Elopak ASA
OSE:ELO
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Earnings Call Analysis
Q3-2023 Analysis
Elopak ASA
Elopak, the world's largest fresh liquid carton packaging company active in around 70 countries, presented its Q3 2023 earnings with positive momentum. The company, recognized for its exceptional Environmental, Social, and Governance (ESG) performance, achieved an organic revenue growth maintaining around 5% and a solid EBITDA margin of 17%, driven by adding more customers and building market share, particularly in the Americas. The Americas region has been crucial, with growth and profitability due to various strategic initiatives, including setting up a state-of-the-art plant in Arkansas, United States. Meanwhile, the European, Middle East, and African markets showed stability and growth, with significant contributions from the MENA region and India.
In terms of financial performance, Elopak reported a year-to-date revenue increase of 12%, underlining the effectiveness of its operational improvements and strategy implementation. The company's innovation efforts, especially in the Americas, led to growth across different sectors such as dairy and juice, and the development of new business areas, including the introduction of board-type packaging for the juice market. Elopak's focus on operational control and innovative strategies, such as introducing new filling machines, has resulted in a robust backlog and positioned it well for future demand fulfillment.
The company remained financially prudent, navigating through volatile material prices while demonstrating strong cash flow, highlighted by a significantly improved cash flow from operations at EUR 108 million, compared to EUR 25 million in the previous year. This is a testament to Elopak's adaptability in managing operational costs and capitalizing on profitable growth opportunities. They successfully reduced the leverage ratio from 3.3 to 2, which aligns with their mid-term target and exemplifies the company's commitment to balancing growth with financial stability.
Elopak has been successful in transforming market dynamics through innovative initiatives such as the 'Small' subscription service in the UK and the installation of high-speed filling machines in response to the shift from plastic to carton packaging. Geographical expansion, particularly in India, has outperformed expectations, with the region achieving a net positive EBITDA in just six months as opposed to the projected three years, confirming the company's strong performance and potential in emerging markets.
Looking ahead, despite inflationary pressures, Elopak is optimistic about the future and expects to close the year with revenues surpassing EUR 1.1 billion and an EBITDA that is projected to be above EUR 170 million, reflecting the company’s resilience and strategic agility. This forecast aligns with Elopak's mid-term targets and shows confidence in sustaining its growth trajectory and profitability.
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Good morning, and welcome to the Third 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 Koermendi; and the CFO, Bent Axelsen. The presentation will last for approximately 30 minutes and there will be a Q&A session after the presentation. The presentation will also be webcasted on our webpage under the IR section. There will be a possibility to ask questions from the audience here in Oslo and also for the audience through the webcast on the chat function.So with that, I leave the word to our CEO, Thomas Koermendi.
Thank you, Mirza, and good morning to everyone here in Oslo on this snowy morning and everyone else who's listening or watching on the web. Let me just start by saying that it is a great pleasure today to present our Q3 results, which is a really strong Q3 results and as you will see, throughout the presentation we are delivering across geographies, across businesses, and in fact, delivering, meeting or exceeding all of our mid to long-term targets. So great start and let's get into it.Firstly, for those of you who are not so familiar with us, a very short glance of who we are. We are, in fact, the world's largest fresh liquid carton packaging company supplying in around 70 countries, 14 billion packs and producing at 11 sites currently. The majority of our business is what we call EMEA, which is a very wide definition, including also Africa and India. And the other part Americas consist of Canada, US, Mexico, and the Caribbean Islands. In the portfolio, we are mainly a fresh liquid carton packaging supply, but we also have a very significant and important aseptic business that we will come back to. But very importantly, we are in the business of sustainable packaging. This is what we do. We work with sustainability at the core of everything we supply to our customers. And we do that primarily by supplying essential commodities such as milk, juice, and food, but we are generally supplying the world with nutrition in the many, many, many countries where we are currently supplying. The sustainability part is essential in what we do and we look at ourselves actually as replacing plastics. This is the task that we think is important from a world point of view, but equally, also a very, very strong business driver that we are engaged in.And on that note, if you look at the ESG or sustainability ratings we have, we have just been rated top 2% in the world from a ESG point of view by receiving the gold rating of EcoVadis. We've actually improved on our rating from last time, a little bit higher rating, meanwhile also, of course, benchmarks are changing, but we also have a number of other achievements that are essential to