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Edited Transcript of HUH1V.HE earnings conference call or presentation 13-Feb-20 11:00am GMT

Q4 2019 Huhtamaki Oyj Earnings Call

ESPOO Feb 14, 2020 (Thomson StreetEvents) -- Edited Transcript of Huhtamaki Oyj earnings conference call or presentation Thursday, February 13, 2020 at 11:00:00am 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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* Anders Knudsen

SEB Investment Management AB - Portfolio Manager

* 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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Ladies and gentlemen, welcome to Huhtamäki's Q4 and Full Year 2019 Results Presentation. My name is Calle Loikkanen, and I'm Head of Investor Relations. And today, Huhtamäki's President and CEO, Charles Héaulmé; and CFO, Thomas Geust, will walk us through the highlights and the results of the quarter and the full year.

Before we jump into the actual presentation, let me remind you of our Capital Markets Day that is upcoming. That's on March 24. But without any further introductions and further marketing, 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, and my pleasure to address all of you for our Q4 2019 results and full year 2019 as well. Jumping straight ahead to the net sales growth for the fourth quarter of 2019 which reports 8% growth, 5% comparable net sales growth versus the same quarter in 2019, and that's 6% actually in the emerging markets, 1% growth coming from acquisition and 3% of positive impacts on the currency valuations.

We are reaching EUR 875 million in the fourth quarter, fairly consistent with our performance over the previous quarters.

Now going to the consolidation of the fourth quarter together with the rest of the year. So the full year growth of 10% reported, and this 10% is composed of 6% comparable growth, 7% in the emerging markets, 2% from acquisition, 3% from the currency impact, obviously, with some rounding, adding up to the total of 10% net sales growth. It's important when you are reflecting on the 8% growth of the fourth quarter versus 10% full year to remember that our fourth quarter 2018 in the U.S. was much stronger than Q3 linked to -- and I'm talking 2018 as a basis for comparison, was much stronger than Q3 linked to some timing or postponement of call offs from customers. Therefore, the comparison for Q4 was slightly deviating, and it's more reliable to look at -- or reflecting our true performance to look at the 10% of the full year.

Looking at that same growth and specifically on the comparable 6% growth full year for the company, but breaking it down by businesses and business segments. Basically, Foodservice Europe-Asia-Oceania is delivering a stable growth throughout the entire year, quarter-after-quarter, around 4% comparable growth.

In North America, likewise, the previous quarters, we are delivering a strong sales growth. I will not comment again, but Q4 is -- looks as comparable, slightly lower than the previous quarters, and that's linked to the explanation I gave on the timing of sales in Q3, Q4 2018.

Flexible Packaging is delivering a more modest 3%. I'll come back to the reasons behind. It's not about performance. We have very good reasons to be happy about the year in flexible, but still below our expectations and long-term ambition. And then Fiber Packaging delivering 6% net sales comparable growth, which is basically slightly accelerating at the end of the year, but consistent with the rest of the quarters.

Now still at group level but translating sales into bottom line profit, our -- on the full year, I should start with Q4, the 8% net sales reported growth is translating in 20% increase of our adjusted EBIT. And in the full year 2019, the same comparison of 10% sales growth is translating into 17% increase of the adjusted EBIT, reaching a level of 8.6% of net sales, which we compare to 8.1% in the full year 2018. That means an improvement of 0.5 percentage points in 2019.

The same earnings increasing 17% translate into an EPS of 11%, I would say, only. And that's only linked to the increase of the effective tax rate in the company. Thomas will come back to that later. And we are continuing to -- about the same level of investments year after year in order to grow organically as well as innovate into more sustainable products and packaging.

Now looking at the business segments specifically. In order to give a little bit of more granularity and starting with Foodservice Europe-Asia-Oceania, we have a solid net sales growth throughout the year. As we said, of 6% -- 8%, sorry, reported growth of the -- and 6% comparable in the segment, translating into 11% bottom line increase. There is a granularity to give regarding where the growth is coming from, it's coming mainly from Eastern Europe and Russia and from Middle East, Africa, whilst the Asian sales, particularly on the back of the trade war, U.S.-China, that has emerged since basically in May 2019, our sales in Asia because of that have been slightly lower than expected.

