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Edited Transcript of HUH1V.HE earnings conference call or presentation 29-Apr-20 6:00am GMT

Q1 2020 Huhtamaki Oyj Earnings Call

ESPOO May 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Huhtamaki Oyj earnings conference call or presentation Wednesday, April 29, 2020 at 6:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Calle Loikkanen

Huhtamäki Oyj - Head of IR & Financial Communications

* Charles Héaulmé

Huhtamäki Oyj - CEO & President

* Thomas Geust

Huhtamäki Oyj - CFO

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Conference Call Participants

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* Justin Joseph Jordan

Exane BNP Paribas, Research Division - Analyst

* Jutta Rahikainen

SEB, Research Division - Country Head of Finland Research and Analyst

* Maria Wikstrom

Danske Bank A/S, Research Division - Analyst

* Robin Santavirta

Carnegie Investment Bank AB, Research Division - Financial Analyst

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Presentation

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Calle Loikkanen, Huhtamäki Oyj - Head of IR & Financial Communications [1]

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Ladies and gentlemen, welcome to Huhtamäki's Q1 2020 Results Presentation. My name is Calle Loikkanen, and I'm Head of Investor Relations. President and CEO, Charles Héaulmé; together with CFO, Thomas Geust, will today walk us through the highlights and results of the quarter. We will follow the traditional presentation, but due to the COVID-19 situation, we have added into the presentation a few slides about COVID-19 and the current situation. After the presentations, we will, of course, have a Q&A session.

But without any further introductions, let's begin with the presentation. So let me hand over to Charles.

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Charles Héaulmé, Huhtamäki Oyj - CEO & President [2]

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Thank you, Calle. And good morning to all of you. And welcome to this review of our first quarter 2020 results. Q1 2020 is obviously a very particular period of this year 2020 with the outbreak of the COVID-19 sanitary and, consequently, economic crisis.

Whilst the crisis has started affecting China since January and the rest of the world since the month of March, we can say that overall, in this increasingly uncertain environment, we have delivered a solid performance.

If we start with our net sales growth of 5%, reaching EUR 845 million in the first quarter. You can see that this is a solid growth in the current context of this global turmoil. This growth of 5% is really actually a moderate comparable growth of 3% compared to the same period of 2019. And 1% of the growth is coming from our acquisitions, the 3 acquisitions that we have completed in 2019 and early 2020. And 1% is coming as well from the positive currency translation.

Looking at the same growth and comparable growth versus the first quarter of last year, but now by business segments. We can highlight that Foodservice Europe-Asia-Oceania is actually losing 4% sales in Q1, comparable sales, as a direct result of the lockdowns of restaurants and the confinement restrictions. We will obviously come back in further detail later on this.

In North America, on the contrary, in this segment, we continued to deliver significant growth of 9% comparable to the same period of 2019. And as well, I will explain you a bit further how, despite the crisis starting in North America in the month of March, how we have been able to deliver such performance.

Our growth in Flexible Packaging was very moderate at 2% despite what I would call a strong demand for the food-on-the-shelf. We will, obviously as well, come back to why this moderate growth of 2%. And in Fiber Packaging, the demand has been very strong, giving us overall a 9% comparable growth in Q1 2020.

So now this growth, how does this convert in the sales growth into the P&L at group level? We have been able to increase our earnings whilst we are reporting sales growth of 5%. We have been able to increase our earnings by 9% compared to our sales growth and compared to the first quarter 2019. This is obviously linked to volume. It's linked as well to a more favorable raw material prices environment, particularly in fiber, and further operational improvements as well as the higher capacity utilization, particularly in the new factory that we had launched back in the end of 2018 in the U.S.A. as well as in the middle of 2019 in Egypt, for instance.

The EPS is increasing 5%. So a little bit lower rate of increase than the EBIT. And that is linked to a higher tax rate. The CapEx is at the same level as 2019 for the first quarter. However, and obviously, linked to the crisis, we have started to prioritize further our investments -- to the critical investments for growth and short-term efficiencies.

So let's look now at some details of our business evolution sales and profitability by business segment. And starting with Foodservice Europe-Asia-Oceania. As I said before, losing 4% comparable sales in Q1, it's minus 5% reported growth. Foodservice is our packaging segment for food-on-the-go, which, obviously, for clear reasons, was affected by the lockdowns of restaurants in most countries. The impact came first between January and February from China and Asia overall, but mainly China. And then in the rest of the world, it affected our business in the month of March. We estimate overall that in Q1, in the growth that we are reporting in Q1, the COVID-19 accounts for approximately minus 10 percentage points of growth. Hence, without the crisis, we estimate that our growth would have been in line -- in the neighborhood of 5%, in line with our long-term ambition. We have taken all necessary actions to contain the cost on the short term as well as, as I said, prioritize the investments. Our margin EBIT is declining 13% on the back of the lower volume and the lower plants utilization.

