Elopak ASA

OSE:ELO

Earnings Call Transcript 2023-Q2

[Mirza Koristovic, executive]

Good morning, everyone, and welcome to the second quarter 2023 earnings presentation for Elopak. My name is Mirza Koristovic, and I'm Head of Investor Relations. Today's presentation will be held by the CEO, Thomas Kormendi; and the CFO, Bent Axelsen.The presentation will last for approximately 30 minutes and it's available on live webcasts on our webpage under the IR section. We will have a Q&A session after the presentation. There will be a possibility to ask questions from the audience here in Oslo and from the audience on webcast through the chat function.So with that, I leave the word to the CEO, Thomas Kormendi.

[Thomas Kormendi, executive]

 Thank you, Mirza, and welcome. Good morning to all of you here in Oslo, and everyone who is following us now on webcast. I am very pleased today to present our Q2 result, which is a very strong -- is a strong quarter for us and it's following the recent strong development we have had for the last quarters, really in line with our strategy execution, delivering both growth and profitability.So, let's just start off by giving you a very brief overview of who we are as Elopak and we are the world's largest fresh liquid carton supplier. We do that in around 70 countries in the world and we supply packaging material, filling machines and technical service to customers in dairy, juice and liquid industries in general.We manufacture our packaging material and filling machines in both Americas, and Europe and when you look at the slide, you'll see the majority of our business is in the Greater European which includes in our case, Africa, MENA and India and the remainder is in Americas, which in our case means Canada, U.S. and Central America.So we are, you could say, in the business of sustainable packaging. [indiscernible]. And that we do because we protect essential commodities, meaning milk, juice, and other food stuffs primarily. We also now protect and pack non-food items which are also commodities and essential for human beings around the world.We do enable world nutrition in many, many parts of the world through the commodities that are being packed in the Elopak systems. And what is very important to understand is -- in our strategy and moving forward is, of course, that what we do is we are part of the movement in replacing plastics.So, enough about the background who we are. Let's look at the quarter and our performance. And firstly, you will see, from a revenue point of view, we present a good organic growth of around 6%, EUR 14 million. We also present a EBITDA level which is strengthened by some EUR 15 million year-on-year and around -- on a quarterly, for a -- and a quarterly margin of around 14.9%, just shy of the 15%.We also presented -- during the quarter, we presented the new plant that we are setting up, state-of-the-art manufacturing plant in U.S. that will fuel and support the continued growth in U.S. We also present this quarter a strong growth in the EMEA area as well as a profitability improvement.India continues to develop well and we are on the edge of increasing our capacity, including addressing new categories and building the organization for the vast, vast opportunities in India.In this industry, albeit that we are primarily at packaging or selling into the commodity areas of food, we are still seeing some impact on consumption related to the economic climate and inflation, also on our supply chain which is impacted by, not the least, inflation in this society.During '23, we will continue to see the full impact of the higher board prices for the year which will have some impact versus the current level of -- the current margin level of EBITDA. But having said that, we remain very confident on a strong financial year in '23, a solid year, and clearly also optimistic for the future to come and the long-term fundamentals of our business.So let's have a look at the revenue side. As you can see, when we look at it from an organic point of view, we have a growth of around 6% and a year-to-date increase of around EUR 50 million in our business in revenue terms. This is split between the 2 regions, and as also you can see on the right, a very solid increase on the EBITDA side. The margin has increased versus the same quarter by around 60%, 57%, and around EUR 15 million increase in EBITDA terms.In -- On a year-on-year basis -- year-to-date basis, we also see a solid improvement. But let's not forget, we came off from a very tough '22 impacting -- impacted by the very high raw material prices which hit us heavily during Q2 of last year.Let's dive into some of the figures when we look on a regional basis. So, EMEA, overall, the growth in Pure-Pak volumes were driven by aseptic growth, mainly in UHT. So UHT