Elopak ASA
OSE:ELO
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Earnings Call Analysis
Q4-2023 Analysis
Elopak ASA
As we discuss Elopak's Q4 and full-year 2023 performance, it's clear the company managed remarkable growth despite facing economic volatility, inflationary pressures, and operational challenges. Elopak, a leader in sustainable liquid packaging solutions, experienced significant developments, such as meeting IPO targets two years ahead of schedule. New initiatives like the announced US plant, exemplify their commitment to strategic priorities and growth in the Americas.
Elopak's U.S. expansion is a strategic move to satisfy growing customer demand, particularly as they capture more market share in the Americas, both in milk and juice sectors. By locating their new plant in Arkansas, Elopak underscores its intent to strengthen its presence in a major market for carton packaging, estimated to be worth around EUR 3.6 billion in the Americas and Europe.
Elopak's smart financial maneuvers, such as the EUR 170 million revenue in line with guidance, and improved control over operational costs in the Americas have contributed to its robust performance. Notably, its EBITDA increased by EUR 4 million compared to the same quarter last year, reaching around EUR 40 million, a testament to the company's prudent financial management amid growth.
With the introduction of a high hygiene, high-capacity filling machine developed with Shikoku, Elopak takes a leap in providing sustainable options that also cut food waste. These machines promise extended shelf life for fresh products and underline Elopak's commitment to driving sustainability and enabling a broader range of products in the market.
Elopak's proactive capital management led to a significant operational cash flow, a figure reaching EUR 157 million compared to just EUR 25 million a year ago. The initiatives taken to reduce working capital demonstrated effective capital turnover, and with a net debt reduction of EUR 70 million, the company is in a strong financial position to deliver a dividend proposal of EUR 1.46 per share—another sign of Elopak's solid business model and its commitment to shareholder value.
Wrapping up the fiscal year, Elopak exhibits strong confidence in its business fundamentals and has concrete expectations to meet its targets. The company has come a long way in strengthening its market position and continues to iterate on a strategy that has shown itself to be successful.
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Good morning, and welcome to the Q4 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 is available on live webcast on our webpage under the IR section. We will have a Q&A session after the presentation.So with that, I leave the word to the CEO, Thomas Kormendi.
Thank you, Mirza, and good morning to all of you here in Oslo who've joined us today and everywhere else where you may be watching right now. So, we have a Q4 and a full year '23 presentation, and to be honest, we are quite excited to present this right now. But before I do that, just a few words of who we are and for those of you who see us for the first time, what is it actually we're doing.We are the world's largest fresh liquid carton packaging company. That means we primarily sell packages which are sold in the chilled cabinets, but not entirely because you will also see that roughly 20% to 25% of our volume is sold in what we call as aseptic, meaning ambient distribution.As a company we sell around 14 billion packs, we sell packaging material, we sell filling machines and technical services around this. We manufacture in 11 plants around the world spread around, what we call EMEA, which is a very big definition ranging from India, Middle East and Europe, or Americas, which contains Canada, North America, U.S. and Central America, Caribbean, Mexico.So we have in this suite a very significant product suite with around 400 SKUs and have been doing this for more than 60 years in this space.So what is it actually we're doing? Well, we are the ones supplying -- and this is very, very central in everything we do in all our strategy -- sustainable packaging. We strongly believe in protecting essential commodities, be that primarily milk, juices but not only different foods, soups, sauces, and also now nonfood products. And the reason we are doing that is, of course, we are enabling the world with nutrition being available in more than 70 markets around the world. It has a very, very big impact on nutrition, food safety and, of course, protecting food to avoid the loss of food.But we're also in the business of replacing plastics, and this, I have mentioned, for those of you who have followed us a number of times. It's becoming more and more significant. We strongly believe in the mega trend of replacing plastics in the work, reducing the littering that we all see everywhere where we move.And during the other presentations, I have used examples of this mega trend. And this presentation is no exception because we have some quite prominent cases to show how the plastics to carton conversion is moving into more and more categories.Before we do that, let's look at our