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Edited Transcript of HUH1V.HE earnings conference call or presentation 23-Oct-19 12:00pm GMT

Q3 2019 Huhtamaki Oyj Earnings Call

ESPOO Oct 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Huhtamaki Oyj earnings conference call or presentation Wednesday, October 23, 2019 at 12:00:00pm 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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* Klaus Kehl

Nykredit Realkredit A/S, Research Division - Chief Analyst

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Presentation

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

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Good afternoon, ladies and gentlemen, and welcome to Huhtamäki's Q3 2019 results presentation. My name is Calle Loikkanen and I'm Head of Investor Relations. And today, President and CEO, Charles Héaulmé; and CFO, Thomas Geust, will walk us through the highlights of the quarter and the year so far. After the presentation, we will end with a Q&A session. But without any further ado, let's begin. 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. Good afternoon to all of you, and I'm very pleased to present to you the results for Q3 2019, whereas it says in the headline, we are delivering a continued strong net sales growth and as well an improved profitability.

If we start with the sales growth for the quarter 3, we are basically reporting a growth of 10%, which is actually a 7% comparable net sales growth compared to Q3 2018, and that is a comparable growth of 8% in specifically the emerging markets that is, as you know, a strategic focus for us as well as we have a 3% positive currency impact from the currency translation, particularly coming from the U.S. dollars.

Moving into the net sales growth year-to-date. So 9 month January to September, well, basically, the chart is the same, where we are reporting 10% growth reaching EUR 2.5 billion at the end of September, and that is a 6% comparable net sales growth, 7% if we are accounting for the -- specifically the emerging markets, 3% as well on the currency translation positive impact and 2% from the acquisitions that we have concluded in the course of 2018, which were Ajanta in India and Tailored Packaging in Australia. So that's the story for very strong growth at the end of Q3.

Looking now at the same consolidated growth but with the granularity of our different business segments. Specifically, if you look on the left-hand side at the comparable growth of the quarter 3, 7%. It breaks down between our business segment, Foodservice Europe-Asia-Oceania, with 4%, and that is very much a growth on the back of very good development with all fast food restaurants category. Then we have North America with a 14% net sales comparable growth. There, I would like to emphasize that it compares to quarter 3 2018, which was fairly low, particularly linked to the performance of 2018, but particularly to the phasing as well, the unbalanced phasing of customers call-offs between Q3 and Q4 last year, which therefore creates a favorable comparability in 2019. Therefore, it's probably more fair to look at the year-to-date figure, which is still a very healthy 11% comparable growth.

The Flexible Packaging is growing in Q3, a consistent 4% with the rest of the previous quarters. And this is very much linked to the growth in emerging markets. And then Fiber Packaging supported by the strong demand of fiber solution in Europe linked to the sustainability requirements as well as linked to the growth we have in our new facility in Australia, and strong demand in Eastern Europe as well as growth on fruit packaging in South Africa. All these together give us a very healthy 7% comparable growth in Q3 2019.

Looking now at the consolidated P&L, key financial indicators. Our net sales growth is translating together with the impact from the pricing increases, together with the operational improvement and together with raw material prices, which were fairly stable during the year. It converted into a very good improvement of our adjusted EBIT by 26% Q3 and 16% year-to-date, again, linked to the comparability of Q3 2018.

Our investment in CapEx is continuing to be approximately on the same level as last year. And we are very much continuing in 2018 -- 2019, sorry, both capacity investment as well as innovation in sustainable products. And the other highlights I would like to mention about Q3 and as well about year-to-date is the excellent generation of cash flow on the back of profit improvement, obviously, but as well very much on the working capital that is much better specifically in the third quarter this year.

Moving on to a few more details at each -- for each of our 4 business segments, starting with Foodservice Europe-Asia-Oceania, where we have a reported growth of 5% and a comparable growth of 4%. As I mentioned before, very much linked to the growth of QSRs, so the fast food restaurants. Important to say that the 4% would actually -- the 4% comparable growth would actually be higher if we didn't have some impacts from the trade war between U.S. and China that has an indirect implication of releasing some capacity at low-cost producers in China which increases the competition that there is with our product specifically on the products we are distributing, and that has -- that is creating a small decline there on our distribution platform that offsets the very good growth on the QSR.