is milk, and also filling machines. When we came into this year, and I think I did say that during Q4, we had a very, very significant installation plan for filling machines actually both in Europe and in Americas, and that is what we are executing on.We have seen delays on the installation of commissioning of filling machines related to really a number of factors primarily outside of our control. But we are delivering that, and that is part of the growth that we're seeing now in EMEA.The other side we're seeing is of course that the Roll Fed volume that we are selling in EMEA, both traditional Europe, North Africa and, not the least, in India is growing, albeit with some impact and decreases in the, let's say older, traditional European markets offset then by the growth outside of the core European markets.It's clear that there are headwinds in consumption in all grocery categories that we look at, whether on a retail level. Everything is being impacted by the purchasing power, and you will also see that there is a downtrading from the more premiumized products to the more private label based products and we see that in our industry as well that a number of our customers around -- in the European market are seeing some decreases in consumption and some shifts within their own categories and their own segments.We see that may be more in MENA than anywhere else where this has also impacted the raw milk production, and hence the raw milk availability. And with a somewhat lower raw milk availability, clearly, the liquid milk part of the available raw milk becomes lower, and that is the impact that we've been seeing for the first half of this year.Having said that, we do also see some improvements in that, and I believe locally that it is about to improve on the availability of milk.Overall, we see a revenue growth organically of around EUR 26 million for the half year, so year-to-date. In Americas, and you remember -- for those of you who've been following our -- the quarterly presentations, we have had a very solid performance in Americas for numerous quarters actually and this year -- sorry, this quarter, we continue on the same pace. We've been onboarding new customers. We have been strengthening our portfolio by delivering more juice to parts of the market that we did not access before and we are then seeing growth in both dairy and in our juice segments. And overall, as you can see, we have a revenue increase on a year-to-date level that is around EUR 16 million or 13%.That is while at the same time, we're seeing decreases in school milk, and the decrease in school milk is really driven by regulatory or allowances from governmental and federal state budgets. The school milk has been decreased from 2 meals per day to 1 meal per day, and hence, that has an impact, of course, on the school milk sales.In Montreal, we have been focusing very, very diligently on improving the operational performance, and we are now again for this quarter continuing consistent, strong performance in waste level and the operations of the plant.One of the strategy elements that we presented when we did the U.S. or the Americas plant was installation of filling machines, the rollout and supply of filling machines, enabling us to be a system supplier enabler in the U.S. to deliver innovations to the market, and we came into this year with a very, very high number of installations compared to where we were historically. And what we're seeing now is that the demand and momentum for the filling machines continue also through this quarter and looking forward in terms of our pipeline.So it's a very positive actually outlook in filling machines. It is also a strain on our organization because it's a high number of filling machines, and at the same time, we do see that our customers in some cases are delaying these for mainly [ this ] whole range of operational issues.So Americas, of course, is a significant part in what we presented as the sustainability-driven strategy consisting of these 5 elements, where the Americas part was #1, and let me just come back to that in a second.Beyond that, for your memory, we also presented the aseptic strategy which was based on the Pure-Fill -- launch of the Pure-Fill system which is now operating in Spain and in Austria. And we're finalizing, or we're working on our beta sites and finalizing both on the Pure-Fill platform as well as the launch of the eSense that has been rolled out now in Spain.We also at that time highlighted the geographical footprint which was where we have delivered on the MENA and the India side and driving these in line with the growth plans we have and then the plastic-to-carton conversion which is the theme that we see becoming more and more prevalent where we look.Let me just come back to some examples on that as