Elopak ASA

OSE:ELO

Earnings Call Transcript 2022-Q1

[Thomas Askeland, executive]

Good morning, and welcome to Elopak's First Quarter Presentation. My name is Thomas Askeland, and I'm Head of the Investor Relations function in Elopak.

Our presentation today will be held by our CEO, Thomas Körmendi; and our CFO, Bent Axelsen, and will be followed by a Q&A session immediately after the presentation. Please use the Ask a Question functionality and submit your questions in writing.

Now without further ado, I'm going to hand over to our CEO, Thomas Körmendi, to take us through the business performance of Elopak Group for the first quarter this year. Over to you, Thomas.

[Thomas Kormendi, executive]

Thank you, Thomas, and a warm welcome to all of you from me as well.

We have had a very busy and active quarter, delivering on many initiatives as well as managing extraordinary events. So we have, in fact, a lot to report this quarter. As usual, I will first provide a business update on how we are performing during -- performed during the first quarter before I hand over to our CFO, Bent Axelsen, who will take us through the financials. Both Bent, Thomas A, and I will be available to respond to questions in the Q&A following the presentation.

So firstly, we are yet, again, I have to say, pleased to report another strong revenue performance in the first quarter. The main highlights this quarter are strong revenue growth of 9% compared to Q1 last year, and that is on the back of a solid growth in Q4 of last year. I will provide more details on the revenue development shortly.

Profitability was as expected on a somewhat lower level in the first quarter compared to the same quarter a year ago, with an adjusted EBITDA of EUR 27 million resulting in an EBITDA margin of 11% for the first quarter. Now the key driver impacting our profitability is, of course, the input costs in the first quarter, which developed to an unprecedented high level. Our Americas business has had an excellent quarter delivering on both financials and on our strategic plan.

And speaking of strategic priorities, we are also delivering on expanding our geographic footprint. As announced, we have in the first quarter, both closed the acquisition of Naturepak in MENA and also announced a new licensing agreement with Nippon for the Oceanian market. And on top of all of this, in April this year, we also signed a joint venture agreement with our partner, GLS, allowing us to enter the huge and exciting Indian packaging market. We will provide more information about our Indian joint venture later in this presentation.

So as we all know, the quarter has been impacted by the horrific events in Ukraine. Having operations and colleagues in both Ukraine and Russia, we have spent a lot of time managing the situation and the effects for our business. I will come back to this point as well.

Good. Now moving on to the business performance and our revenues. So as I said, our revenues are up by 9% compared to Q1 last year. And adjusting for currency translation effects between U.S. dollars and euro, the revenue growth is around 7%.

In EMEA, revenues were primarily driven by price increases announced last year with effect from January this year. And in Americas, the main reason for the increase was both volume growth, but also a positive product mix in our blank sales and very solid growth in our school milk business.

Finally, as we suspended operations in Russia on 4th of March, we have recognized lower sales in the Russian market in March. We will come back to the full impact later in this presentation. So once again, a growth of 9% for Elopak in the first quarter is a very solid figure, and that on the back of a strong revenue development in Q4 as well.

Moving on to our business performance in EMEA. Our quarterly revenue performance in the first quarter is good compared to last year, up by 7%. The volume development in EMEA compared to last year was stable in the quarter, supported by good growth in Aseptic Roll Fed and new customer contracts in the MENA area. The market momentum remains good in the EMEA region, although impacted by inflationary pressure and price increases. Elopak is recognized as a stable and reliable supplier given our long track record in the carton packaging market with high-quality offering and long customer tenors.

In the current environment with supply constraints and huge pressures on costs, we are very well positioned to offer our customers safe and uninterrupted deliveries and further win business from competitors.

The main topic also for the first quarter was rising input costs across essentially all areas. Consequently, given the continued increase in raw materials during the first quarter, we have also announced further price increases to our customers with effect from second half of Q2 this year.

Turning to Americas. As this is one of our strategic growth pillars, we are incredibly pleased to report a significant revenue growth also in Americas, up by 28% compared to last year and 19% on a constant currency basis. Main drivers for the revenue growth in Americas segment is an attractive mix effect in our carton business, growth in the school milk segment and higher prices due to raw material clauses in our customer contracts.

The operational performance in America continues to be strong, and gives us the comfort that we are actually on track. More about our strategy implementation in Americas later in this presentation.

Moving on to our growth strategy. In the first quarter, despite being a challenging quarter in many ways, we continue to deliver on several of our growth pillars. Firstly, in our Americas business, we are, of course, pleased with the strong top line performance and the profitability has also improved in Americas, both in absolute and relative terms compared to last year.