Moving on to North America. In the North America segment, our Foodservice sales, likewise in the rest of the world, have been affected during the month of March. However, we have seen a significant part of our business that is in the retail and particularly retail tableware that benefited from the crisis with a clear consumption spike during the month of March that we -- this consumption spike, we have seen it basically in all food on the shelves and, consequently, on the packaging that we are supplying. As well, to be fully complete on the analysis, we have to say that the preparation of the Easter period, which happened in the second quarter last year, was very much happening earlier this year and therefore accounted for in Q1, which makes the comparability a little bit positive towards or in favor of Q1 2020 in the U.S. We ended up, therefore, in the quarter with a growth of 9% comparable to the same period 2019. That's 12% reported growth when considering as well the short-term USD translation, which has been a favorable impact for us during the first quarter.

Our EBIT margin continued to increase by an impressive 48% in the first quarter compared to the same period last year. This has been supported by many different factors. First of all, of course, the volume growth that I was underlining, particularly on the retail tableware. As well, it has been supported by some price increases that we implemented during the year 2019. It has been, as I said before, supported by currency translation as well as further operational improvements and the higher utilization quarter-to-quarter, quarter 1 2019 to quarter 1 2020, higher utilization of our new factory, Goodyear in Arizona. The CapEx has been managed tightly as well, like in the rest of our business segments, to reflect, of course, the context in which we are in this first quarter and I will say in this first semester.

Moving on to our Flexible Packaging. Our reported growth in Flexible is 8% in Q1 2020. However, the organic growth or comparable growth is only 2%. 6% is basically coming from the recent acquisitions concluded in 2019 and early 2020. Just to remind them, Everest Flexibles in South Africa; Mohan Mutha Polytech in India -- in the south of India; and Laminor, the tube laminate leader of South America in Brazil. Our comparable growth in Flexible was, therefore, a moderate 2% and requires some explanation to understand that this performance doesn't reflect the solid demand of Flexible Packaging, particularly for food, particularly for health care as well during this crisis time.

For instance, we have been growing very nicely in Europe on the back of this strong demand. However, and there is a specific event happening, this is the lockdown of India in the second part of March, and this lockdown has been extremely strong across the entire country, which has meant that factories in all sectors were basically forbidden to operate for some days until we convince the authorities that food service -- food packaging, sorry, is essential for the society. And therefore, we were then given back the license to operate and produce food packaging, which doesn't mean 100% of our offering and our capacity, because it was considered as essential for the population. So we have, during the second part of March, and I would say even in the very late part of March, so after the 23rd of March, we have faced huge problems of logistics and as well to get our staff present in the factories due to the limitations to get to work. Our sales in India declined. Therefore, just because of this 10 days window in the first quarter linked to this short period of time.

We estimate that overall, and I'm talking now not about India, but overall on flexibles globally, the COVID-19 negative net impact on our sales growth when we take the positive in Europe and then the very negative in India is approximately a minus 2 percentage points of growth. In other words, we believe that our comparable growth would have been 4% without the crisis.

This sales drop in India, whilst we couldn't change anything to the cost balance, obviously, because it was really an sudden event, meant a reduced EBIT margin, entire leading to the production and logistic interruption in India that made the consolidated EBIT margin to reduce severely to 7.7% level. We have managed CapEx tightly in accordance to the other segments.

On to Fiber Packaging. In Fiber Packaging, the demand has been very strong for ex packaging as well as for cup carriers due to the increase of food delivery demand. Our reported growth was 4%. But when we are eliminating the internal and the equipment sales, we have an overall comparable growth of 9% in the first quarter of 2020. This higher demand is basically general across all geographies. Our main challenge in fiber has been actually to be able to man our capacity to the full extent between suffering temporary lockdowns of factories by authorities in different countries and a little bit of increased absenteeism as well during the first period of what I would call the initial shock of the virus outbreak in the different countries.

Fiber raw material, I mentioned this -- I suggested this right at the beginning, fiber raw material prices were substantially lower during the first quarter, which affected from one side negatively our fiber -- our sales of fiber supply. However, it supported our margins, which reached at adjusted EBIT level 11% in Q1. And that includes the development and commercialization costs of our fresh sustainable ready meal trays that we launched in the U.K. back in May 2019.

So all this comment drives me to give you an update on the consolidated update on the impact of the COVID-19 crisis on our business and as well giving you a little bit of a perspective on how we are managing through the crisis. I would say, first of all, in this context that we need to be conscious and confident as well of the importance of our industry. We are with our customers contributing to the food systems, which are absolutely essential to everyone in the world and even more in periods of crisis. We play an important role to make sure that, first of all, food is available on the shelves across the world. We play a big role in securing a better hygiene that is so much highlighted through this crisis as well as we contribute to food safety, preserving original properties of the food that is packed in our products. And as we have mentioned in earlier broadcast, we are, in the broader sustainability agenda, contributing to reducing the food waste which is the biggest climate impact for the food system. So this industry is extremely essential for the society and for the future of the planet. So when we think about our role working with a -- for a purpose, I think that all of us, all our employees are really proud to work at Huhtamäki.

This being said, the crisis is emphasizing the value of having a diversified portfolio as it provides some resilience to face the current turbulences. We make about 40% -- a bit more than 40% of our sales in packaging for food-on-the-go. And then the majority of our size is for packaging for food-on-the-shelf. What I mean with food-on-the-shelf is or packaging for food-on-the-shelf is all our products for retail tableware, for consumer goods packaging, flexible packaging and fiber packaging.