Important from a business point of view as well to mention that we continue to see a strong conversion of plastic products to more sustainable solutions like paperboard, carton or fiber-based, and that's obviously excellent news, opportunities for us. On the short-term, it's potentially not showing up in the numbers because we have as well a small part of our portfolio in plastic that is declining. We are building up capacity right now to take the opportunity of this clear shift that is happening in the market.

Earnings in Foodservice are growing as well in a very healthy manner on the back of volume, pricing, the operational -- continuous operational improvement.

North America, to comment a little bit further on the excellent results, both in Q3 and year-to-date. Obviously, we are very happy with the fact that our new capacity at the Arizona factory Goodyear is really delivering additional volume for us this year and as well potentially taking market share. So that's -- and we are in the ramping up slightly ahead of the plan with this factory. So that supports the growth. As I said, before, comparability to Q3 is not complete, so better to look at the year-to-date. And important to mention that we are actually progressing very nicely in the 3 businesses where we are in the U.S. that is in Foodservice, in the consumer goods products and very much so in the retail tableware that is growing very nicely in our sales.

And all this combined with the pricing increases that we've posted in the end of 2018 together with operational improvement, together with a more moderate distribution cost, all this together means a very strong improvement of our profit margins in 2019.

Flexible business is growing, as I said, very much in emerging markets, specifically in Middle East Africa. If I'm even more specific, South Africa is a very good performance in flexible business as well in Southeast Asia. For instance, in Thailand and India, we are continuing to grow nicely this year. As you probably remember, our focus in flexible has been a lot on profitability this year to improve the profit level that we have particularly in India and in Europe. That is potentially sometimes driving to decisions outside of getting profitability and growth, and it's partly the reason for having a very moderate growth in Europe, all together 4% with an EBIT improvement of 36% in quarter 3, so excellent results from a profit point of view in flexibles, and that should continue going forward.

And then I would like to highlight something that you have certainly caught in the news in September is that our flexible business has acquired 2 additional companies and one is in South Africa, where through a joint venture at 70% for Huhtamäki, we are expanding our footprint buying Everest Flexibles Limited. It's a EUR 40 million sales company, and it makes us -- together with the setup of the joint venture, it makes up really Huhtamäki as the -- a leader of the flexible business in, and I would say, most competitive flexible leader into the South African market. And that's not just for the South African market, but as well, we enable exporting further into the surrounding countries.

Another important acquisition is the Mohan Mutha company in India. It's a rather small operation, however, very important from the positioning since it supplies already customers of Huhtamäki. This is a platform for us to further grow and serve better on customers from a competitiveness but as well from a lead time point of view in the south of India, where we didn't have any manufacturing plant and where it is very important to be -- to have installed capacity because that's the region that with roughly the same density as the rest of -- density of population as the rest of India. However, it's the region that is economically growing the most rapidly. So we have a good faith into this strategic decision.

And then Fiber Packaging, where I said comparable net sales growth of 7% in quarter 3, and that's very much in -- thanks to the strong demand of -- for egg cartons especially in Europe and in Russia. In Europe, it's very much linked to the sustainability wave, if I may put it like this, converting plastic packaging to -- for eggs to fiber, so strong demand. South Africa for food packaging and then as I think I mentioned already, the net sales growth is good to very good in Australia, thanks to the new facility -- the new capacity installed during the late part of 2018.

The EBIT margin and the profitability may look a bit modest in quarter 3, but I think it's important to keep in mind that our operational improvements in fiber are very good and like it is in the other business segments. It doesn't reflect into the foods business segment profitability because we are accounting for in 2019 development costs and commercialization costs for our new sustainable smooth molded fiber trays for ready meals that we launched in the U.K. in April. And of course, we are really in the first phase with only one pilot customer. Therefore, we have today basically cost much more than revenues, and that's of course only temporary and it impacts negatively the profit that we report on the segment.

I will hand over now maybe to Thomas Geust for the financials.