well. And then finally, of course, commercial excellence, which is very much the part of what we have been doing during last year and this year, ensuring that the cost increases that we experience will be met by price increases and price adaptions, which has also been the case.So, let me then quickly have a look at Americas, and Americas is something we highlight many, many times, and it's because it's an essential part of our strategy and we have seen a consistent and strong delivery in this part of the world for the last few years. So overall, this is an environment and a market of around EUR 1.6 billion, and remember, our share of that market is around LTM EUR 280 million. So we are still a small player in a big market, with a lot of potential to grow.A little bit of backdrop here. We have been actually in the American market for many, many years. But in 2015, we built a state-of-the-art plant in Montreal which actually still is the newest large size -- Pure-Pak large size gable top plant in the world. And in 2021, we then started the implementation of the strategy that we're now seeing the fruits of, and you can see that on the slide with the revenue part on the lower left. And of course a EBITDA improvement of around 60% -- sorry. It's 30%. It's difficult to see on this slide.A very solid improvement year-on-year in EBITDA terms and also in revenue terms, driven by supplying our customers -- more customers, supplying our current customers with more products. And if -- and also delivering filling machines and securing that we have the services around the delivery of these filling machines.So all of that led to the decision, which was a significant decision in the U.S. market, that we establish and build a plant that will fuel and support the future growth that we have been seeing and that we have -- and that we are seeing in the period to come. So this is very much an example of executing on the strategy that we outlined and the team in Americas has been doing a fantastic job in doing this.So finally, let me just give you a few examples from around the world where we have seen, what we call plastic-to-carton, or where we are seeing that the carton package format is continuing to do very, very well, also in more innovative areas. So one is Robinsons. And for those of you who've been to UK, you would have seen this in every store in U.K. This is an iconic product. It's been -- I think it's existed for more than 200 years. This is summertime in U.K. Robinsons squash mixed with water. It's all about summer.Now, they have then decided that Britvic, who's the owner of Robinsons since '95, that they would trial this in a carton format because the intent is to reduce plastics and increase the product you buy. So it's an example where we've seen that in other markets refills are coming in more and more into a carton format and bringing -- taking out either PET or HDPE bottles. Strap line, less plastic, more serves. That's what they're saying. I think this is a -- quite a interest of our -- nice example of where carton is entering even in areas where you've typically said it has to be transparent for coloring, et cetera.The other one, and this is the big, big, big challenge in the carton industry, is of course water, which is completely dominated today by PET. And what we're seeing in many parts of the world, in this case, it's U.S., innovative marketing-driven new products are looking at water as well to be replace the plastic, the traditional PET water bottle with alternative carton bottles, and this is then supported with a whole range of marketing initiatives and updates in flavorings, et cetera.Boxed Water is probably the leading American water brand in carton, and then, of course, it is a product that you will see in terms of visibility in many, many cases when you look in U.S. I saw an actually picture of UN where they were using this for the UN meeting.And finally, and this only to say that we have during these meetings often talked about dairy alternatives. One such has been plant-based. We talked about oat, almond, a whole range of different ones. This one is brand new, and I took this because this, we've -- I've never seen this before, to be honest. But this is egg white as an alternative to dairy and an alternative to finding protein-rich drinks and ensuring that it's not only good for your health, but also for your planet. This is the driving force around these kind of products.So, a lot of things happening on the plastic-to-carton side. It is clearly a trend that we will see with a whole range of new products in the coming period, both in the food and in the non-food area. So stay tuned for more, for the coming quarterly presentations when we come back to this.I think I will hand over now to you, Bent, and -- to the financial performance.