Our packaging for food-on-the-go is certainly affected temporarily by the QSR closures, all the restaurants being closed temporarily in most of the countries in the world. At the same time, however, purchases through food delivery channel as well as drive-through channels at QSRs have been increasing since the start of the crisis. However, it's only partly mitigating the impact that we have in the in-store consumption of food service. On the other side, our packaging for food-on-the-shelf, that represents, as I said, more than 50% of our sales, is especially resilient, is seeing a higher demand. We do not see any slowdown on the contrary.

As we see it today, we will manage through this crisis. Thanks, first of all, to our healthy balance sheet, allowing us to continue, during this period of time, to continue our critical investments dedicated to growth as well as efficiency activities. Whilst at the same time, we are obviously holding on all activities which are not critical for the short-term growth or efficiency.

I would like to maybe try to take a holistic perspective on the way we have managed so far through this crisis, and I would summarize basically the way we've been managing in 4 different phases, which are coming one after each but are now working in parallel. Let me try to explain it.

The first phase of that we have known, of course, is when -- at the virus outbreak, and I would say this has been in 2 steps. So the virus outbreak in China and then the virus spread in the rest of the world, early March. This first phase of initial shock is when the crisis started, and it was only during, of course, couple of weeks, 2 weeks, certainly not more, where we have been really focusing on putting in place daily crisis management at all levels. So globally as well as in our business units and in all our locations, with a clear focus put on protecting our employees and securing the business continuity.

We then very quickly entered in a second phase of crisis management. When this part of protection of our employees and business continuity was very much under control, we have put in place containment actions. Daily cash management has been, of course, a major concern because liquidity is king during a crisis like this one. And already at that time, taking containment actions on investments, of course, on cost, but as well already starting to think about how do we work out the competitiveness of our company to prepare for the bounce back after the crisis. So not just focused on the daily management, on the immediacy, but as well looking forward.

Once all of this was under control, if I may say, planned and implemented, we have launched a third phase. Now that's very recently. A third phase of focus, which is really about dedicating resources, mostly centrally, but as well involving the businesses, at the highest level in the company in planning ahead. We call it planning ahead to prepare for the new normal of the after crisis. So understanding what it will mean for our business as well as understand what potential opportunities may unfold from the crisis. So that is a very important aspect which is very much looking forward and understand how this crisis is going to affect our business potentially, negatively or positively going forward, but as well what are all the opportunities where we have not been doing business where we may find interest after the crisis is unfolding.

Whilst we're doing all this and now doing that in parallel because, of course, the daily crisis management is, of course, fully in place on a continuous basis, we have been conscious of our citizenship role as a company, globally and locally. First, making sure that what I was underlining just before, that underlining to everyone in our employees, but as well to authorities, that everyone understands that food packaging is essential for the society. And that was critical in order to continue operating, to motivate our employees to continue to come to the factories and maintain the supply chain, but as well to motivate and make understand to authorities that it would be cumbersome for the society and with some unwished consequences to break the supply chain for -- of the food.

So beyond, however, this direct core role, our core business role, we have played an active role in playing a role in helping where it really matters, where the society needs help during such a period of time. And that has meant that we have implemented some global and local activities towards the society. And I will give you a few examples. I will not have the potential now to be extremely long and complete on giving you all of them because there has been many local initiatives, but a few examples.

At global level, we have donated EUR 0.5 million to the International Red Cross for emergency relief in countries where the NGO has identified very strong means, such as -- and I don't have the complete list here, but the -- India, Bangladesh, some countries in Eastern Europe. Those targets were chosen by the Red Cross as countries that are most in need of help. So that has happened during the month of April.

We have also asked our management or motivated our management across all our operations globally to reach out to the communities that would be in need of help, particularly the health care staff in the different locations. And in many places, we have donated our products, such as paper cups to -- or as well tableware kits to hospitals or health care institutions to ensure food hygiene and food safety, help this staff that is doing an amazing job in these exceptional circumstances to do their work in good conditions, protect them and as well, obviously, build equity for our brand, our company and what we are doing.

Third example in our factory in Belfast, Northern Ireland, we have been using, thanks to the creativity of our local employees, we have been using our existing equipment that has been made idle by the crisis. We have been using the equipment to start manufacturing protective face shields for health care workers, and that was primarily dedicated to the NHS health care staff in Northern Ireland and in the U.K. And we are now looking into replicating this in other units where we have the relevant equipment to do it with the similar technology in order to give access to such a protective face shields whilst our equipment is made idle.

So those are great examples of how to emphasize and leverage our purpose as a company, and particularly emphasizing, that will be my words of conclusion on this update of the COVID-19 crisis, it's to reflect on the fact that such a period is emphasizing further the importance of our role, of our purpose, I would say. And this, in unprecedented times, really remind us of our beliefs and reinforce our commitment to our priorities, which are to protect people, to protect food and protect the planet.

Without further, I will hand over now to Thomas Geust for the financial review.

