jutta. So on the -- on your first question about the price mix, what we would expect is that we come to Q3 into a flat situation. So far, there has not been, there is a competitive pressure in the market, but we've been relatively good at resisting so far. However, there has not been much price increase either in Q4 last year or in Q1 this year, therefore, that would still impact in Q3. So basically, an assumption of a flat pricing impact would be reasonable.
The volume development, as I suggested when answering Calle, some elements are very difficult to predict like consumption is impossible to predict when consumption is going to restart to recover to normal level. Because of the explanation of the destocking impact in the first semester that we expect to go back to normal order pattern.
That doesn't mean that the 3% I was mentioning is immediately back in July and in Q3 because I think in the context, all companies will be -- all the value chain is going to be prudent in the rebuilding stocks. But that at least the negative effect of the destocking should not be visible anymore.
And second aspect that I mentioned in the beginning of the presentation, we have a number of commercial productions ramping up in different parts of the world, particularly in US, South Africa and Europe, which will show volume increase because this is in categories which are demanded.
So it's not like in, it is, of course, even though it would be in a depressed market, this is in markets which are demanded. So we are undersupplying retail tableware, for instance, in US. We have a ban of form packaging in the US that is demanding fiber packaging. So as soon as we start, again, that's Q4.
But as soon as we start, then we will ramp up in the US. South Africa, same. Well, not that there is a ban, but there is a need of this capacity. Then fiber lids, it's only since May in our factory in Alf that we started to benefit to a substantial capacity utilization from the deployment across Europe by McDonald's of the fiber lids.
So all this is going to come to the coffee capsules as I mentioned, even though it should not be such a material difference in the second semester. But still, I mean, it will be much more than in the first semester, let's say. So lots of positives. Will we promise now today a completely changed trend? This is not what we're saying.
We're saying that there are signs for uncertainty, very clearly signs of uncertainty. The consumption may go down further and more. That we don't -- we really don't know. It's -- what I read this morning was minus 5% in volume in the first semester. It's quite a high level. But, yes, who knows what it's going to give in the second semester.
Maybe to continue on that one. We also addressed, as you remember in Q1, that the first half of the year from a comparison point of view was more challenging as we were then benefiting quite a lot of that upstocking due to the fear of the supply chain. So that just as a further reminder to how the second half -- what the second half has as a comparison base.
Okay. Good. Thanks. That's helpful. The second question I have is on the investments you have and the payback schedule so to say. I mean, you've been investing now for a few years. And my question really is that, and you continue to invest, of course. So my question is that should we kind of get very excited about '24 already? Will we see kind of some sort of hockey stick of all these investments at some point, generating also EBIT? Or is it more a sort of steady thing that happens over the past, say, three years? If you see what I mean, kind of just to get the big picture on the pace of the return on investment plans you have.
I think overall, you should consider that we will see a clear benefit from the recent investments because we are focusing as before, but I would say even more, relatively speaking, into scaling up our profitable core business. We are -- you said, should we be happy or what did you say as a word, excited about the investments.
For instance, we are very excited about the investments we are doing today and planning now with this new investment in the US because this is going to be both value accretive and you're talking about payback, the payback of an investment like and the return on investment of an investment like the one in Paris, Texas announced a couple of days ago, is value accretive for the company and is a relatively rapid payback.
You probably remember that in our business, when we invest in fiber, the payback tends to be a bit longer, between 5 and 10 years. When it's in foodservice and paperboard conversion, it's much faster. And we are focusing on basically scaling up our profitable core business. And therefore, we're so happy to do it in the US because US, as you know, is relatively speaking, at a very good performance level.
I would add to this one that it's not like the investments we haven't -- we have put in like the fiber lids and this wouldn't be contributing. They are, in fact, contributing already to the numbers. However, that positive thing is being masked now by the overall low market sentiment, which is impacting what I would call the legacy part of the business in, for instance, flexibles.
Okay. Good. And then my last question, I think, links to North America. At least versus my estimate, it's been surprising positively now for a very long time, and you commented already on that, that it has prevailed at a high and good level in terms of margins. But the future then, I mean, now you invest a bit there. What else kind of should we think that this is a sustainable profit level to have also in the coming few years? So is it fair to say that we go back to that sort of, should I say, 10%, 12% EBIT margin that's historically been there?
It's very clearly our target to remain at 12%. The reason for that is we are investing particularly in categories where we are very well positioned with our brand, for instance, our China brand or with a category like egg packaging that is going to be value accretive or in foodservice where we see growth in a profitable market. So that's the first answer.
The second one is I guess in the back of your question, there is the experience of Goodyear of Batavia, when those factories were built up and that there was a pretty sizable impact of the start-up cost at least during one year.
Here, let's remember that where we are building capacity is basically in existing sites. And that's the beauty of the legacy North America strategy has been to establish a network across the territory. And now with this network, this manufacturing footprint, we have the possibility to expand capacity, not in the walls that we have, but at least on the site.