Important to mention as well that in the Foodservice business, sustainability matters continue to drive the business trend and there is a clear preference -- and there is clear plans from customers to prioritize going forward fiber-based packaging solutions, which from this point of view, is a positive news for us.

North America, as I said before, very strong continued performance, where in the full year we report 15% net sales growth, and that's very much driven by volume. Volume increase, thanks to our new factory, started a bit more than a year ago in Arizona in the U.S., the so-called Goodyear factory. So that's the volume as well that has enabled us to gain market share as well as increased prices, and that altogether has driven the sales growth, but as well, the profitability level that is increasing by more than 50% in the year 2019, reaching almost 10% for the full year on adjusted EBIT level.

Flexible Packaging. We've -- as I said before, a moderate net sales growth of 3% comparable to the previous year, 7% reported. The 7% reported are on the back of currency changes but as well acquisitive growth. There has been, however, despite the slightly more moderated growth than expected, a very good improvement of our profitability in flexibles. And I must say that this has been a conscious decision to prioritize profitability in India, for instance as well as in Europe as opposed to growth in order to make sure that in all products and our customers in our portfolio are sustainable profitable business.

Maybe a bit anecdotic, but still nice to signal that we have reached the threshold or passed the threshold of EUR 1 billion sales in flexible in 2019. Still in 2019, important to mention the 3 acquisitions that we have completed in the flexible business -- well, actually 2 completed and 1 signed, but still under administrative process. That's the last one for the company called Laminor. This company is based in Brazil and they specialize in high-quality tube laminates. And it's not a foreign company to Huhtamäki since we were already in the JV 50-50 with Bemis. Bemis has been acquired by Amcor, and we came to a conclusion after negotiation with Amcor to call off this joint venture and get the 100% ownership of the company. EUR 25 million sales level will be consolidated in the group and further increase our leadership in this tube laminates business in that region. Previously, we had concluded the acquisition of Everest Flexibles' packaging in South Africa, which gives us not only higher market share and sales, but as well a better competitive situation in South Africa. And that's particularly linked to the JV structure that has been built together with this new partner at 70-30, which gives us a much better rating in the business conditions in South Africa.

So that's improving our competitiveness for the growth going forward.

And then the last acquisition looks fairly small, Mohan Mutha Polytech company in India. However, it's bigger than it looks like on the sales number. First of all because the assets are of excellent quality and very underutilized in this company. Therefore, we will be able to grow with the existing equipment of that company in a fairly straightforward manner.

Second, strategically, it's a very well-located case because it's in the south of India, which is the region populated with roughly 25%. If you divide India in 4, where it's got 24% of -- 25% of the population roughly in the south region, but it's the per capita wealthiest region as well as most developing economically in those days. And therefore, it is important for us to have as well a footprint in the south of India.

Moving to Fiber Packaging, our fourth business segment. Reaching EUR 300 million -- or close to EUR 300 million sales in the year. Comparable sales of 6%. Reported net sales 4% growth. The net sales have been increasing, particularly in Eastern Europe and South Africa. Capacity is of essence in fiber in order to deliver the very strong demand that there is. Sustainability consideration are extremely well supporting the fiber technology to become even more relevant going forward, particularly, for instance, in converting fruit plastic packaging or plastic trays into fiber. So we are working on all these opportunities and need to further enhance our capacity.

Last comment I would put on the fiber performance, so that the P&L as such as it is reported is not misleading. As it is reported, we saw a decrease of the margin from 11.0% -- the adjusted EBIT margin from 11.0% to 9.9%. However, when you look really at the granularity of the business and specifically the legacy rough molded business, which is most of the sales, we are there improving the adjusted EBIT margin from 11.0% to 11.8%. Then, this margin is reduced to 9.9%, linked to the new fresh ready meal trays that we have launched in the middle of the year 2019 for sustainability reasons. Yet, these products are under ramp-up -- commercialization ramp-up and therefore, volume is not covering for the cost and that hampers the reported margin. But on the legacy business, nothing to be worried about.