Secondly, our EMEA segment is reporting healthy growth in Roll Fed aseptic by more than 9% compared to last year. And thirdly, we announced the closing of the Naturepak acquisition, broadening our geographic footprint to high-growth markets in MENA. In addition, we announced the signing of a joint venture agreement in India. And lastly, we implemented price increases with effect from Q1, have announced further price increases with effect from end of Q2 to protect our margins.

We have a sustainability-driven strategy. And yesterday, we announced that we have now taken this one step further. We have announced our targets to become a net zero company by 2050. In fact, we are proud to be 1 of the first 3 companies in the world to have our targets officially approved by the science-based targets initiative.

The Americas business continues to do well, and we're happy with our current performance in our Americas business. Looking at the chart, we are able to also realize financial results from the strategic efforts we have been working on in our Americas business for some time.

We see volume growth especially in the school milk segment and the results are also driven by positive mix effects and the price increases from customer clauses in Americas. Particularly positive is the fact that we have been able to sign a number of new filling machine contracts in the quarter.

Our strategy is to offer high-quality filling machines for extended shelf-life products in the U.S. and Canada. And in this quarter, we have already signed several filling machines within the dairy, plant-based and juice segments.

Now as you might have seen in our stock notice on April 28, we announced that we have now signed a joint venture agreement with a very well well-renowned packaging company, GLS, establish a company GLS Elopak, that will produce and sell packaging material to beverage customers in India. This truly represents another landmark deal for Elopak, delivering on our strategic ambition to broaden our geographic footprint and target high-growth markets.

And we have actually been looking at several options in India for a long time. In the world's largest fresh dairy market, this has always been an interesting growth market for Elopak. We quickly concluded that we wanted to enter India together with a local partner. This is a challenging market to navigate. Our criteria was to find an industrial partner with experience from the packaging industry, including relations with local customers, a mutual aspiration to build a leading packaging company in India.

It was also important that we shared the same views on ethics and compliance matters. And GLS ticked all of these boxes, and we are incredibly pleased that we have now been able to reach an agreement to form a 50-50 joint venture. The purpose of this joint venture will be to build up a packaging material plant outside of Delhi. And from this location, we will have a good reach to customers in the Indian market.

So as a first step, the plant will have Roll Fed production capabilities, but we will also set up Pure-Pak production capabilities in near future. The plant has already been constructed, and we plan to be able to start sales and production from this joint venture already in Q2 this year.

So a little bit about India. India represents a remarkably interesting market, given the strong underlying growth drivers such as population growth, urbanization and favorable demographics. And as you can see on the graph on the left-hand side, the liquid carton market has grown with an extraordinarily strong 8% over the past years -- 5 years. Now we expect this growth to continue at around 7% on an annual basis going forward. This makes India the highest growing liquid carton market in the world.

And by investing EUR 16 million in a packaging material plant, we get an attractive entry and can secure a solid platform for a significant growth opportunity. Within the next 5 years, we believe this joint venture can generate up to EUR 100 million in revenue and provide positive EBITDA contribution already in year 3. The JV will be fully consolidated in Elopak's financials as we have the control rights in the joint venture.

A very important topic for Elopak is, of course, pricing. In the first quarter, we have been -- we have increased our revenues by EUR 20 million, of which EUR 7 million can be explained by increased prices. In Americas, we have raw material clauses in our contracts, while in EMEA, we've negotiated price adjustments with customers. And given the unprecedented raw material situation we are currently facing; we have recently announced further price increases to our customers. These price increases will take effect from June this year, and expect to cover most of the higher raw material costs on a running basis.

As I'm sure you are all aware of, Elopak's operations in both Russia and Ukraine are very much impacted by the current situation in Ukraine. Currently, we have suspended our operations in Russia and our operations in Ukraine have restarted, however, at this time, still at a low production level.

It has been challenging to navigate the continuously evolving situation, but we have a good and active dialogue with both employees and customers as well as authorities in the region. In Ukraine, we have also provided humanitarian support on the ground ranging from providing first aid equipment, water and cartons and logistical services to local civilians.

Financially, we have had to take certain write-downs in the first quarter. You will see in our financials that we have adjusted down our fixed assets by EUR 14 million and written up some working capital of around EUR 8 million, in total, EUR 22 million. These calculations are based on our best estimates related to the possible scenarios. But as mentioned, there is still, of course, a high degree of uncertainty related to the exact outcome.

So going forward, we will continue to support the wellbeing and safety of our local employees, including the provisions of humanitarian support in Ukraine.

Our business in Russia was suspended on 4th of March, and we are currently exploring all options for this business, including a potential sale of the business. In Ukraine, we kept our plant closed for most of March, but restarted operations by the end of March, although producing low volumes for the moment. We will continuously monitor the situation and ramp up when feasible.

So with this, let me now hand over to Bent, who will take us through the financials. Bent?

[Bent K. Axelsen, executive]

Thank you, Thomas. I will first take you through the adjusted EBITDA to report on the underlying performance. Then I will go through the different one-off effects we have adjusted for and conclude with our financial position and outlook.

