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Edited Transcript of HUH1V.HE earnings conference call or presentation 27-Apr-17 1:15pm GMT

Thomson Reuters StreetEvents

Q1 2017 Huhtamaki Oyj Earnings Call

ESPOO May 26, 2017 (Thomson StreetEvents) -- Edited Transcript of Huhtamaki Oyj earnings conference call or presentation Thursday, April 27, 2017 at 1:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jukka Moisio

Huhtamaki Oyj - CEO and Chairman of the GET

* Kaisa Uurasmaa

Huhtamaki Oyj - Head of IR

* Thomas Geust

Huhtamaki Oyj - CFO

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Conference Call Participants

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* Kalle Karppinen

Danske Bank Markets Equity Research - Senior Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Huhtamaki Interim Report January to March 2017 Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Kaisa Uurasmaa. Please go ahead, ma'am.

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Kaisa Uurasmaa, Huhtamaki Oyj - Head of IR [2]

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Yes, thank you. Welcome to Huhtamaki's First Quarter 2017 Results Call. I have here our CEO, Jukka Moisio; and our CFO, Thomas Geust with me. And Jukka, please go ahead with your thoughts.

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Jukka Moisio, Huhtamaki Oyj - CEO and Chairman of the GET [3]

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Thank you, Kaisa. Good afternoon, and welcome to Huhtamaki first quarter interim report. So I'll go through prepared notes on the PowerPoint presentation of our interim report.

And I move to Page 2, which captures the first quarter top line growth. It was 10%, all included. If you look at the components of that, so we had a 3% comparable growth, 2% in the emerging markets -- out of that 2% at the emerging markets, then 4% from acquisitions and also EUR 20 million from positive currency translation. So all in all, our top line moved from EUR 672 million up to EUR 739 million.

There was a negative impact from demonetization action in India. That action was taken by the government in November 2016. But there was still an impact in the first quarter. And if that impact would have been neutralized, the group's emerging market growth would have been 6% to 7%, and the group's comparable growth would have been approximately 5%.

I move to Page 2 -- 3, sorry: all segments grew organically. So the important change is Flexible Packaging, which was negative growth in third quarter '16, fourth quarter 2016. We achieved 3% growth in first quarter 2017. And this is despite the fact that we had a 5% like-for-like net sales decline in India.

We had solid growth in foodservice and Fiber Packaging segments and also good progress in North America, taking into account that there's a strong comparison in the first quarter 2016 of 10% growth in North America. And then on top of that, achieving 2% in the first quarter '17 is a strong -- is a good progress.

On Page 4, highlights of the results. Top line up by 10%. EBIT improved by 9%, EPS by 8%. And return on investment, return on equity, roughly at last year's level, and our capital expenditure in the first quarter was EUR 47 million versus EUR 24 million in 2016. Most of the money is being spent at this moment in North America, especially building our new facility in Goodyear, Arizona.

I move to segment by segments review on Page 6. We have Foodservice Europe-Asia-Oceania, where we had a net -- solid net sales and earnings growth. In terms of organic growth, we had positive numbers across all Europe. In China, we progressed with our restructuring and improvement of the manufacturing operations.

So a few things happened or impacted our numbers in the quarter. One is that we are phasing out the noncore product categories. And therefore, those will not be in our top line anymore, and at the same time, we are about to close or empty the facility in Guangzhou, and we actually announced after the first quarter, in early April, that we have agreed to divest one of the facilities in Guangzhou and empty the facility by quarter 3.

And this means that our investment -- EUR 50 million investment in the facility, which is not being sold, is progressing well. And the core product categories are gradually, step-by-step, moving into that expanded facility. That means that our China restructuring is proceeding as planned.

Earnings grew because of net sales growth, improved operational efficiency and the restructuring actions. I talk about China already. And also I remind you that we had restructuring and improvements going on in New Zealand, which are also progressing well.

During the quarter, we announced a greenfield paper cup manufacturing unit that will be set up in Kiev, Ukraine. We've been historically in Ukraine and also our top line is at such level that it justifies and requires establishing local manufacturing in the country.