With this, we will have a quick review of the financials with Thomas, and then we'll take your questions.

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Thomas Geust, Huhtamäki Oyj - CFO [3]

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Yes, we take a quick review, as Charles said, and following up on some of the comments made earlier. So first of all, happy to say that the growth continues and even more happy to say that the translation of growth into EBIT improvement also continues.

So as you can see from the slide, both for the quarter as well as for the year-to-date, the EBIT margin has been improving versus previous year. Now at 8.6% for the full year and 8.5% for the quarter. So up roughly 0.5% point for the year and then 0.8% for the quarter. So therefore, the leverage of the increased sales coming through as well as the actions taken throughout the back end of last year and throughout this year.

Also to show here is that the net financial items, so cost for financing is at a competitive level, actually down from previous year. And therefore, positively contributing to the EPS. However, as you will also see from the slide, our tax rate is now at 23%, while it was at 19% previous year. More descriptive for previous year would be to use the tax rate, which is -- was 21% by Q3. I have highlighted earlier that the tax is, with the increasing profits, challenging chapter to maintain on the low level.

The adjusted EPS EUR 188 million versus EUR 169 million previous year. So as you can see then, the impact from both the tax but also partly from the minority holdings are leading to the fact that the profit is -- the EPS is not growing as fast as the EBIT.

On the next slide, you see the development of the currencies. The most favorable currency in translation point of view this year has been USD, which is the majority of the impact in translation full year basis, EUR 90 million positive. You might recall that we last year had a significant over EUR 100 million negative impact on net sales, so recovering from that. And then for the quarter, net sales impact minus -- plus EUR 23 million. And obviously, then also converting into EBIT positively.

Net debt development also from a proportional point of view improving. So we are now at a net debt-to-adjusted EBITDA level of 2, you see that we were at the end of the previous year at 2.3%. So our ability to take on both capital expenditure projects as well as acquisitions remain strong. Our gearing improved to 0.63 versus 0.73 end of last year. So also there, a significant improvement.

And from absolute net debt point of view, we are now at EUR 904 million versus EUR 928 million previous year.

Also to point out that from the IFRS 16 point of view, the lease liabilities are at EUR 163 million. So if you recalculate, excluding lease liabilities, the net debt-to-EBITDA is approximately at 1.8.

Maturity -- from a maturity point of view, just as reminder, we issued a EUR 175 million euro bond earlier this year, which takes our maturity into a healthy level. We are, therefore, well equipped also from a financing point of view to look for the future growth perspectives and the maturity asset is now 3.4 years versus 3.7 end of previous year. Unused committed credit facilities is at EUR 302 million maturing in 2023.

From cash flow point of view, we can, of course, be very satisfied with the EUR 226 million delivered in 2019. We, of course, need to remember that 2,000 -- that is coming out of an investment here in 2018, where we will start -- when we were starting up the major factory in the U.S. So a big part of this cash flow improvement is related to working capital released and mainly then in the U.S. EUR 114 million coming out of working capital change, while then the profit contributes with approximately EUR 59 million.

I think a better way to look at the overall cash flow performance is maybe, therefore, to average out those 2 years, which would give us roughly EUR 150 million type of free cash flow generation.

From a balance sheet point of view, the assets are following basically the overall growth. And of course, we also have in here currency translation impacts, but mainly following the growth and, as I said earlier, the gearing improved.

The Board is proposing a dividend for -- to be paid in paid this year of EUR 0.89. So the dividend would therefore increase by 6% versus previous year's dividend with a payout ratio of 47%. With the share price of the last of December 2019 at EUR 41.38, that would then give a dividend yield of 2.1, which is obviously down versus previous year, as the share price has developed quite favorably during the year.

If the AGM approves this dividend, this would be the eleventh consecutive year of growing dividends. And as you see, we have 162% of -- would have 162% of increase since 2008 and then giving it approximately 9% CAGR over the -- over a 10-year period.