us and the commitments we have made, not the least towards the science-based targets, where we were the first bigger packaging company to sign on to 1.5 degrees maximum temperature increase in the Paris Agreement.Okay. So enough about that. Let's look at Q3 and there is enough to look at, because it has been yet another quarter of very strong performance that we've had. And firstly, of course, we look at revenue where we had an organic revenue level of around 5%. We also had a very, very solid EBITDA development, leaving us with a margin level of 17% and that is driven, not the least by the growth and the continued momentum we have in Americas, where we are delivering on the strategy we've outlined around adding more customers, building market share, providing more innovative solution and not the least, also the filling machine business. But we also announced in June that we would be building a new plant and we are now setting up a state-of-the-art plant in Arkansas in US and this will complement the factory we have in Canada, which is currently the world's largest gable top factory. Modern gable top factory I should add. And with the plant in Arkansas, we will now have a footprint in Canada, US, Mexico, and in the Central America. We also see in EMEA, very importantly for our business, of course, solid growth and profitability, thanks to the initiatives we have been taking throughout the last few years. And MENA, as you recall, that we acquired during last year is now after some struggling back and delivering growth and profitability as per plan. What we have seen and we come back to that is that while material prices are softening in some cases, we still believe that volatility is there and it does clearly impact consumption to some extent throughout both our business and let's say, groceries in general.Finally and very importantly, we see as Bent will come into present on the balance sheet, very good cash generation in the quarter and all of that leaves us with a strong belief and confidence that we will end the year on a strong note. And importantly, the longer-term market fundamentals remain very, very attractive.So, a little bit more on the revenue side. Revenue, as you can see on a year-to-date basis, up by 12%. It is driven by Americas, where we driving on the momentum. It's driven by a business that we have built and acquired in MENA and in India. And it's riven by the business development we have also on the service business that is now improving, thanks to some initiatives we have taken there.On the profitability side, we have also seen and on this chart, very good development. Clearly, it's versus a year last year where we all recall very, very heavy raw material pricing and by the time we implemented the price increase, it must skew the comparisons somewhat. But very importantly is that the activities we've taken to bring back the profitability to a normalized level in Europe has happened and is delivering, as we will see. And also we are seeing that the new business we are generating and have acquired is delivering very nicely towards our result.I think we're back on the slide here. So EMEA. EMEA from a revenue point of view, we could say that we have seen stable volumes and actually, we are pretty happy about that to be honest, given the consumption development we see and the overall pressure on groceries. We see some shifts from premium to private label clearly, but there is a strong impact across Europe on consumption driven by purchasing power, driven by the inflationary pressure that consumers feel. Meanwhile, our Roll-Fed business, which has been doing very well the last few years continues, not the least with, of course, strong growth in India, but also we are delivering well on the European business of the Roll-Fed business, pretty much in line with where we planned for this time or more importantly versus last year. As I explained a few quarters ago, MENA, given the lower purchasing power is more impacted by economic downturns and the availability of raw milk meant that consumption of milk decreased for a while. Now, we are starting to see the trend, if not move, then stabilize and slightly improve. So we are seeing volumes coming back in MENA and seeing a competitive environment, but a lot of activity from a business point of view.On the Americas side, this of course, is a story that we spent some time on during the last Q quarterly presentation to highlight what is actually happening there. And what we can see is that from a market point of view [Technical Difficulty] factors is in Europe. But we continue to deliver [Technical Difficulty] and that is primarily driven by onboarding new customers, new business driving our market share within the dairy sector, within the juice sector that we started, as you recall maybe during last year when we introduced a board-type for the juice market. So we see good growth. We see growth across both dairy and juice. We see growth both within existing customers who do have dual supply and brand new customers whom we are onboarding as we speak. Importantly as well, and part of the America strategy are the filling machines. And what we presented a while back that we are installing more filling machines. Installing filling machines are very important because it allows us to present innovations and with the innovations, we can de-commoditize a commoditized business, and that process and that development of filling machines continues. We have a strong backlog for that also in the period to come.All-in-all, a very, very good development, and importantly, it's consistent with many, many quarters we have had for a while now. So let's just look at what that means from