performance. And before I do the quarter, I'd like just this [ time ] start with the year because it has been quite an incredible year for us, to be honest. We have seen, of course, quite some market fluctuations, headwind as well, not the least the economic climate, inflationary pressures we've all seen. To some extent, we've seen supply chain disruptions. And previously I've mentioned that a number of our filling machines have been delayed for that reason as well during the year.For our own sake as well, we have looked at extending our organization. We find scarcity in finding people, et cetera, et cetera. So amidst all of this, we have seen a very good growth in our strategic priorities. We have seen that our offer that we've been presenting, be that in Europe on some of our new sustainable innovations, be that in Americas, that we constantly have a increased interest and also an increased demand from our customers.We also announced during this year, which is something very, very big for us and something we see a fantastic potential, and we announced the building of a new plant in U.S., and that is really there to meet the increased demand that we have been seeing throughout now a couple of years.And finally, and this is for those of us who work with this, something that is of great, great, great pride, is that we have now met all of the IPO targets that were set for 3 to 5 year period, we've met after 2 years.Let's turn to the quarter then and saying what happened in the quarter. Well, firstly, we saw the revenue growth. As you can see here, we said 7%, actually organic 8% because we had the translation effect against us this time a little bit. We also saw an EBITDA level of around EUR 40 million, which is plus EUR 4 million versus similar quarter last year.We saw the signing of the factory, meaning the position of the factory in Americas, which is now going to be announced. It is Little Rock, Arkansas, very good location from a supply point of view and also from a customer point of view, really complementing the North American -- Montreal factory as well as the Mexican plant in a very good way.And we've done that -- Actually, we are now installing the first line, but what we have done is we have scaled this factory to the same size as what we have in Montreal, which is a large size factory, the largest modern gable top factory actually, so just a testament to -- we believe, in a longer perspective there will be more demand and hence, we build a plant with potential to extend it as we go along.EMEA, we have seen good revenue growth, very solid revenue growth. And we have also seen that while we had a somewhat slow start on the filling machines, we actually saw the end of the year good commissioning of filling machines, which in our business is the best indicator of interest and the best indicator of where the business is moving.Very importantly, for our investors and all of us is that this cash generation was good. We came in at 1.9 leverage ratio, frankly -- slightly below what we had as a target for the 3 to 5-year period. And all of that actually means that we're starting off the year here with a strong belief and a strong confidence that we are on the right track and that the fundamentals of this industry is in a very good place.Let's just look briefly on the financials. And of course, this year is more than anything else characterized by both a solid revenue development as well as a very solid EBITDA development of 43% in the period.On the revenue side, we can see that we grew around EUR 100 million from an organic point of view in the period, which given -- remember, given that we are in markets where consumption is not increasing, on the contrary, and we did have somewhat of a headwind when it comes to the inflationary pressures in the market. We are very happy with that kind of development. This is based on both good development in Europe and Americas.Equally so, on the EBITDA side, we saw a very good development in Q4, but also for the rest of the year where our initiatives delivered both growth and the profitability that we had planned.Now, looking at EMEA, what we saw in EMEA is that consumption -- I did mention that in Q3, consumption throughout the year was somewhat slow -- soft probably, although we can't say for sure, but the assumption is impacted by the inflationary pressures, the economic climate in EMEA. We saw that actually in some countries more and in other countries in [ our part of ] the world less so when it comes to milk consumption.But what we also saw is that the last quarter actually started to stabilize and our Pure-Pak business stabilized in this quarter. Meanwhile, our Roll Fed business, where you remember we are supplying Roll Fed to customers, in some cases who also have Pure-Pak and in some cases such as India, we are building the business based on Roll Fed right now. And here, we saw that the Roll Fed business throughout the year did very well and had a solid growth.MENA, where we saw in the beginning of the year somewhat softer sales primarily due to lack of raw milk, and the lack of raw milk meant that there was a distribution difference from drinking milk to eating milk, in sense because you