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Thomas Geust, Huhtamäki Oyj - CFO [3]

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Thank you, Charles. I turn to Slide #19. Okay. So as you see from the chart, the development, as already highlighted by Charles, was positive on net sales as well as on EPS, exactly the same 5% growth versus previous year.

In between, you can actually see that the EBITDA and EBIT development has been even more favorable, so 9%. And as highlighted by Charles already earlier, the reason for the lower EPS development comes from net financial items as well as from the tax rate. So the tax rate is now 23% versus 21% in Q1 2019.

Also to highlight here is that we booked a positive gain from the Laminor transaction of around EUR 20 million and also took restructuring measures in order to improve our competitiveness and efficiency at an amount of approximately EUR 11 million. These are the key highlights from this slide.

On the currency side, we can see the positive development in translation of EUR 10 million in net sales and EBIT of EUR 1 million, as highlighted on the slide, coming mainly from the USD. You can see from the change -- the column change in average rates that most of the currencies has been trending very favorably versus average rate Q1 2019. However, if we compare this to the end rate of -- average rate of 2019, we can see that many of the currencies are already now trending a bit unfavorably. We have, for instance, the Indian rupee now at INR 79.8, while the average rate was INR 78.85 in 2019.

Moving over to the debt structure. We are at a net debt-to-EBITDA level of 2.1 to compare to previous year same period, 2.4. So an improvement here with an exactly equal net debt level of EUR 980 million. The gearing at 0.68. I will get back a bit more to the cash and cash equivalents on next slide. However, pointing out, as a reminder, that the covenant level of 3.5 is calculated based on frozen [GAAP] and, according to that, approximately 0.2% points lower than indicated here -- or turns lower, sorry.

The loan maturity side, you can see here that we have -- or on the previous slide, we had indicated that we have EUR 330 million of cash equivalents, up from EUR 199 million at year-end. The average maturity is at 3.2 versus 3.4 at year-end, so a bit of a change here. However, we have still EUR 175 million of unused RCF. We did pull around EUR 125 million in during the quarter on that one.

To point out, one of the reasons for having such a high cash position or liquidity position currently is that we have of the EUR 300 million maturing in 2020 around EUR 125 million maturing already in Q2. The majority of that one is -- or a big part of that one is the bond of EUR 65 million that needs to be repaid. And then we have outstanding commercial papers, which, to some extents like -- are likely to be possible to renew.

On general terms, when it comes to the financing market, I would say that the bond market has already during the crisis been opened mainly for rated companies. We expect that bond markets would be available also for companies similar to us after the Q1. And then the normal loan market seems to be functioning pretty normally.

To the cash flow. You see from the slide that higher EBITDA comes from the higher performance or better performance -- operational performance. However, in the EBITDA, we also have a net gain of EUR 30 million, so that Laminor gain and the restructuring part of the profit. And then on the other hand, you will see a big negative of EUR 21 million in the other items. And there, you can see the noncash part of the Laminor gain.

Other things to point out on the cash flow is that the main negatives comes from the working capital, where we, of course, come out from a very strong back end of the year 2019. However, if I look at the main items here, it is really on the inventory side where we are slightly higher than previous year.

On the balance sheet-related items, so we state here a stable financial position. You saw it already from the net debt-to-EBITDA level as well that, that's where we stand. I would point out that in the equity we have a translation difference, negative of minus EUR 45 million, that's actually the biggest variable to normal movement. On the other hand, we had a positive of EUR 30 million last year on the same row. And then looking at returns, it's mainly the North American improved performance that is helping us here.

Looking at the progress towards the long-term ambition, the one we launched in mid of March. We see that organic growth with the elements highlighted by Charles earlier in the presentation is below the long-term ambition at 3%. We also see that adjusted EBIT margin, despite being up from Q1 2019 and actually also up against end of 2019, we still have quite some way to go to meet the ambition. Although, for instance, North America was already above 10. And then the net debt-to-EBITDA, well within the corridor. And what comes to the dividend payout decision would be taken today by the AGM on how to proceed with that one.

So looking forward here, we have a bit of a different statement compared to what we normally have. So I choose to actually read it out this time.

So short-term risks and uncertainties, the COVID-19 pandemic is significant -- is a significant short-term risk, creating disturbance in the group's trading condition and its operating environment as well as demand for the group's products. Volatile raw material and energy prices as well as movements in currency rates are considered to be relevant short-term business risks and uncertainties in the group's operations. General political, economic and financial market conditions can also have an adverse effect on the implementation of the group's strategy and on its business performance and earnings.

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Calle Loikkanen, Huhtamäki Oyj - Head of IR & Financial Communications [4]

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All right. Thank you, Thomas, for the presentation. Also, thank you, Charles, for the presentation. And now we are then ready to move into questions. So operator, please, do we have any questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Justin Jordan at Exane.

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Justin Joseph Jordan, Exane BNP Paribas, Research Division - Analyst [2]

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Firstly, if you remember back to the March 24 strategy update, at the time you spoke about trading in China being materially impacted in nearly 2 weeks of March. I'm just wondering, can you give us some color as to where trading is in China right now? I'm just hoping clearly that was first in, perhaps? Maybe it's seen some recovery in current trading?