So the adjusted EBITDA was EUR 27 million in Q1, which is down from EUR 32 million last year. This corresponds to an EBITDA margin of 11% and 14.5% 1 year ago. I would like to remind that Q1 last year was a very strong quarter as raw material prices have not yet impacted our cost base.

If you break down the EBITDA to reporting segments, we see very different developments in EMEA versus America. In EMEA, the adjusted EBITDA is down from EUR 29 million to EUR 22 million. In the end of 2021, we increased prices for '22 in line with raw material prices, which turned out to be even higher than expected. In the end of the quarter, they continue to rise as a consequence of the conflict in Ukraine.

If you look at the Americas, the EBITDA development is very positive with around 20% increase to EUR 11 million. As explained earlier, we have pass-through models with indexing of raw materials and customer prices, which protect our margins. The improvements come from positive customer and size mix and also continued growth, especially to school milk.

Let's take a look at our adjusted EBITDA bridge for the quarter. Our first bridge element contains the impact from volume mix and price for the group. For Americas, we include a net margin effect of price and raw material increase due to the indexing mechanism. In Europe, price and the raw materials is presented gross, which brings me to the second element of the bridge, raw materials.

This element includes the impact of raw material costs for production of carton and sourcing of closures in Europe and is in total EUR 9 million. Our costs related to operations are [ slightly up ] due to COVID-related sick leave, strengthening our corporate function following the IPO and also a generally higher activity level post pandemic. The FX is simply a positive translation effect between U.S. dollar and euro.

As mentioned in the intro, we have some of one-offs, which I would like to comment. The first is impairment related to Russia and Ukraine. This is an integrated system as our plant in -- used to serve the majority of its Roll Fed products to the Russian market. Consequently, we have looked at the totality when doing our impairment testing.

Due to the nature of the crisis, there is an uncertainty in the assessments. We have used the weighted average of several possible scenarios. The total impairment affecting EBITDA is around EUR 8 million, consisting mainly of account receivables and inventory. At EBIT level, the impairment is EUR 21 million, which consists of the additional impairment of EUR 13.5 million related to fixed assets. You'll find more information in Note 13 in the quarterly report.

The next adjustment is related to onerous contracts, around EUR 4 million. These are some of fixed price contracts with obligation to deliver that have negative contribution from Q2 onwards based on current raw material costs and pricing.

However, we targeted for increase prices to all customers during Q2 as a response to the unprecedented raw material situation. With this, we expect that most of this provision will be reversed during the second quarter. So consequently, this has been adjusted for in the APM adjusted EBITDA.

In addition, we incurred EUR 2 million in transaction costs, mainly related to Naturepak acquisition, but also the India JV. Last year, we only adjusted for the costs related to the IPO.

Let's move to our financial position, where we report a leverage ratio of 2.9. The increase is mainly driven by the Naturepak acquisition, but also the lower LTM EBITDA. The cash flow from operation is minus 2.7 due to the reduced earnings, but also the increase in operating capital since year-end, which is a quite normal in the beginning of the year due to seasonality, and we saw the same thing last year.

Net cash flow used in investing activities was minus EUR 94 million. The main investment was the acquisition of Naturepak and the existing business invested around EUR 10 million. Here, the main driver was filling machine CapEx linked to plastic-to-carton project in the U.K., where we have installed two fresh filling machines to our customer, Freshways.

We confirm the Board's proposal to the general assembly to pay NOK 0.75 dividend per share, and this is in line with our long term -- with our midterm targets.

So to the outlook. So Elopak looks quite different compared to 1 year ago. We have closed the Naturepak acquisition, we have signed an exciting new JV in India, we have the ongoing conflict in Ukraine with an unknown outcome, which also puts pressure on an already tight raw material situation. All in all, this provides both opportunities and challenges with many variables. So consequently, we are cautious to provide very specific outlook as the environment may change.

We expect full year revenues to be above 2021 and in line with our midterm targets. This excludes the additional revenues from Naturepak. Regarding margins, we have announced price increases, which will largely cover increased raw material costs on a running basis. The price increase will take effect from second half of Q2.

So for Q2, we expect a negative impact from raw material prices as well as the loss of our revenues in the Russian market. So in combination, raw materials and the Russian-Ukraine conflict will have a negative impact on our EBITDA margin in Q2 of around 2 percentage points, and that is given the current raw material prices. However, from second half of the year, we get the full impact of the price increases and consequently, higher margin levels.

So to wrap up the financial part. Given the challenges we have experienced, we closed the quarter in a satisfactory level, while group EBITDA is somewhat below the strong quarter last year. It's up by around EUR 5 million from the Q4 showing that company has been able to take action and protect the margin level through price increases in Europe and also continued strong performance in Americas.