a strategy point of view. And some of you who have attended these presentations have seen this slide. This is what we're delivering on. This is what is driving us right now. On one hand, the Americas opportunity, which evidently led to us [Technical Difficulty] driving innovations, driving new products, driving filling machines, the aseptic platform with new pure filling machine platform that we have launched and is operating in both Spain and in Austria. The footprint, which includes the inclusion of MENA in India and for us in the strategy point of view, means that we are going deeper and building that business. Coming back to that in a second, the plastic to carton conversion, which is the big Holy Grail, you could say. And what is the driver for us in the business in the longer term and then the commercial excellence, which really relate to the pricing initiatives we took, the continued operational improvement that we have ongoing, and of course, value engineering around the materials, the Boards, and the supplies we do.Let's just have a look at some examples on this. And they are examples to illustrate in our world, in our view, how the world is moving. One of this is a small, but very, very innovative, successful now in UK initiative with a product called Small. I think it's correct [Technical Difficulty] way I pronounce it. This is an idea which came up during COVID, where people couldn't go shopping and where you needed to get your household chemicals, your washing, your detergents, your softeners, your soaps, et cetera, in a new way. It was started with a very, very strong idea. Why don't we do this as a subscription service and why don't we do it then in a sustainable way? Instead of the vast amount of plastic littering that you have out of this industry, this is now a refill service. You buy a one-time-only plastic, in this case, can bottle, and then you continuously get your refills in a sustainable carton format. So for us, it's interesting because the new ways of thinking, the new ways of being a little bit more innovative of how products are supplied and used, actually typically means that the choice is carton.The other one we have, and this is, of course, within a European point of view, this is the Holy Grail in Europe. Because UK is a very, very significant market, milk market. It is also dominated completely by plastic, primarily HDPE bottles. So the second largest milk processor, Freshways in UK chose last year to install two high-speed filling machines from us and they have now started launching their products, they're supplying it to bakeries, food services and all of that non-retail currently. And, of course, we hope and believe that there will be a retail story to tell in one of these quarterly meetings as well. What is absolutely certain is that there is a lot ongoing on exactly the dairy field in UK. So I hope to be back on some projects very, very soon.The third element in the strategy chart relates to geographic expansion. And we have talked about it and we are very, very strong believers in India. And India, just to get it is a massively huge opportunity. From a pure size point of view, that's evident, but also from a milk point of view and also because they currently have legislation regulation, which actually drives the banning of single-use plastic items. Now, in India that means a lot of items and it doesn't necessarily mean that they are banning milk pouches, but they are very, very high consumer of plastic as such and single-use plastic. And there's a high level of recognition that littering of plastic around in India. And after those of you who've been there will see this is something that has to be addressed and that is being addressed right now. And that's part of why carton is growing fast as it is in India right now. They have a commitment to net-zero and 2070 is maybe far away, but it's also a big place. So there are a lot of activities and that needs to go on.So from our point of view, if you think back to when we presented this in '22, we talked about the India activities and the India setup. And what we set at the time was we would invest the equivalent of EUR 16 million. We have invested currently EUR 13 million of the EUR 16 million [Technical Difficulty] auction. Why? Because there is a significant Roll-Fed market and of course, we want to take part of that and build a business before we go into the next phase, which is launching PurePak which will be on the back of the investments we are making now.We also said that we would see around EUR 80 million to EUR 100 million in a 5-year period and we are very confident that that is going to be achieved. But what we said was that we will arrive at a net positive EBITDA in 3 years. That turned out to be wrong because we did that in 6 months instead. So we are delivering in India on growth and very happy to say that's [Technical Difficulty] place, it's an attractive place, a lot of people are going there. But we are very determined with our very, very good partnership with GLS that we are building on the plan we had and delivering in line with the plan we had.We are going to offer a wider solution of products. We've started with small portion packs in India. That means really, really small. They are 125 milliliter, 100 milliliter, very small ones and then all the way up to a liter size and then expanding through more regions as we are now building the sales force from the very local areas that we are in around Delhi to a much, much wider scale. So very positive towards our development in India and excited [Technical Difficulty] moving into the next phase and offering also PurePak in India.And with that Bent, I will hand over to you.