[Bent K. Axelsen, executive]

Thank you, Thomas. The financial part is also fun and interesting this time. So, I'm happy to be on stage. Another strong quarter, I would say, and I will take you through the drivers of these results. But let me first remind you on how we have dated Russia in our numbers. So Russia are excluded from the P&L this year and we have reset it last year. It's obviously out of the balance sheet this year, but we have not reset the balance sheet last year, just to have that in the back of your mind. So we have that clear.So let's move on. We're going to start with the EBITDA for our 2 operating segments, EMEA and Americas. And I think if you look at EMEA, this is where we have the strongest improvement of our profitability both in absolute terms and relatively. So it's EUR 13 million, better results, which corresponds to 61% improvement.And as Thomas mentioned, I think it's important to remember the context. So last year in Europe, we were challenged with our margins because the raw material rally really started to kick off. I think it was in the second half of 2021 and they continued throughout 2022. And it was in the beginning or in the middle of 2022, we started to manage to level [ off ] that. So what we are looking at here is really a catch up where we bring the European margins to a more normal level. I think that is an important comment.When it comes to the boards, so what we explained in the first quarter review, we said that we have an inventory effect and we will see those effects coming into the second quarter, which they did. So in the second quarter, we are realizing the new board prices. Still have some inventory effects left because there is a portfolio of boards. So those will have some minor inventory impacts also for the second half of the year.If we comment on the other raw materials, the realized costs, the PET costs are actually higher in this quarter compared to the same quarter last year. This is both a result of the inventory turns effects, but also due to our hedging program, and as you know, we are hedging the majority of our PET position.When it comes to aluminum costs, they were at the same level as last year. We have seen some softening on other things. Pallets, it seems small, but actually, it adds up to be a quite big number. Utilities and electricity have come down and we also [ see ] softening on some other input costs, while the general inflation is driving the fixed cost base in the other direction.If we move to Americas, as Thomas mentioned, continued positive momentum almost at the same pace as Q1. We had some delays on the filling machine commission. So we expect those to come on stream later this year. So this is a combination of volume growth, onboarding new customers, having sales into the juice segment and an overall positive portfolio mix of the business.America has also done a really good job to manage their cost base and they also improved the efficiency in their plant.So let's take it to the bridge. So we are going from EUR 26 million last year to EUR 42 million this year. EUR 15 million, 57%. Again, strong quarter this year. Challenging quarter, same quarter last year. So last year, the margin here was 10.2% and I think that's an important context, even though we are very proud of the results this year obviously.The net revenue mix is EUR 23 million, and obviously this is an impact of the pricing -- the catch up of the pricing, bringing the margins back to a more normal level. It is the profitable growth in America. It is the new business we have coming in from India, that is also driving that revenue mix.When it comes to the raw materials, EUR 4 million for a reason I explained. And operations, they are up 3%. There are no special changes here. It is more traveling, general inflation, but we also spent more on R&D to deliver on our strategy. So I think we're proud to say that we have been good and diligent in managing the margin and we are back to where we should be.If we go to the cash flow, we have a cash flow from operations of EUR 63 million. The key driver here is profit before tax and interest paid of EUR 52 million. For the comparable period, that number was EUR 4 million. Adding back normal depreciation, and then when it comes to working capital, it's grown EUR 2 million. So quite moderate.Underneath here, we have seen an inventory buildup of filling machines because of delays of commissioning, and we also have higher inventory of packaging material because we expected the peak season to be better than it turned out to be for the second quarter. The other operations is basically paying our taxes, and we're also reversing the -- some unrealized currency exchange gains.Moving on to cash flow from investments. What we are seeing here is a slightly normal CapEx level than normal. This is mainly due to phasing. This goes both to the maintenance investments we have in our plant, but also the filling machines where we see the majority of those commissioning to happen in the second half of the year.In other, we have received actually money from Russia. So we have received the first installment from the divestment of Russia. So that is EUR 3.6 million. So that is really good. And we have received also dividend from one of our joint ventures.Cash flow from financing, minus EUR 63 million. We paid our dividends. We also have other financing, which is basically interest payments. Interest rates are up, and we also have our -- the lease payments for our right-of-use assets in that category, and that brings us to EUR 15 million in cash in the quarter.That brings us to the financial position. So this takes us from 3.3 end of the year to 2.6. So we're really good. LTM EBITDA is up EUR 31 million compared to end of the year. We have then reduced the net debt by EUR 12 million and we have -- obviously, here, we paid the dividend of [ debt ], and we also have some increased lease liabilities because of the tethered caps that we are getting ready for. So tethered caps are those caps that are sticking to the carton, which is a requirement from next year, I believe. So the financial position is -- remains strong, and we are continuing to move in the right direction.Now to the outlook. So we still -- as everybody else, we experienced the inflationary pressure and the general climate has affected the consumption also in our business, even though as Thomas says, we are in a resilient sector. We expect the revenue growth -- the organic revenue part to be well above our midterm target. So our midterm targets for revenue growth is between 2% to 3%. And when it comes to the EBITDA, we expect that our EBITDA will be better than the comparable period last year. So last year, we were just south of EUR 70 million for the second half. That means south of EUR 51 million and we believe that we will beat that.What can drive that up would be further softening of PET and what could drive that down could be consumption decline, if that would happen. So those would be the variables that we will follow going forward.Another point is that, at least in normal years, the second half seasonally is slightly weaker than the first half of the year. And another final point here is that the positive inventory impact we had on the board costs, those are not with us for the second half because then it's all new board prices.So with that, I will hand it back to you, Thomas.