From our ambition point of view, we are still trending quite nicely on the growth level. So actually, above our ambition. However, as we are still trailing a bit below our long-term ambition on profitability or the other KPIs following profit, therefore, still trailing behind the ambition.

CapEx is at 45% of EBITDA. And then, as I said earlier here, the net debt-to-EBITDA is at 2. Cash flow, EUR 226 million, overshooting the long-term ambition significantly. But as I said, if we have reached out, we were approximately EUR 150 million over the 2 last years.

On the outlook, we have no changes here. However, as usual, the capital expenditure part will be depending on how we execute, for instance, also acquisitions. And therefore, we will monitor how this part develops during the year.

In the short-term risk and uncertainties, we have here added a comment on possible impact from serious virus outbreaks, which is obviously following the current corona epidemic, which was -- which started mid of January.

Calle already pointed out that we have the Capital Markets Day on March 24, and otherwise, we then have the annual -- official annual accounts coming out on the 10th -- week 10, sorry, in week 10, and then we have the Q1 report coming up and AGM coming up in April 29.

With that one, I conclude my part. So, I guess, we'll open up for questions.

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

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Yes, that's correct. Thank you, Charles and Thomas for the presentation. And now let's continue with Q&A. 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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Before we go to Klaus Kehl at Nykredit (Operator Instructions) So Klaus, please go ahead.

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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. I have a couple of questions. First of all, I noticed that, yes, you had 8% growth in Fiber Packaging in Q4 and that's pretty strong. Could you elaborate a bit more on what's driving that? And in this respect, could you also talk a little bit about the competitive environment in this segment? And finally, is there any particular areas where you are seeing an increased demand for these sustainable products? That would be my first question.

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

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Okay. So Charles Héaulmé here. I'm going to try answering your -- the two questions embedded into one. 8% Fiber Packaging growth in 2019, yes, it's a very good growth. And basically, this is on the back of strong demand in the market. We have a strong position in the market. And building on the second part of your question, which is about the competitive situation, there are 2 big players in the world of molded fiber, that's Hartmann, the Danish company; and then Huhtamäki, and then the rest is very fragmented. There is a strong demand in the market, and that's particularly driven by sustainability considerations. The molded fiber products are mainly made of recycled content of recycled fiber, so that's the first big advantage from a sustainability point of view. They are fully recyclable, if not compostable, actually. And that, obviously, gives a very good profile.

In the food industry, particularly, there is a lot of plastic solution, plastic trays and where -- to your question of where do we see the demand, particularly pooling, well that's a part of eggs, which is the consumption of eggs is increasing in the world. And in Europe, we still have a few markets. France and Italy are probably the biggest ones where plastic is still a very relevant solution, if not dominant. This is decreasing in favor of fiber. So that's for the traditional business of eggs packaging. But then, the packaging business that we see rising very strongly in terms of demand is fruit packaging moving from plastic trays to fiber trays.

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

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Okay. Okay, and then secondly, you mentioned throughout the presentation that pricing is affecting margin and earnings positively on group level. And I know that you implemented some price actions in the second half of '18, but have you raised prices further here in '19? And this impact from price hikes, is that in all divisions? Or is it more in 1 division?

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Thomas Geust, Huhtamäki Oyj - CFO [5]

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This is Thomas answering. So first of all, you are quite right, we took a targeted pricing effort in last year. I would say extraordinary from the point of view that the movements of the various cost elements were so significant. Throughout this year, I would say it's -- the difference is that we have been more diligent and more active in the price management, portfolio management. Significant movements in increased prices, I wouldn't say has occurred on an extraordinary level this year. So it's more portfolio management actually during 2019.

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Operator [6]

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(Operator Instructions) And we're back to you, Klaus.

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Klaus Kehl, Nykredit Realkredit A/S, Research Division - Chief Analyst [7]

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Okay. If there's no further questions, then I can ask a couple more. You have done pretty well on your net working capital here in '19 compared to '18. And I believe that in Q3, you highlighted that you could take down net working capital, which you then have done here in Q4. But is there more to do on the net working capital line going forward? Or have we now seen all the actions? And secondly, this tax rate, you mentioned that it jumps to around 23% here in '19. What would be a reasonable level going forward?