Thank you, Thomas.I think we need to be honest that we ended the quarter slightly better than what we expected ourselves a few months ago, with a 17% EBITDA margin and with a strong cash flow generation. So I will take you through the drivers of this improvement with our operating segments EMEA and America.So when it comes to EMEA, the key driver here is the price increases that we implemented in the beginning of the year, that we have maintained throughout the year. And we have seen now that the raw materials are actually in line with last year. I think what is important to remember, even though we see some softening, raw materials are actually at a historically high level still. I think that is really is a important to remember. We look also at another thing that I think is important to mention on EMEA with the 16.4% EBITDA margin, that is actually what we need to deliver in order to contribute to the midterm targets for the group. So, basically the margins in Europe are coming back to where they should be. They are back to normal levels. Another driver is, as Thomas mentioned, the positive developments in our new markets. In MENA, while the volumes are stable, we are seeing improvement in our profitability and we also see growth throughout the quarter in India. As everybody else, we see the effect of the inflation that is impacting our fixed cost base. The last point on EMEA is that we had a positive one-off effect for the quarter of around EUR 2 million and that bumped up the EBITDA up to 40% in EMEA.In Americas, the story continues. It's a continued profitable growth. The key driver here is that we are onboarding a lot of new customers, that is the key driver for the growth. But we are also growing with the existing customer base. In the quarter, we have a particularly strong product mix that really improved profitability and we also see strong operational control. So while we are growing the top line, we are able to manage the cost base in a very good way.The EBITDA bridge is and what is -- I mean, look at this bridge is that now the raw material change is now stabilized and we are seeing, I'd say, a slight improvement on the raw material situation. So that is the key kind of change from what we've seen before. If you start on the left-hand side with net revenue mix, that is basically the contribution effect from our pricing efforts in EMEA, our profitable growth in America, and the contribution from our new businesses that makes up the EUR 18 million and remember, we also have the EUR 2 million in one-off effects. The raw materials is plus one. And what we are looking at here is a -- despite an increase of our board cost, as we talked about in the previous quarter, that has been more than mitigated and more than compensated for all the other raw materials in the group. Operations up around EUR 3 million, that is one increased R&D efforts, but it's also the inflation of our fixed cost base. If we add the other items that bring us then from EUR 32 million to EUR 48 million.If you go to the cash flow, we have a cash flow from operations of EUR 108 million. If you compare that to one year ago that number was EUR 25 million. So I think that is an improvement. And the key driver here is the profit before tax of EUR 82 million, which is up from -- I think it was around EUR 18 million, EUR 114 million 1 year ago. What is also helping this cash flow is the working capital that is increasing only EUR 5 million is a moderate increase for the company and that number last year was actually EUR 46 million increase. So we have managed the 2023 situation very well because we also have a top line growth. In that working capital, we have increased inventory of filling machines, but that is mitigated by prepayment from customers. We also have some increase in the packaging material stock as well. Other operations is basically taxes and also unrealized currency gains.If we look at the cash flow from investments that is EUR 13 million. That is slightly lower than normal and is driven by two things. Our maintenance program, typically we invest in our plans more in the second half of the year, so we expect to spend somewhat more money on maintenance for the last quarter. And as Thomas mentioned, we have some delays in filling machine commission that also impact the CapEx. If we move to the next cash flow from financing is EUR 92 million and that brings us to the cash level of EUR 29 million. And the takeaway here is that when we have been able to pay down on our bank debt by EUR 51 million. So that brings us to then the financial position and you know, everything cannot go up. And that is the case for leverage ratio which went the other way. We are today at our mid-term target of 2, which we are extremely happy about and it's a really radical drop from the 3.3 that we had at the end of last year. Second quarter only we had 2.6. So we are extremely pleased by this development and gives us the balance sheet to meet the future. It's driven by an improved LTM EBITDA of EUR 47 million, as well as paying down on our bank debt by EUR 51 million. I think as a fun fact we're also back to the leverage ratio we had before we acquired Naturepak and GLS.Now to the outlook. So what we are saying this time is that despite the inflationary pressure we expect a strong end of the year. We expect our full year revenues to be above EUR 1.1 billion, which is in line with our mid-term targets. Our full year EBITDA we expect to be above EUR 170 million. That reflects the improved profitability in the third quarter. In that forecast, we also acknowledged that there are some particularly positive impacts, like the one-off we talked about that will not be repeated into the fourth quarter.So with that, I will leave it to you, Thomas.