And what it means is that even though we may have sometimes to expand the building, like in Paris, Texas on the leasing base, we can still leverage the local structure of the factory because it's not a new factory. So that makes those investments profitable, much faster profitable than maybe the examples you had in mind.
Okay. That's clear. Thanks. And actually, one more question came into my mind on the working capital for the latter half of this year because, I mean, last year, you did tie up a lot of it and now you are releasing some of it. So with the working capital development be positive for the Q3 and Q4 as well, so when we ended the year, the situation is better?
I expect the working capital to continue trending positively, especially towards the end of the year. A bit of a question mark is the inventory build prior to the seasonal events in North America. And then, of course, with a disclaimer that should the market heavily pick up, then obviously, it has a trending negative impact from a receivables point of view and so on. But my best estimate is that we will have a positive impact from the working capital also going forward.
Thank you. That's all from me.
The next question comes from Henri Parkkinen from OP Yrityspankki. Please go ahead.
Yes. First of all good day for everyone. I have two questions and I'll start with the question which is more or less related to short-term issue and it's about the raw material development. We're taking into account what we currently see on the raw material side and when taking into your contract structures, what are your expectations for the second half of this year and also for the 2024? And my question is especially related to fiber costs, recycled fiber and then also for carton board market, which seems to be very, very oversupplied at the moment in Europe.
So your question being on overall raw materials, so where are we, first of all, and then what we expect -- and in what we expect? It's relatively uncertain, of course.
What we're seeing is what you certainly know is a cost reduction of all the film resins and polymers. And that has been now for about six months. So we may not see it all in the cost of goods sold in our P&L, but relatively soon, we see part of it already. Aluminum, alu foil is as well going down.
The paperboard is still high in most of our markets and that's linked to the fact that paperboard is based more on a longer term, not multi-years, but longer term, I mean at least one year contracts.
Your question was particularly on the recycled fiber. Recycled fiber went down pretty substantially over the last six, nine months, and that's linked very much to demand. This is a market that is extremely sensitive to demand. We remember that during COVID, when the demand was very high for e-commerce, then recycled fiber became scarce in terms of sourcing and the pricing went to the roof.
Now they are down. They should be stabilizing. If the demand is restarting, they should certainly further increase a bit, but probably not to the extent of where it used to be. I would -- and this is going to be -- and the recycled fiber is going to be very much demand-related. Thomas, anything you want to add?
I would add maybe because, of course, also the board market and paper market is quite a wide concept as such. So I would highlight here that although also the consumer board side, which we are participating in is down from a demand point of view for our suppliers, I believe, it's not impacted as much as the containerboard side. So the real -- many of the things you are referring to with the softness in the market are related to e-commerce, containerboards and these kind of businesses.
Okay. Many thanks. And then the second part of the question is related to long-term, and it's about the European Commission and European Union. They came out with their initial action plans, how to decrease and prevent wood phased. And if I understood it correctly, there are some kind of obligations coming to consumers for retail sector and also for the whole packaging value chain. I understand that this is a very, very early stage. But what is -- what do you think about this? And then what's your view regarding this kind of plans and the proceeds?
So on this question of the -- you're talking about the PPWR, so the Packaging and Packaging Waste Regulation.
The project was issued on the 30th of November 2022. Specifically on if we just remind quickly what it is about, it's about a very broad scope about packaging, but there are some specific articles in this project of legislation, which interest us directly, particularly Article 22 and Article 26.
These two articles are basically introducing stringent targets for reusable containers to be used in the HoReCa sector and in the takeaway sector. So that means it would impact relatively directly our foodservice business. So that's without going into more details, that's the letter of the project.
Now what is the impact, and then I come to what is the status today. You ask what we think, I may tell you a few words. So the impact that we have measured in our business is that it would be by 2030, excluding the growth of our business with the market and with the growth with innovation and with other products, okay?
But just from this would be a minus 2% by 2030. So we're not talking about on our sales. We're not talking about a substantial impact, but still an impact that is adverse and negative. What do we think? And I will say two words about this. What do we think? Something positive and something negative.
The positive is we are totally in favor of legislation for sustainability because there is no way we drive sustainability for the planet, altogether, the society without legislation. The other part we think negatively now is we think this legislation is in many aspects wrong because it's not based on the right science and fact base, and therefore, it will have unintended consequences. So now that's our opinion, and we are advocating it very clearly.
Now where are we in the legislative process and I will end my answer there, very important, and your question is timely is yesterday, commissions of industry and trade and commission for agriculture. We're voting about those two -- about this legislation and have voted at 84% against these two articles, meaning that their recommendation is at 84%, both committees, to delete the two articles that are affecting our business.
So I'm not saying victory. I'm saying, it could be, and you said we are early in the process, it could be that there are more positive news coming towards the end of this legislative process early '24.
Okay. Thank you very much.
All right. Thank you, everyone. Time is running up and hope to hear from you again next time. Have a great day. Thank you.
Thank you.