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Charles Héaulmé, Huhtamäki Oyj - CEO & President [3]

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Okay. Yes, at that time, we have indicated that the experience in China during the first 2 months of 2020, January, February, our sales were approximately down 30% compared to the same period of the previous year. So the first 2 months. And the lockdown was basically -- the restrictions were lifted early March in China. And that has meant a pretty rapid -- so there are different aspects to it, it is the staffing, the capacity of production and then the demand. So when it comes to lifting the restriction, that has allowed a pretty rapid come back to work, if I may put it like this, in terms of capacity. Early March, we went back at a capacity utilization of roughly 90%. The demand, however, early March, was around 60% to 70%. And your question is now about right now with the progression from March to April at this point in time, the demand is around 90% of the normal level. So it's a pretty progressive, but a pretty fast recovery as well of the demand.

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Justin Joseph Jordan, Exane BNP Paribas, Research Division - Analyst [4]

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Okay. And I guess, appreciate this is very, very tentative in terms of the lifting of lockdowns and restrictions that seemed to be planned in various regions around the world. But is there anything to suggest that the Chinese experience would not be replicated in other geographies around the world as and when lockdowns may be lifted?

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Charles Héaulmé, Huhtamäki Oyj - CEO & President [5]

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Yes. You're right to point out that it's a difficult question because it's about the future and because the situation is so volatile and will depend on not a global decision, but decisions basically by country, because each country is potentially deciding differently in the process of going out of this crisis or the lockdowns. The key issue is the lockdowns. And everything we are forecasting at this point is under the assumption that, first of all, there will not be a second wave that is going to mean -- that would mean a renewed huge lockdown across the countries, whether in China, in the rest of Asia and later on in Europe and in the U.S. Having said that, there is good reasons to believe that once the lockdowns and the restrictions are lifted, we should see the same path as we have seen in China. The big question is, does it take 2 weeks, 1 month, 2 months to recover a reasonable level of demand? And that's very difficult to predict at this point in time, again, because each country is going to have a different way of lifting the restrictions and this is likely not going to be overnight.

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Justin Joseph Jordan, Exane BNP Paribas, Research Division - Analyst [6]

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I absolutely appreciate that. Can you give us, I guess, some color on current trading in Foodservice, in let's say, North America and Europe? Just is that similar to where China was in, let's say, the early weeks of March? Or just what are the current trading in those geographies?

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Charles Héaulmé, Huhtamäki Oyj - CEO & President [7]

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Yes. I think it's fair to say that -- and I would try to really make the difference, again, from between everything which is food-on-the-shelf, and therefore all our packaging for food-on-the-shelf, where basically you can count on a demand that is more or less in line with our capacity and with our normal -- with what I would call our normal level. And then the Foodservice and the Foodservice or the food-on-the-go packaging. There, we see the same pattern where what I mean is approximately, net-net, between the pluses and the minuses, a minus 40% on the demand during the time of the strict lockdowns, meaning because restaurants are being closed, basically. That's what we are seeing.

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Justin Joseph Jordan, Exane BNP Paribas, Research Division - Analyst [8]

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Yes. Okay. And then I guess, the mitigating factors being, I guess, the food delivery or drive-through activity?

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Charles Héaulmé, Huhtamäki Oyj - CEO & President [9]

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Yes. When I'm saying 40%, if I take everything in consideration, the food delivery increase, the drive-through, that for instance, in the U.S. remains extremely strong because people still use quick-service restaurants, but not in store. We're talking about the demand that is probably 30% to 40% down, that's the net-net, okay, considering everything. But again, during this strict period of restrictions, okay?

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Justin Joseph Jordan, Exane BNP Paribas, Research Division - Analyst [10]

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Yes. Okay. When you refer to planning ahead on Slide 13, are there any sort of early thoughts on perhaps new opportunities or evolution of strategy as it were from your early thinking on this as to what the new reality may bring in terms of opportunities for Huhtamäki?

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Charles Héaulmé, Huhtamäki Oyj - CEO & President [11]

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Yes. I won't get -- it would be a bit presumptuous and very early to go to any conclusion. What I can comment upon is, first of all, about the action that we're putting in place, which I think is extremely important. So that is very important in terms of motivation within the company but as well in terms of strategically think about beyond the crisis. Because it's very clear, it's going to be only a temporary crisis.

What are the trends that we foresee, and I will not have the pretension to be complete nor right, okay? We are having this planning ahead activity -- initiative in order to put all the right intelligence and data and insights into it. What we can foresee is, very clearly, an increased focus on hygiene standards. That's not a complex, difficult bet to make. We see an increased awareness of food safety, which I think is excellent for food packaging. When -- because of order consideration, many may say, "Packaging is the prime of sustainability." Well, actually, it's going to put back food safety at the #1 position and make everyone understand that food packaging is extremely important as well for the sustainability because it's reducing food waste.

There will be an increased need of personal protective equipment, whatever this is going to mean in terms of product. There will be an increased use of e-commerce that is underlying in all sectors, not only in ours.