Right. Thank you, Bent, for this. And then let's just quickly sum up here. What we tried to present here is that we continue on the path that we have been now for a while. And I think with this quarter as well, we have seen that we are maneuvering through what is otherwise quite difficult days as we all see, and delivering very, very consistently good results. We have improved and we have developed. And what is very important for us is that it's not one item that's developing, but it's a whole set of the items in the strategy part that continues delivering the results we're seeing. So we remain, to Bent's point, very confident when it comes to a strong '23 and a very strong '23 for us, I can say, and continue to remain very optimistic around the future of the business we're in. Thank you.
Thank you for your presentation, Thomas and Bent. We will now go into the Q&A session. We will begin with the audience here in Oslo, before we take on the ones that we have received online. For the journalists that are here today, we will set aside time immediately after the Q&A session. So let's begin. I would like to kindly ask you to please state your name and the company you are representing and also please use the microphone here in Oslo.Okay. While we wait for the audience in Oslo, we will take first question received from Charlie Muir Sands from BNP Paribas online. What was the nature of the EUR 2 million one-off benefit in the third quarter?
Yeah. So that was a commercial disagreement where we agreed. So that was a reversal of an accrual that was made for the second quarter.
And another one from Charlie in BNP. Stable volumes, does that mean stable year-on-year or sequentially quarter-over-quarter?
So this is stable year-over-year when we made that comment.
Good. So then, regarding the new plant in the US. Factoring in the Arkansas project, what might be the level of CapEx in 2024?
Yeah. So that CapEx will be mostly in 2024. So I think what we said in the stock notice is that it's only going to be around EUR 50 million and a net debt impact of EUR 70 million. But we are also in the finalization of that project where we are optimizing the scope of the project.
Let's see. Any questions from Oslo here? Do we have any? No. I'll continue with the analyst from DNB, Niclas Gehin. As you mentioned in the beginning of the presentation, you are delivering ahead of your mid and long-term financial targets. Should we think of Q3 EBITDA and EPS as a sustainable run rate level going forward, or are there any one-offs or fluctuations that explains why this quarter was ahead of your targets?
So I can take you through the 3 drivers. Why Q3 ended better than what we expected? I think the first one is that the product mix in America was better than expected. The second point is that the open position we had on PE were more attractive than we thought and we saw a dip in the spot prices in Q3 and we see some of these prices now coming up. We also have softening of all other input factors across the board, a little bit here and there. That adds up to the picture. And then we have to remember the EUR 2 million that will not be repeated. So you can say that the fourth quarter is taking that into. If you look at our full year forecast of EUR 170 million, that is taking that into consideration.
Robin Santavirta from Carnegie. Sorry, he has several questions. I will take them, the ones that we haven't answered. So, input costs, what are you seeing in terms of input cost development during the end of the year and early 2024? That's one. Second one is, what are your hedges for PE and aluminium? And the third one, how do you expect paperboard prices to develop in 2024?