don't have enough milk. During the last quarter, we saw that MENA is picking up and the volumes are now getting back to the pace that we had seen before and pretty much due to the improved fundamentals in the dairy segment in MENA as well. So organically for the quarter, 11% and organically for the year we looked at a EUR 65 million growth or 8% growth.Now Americas has been our story for quite a long time. And we have had a fantastic development in Americas. And we have had it for now. I know -- I saw that yesterday, 11 quarters in a row, except one, which was the odd one. But otherwise, 11 consecutive growth quarters in Americas, profitability and growth. Hence, as you can imagine, this is why, of course, we are building the factory based on very solid demand in the market.The key thing -- and some of you may have seen that in the news, it's certainly been in the news a lot in U.S., it's even been to Congress -- is the concern around school milk, shortage of school milk and that in turn has led to quite some turmoil in the market, and we have actually taken as much school milk as we can ever fill in any of our factories.What we also see as -- in the American market is that we continue to drive and build our business. We are gaining market share in an environment which is not growing from a consumption point of view. But we are gaining market share in our milk business. We are gaining market share in our juice business and the strategy that we've been presented in this session, a few times, filling machines, gaining market share, driving the business through more juices as well is exactly what is paying off now.We did during this period decide to purchase the land around the Arkansas plant and that for reasons -- financial reasons, it's a better solution for us to do it like that in a little bit longer term. 15% organic revenue growth in the year and equaling around EUR 40 million growth. So Americas is becoming more and more central in our strategy, and we are gaining market share in the environment, and we are extremely excited. And I can say, so are our customers that we get the new plant up and running during first quarter of '25.Let's turn to this one. And those of you who have seen our quarterly presentation will have seen this. And this is the picture we use to illustrate our strategy. And clearly, on this one, we have the Americas, which I just described is doing very well. We have the aseptic platform where we have launched, the Pure-Fill platform and the new [ true leader ] aseptic low-acid solution that is also with an eSense i.e., non-aluminum foil, but using another barrier material, creating a more sustainable, a lower CO2 footprint than any other aseptic packaging system in the market. We've also talked about our footprint many times, we talked about MENA, the plant in India, and of course, the plastics to carton, which is what is something that we are very, very interested in.Finally, the commercial excellence for us has been about securing the operational improvements in the plants and also clearly ensure that we price in the right way, that we ensure that our pricing is value based, but also reflecting the ever-increasing cost that we have seen throughout the last few years.Let's look at the plastics to carton, because this is a topic that is very close at heart, and we continuously see more and more examples on how this actually is materializing into very concrete examples. And a very interesting point and a very, very interesting market is, of course, the yogurt market. And many of you, I'm sure all of you have traveled to countries where you look in the supermarket and you look at the yogurt, you'll see a huge amount of small yogurt plastic cups, all kinds of colors and shapes, but one very, very strongly dominated by plastic cups.Now when we look at this market, and we look at Americas and Europe, this is around the EUR 3.6 billion market. It's a huge, huge, huge market. And our belief -- our strong belief is that this market has a significant potential to reduce plastic and move it into carton. And we are basing that, of course, with -- based on our customers, our projects that we have with customers and also what is actually happening in the market right now.Now many of these plastic cups mostly are small single-serve, right? So in our part of the world, you go into a supermarket here, you will find yogurt in -- also in cartons, but that's not the case in many other places in Europe.So we have now with the company called Yoplait. And this is one of the world's largest brands in yogurt. It's a company which is a dairy cooperative from France and partly owned by the American General Mills, FMCG company -- huge FMCG company. They are selling Yoplait as their strongest brand in more than 70 markets of the world. What they have done now saying, we are committed to reducing plastics. We must reduce plastics. And so they have then switched to a 750-milliliter carton which replaces 6 of their small single-use plastic containers. And by that, they actually reduce 50% of their packaging just by doing this move. The consumers in turn will, of course, pour from the carton. It's a spoonable yogurt, but they will pour