So back to you, Thomas.

[Thomas Kormendi, executive]

Thanks, Bent. And to summarize it all, I would like to leave you with the following key takeaways from our presentation.

Firstly, clearly, for all of us, these are extraordinary days. And in -- Q1 has been characterized by unique supply constraints, unprecedented cost increases and not the least, the current geopolitical crisis. And this is, of course, a very challenging time for any company, but also a time of opportunities.

We see weaker competitors struggling and creating opportunities for solid companies such as Elopak. So firstly, despite the challenging environment we are operating in, Elopak has managed to deliver top line growth of 9% and further develop our business in the first quarter.

Secondly, and importantly, we continue to deliver on our strategic plan as we have now done for quite some time. The Americas business is delivering good financial and strategic performance; we are broadening our geographical footprint, not only by closing our acquisition of Naturepak in MENA, but now also by entering the exciting high-growth market, India with our new joint venture agreement; and not the least, we are taking value initiatives to mitigate the increased raw material costs for the company.

So thank you all for listening and we will now continue to the Q&A session. Over to you, Thomas.

[Thomas Askeland, executive]

Well, then, we are moving on to the questions. [Operator Instructions] First question is from Ole Martin Westgaard, DNB analyst, and it goes to Bent.

When will you be out of the onerous contracts? How should we think about the second quarter gross margins relative to the weak Q1 level? And will the price increases that are implemented restore the gross margins in Q3 based on the current raw material prices? So I suppose two questions, starting with the onerous contracts, Bent.

[Bent K. Axelsen, executive]

Thank you. So our expectation is that we will be out of most of these onerous contracts by end of Q2 as we have announced these price increases. So that is our expectation.

Regarding margin, just want to remind the margin in Q1 was actually 2 percentage points better than Q4 last year. So we were able to take the first steps to improve our margins between those two quarters.

Now for Q1 versus Q2, there is a time lag between the continued raw material prices and our price increases as we will implement our price increases from end of second quarter. This means that our expectation is that there will be a decline in EBITDA margin in Q2 for them to improve in the second half of the year.

[Thomas Askeland, executive]

Very well. And then on to another margin question from Truls Engene in SEB.

And that goes, will margins in EMEA be down quarter-on-quarter in the second quarter? Or will the raw material hedging in -- or the heading be offset by accretive contribution from Naturepak?

[Bent K. Axelsen, executive]

Yes. So I think it's a little bit the same answer there. So in Europe, the margins will get worse in Q2 versus Q4 for them to improve in the second half. And the main reason, again, is the time lag of the price increases, and we also have a running cost rate of the Russia and Ukraine operations because we feel that we have a commitment to support our employees even though we have suspended our operation. So that will also impact the quarter -- the second quarter negatively.

[Thomas Askeland, executive]

Okay. Good. Another question from Truls in SEB and that goes to Thomas. How large are the price increases in Europe from June? Are they larger than in January price increases?

[Thomas Kormendi, executive]

Right. So the price increases in June will be at a different level. And the reason being simple that we implement these price increases to offset the increased raw material costs. And as we have seen, the increases that we've described, the increases we have announced are set to offset these increases in raw materials.

[Thomas Askeland, executive]

Okay. Very well. And then another question from Truls in SEB and that goes to Thomas as well. Could you please elaborate on the process related to operations in Russia and potential divestment in Russia?

[Thomas Kormendi, executive]

Yes. So as I said, we -- as you -- we suspended our activities in Russia based on a Board meeting on March of 4th. Meanwhile, we have decided to explore the opportunities of what to do with our operations in Russia, and one of these avenues that we're exploring is also, as you say, divesting it, selling it.

So specifically, what we have done is we have started the negotiations and the work and the preparatory work with numerous potential investors. But at this stage, this is really all I can say. Operations remain suspended, and we are in the midst of that discussion and evaluation by the investors.

[Thomas Askeland, executive]

Excellent. Very good. And then another question to -- I think that goes to Bent. It's about midterm guidance. And it's a question from Moomal Irfan, Goldman Sachs analyst. So Bent, given the uncertainties you mentioned, how do you view midterm guidance on revenue growth and margins?

[Bent K. Axelsen, executive]

Yes. So until further notice, the midterm targets are the midterm targets. But as we mentioned in our outlook, Elopak is a different company with Naturepak on board, with a new exciting onboarding of the JV in India.

The situation in Russia, Ukraine has an end game, which is still undefined. So right now, there are many variables. So it would be natural for us to review the midterm targets based on the new portfolio in Elopak when we have a better visibility of the whole situation.

[Thomas Askeland, executive]

Very good. And with that, that was the final question for this Q&A. And then thank you, Thomas, Bent, and thank you all for joining the first quarter presentation.

[Thomas Kormendi, executive]

Thank you very much. Thank you.