[Thomas Kormendi, executive]

Thank you, Bent. So summing up -- sorry. This was not the right -- It's upside down. That's why. Okay. Summing up, as we have been saying, we are very happy to have delivered another profitable and strong quarter, and I think also for us, what is important consistently in line with what we have seen over the last many quarters. What also makes us particularly happy is that we see good development across geographies, across our businesses and pretty much across the company as such. While we have been saying that we are in a resilient industry -- and I think relatively speaking, we are. We are, of course, not immune for inflationary pressures impacting consumer demand, impacting also across all of the geographies that we are working. So we see that happening as well. But we strongly believe and feel confident we will deliver a solid '23 and very much optimistic on the longer-term fundamentals of this business replacing plastics with carton.With this, I thank you very much, and I'll hand over to you, Mirza.

[Mirza Koristovic, executive]

Thank you, Thomas, and Bent, for your presentation. We will now go into the Q&A session. We will begin with the audience here in Oslo before we take on the ones received online. For the journalists present here today, we will set aside some time after the Q&A session. So let's begin. I would like to kindly ask you to please use the microphone and state your name and the company you're representing. All right. So no questions yet in Oslo, but we can start with some received online. So we have a few questions from Fredrik Windrup from Boldhaven. Can you please provide an update on the equipment deliveries in the U.S.? It looks like equipment sales are 0 in Americas year-to-date. How many new machines do you now expect to deliver in 2023?

[Thomas Kormendi, executive]

Yes. Actually, equipment sale is not 0. I don't know how we arrived at that figure, but that's definitely not the case. As I said, the demand and momentum that we saw last year continues this year. What we are experiencing in U.S. and essentially in the group are supply chain challenges. So when it comes to delivering new machines, we have some restrictions in the availability of machines. That is the reality we're facing. When it comes to the installation and commissioning of the machines for this year, there we are experiencing delays for a whole host of reasons. Part of that relates to customers who, for one of the other reasons, decide to delay it. Some of it relates to the capacity of our site to actually execute on these installations, et cetera.But there's equally strong demand on new filling machines as we saw last year. And what we explained when we went through the strategy, there is a strong need to change filling equipment in Americas. That is a very, very old installed base that will need to be replaced.

[Bent K. Axelsen, executive]

Just another comment there is that -- finance comment and that is a proportion of those delays, we already received them on it because we get prepayments for part of these contracts, and that has also improved the cash flow position.

[Mirza Koristovic, executive]

And another follow-up from Fredrik. When are you expected to make the decision for the location of the new U.S. factory and when will you break ground on the construction?

[Thomas Kormendi, executive]

Good -- Very good question. We will decide on the exact location literally within weeks, maybe 1 month, very soon. The intent is to start construction immediately thereafter. And our intent is to be up and running end of next year.

[Mirza Koristovic, executive]

And a question from the analyst in SEB, [ Hakon Fuglu ]. Congratulations with another very strong quarter. Can you elaborate on the change in organic growth from Q1 this year to Q2 this year? Is it more difficult to push higher prices on customers or is it mostly volume-driven?