it out like we do in our world, frankly, but not so common in France. And then they will be reusing, if you like, their home pots and pans, pots, spoons instead of throwing away one-way plastic cups. Very, very interestingly, and this is quite unique, 85% of the consumers asked, I think it's a great idea to get out of plastics and replace that by carton.So this is in the market now in France. It is, of course, something that we, you can imagine, are following with great interest. We think this is another example of the world moving away from plastics and into a more sustainable solution such as carton.The other point I'd like to mention is, we have in the strategy document many, many times talked about our unique and proprietary aseptic solutions. We have the Pure-Fill platform. We've developed it, we are placing the machines, and we are now also highlighting [ distancing ], we also have a very significant -- actually bigger business for us, which is the chilled business, the fresh business. And also here, we are, of course, driving innovations and placing new equipment.And we can now present, if I can put it like this, we are launching a brand-new high hygiene, I could say the world's most modern high hygiene, high-capacity filling machine, which we develop with our partner, Shikoku in Japan. We have worked with them, as you know, for many, many years. We have this exclusive agreement with them in all the markets where we are operating. And this machine -- this filling machine now allows our customers to produce any of their fresh products -- freshly pasteurized, fresh products with shelf life to 60 days.Why is this important from a sustainability point of view, because it will reduce food waste, and it will allow our customers to bring out more products to the market, which have more varieties, which will have -- need longer shelf life to actually be sold. So it drives more products in the market, less food waste and a higher degree of flexibility from our customers. These machines are now being placed in the market in Europe and will be rolled out as we move along into more and more markets. Extended shelf life is very, very critical way of reducing food waste, of course.So with this, I think I will hand over to the financials. Bent, please.
Thank you, Thomas. So we are pleased with delivering north of EUR 170 million for the quarter, which was in line with our guiding last time we presented our results for Q3. But I think the greatest thing for the financial section this time is the cash flow where we were able to [ really ] reduce a lot of working capital. I will take you through the EBITDA performance for our operating segments, starting with EMEA. So here, we see the benefits of the price increases that we executed in the beginning of the year, and that has been combined with a rather stable raw material development. If you look at the number for EMEA, 12.9% is actually underlie quite good results, and I'll explain you why.Throughout this quarter, we took the initiative to reduce the working capital in the company. And by doing so, we reduced coated raw materials, [ board ], we reduced finished goods. And the accounting effect of that is a reduction of EUR 3 million just by doing the right thing on the working capital. That accounting effect is called IFRS 15, and you can read about it in our note [ #3 ], where we explained the mechanics of that.There's another element, in fourth quarter we were successful in commissioning more machines than usual. And when you commission more machines, these machines do not have the same margins as our [ blanks ]. So the machine transactions are diluting the margins. So if we adjust for these 2 effects, the underlying EBITDA margin for EMEA for the quarter is 15.1%. So that is important when you think about what is the clean EBITDA margin for the quarter for EMEA.If we look at Americas, I think the great thing here is, Thomas, you already talked about it. We have continued volume growth from existing and new customers. We talked about the shortage of school milk in the U.S., and that has also contributed positively to the financial results with our joint ventures because they are producing cartons for school milk into the U.S. So we have an improvement of close to EUR 2 million. This is then share of net profit from those 2 joint ventures that go into the EBITDA, the way we have defined it.In America, we also have good profitability for filling machines. It's a slightly different commercial model there than what we see in Europe, and we also have some positive one-offs related to that business. In America, despite the growth, we are keeping the -- good control of the costs and we continue to improve their waste performance.Now to the bridge from EUR 36 million to EUR 40 million. Starting with the net revenue mix, just to remind what -- how we define that. This is the effect of volumes and pricing in EMEA, and it also is the contribution effect in Americas. This is a positive EUR 6 million. The improved performance in America, the profitable growth and the pricing initiatives in Europe gave us EUR 10 million in positive effects, but this was mitigated, or can I say, going the other way