There will be, I believe, an increased requirements on -- from consumers on trustability of product. So when you put together e-commerce trustability, that will mean an increased requirements of digitalization. There will be most likely an increased requirement or increased requirements on food delivery process. What I mean is likely consumers will be willing to see a guarantee of no human contact to the food that they are eating, and that may have some impacts on packaging and on the process of food delivery.

We could say as well that this crisis has underlined very strong international interdependencies. And there may be an increased importance of local supply, which as well may emphasize that we have the right operating model in Huhtamäki with all our footprint close to our customers. Those are examples that I can say in response to your question about what we are foreseeing, but again, without the pretension to be neither complete nor right at this point in time.

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Justin Joseph Jordan, Exane BNP Paribas, Research Division - Analyst [12]

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Sure. Two very quick ones for Thomas.

Just firstly, you spoke in Fiber Packaging about easing raw material pressures or clearly raw material tailwind, should we say, in recovered fiber in Q1. I'm just conscious of the fact that we're seeing in recent weeks some increases in recovered fiber prices both in North America and Europe. And I think globally, actually. How quickly might that impact Huhtamäki? I'm just curious about your sourcing and the time lines involved.

And secondly, clearly, we're seeing falling oil prices globally. I'm just wondering, is that potentially a tailwind when I think about polymer prices for Flexible Packaging going forward for Huhtamäki?

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Thomas Geust, Huhtamäki Oyj - CFO [13]

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Thank you for the questions. I think when it comes to the fiber side, you are quite right, there has been pricing -- prices -- price pressure upwards, but we need to remember we come from a very favorable market environment as well in this level. I think the main drivers here, and whether they will stick the prices, is really again partly related to the lockdown levels because one of the main drivers for the scarcity, especially in North America, on fiber comes from the big demand in, for instance, the tissue business, following we are -- all know about the hoarding on toilet papers and similar. And then that, in combination with people actually staying at home, not going to the offices and consuming paper in the offices. How quickly it will materialize? I think it will be a constant pressure upwards until the crisis are solved and the supply picture gets back to normal. In Europe, it's partly the same, but not to the same extent as when it comes to availability as we would be seeing in North America.

In -- with regards to the falling oil prices, here, I think it's -- as we have seen earlier, not of complete correlation always between the oil prices and the polymers. However, one could expect and one have already seen that the polymer side is more under pressure to go even further down than where they are currently.

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Calle Loikkanen, Huhtamäki Oyj - Head of IR & Financial Communications [14]

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All right. Thank you. Thank you, Justin for the questions. I think we need to move on to the next people asking in the line. So please, if you have any follow-up questions, then go back to the queue, please.

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Operator [15]

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Our next question comes from the line of Robin Santavirta of Carnegie.

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Robin Santavirta, Carnegie Investment Bank AB, Research Division - Financial Analyst [16]

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Yes. I just want to check the answer for the previous question. Did I get it right that you indicate, that as a rough sort of number, that the on-the-go business in North America and in Europe would, at the moment, be down roughly 30% to 40%? Or was it just for North America?

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Charles Héaulmé, Huhtamäki Oyj - CEO & President [17]

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Yes, Robin, you are right. You understood correctly. I mean, globally, it has been in China for 2 months. It has been in Europe, Middle East, Africa as well as in the U.S. during the time. And that's why I insisted during the strict time of the strong restrictions and lockdowns. When restaurants are closed, yes, we are counting on about a 30% to 40% reduction of the sales of Foodservice packaging, yes.

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Robin Santavirta, Carnegie Investment Bank AB, Research Division - Financial Analyst [18]

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All right. That is clear and helpful. Now could you share some light on the operating leverage to the bottom line for that kind of volume decline. Maybe just take it from sort of a fixed cost perspective, if you could just share some kind of information about how much of the costs are fixed or just stress rate go to the bottom line. Can the Foodservice business with that kind of drop be in the black or is it in the red and with that kind of volume drops?

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Thomas Geust, Huhtamäki Oyj - CFO [19]

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Robin, I would maybe say this way that in rough terms when you are looking at a very significant drop in the 30% to 40% category, you can expect approximately a similar drop in -- sorry, even up to double drop in EBIT. So that would be the impact in the business.

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Robin Santavirta, Carnegie Investment Bank AB, Research Division - Financial Analyst [20]

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Okay. So then 60% to 80%, roughly speaking, just as an indication of the world?

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Thomas Geust, Huhtamäki Oyj - CFO [21]

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Yes. I would say that's -- with this very big drops, pretty okay assumption. Of course, the smaller the impact is on net sales, then it doesn't correspond exactly in the same way.

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Robin Santavirta, Carnegie Investment Bank AB, Research Division - Financial Analyst [22]

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Yes, yes, I understand. That is helpful. And then just final question for me before I let others ask, what is the situation currently in India?