EBIT margin 8% in the first quarter versus 7.6% in 2016. Even here, the capital expenditure at EUR 11.5 million versus EUR 5.3 million is significantly above prior year. Operating cash flow nevertheless good at EUR 13 million.

I'll move to Page 7: North America. We had very strong progress in retail. Easter promotions boosted both private label tableware and Chinet brand ahead of the Easter season. Frozen dessert packaging declined.

Our profitability improved by good solid manufacturing performance and volume growth in the whole segment. Investments in the Arizona facility continued, and we actually now -- we have invested more than EUR 60 million in the facility, and we are over halfway in our capital spend and in our build up the facility and, obviously, step by step in this quarter and coming quarter, we start installing equipment so that we are ready to start manufacturing ramping up towards the end of 2017.

The distribution center commenced operations already in Q1 2017. In terms of the EBIT margin, 9.1% versus 8.8% in 2016. Capital expenditure more than double of 2016 numbers and operating cash flow. Because of the seasonal inventory buildup, receivables growing to do strong sales in retail, the operating cash flow was negative in the quarter.

Move to Page 8: Flexible Packaging. So we returned to growth path in flexibles. Net sales development was good in Southeast Asia, Europe and Middle East. We had a decline in India. So that soft demand was following the government's demonetization action in the fourth quarter 2016. However, we saw that there were signs of normalization towards the end of first quarter. And we expect that the demand in India -- consumer demand is returning to normal levels gradually during second quarter, third quarter.

This decline in sales also had a negative impact on segments earning. If you look at the growth without the negative India impact, the segment would have been growing about 6% to 7% during the quarter.

Profitability was helped by volume growth, operational efficiency and product mix, however, the India -- our net sales decline was the negative factor in the earnings. Manufacturing operations started in 2 new sites in Northeast India at the end of quarter 1.

Look at the margin -- EBIT margin 8.1% versus 8.7% in 2016, and capital expenditure here up to EUR 6.9 million versus EUR 4.1 million a year ago. And operating cash flow at good level at EUR 16.2 million in the quarter.

I move to Page 9: Fiber Packaging. So we have changed the name of our Molded Fiber segment into Fiber Packaging to signal that we have a number of ambitions in terms of raw material and in fibers, and at the same time, we are looking -- seeking innovations in terms of finding new products and new applications in the Fiber Packaging segment.

The business had a good volume growth in the U.K. and Eastern Europe through added capacity. Strong headwind in South America because net sales declined and earnings declined in weak markets. Most of the absolute EBIT decline is attributable to South America performance.

Earnings also had an impact from unfavorable product mix. The avian flu in Europe caused our customers to sell barn eggs instead of the free-range eggs. And therefore, the packaging also had lower value versus what you normally have when you have free-range eggs also included. In addition, higher raw material prices hit into our margins and had an impact on the quarterly earnings.

In terms of EBIT margin, 10.1% in the first quarter, EUR 7.3 million EBIT versus EUR 8.2 million a year ago. Capital expenditure at the same level as a year ago, and operating cash flow slightly up at EUR 5.2 million in the segment.

I now hand over to Thomas Geust, our CFO, to talk about the financial review. Thomas, please.

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Thomas Geust, Huhtamaki Oyj - CFO [4]

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Thank you, Jukka. I turn to Slide #11, the full profit and loss as such. Net sales grew 10%, as Jukka mentioned earlier. You can see also that the EBIT grew 9% and EBITDA 11%. The deviation between growth in EBITDA and EBIT as the slightly lower growth in EBIT comes from increased depreciation, amortization, which is the outcome of the investment program we are currently in and have been over the last years.

Also to point out, the gross margin was on a slightly lower level compared to previous year and that actually converted out to a large extent from raw materials, which I will get back to later on.

You will find that net financial items continues to develop favorably while the tax expenses -- tax rate is currently at 22%. Last year, pretty much almost 18%, and year-end 20%, indicating that the tax rate is moving upwards at the moment.

EPS for the period is $0.43. That's 8% up compared to previous year and continuing favorably -- developing favorably.