due to the IFRS 15 impact that this quarter we reduced the finished goods. Last year, we increased it a bit, and that gave us a net effect of EUR 4 million, giving that -- taken it from [ 10% ] to [ 6% ].Raw materials, as you can see, is slightly up compared to last year, was this, that is increased board costs that are higher than the softening of all other raw materials. It also shows that actually the raw material level is still at a historical high level in Europe.Our operations are up EUR 4.6 million. This is mainly inflation, but the fact that we actually are producing less in fourth quarter to reduce inventory has some, what we call, less absorption effect. So there is a cost impact of producing less that is actually in this period affecting the operational costs in our bridge.In other, we have the results from the filling machines business and also the results from the joint ventures, bringing up then -- bring us back to the EUR 40 million.Now to the front part, which is the cash flow. So we have delivered a cash flow from operations of EUR 157 million. 1 year ago that number was EUR 25 million.It's driven by the improved profit before tax and interest paid. But it's interesting to also note the working capital -- so last time we met, we showed an increase of EUR 5 million of working capital year-to-date. In -- for the full year is 17% reduction, which means that in this quarter, we have reduced the working capital by EUR 22 million, and that is the positive side of the picture of reducing working capital, albeit we have some negative P&L effects due to accounting standards. So this is really good achievements from the whole team in our efforts to work on our capital turnover.We have some other operations that is basically taxes paid and realized currency gains and other non-cash items. If we look at the investments, we have a net cash flow for investment of EUR 32 million. We have a normal maintenance program. We were a little bit behind on our maintenance program year-to-date Q3, but we are catching up, so this is a normal level.Compared to our guiding, we are below the long-term guiding and that is because we are still delayed with some of our filling machine placements, the machines that we are leasing out. On other investments, we have EUR 5 million proceeds from sales of Russia this summer. And we also had EUR 2 million in dividends from the joint ventures.If you go to the cash flow financing activities, we have the dividends, we have the lease payments, the interest. And net we have paid down around EUR 70 million on our loans and bringing the cash to EUR 13 million in the end of the year. So great achievement in Q4 on cash flow.If you go to the financial position, as Thomas mentioned, we are now below our mid-term target of [ 1.9 ]. I think the interesting thing is, if you're comparing to Q4 2021, we are actually below that level. And Q4 2021 was before we acquired Naturepak. It was before we established GLS-Elopak, and it was also before the exit of Russia. So we are back where we started, which is very, very comfortable. This is driven by the improved EBITDA of EUR 51 million. It's also driven by the reduction of net debt, which decreased EUR 70 million.When you have that financial position, we also have the ability to pay dividends. And our proposal, or the Board's proposal is to declare a dividend of EUR 1.46 per share. This is in line with our dividend policy of 50% to 60% of adjusted net profit. It's important for us to stay consistent with this policy. So hence, this increased, reflecting the improved results of the company. The ex dividend date will be 14th of May.Now to the outlook. This early in the year we typically don't share numbers in our outlook statement. What we can say is that we are observing the geopolitical conditions. This obviously can influence our raw material prices. It could also lead to logistical challenges depending on how things develop. The macroeconomic conditions will continue to influence consumer behavior and consumption pattern. But despite this, we remain very confident in the long-term fundamentals for our business, and we expect to deliver on our targets.So with this, I hand it to you, Thomas.
Thank you, Bent. And just summing up the day, or rather the presentation. So as you can see, we strongly, strongly believe that this has been an amazing year for Elopak and frankly, driven by a lot of very, very good efforts from our teams around the world, from EMEA, India, Americas, MENA, everywhere.And for us as a company, the fact that we are delivering on our promises, again and again, of course, is a very important fact and now delivering on the IPO targets has been -- stands out significant for all of us. We also believe that based on that, and the fact that Q4 continued delivering strong growth and delivering on our strategy, delivering on the priorities and the strategy, where there was Americas or also in both EMEA and MENA and India, brings us into a position where we are in a very good starting point for the new year. We are better and stronger company. And our investments in U.S. is a testament to our belief in the future and in the belief in the period to come. Thank you.