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Thomas Geust, Huhtamäki Oyj - CFO [8]

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Well, the first question on net working capital, I think anyone will always say that they are working on improving net working capital. And for sure, we are also doing the things possible. One of the things maybe to notice when you analyze net working capital from an external point of view is that you don't get the subtleties of movements within various businesses. You need to remember, in our case, we have 3 main businesses: one is the flexibles, which is plastic-based; and then you have a virgin paper-based businesses; and then you have the recycled fiber. All of them have a bit of a different working capital structure, if we say it that way, and obviously, that might always swing the balance sheet movements.

With regards to that one, though, I think the trend we achieved towards the end of the year is a good -- so the last 2 quarters is a good trend development, and we will continue to try to keep such a pace ongoing.

With regards to the tax rate, forecasting tax rates where we would land is also a very difficult topic as we have a global footprint, where depending on which country is contributing the most is then also moving the tax rate in different levels. My general statement is that one should not assume the tax rate to go down from the level where we are as we are very much operating in high tax jurisdictions, and the growth is also coming from high tax jurisdictions. I wouldn't expect, though, very serious hikes from this level short term at least.

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Operator [9]

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We have another question and that's Anders Knudsen at SEB.

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Anders Knudsen, SEB Investment Management AB - Portfolio Manager [10]

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First of all, beyond Fiber Packaging, do you have -- as you also mentioned, there is clear trend for your products. But is there any other evidence that you can give us in terms of this trend and then products and market share gains that you're getting? Secondly, as you mentioned, the cash flow was very strong. And you, of course, continue to work on improving at working capital, but what about the M&A pipeline, how is that looking? And what should we be looking for in 2020? Obviously, this is a binary thing. But still, if you have any comments, would be appreciated.

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

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Okay. Anders, Charles here, I will take your questions. So the first one, which has to do with portfolio and market pool, we are -- as you know, we are in the entire world, I would say, but probably led very much from Europe in a context where sustainability matters more than ever, and that's very good. That's very good for the driving a more responsible future and a better future for the planet. We are so pleased as Huhtamäki with this. The -- it puts a lot of challenge in doing the business, but great opportunities as well. And the main one is that the pool of the market is basically about plastic substitution towards more fiber and paper-based solutions. I would say, if you're asking me, I commented quite extensively on the fiber, on the molded fiber, on the impact on the molded fiber business, but I omitted and therefore, very good that you're asking the question. I omitted to mention that as well in the paper technology, there is a lot of demand from FMCG customers asking solutions to replace plastic on containers for dairy product, ice creams, yogurt and so forth. So in the food industry, lots of in-brand developments. As well, it's not just FMCGs, as well regulators through legislation that is pushing for more innovation. And a good example of that is the agility that Huhtamäki has been demonstrating in -- back in end of 2018 with the legislation against plastic straws and immediately, within 5 months, we, together with a partner, developed a very robust solution for high-quality paper straws. From not being in the business of the plastic straws, we saw only the benefits of this legislation because we took basically the leadership in the paper straws. So that's an example to show that much more is going to happen going forward in the concept of what sustainability is going to drive in terms of product portfolio changes and reprioritization.

To your second question, which is completely different, about our cash flow and Thomas illustrated in his comments earlier, in his presentation about the ratios of our balance sheet that basically give us a clear space or firepower for organic investment, but as well, acquisitions. Here, we continue the same strategy. I think we have been consistent and the change of leadership from that perspective has not changed the right strategy of Huhtamäki, which is to look into 2 types of M&As. First one -- and in all different businesses that we've got, first one is bolt-on -- rather small-scale acquisitions that give us either a new -- the clear entry -- quality entry in a new geography or extension of our product portfolio or eventually a new technology. That's the first fold.