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Thomas Geust, Huhtamäki Oyj - CFO [3]

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Thank you, Charles. So the headline adjusted EPS growth driven by strong net sales growth says the story. Net sales growth for the quarter up 10%, adjusted EPS up 17%. But as you can see from the quarterly EBIT development, it's up 19%. In the EBIT, it's still strongly driven by both value-added development as well as improved conversion developments. So for the quarter, we are up 1.5 percent points on gross margin level and 0.9 percent points up year-to-date.

If I'm looking at -- then the other elements of this profit and loss, you can see that it's also accelerating from a profit point of view versus the year-to-date numbers, so EBIT up 8% year-to-date and 19% in the quarter. Charles already indicated that Q3 last year was the lowest quarter both from profit point of view but also some lower sales which were then converted down to Q4 especially in North America. So obviously, I guess a bit of a weaker comparison, a very strong EBIT development which converts it to a margin of 8.5% for the quarter, up 1.2% in total.

Other things to note on this one is that the net financial items remain competitive while then the tax rate is increased to 23% from 22% in Q2. This is clearly following then our profit mix. So we are operating in quite high tax countries throughout our scheme.

Next slide. So we are continuing with the positive currency impact, mostly from the USD, as I mentioned here earlier. You can see from the average rate in Q1 to Q3 2018 versus '19 that it's only a few currencies, Australian dollars, Brazilian and South African rand, which are trending slightly negative. The most important currencies for us, like USD and Indian rupees, are trending quite nicely, and the trend is currently also continuing. So if I compare the Q2 development versus Q3, most of the currency is also here trended favorably from our point of view.

Looking at the net debt level, we are improving. We are at 2.1 net debt to EBITDA coming down from 2.4 in the previous quarter. The main driver here is obviously a good release of cash, which is taking down the net debt level of -- to EUR 944 million, which then in total corresponds to net debt EBITDA -- sorry, a gearing level of 0.68. So that has also improved clearly against earlier quarters.

So all in all, the balance sheet remains strong and opens up for capability to further invest and look for acquisitions.

The loan maturity is currently at 3 years. End of Q3 2018, we were at 3.9 years. There are facilities coming up for maturity in 2020. So we might be starting to look into refinancing of those. But otherwise, as I said, a good, well distributed position of maturity currently.

Cash flow was a really positive outcome in the quarter. We had an improvement up to EUR 117 million of free cash flow, EUR 78 million up versus previous year generated by mainly release of working capital, so EUR 69 million improvement in working capital. Obviously, also the EBITDA improving at EUR 26 million versus previous year. You might recall that last year, we also had a positive onetime of EUR 19 million in. So if I take apple-to-apple comparison, we are actually up EUR 97 million in free cash flow versus previous year. CapEx is slightly higher at EUR 133 million, but that is mainly timing-related.

Looking at the financial position next. We are higher on assets, and though operating working capital is coming down but compared to previous -- sorry, operating working capital in relative terms is on a better level than previous year and net debt is coming down from previous year's level. We are still slightly heavy on the asset side, which is then seen in the return on investments, of course in combination with the profit level at 8.5 for the quarter.

Looking at the progress towards our long-term ambitions. We are now on track with -- or actually above on the growth side. Growth side is extremely important for us in order to deliver also on the profit side. Profit is still lagging behind, so 8.7% for -- in year-to-date numbers. Return on investment is still impacted by the IFRS 16 restatement also. So on a comparable basis, we would be slightly higher, close to 12.5.

CapEx EBITDA is at 39% versus our ambition of below 40%. We have EUR 132 million CapEx year-to-date, so EUR 6 million above previous year's level. And as we will be noting in the outlook, we are expecting us to remain on approximately previous year's level.

Net debt to EBITDA, 2.1, so within the corridor and leaving then headroom for acquisitions. Free cash flow, as mentioned, very strong EUR 117 million, getting closer to the EUR 150 million ambition level.

Outlook. The outlook, as I indicated, remains unchanged. We expect it -- the operations to remain in a relative stable trading environment. And with the financial position we have and the ability to generate cash flow, we have the opportunity to address profitable growth opportunities. And as I indicated, the capital expenditure is expected to remain on approximately the previous year's level.

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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. Thank you, also Charles. I think that at this point, we would be ready to take on questions. So operator, please, do we have any questions on the lines?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a question from Klaus Kehl at Nykredit.