Right. So if we start with the rest of the year, our financial plus commercial hedges for the rest of the year on PE is around 80%. When it comes to the spot prices on plastic, we see that they are on a moderate rise compared to what we saw in the third quarter. When it comes to the hedging for 2024, that is something that we will revert to in the next quarter.
All right. And one from ABG, [Martin Melbye]. Do you expect price pressure from customers going forward as input costs are coming down?
I can answer that. And the simple truth is, yes, we do that. I think everybody, every industry are experiencing price pressure. We are as well. And as Bent explained, we remain at a very high, historically high input cost level. We are still facing inflationary pressures, et cetera. So, yes, there are evidently discussions and pressures, but I think we have very good argumentation to say that actually, the cost level remains very high.
We have 2 unanswered questions from Fredrik Windrup in Boldhaven. So, number 1, can you please give an update on the status of the installation of machines in the US? How many are left? That's number one. And then the second one, could you elaborate a bit further on India, given that you are running well ahead of plans? Is there an opportunity to invest even more and broaden the offering in the market?
Right. So a very good question, let me start by India. And actually we are at this moment reviewing with our joint venture partner, should we accelerate? Can we accelerate? It's not only a question of willingness here, it also has to do with availability of equipment et cetera. There are some constraints that we are facing, but we have a very good team in place now in India and they are actively looking at this and we actually talk about it within a month that this will be reviewed.On the filling machine side. So what has happened during this year is that we have seen, which is not uncommon by the way, we see that in Europe as well, delays, various reasons customers want to delay their projects and finalize building construction, civil work, whatever it is that impacts some of these filling machines. In some cases, we have been the cause of delay as well, simply from a practical reasons and some issues related to that. So the amount of filling machines that we will actually commission this year is going to be a little bit less than what we thought. But all other ones we are not installing are just moved into next year. There, it's all contracted. What we are seeing is that the backlog of interest, the new filling machines remains at a very solid and strong level. And I believe, as we now see, both the same customers ordering the second filling machines and this is an industry where people know each other. We are seeing this as a very attractive and modern high-quality offering from filling machine. We will start seeing that this is just going even at a higher speed.
So Charlie Muir Sands from BNP is asking about the PPWR following the publication of the latest draft of the EU's packaging and packaging waste regulation by the ENVI committee. How do you assess the likely impact of this on your business, positive or negative?
So I think this is a very, very good question that actually can take quite some time to discuss. But overall I mean, I think it's fundamentally important that we as a company actually support regulation in this industry. Why? Because it means that the companies who are supplying sustainable solutions will actually benefit from this at some point. I think this is good for society, good for us as consumers as well. So we are actually supporting that we increase the recycling that we do, the activities that are more or less outlined in the PPWR. This is also supported by ACE, the Alliance for Carton and Environment, who are driving the same direction for this. The discussion, of course, which is relevant is more on the mechanics of this, some details in this, how it should be done. To the point is it good, is it bad? We believe that with the innovations that this will generate and someone like us will be incentivized to do by regulation if you put it like that. We think this is a good thing for Elopak and we think this is a point where our solutions have a very good position in a longer perspective.
And 1 more for Bent, perhaps. This is from Hakon Fuglu in SEB analyst. Thank you for the presentation. Can we assume that the liquid board prices are fully reflected in the Q3 numbers? And do you expect liquid board suppliers to push for higher prices for 2024 and beyond the CPI?
So when it comes to the third quarter, there were some position, positive position effects because there are very many different grades. We had different plants in different locations. There were some minor position effects in the third quarter. So almost at the full run rate. When it comes to next year, I don't really have any comments, but I'm sure that will be reasonable.
Okay. And the last one, it's from Martin Melby in ABG. Where do you see your PurePak prices into Q4 and 2024?
You're talking about Q4?
Fourth quarter.
Fourth quarter and then '24.
And 2024.
Yeah. So there are no changes to our prices in the fourth quarter. And when it comes to price for 2024, we really don't have any comments.
Good. Do we have any questions here in the audience in Oslo? No. Thank you very much for your attention. That concludes our session and have a nice day.
Thank you very much.