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Charles Héaulmé, Huhtamäki Oyj - CEO & President [23]

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Yes. The situation in India, Robin is -- the situation is, number one, that there has been a very strict lockdown of the country announced by the government on the 23rd of March. When I say very strict is because it has been, I believe, stronger and stricter than in most of other economies for different reasons. That has created, I would say, to start with and considering the size of the country and the density of population, particularly in the big cities, kind of accounts in the supply chain. This has been underlined by FMCG companies in their quarterly reports as well. This has been a short period of time during Q1. So it has been very much the end of March. It has continued during the first part of April. However, during the first day of this lockdown, so we're talking March, as I said, all, everything was closed and nobody was allowed to basically go to work and continue to produce. This has been lifted for essential industries like us very quickly after a couple of days, talking to the authorities. And that has meant not that we can operate 100% of our capacity. Why? Because there has been a very strict definition in India of what is essential. It has to be food, and it has to be health care products or basic hygiene products. That means that we still have a certain percentage, more than double digit, about 30% of our business that cannot run, cannot run because of a lack of -- because of restrictions. Second, because of a lack of demand because our customers are in the same situation. Third, because of a lack of staffing linked to logistic issues and restrictions for people to move around. That has been basically a full month, okay, if you consider it like this. However, we are foreseeing for very early May the easing of the situation. So basically, we can count with a 1 month of strong disturbance in India with amount 30% to 40%, a reduction of the demand and of the capacity of producing.

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Operator [24]

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Our next question comes from the line of Maria Wikstrom of Danskebank.

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Maria Wikstrom, Danske Bank A/S, Research Division - Analyst [25]

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Quite a few of them have already been answered, but I would like to touch upon the retail tableware in North America. I guess -- I mean you indicated earlier that we had a good demand, which probably partly due to the customers hoarding necessities as well as the Easter. So can you please a little bit elaborate that what are your expectations on the retail tableware business going forward?

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Charles Héaulmé, Huhtamäki Oyj - CEO & President [26]

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Yes. So our expectation -- I mean, we had a consumption spike in the month of March, very clearly. We have been able to supply that demand, and that has contributed highly to this very solid performance of North America in Q1. What we foresee is a bit more of a stabilization of the demand to a normal level, but we believe we will continue growing. There are different factors to it, not only the crisis, but as well the underlying growth of the market -- of the tableware market for daily use as well as event use in the U.S., it's very much the single-use table where product is very much part of the convenience lifestyle in the U.S. It's increasing, and this is a market that is very healthy. So we see it continuing, but probably not at the same pace as we have seen in the month of March or in the first quarter.

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Maria Wikstrom, Danske Bank A/S, Research Division - Analyst [27]

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Okay. And then I thought there was an interesting question earlier. I mean, how we should -- I mean see Europe and Europe and North America coming back I mean after the crisis? And should we use thus China as a proxy? And the one thing that wonders me is that, I mean, now I would guess that, I mean, quite a lot of these sports events will be canceled for the longer time and especially like living in the U.S., you know that the whole society is quite a lot about the sports that -- do you see that, I mean, some of this tableware and food service tableware demand is linked to the sports events? Or is there any link between these two?

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Charles Héaulmé, Huhtamäki Oyj - CEO & President [28]

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It's honestly a difficult question to answer because there are different aspects playing a role. First of all, I would say that -- so you -- maybe I understand 2 aspects into it is, can we use the China as a proxy for the recovery? As I answer them with all humility of what we see and what you see, what everyone sees, but as well the lack of clarity on how restrictions are going to be lifted country by country, it's quite a difficult exercise to make real event forecasting. At the same time, yes, using the China experience as a proxy is a good guideline.

Then on your specific question about the U.S., there is a very strong aspect. This is an increasing aspect, as I was saying in your first question -- answering your first question, the convenience lifestyle is very strong in the U.S., and it's only increasing. Why I'm saying it's difficult to answer your question about how to predict this part is because there are some aspects that go in pluses and some in minuses. As long as the situation will mean that sports event cannot take place with the public, we know that this is an area where we are providing a lot of products for on-the-go consumption. And that, of course, we don't count on those sales during the time that there is a restriction on the sports event. Whilst there are as well restrictions on the schools being closed, and that, again, very difficult because it depends state-by-state in the U.S. as well we sell a pretty significant amount of school trays for lunch trays. And that business, when the schools are closed, that business is obviously basically reduced to a 0 level. At the same -- that's a negative, or 2 illustrations of the negative.

At the same time, we see -- everyone is at home basically, much more eating at home and obviously not in the restaurants, and that is increasing the use of single-use, because of the American culture, the convenience culture, single-use they're using single-use tableware much more, and that's a plus. How the balance of this is operating? As we said, Q1, it has operated well. Q2, the experience of Q2 is April, we are saying that it's fairly balanced between the -- on these category of products between the pluses and minuses. But it's, again, difficult to say much more about going forward because it will depend on how fast or how slow schools are going to reopen state-by-state, how sports events are going to restart as 2 illustrations.

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Maria Wikstrom, Danske Bank A/S, Research Division - Analyst [29]

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Okay. And then just my final question on the COVID impact on the flexibles. So do I read it right if this is more of a like supply issue rather than demand issue, as you would think that the -- on the demand side, I mean, people are hoarding things that stay longer, I mean, in your own shelf. So I would think that it would have been a positive impact, but then we have this supply constraint. So is this more like a supply issue than a demand issue, please?

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Charles Héaulmé, Huhtamäki Oyj - CEO & President [30]

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Yes. I think your question is very acute, and you're putting it in the perfect, right wording in the sense of this crisis, this -- of particularity is that there is a crisis of demand and there is a crisis of supply.