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Klaus Kehl, Nykredit Realkredit A/S, Research Division - Chief Analyst [2]

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Klaus Kehl from Nykredit, in Denmark. Firstly, question related to your net working capital. You improved quite a lot here in Q3 and also for the first 9 months. Could you talk a little bit about how sustainable that is and what kind of level of net working capital to sales would be reasonable to expect going forward? That would be my first question.

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Thomas Geust, Huhtamäki Oyj - CFO [3]

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Yes. I can take that one. So Thomas answering that one. Well, first of all, of course, we have a step-up if you take your comparison to previous year as we had the buildup of working capital in -- especially in North America last year related to the startup of Arizona. So from that point of view, there was, of course, on a comparison basis a better level of working capital now. Looking forward, there is still room for improvement. I think the inventory levels are approximately starting to trend on a decent level. But then on the payables, trade receivable ratio, there is still room for improvement. I will not give you a guidance on where I believe that it will be. But clearly, with regards to current levels, I think going back to previous year's levels would not be acceptable for sure. So this year's level and slight improvement going forward is what to expect.

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Klaus Kehl, Nykredit Realkredit A/S, Research Division - Chief Analyst [4]

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Okay. And then a question related to your sustainable products. Could you talk a little bit about the interest that you're receiving from customers around the world and what kind of impact you are you seeing on your financial numbers here in '19 and what that impact could turn out to be in, let's say, 2 or 3 years?

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

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Okay. So Charles here. I will take that question. So first of all, from a customer perspective, I think it's -- I wouldn't be surprising by saying that there is a very strong demand. There is a strong demand from consumers because the awareness has risen very high since 1 to 2 years. There is a strong demand from customers as well. And the most demanding customers are probably the global customers because the global brands are making strong commitments to the market from the long term and then it's all about executing and -- working the top of their commitments and they ask partners like us to innovate. So now the second part of that question regarding customers is, what is the response on the products that we are launching? And I could take a couple of examples like the smooth molded fiber trays like the paper straws, like the blueloop concept for recycled -- recyclable Flexible Packaging, on all of them, we received strong interest. The pilot phases are going well. There is a strong traction. Impact, I won't get into the impact of 3 years, first, because we're not guiding, but second, because it would be a bit presumptuous to forecast the volume shift because it has to do with the interest from the market but as well the value we get and as well with the capacity. So it's lots of variables linked to all the different products and businesses we have. In the first phase, there is obviously an additional cost. You see it in our fiber business because of the development and the commercialization during the pilot phase. There, you have more cost than revenues but that's only a temporary effect.

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Thomas Geust, Huhtamäki Oyj - CFO [6]

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Yes. Maybe to add to that one on the profitability side of it. It's exactly as Charles is saying. When there's plenty of own R&D and then more heavy assets coming in like we have on the fiber side, the burden on profit will be evident during the first period. When we have more on the lighter conversion quick asset velocity type of products, then typically, you are able to get profits much quicker and with less impact. So it also depends quite a lot on what the requested products are. And then when it comes to time to market and what kind of speed-up with regards to top line, I think anything where you add new assets, it has its time.

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

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Yes. Very good complement that you gave, Thomas. And I would close the loop on this by saying that if we take examples of the products we're launching, there is a value. Because there is interest and demand from the market, there is a value. How long will this value continue, meaning when do we need to come to scaling up being competitive? Well, it's when there will be more offering. But at this point in time, if you take paper straws, for instance, we're the only ones with this quality of paper straws. Therefore, we sell value.

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Operator [8]

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(Operator Instructions) Okay. I think for this quarter, that's it. So back to you for any closing comments at this stage.

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Calle Loikkanen, Huhtamäki Oyj - Head of IR & Financial Communications [9]

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All right. Thank you very much, operator. As a final remark, we would like to say that, that we are looking at organizing Capital Markets Day next year, and the date would be the 24th of March and location, Helsinki here in Finland. But otherwise, that's it for today. Thank you very much for participating, and I wish you a really good rest of the day. Thank you.

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Charles Héaulmé, Huhtamäki Oyj - CEO & President [10]

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Thank you.