And the second fold of it is looking for more significant targets. So more transformative acquisitions potentially. We have the capacity to look at that. Of course, it's -- the opportunities are more real, if I put it like this. And we are extremely careful about the strategic fit, about the potential synergies, and as well, about the valuations that are ongoing in the market. That's why maybe compared to our ambition, it takes quite some time. But that's -- so it's -- to answer into with one word to your question about the M&A pipeline, it's on. And I can't say much more about the details.

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Operator [12]

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Okay, so that seems -- sorry, we're back to Klaus for another question.

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Klaus Kehl, Nykredit Realkredit A/S, Research Division - Chief Analyst [13]

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Yes. Then just a final question from my side. It's starting to be quite obvious that you will have a positive impact on -- in the fiber business from this increased focus on sustainable products. But I guess, you could start sooner later to see some kind of negative impact on the Flexible Packaging side. But net-net, would you then say it would -- it is a positive trend for growth and margins for Huhtamäki?

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Charles Héaulmé, Huhtamäki Oyj - CEO & President [14]

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So you are extremely elegant class in asking many questions in only one, but let me put like this. So if I take it from the overall perspective first, sustainability is one word, but there are plenty of different meanings depending on where you are in the world, okay? It's an extremely complex concept and where we should not go with opinions and emotions, but rather, really understand the facts. And I'm not answering to you, but when I'm saying this comment, it's not directed to you, but more to the -- to consumers and even more to legislator. Why am I saying that is because when you're saying, "Isn't it going to be negative in flexible?" And you are not the first one to ask this question, it's a recurrent question. I would say that if you consider that the number one problem in the world of sustainability, at least for the food ecosystem, the food systems, the number one issue is by far not packaging, the number one issue is food waste. The best packaging ever for reducing food waste is aseptic packaging and flexible packaging. This is the most effective solutions there is in the world. And we fail to know that, why? Because, yes, the main material, even though that's changing slowly, but surely. The main material is plastic. And therefore, it is considered as evil. But plastic, let's remember, plastic has tremendous functionalities that no other material can compete with, okay, in terms of cost competitive and sustainable solutions. So we don't foresee that it's going to be negative for flexibles, even though, yes, you are right. There is some kind of a perception, which we need to combat. There is much more growth opportunity for Flexible Packaging than the sustainability consideration or wrong sustainability consideration may impact. This being said, it's not going to be an easy and only positive -- I don't want to be misunderstood either. I don't want to sound over-optimistic, it's not going to be all easy and only positive because depending on the countries, depending on the consumers, depending as well on activists, one of the big issues I consider in the world of today is that we are listening too much to activists that are going with a lot of emotions and big statements rather than listening to scientific voices -- very educated, documented, proven. And why I'm saying that and a bit forcefully is because, unfortunately, we see even in countries -- in some countries, and we see it even in Europe, where some regulations are set up based on lack of facts, lack of study. Therefore, we have to be very careful that it's not going to be an easy walk in the park, all the sustainability concerns.

To your last question, which was is it going to be positive for the sales growth and the profitability? There is a challenge is, if we look -- if we take the voice of big customers, global customers, FMCGs, they all want only sustainable solutions going forward, and they want it at the same prices today. Basically, that's -- if I summarize it in one statement. So that's a huge challenge because we all know that innovation brings more cost, at least during the ramp-up phase. And it's not always more expensive, but at least at the beginning. Well, it is more profit? Yes, as long as there is a strong pull from the market, there is more value. It's our job to sell that value. But definitely, it implies additional cost for the value chain. That's if nobody wants to pay, well, either the regulators is going to require that we pay for it, that the consumers are paying for it because that will be the implication of legislation. But it's clearly as well a challenge for us to make sure that those solutions will become more and more competitive.

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Operator [15]

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Okay. As that was the final question on today's call, may I please pass the call back to you for any closing comments at this stage.

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Calle Loikkanen, Huhtamäki Oyj - Head of IR & Financial Communications [16]

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All right. Thank you very much, operator. This then concludes the event for today. Thank you very much for participating, and I wish you a really good rest of the day.

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

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Thank you.

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Thomas Geust, Huhtamäki Oyj - CFO [18]

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Thank you.