[Thomas Kormendi, executive]

So between Q1 and Q2 this year -- we have not increased prices between Q1 and Q2 of this year. We increased prices beginning of the year. So that impact we're seeing on pricing in the slides, of course, relates to last year -- comparables we had last year. When it comes to the pricing situation, as such, of course, everybody in every single industry you're in -- certainly, when you look at groceries and retailers are looking at consumer impact, and hence, price increases are difficult to implement. In our case though, they are based on cost increases, very, very clear inflationary pressures. So that's why we have been implementing them as of January.

[Bent K. Axelsen, executive]

I think there's a one important thing to mention is that there's very little link between our volume developments and our price increases because we -- our cartons is a part of a finished product. It is not the finished product for the consumer. So the consumption pattern we've seen has been a little bit softer in the second quarter compared to first quarter, but that is more related to the overall macroeconomic environment, high interest rates, et cetera.

[Mirza Koristovic, executive]

And from a DNB analyst, [ Niclas Gehin ], you say higher board prices in 2023 will impact full-year EBITDA margin compared to current level. By current level, do you mean the margin reported in Q2? And then second question is, the higher liquid board prices started to take effect early or late in Q2. Could you quantify a bit more, please?

[Bent K. Axelsen, executive]

Yes. So I think for Q2, most of the board price effects were effective in the cost base in the second quarter. So it's very close to the run rate in the second quarter, but there are still some impacts for second half, and that has more, say, portfolio effects within -- in the boards because we have different board costs with different inventory turns. So it's a marginal impact for the second half compared to the run rate of the second quarter. I think one thing to look at is that the second half of the year from a volume perspective typically is softer in the second half of the year than in the first half of the year, while it's difficult to comment on what is the peak season, since we didn't see the normal peak season in the second quarter. So we don't have any more numbers to give that -- beyond the EBITDA outlook that we gave in the outlook page.

[Mirza Koristovic, executive]

Right now that we have warmed up with the questions from online, are you -- do we have any more -- any questions from the audience here in Oslo? No.Then I will ask the last question received from [ Lewis Merrick ] from BNP Paribas Exane. You mentioned delays in the pipeline, including by customers, but also said demand is strong for machines. Can you clarify these somewhat contradictory statements? Is the pipeline stronger now than end of last year? And second question is, when will you annualize the U.S. school milk decline effect?

[Thomas Kormendi, executive]

So let me try to answer on the machine side. The demand -- in this industry, the demand on filling machines is driven by 2 factors, really. We have the replacement of filling machines, which is a big part of what you do in the European context. You also have a replacement in U.S. of the existing base, but we're not replacing our filling machines because we didn't have filling machines previously. So for us, it's new sales. The delays we see are really in many, many cases, machines which, to Bent's point, have been paid for, have been contracted. But for various operational reasons, we cannot install them as agreed because our customers changed their plans in some ways. So that's the reason. And it has nothing to do with the demand.The demand side is equally strong, and the demand on filling machines in a European context is strong because you look at getting -- replacing alufoil in filling machines is one of the drivers we see with our eSense option. And we also see that the demand we see for the large-size containers in the Pure-Fill system, the only 2-liter aseptic system existing in low acid in a gable top is also strong because in times of current economics, large-size, family size is a size that is attractive generally for consumers. So delays and demand in this particular case are not linked.And the other -- what was the last part of the question again?

[Mirza Koristovic, executive]

The second question is about the -- when will you annualize the U.S. school milk meal decline effect?

[Thomas Kormendi, executive]

To be honest, I don't have the figure on when that would happen. We are -- the school milk business for us is quite a separate and unique business in as much as we manufacture most of that, if not all of that, actually in Mexico. And the impact on this change in allowances and regulation started last year, and I think we see it graduate over this year. I cannot give you an answer of when we get the full effect.

[Bent K. Axelsen, executive]

I think it's fair to say that it's not a significant value driver to follow. It's not a key explanation factor from a bottom-line perspective.

[Mirza Koristovic, executive]

Good. Thank you. I do not see any more questions. So thank you so much for your attention, and have a nice day.

[Thomas Kormendi, executive]

Thank you very much.

[Bent K. Axelsen, executive]

Thank you.