In our Foodservice business, is very clearly a crisis of demand, not because people don't want to consume, but because they cannot, linked to the lockdowns. And that's restricted to our Foodservice or food-on-the-go packaging. Then there is a crisis of demand -- or sorry, of supply, I'm sorry for all the confusion, of supply in some areas because of the local authorities' restrictions in some countries, and India is really the one example where we are not in a position. And we as well -- I'm talking about the whole supply chain, I'm not talking only Huhtamäki, our customers, in the same way, cannot operate to the full extent due to the restrictions. However, at the same time, and we confirm and maintain that our flexible business is very resilient because the demand there, there is no crisis of demand. The demand is high. The question is how to be in a position to put the demand capacity in place to produce all the demand. So -- and we see that in Europe, where we have no problem of staffing and no problem with the authorities to unlock or to operate our factories, then we are growing a very nice 6% during the Q1. And that's an excellent illustration that everything which is linked to food-on-the-shelf, health care and hygiene product is -- there is a strong demand.

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Operator [31]

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And we have one further question in the queue. That's from the line of Jutta Rahikainen of SEB.

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Jutta Rahikainen, SEB, Research Division - Country Head of Finland Research and Analyst [32]

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All right. Excellent. I have 3 questions. The first one is really a follow-up on the India comment, again, double-checking. You said that India is down, was it 30% to 40%? And did you refer kind of current trading, where we are right now? Or was that more backward-looking or forward-looking? Just to get a feel of what that number actually alluded to.

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Charles Héaulmé, Huhtamäki Oyj - CEO & President [33]

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It was -- I mean, the number was backwards-looking if we are placing ourself on the 29th of April, okay? So this was since the lockdown on the 23rd of March, sorry, and during the most part of April. And when I said, looking forward, however, we see all the conditions for India government to ease the situation as early as the first days of May. That's the information we have and how we are starting to plan our operations. So that was, to your question, that was backwards, 1 month.

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Jutta Rahikainen, SEB, Research Division - Country Head of Finland Research and Analyst [34]

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Okay. All right. Excellent. Good. And I understand. And then the second question, I mean, for Q1, thanks for giving these indications on the COVID-19 impacts or numbers even for each division. If I ask it like this, when you say that net-net the COVID-19 crisis had a positive or negative impact for your quarter EBIT.

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Thomas Geust, Huhtamäki Oyj - CFO [35]

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I would state it had a net-net negative impact to our quarter EBIT. And my statement comes from that North America was basically delivering where they should have been delivering. Fiber Packaging was very much in line. Flexibles was burdened by India, and that had a significant impact. And then Foodservice, obviously, we see the result. So I would say net-net a negative impact versus where we could have been.

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Charles Héaulmé, Huhtamäki Oyj - CEO & President [36]

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Yes. I think if you -- if I may complement, it's -- from everything we have presented, I think you get the answer. It's negative in Foodservice, for obvious reasons we have explained. And I guess you can, from the information we have given, extrapolate what it means.

In North America, despite a very strong performance, yes, there was a negative impact linked to the Foodservice lower orders during the month of March, during the later part of the month of March I would say. So there is a slight negative impact.

In flexible, we have been very clear about India. Not about -- there is a positive in Flexible that's in Europe, but there is a strong negative because of India situation. The segment where we have a positive impact likely is Fiber. However, that's only 10% of the business of Huhtamäki as well. So that's -- the very clear answer is it has been negative on Q1 as well.

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Jutta Rahikainen, SEB, Research Division - Country Head of Finland Research and Analyst [37]

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Good. Okay. Because this was my question really, that was the U.S. potentially boosted so much that it was kind of explaining all of the good stuff there. But it sounds that North America was excluding and COVID-19 impact also strong, isn't that correct?

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Thomas Geust, Huhtamäki Oyj - CFO [38]

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I mean, we were expecting a strong result out of North America. And I would say the positives outweighed or compensated for the negatives that Charles was referring to in North America.

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Jutta Rahikainen, SEB, Research Division - Country Head of Finland Research and Analyst [39]

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Yes. Okay. And then the last one, CapEx. Now I do know that you have withdrawn your outlook statement, but some companies have still indicated CapEx plans, most of them probably down versus previous plans. Do you want to give a flavor on what we should factor in for the CapEx for this year?

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Thomas Geust, Huhtamäki Oyj - CFO [40]

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Well, our current view is that we will be slightly down from previous year, to be then further confirmed when we see how the -- how it develops. Because as Charles was also indicating, we want to take the opportunity wherever the opportunity is there. But our current view is that we will be down from previous year.

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Operator [41]

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And as there are no further questions in the queue at this time, I'll hand back to our speakers for the closing comments.

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Calle Loikkanen, Huhtamäki Oyj - Head of IR & Financial Communications [42]

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All right. Thank you very much, operator. Thank you for the questions. Thank you for the answers and the whole presentation as well. This then concludes the event for today. We will report the Q2 numbers on July 23. So we'll get back to this then at that date.

Thank you very much for participating. Stay safe, and have a really good rest of the day.