I turn to Slide #12. Foreign currency translation, as you see, it's turned positive, and Jukka already mentioned that we had a EUR 20 million positive tailwind and as you can see also EUR 2 million positive tailwind on EBIT, which basically indicates that it's a translation impact as such without impact on the result -- negative impact on the result or positive.

Then we have 2 currencies which have basically weakened against euro. It's the British pound and the Chinese renminbi. All the other currencies have trended favorably versus euro when it comes to translation so, basically, continuing on a slight positive path as we -- over the start of this year to end of last year.

I turn to Slide #13. Prices for plastic raw materials. This confirms what I said earlier that we have had steep increases, especially on the plastic side but also on the recycled fiber where demand in Asia has clearly driven up the prices over the last quarter or actually already for some time.

One of the -- one element also triggering transport into Asia is some weak currencies in, for instance, Northern Africa, like Egypt, where weak local currencies encourage export out of the country and thereby driving up the prices. Paperboard as such remained on a relatively stable level.

I move to Slide #14. The solid balance sheet continues to -- continues. We have a net debt to EBITDA level of 1.7 with overall net debt at EUR 681 million to be compared against EUR 549 million previous year and EUR 675 million at the end of 2016. But as you can see, the development is pretty stable and gearing is 56%, about 56%.

Cash and cash equivalents at the end of the quarter was EUR 100 million, partly reflecting the tied-up capital in both CapEx as well as working capital. And to be noted is that we issued Schuldschein at the end of -- now in April, which value is around 150 -- EUR 160 million. Funds available for acquisitions remains at some EUR 400 million to EUR 500 million.

Turning now to Slide #15, which shows our CapEx. As you can see, we have a positive outcome from the result, obviously. However, tied up capital in inventory as well as acceleration of all the receivables towards the end of the quarter gives a negative effect on the changing working capital, and while net financial items and taxes are more timing issues. So depends a bit on when we are paying various increases like interest rates. Capital expenditure is also heavily influencing the free cash flow and, consequently, the free cash flow for the quarter is minus EUR 9 million.

I go to Slide #16 next. Slide #16 shows our financial position. You can see we have been developing here favorably. As already mentioned, the net debt of EUR 681 million. The equity is up to EUR 1.2 billion approximately. Gearing mentioned to be 0.56 while the return on investment is 14.6%, so basically on the same level as year-end and then return on equity 17.4%. In the AGM today, it was decided that the dividend payout is EUR 0.73 per share. That means we would give a -- give the payout ratio of 40% and the yield of approximately 2%, thereby, the dividend then to be paid is EUR 76 million in total.

Move to Slide #17, showing our trends in both our long-term ambition. As it is Q1, it is very early days, and obviously, the ones that who have been following us more actively know that, that for instance, free cash flow buildup is typically towards the end of the year. That said, currently minus EUR 9 million with our ambition being EUR 150 million. So obviously, far away from that ambition level. Organic growth at 3% is also distant from the 5% [long] term. However, on most of the other parameters, we are pretty close to the ambition levels.

Last but not least, Slide #19. The outlook remains unchanged, meaning that the trending conditions are expected to remain relatively stable during the year. Our good financial position and ability to generate cash flow is in our view enabling us to continue our profitable growth as well as capital expenditures, which we believe to be on same level as previous year.

With that, I finish my part, and we open up for questions.

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Kaisa Uurasmaa, Huhtamaki Oyj - Head of IR [5]

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Any questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We can now take our first question. It comes from Kalle Karppinen from Danske Bank.

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Kalle Karppinen, Danske Bank Markets Equity Research - Senior Analyst [2]

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Kalle Karppinen from Danske here. Question about the numbers -- growth numbers on Fiber Packaging. You stated currency impact on sales was EUR 1 million. That's to me surprisingly low as they have business in South Africa, Brazil, Russia, which currencies are strongly up. Is U.K. big enough in that segment to keep currency impact that low? And then the other question I just can't add up is the segment sales in Fiber Packaging grew by 10%, and you're saying comparable growth 4% and then EUR 1 million from currencies. That gets us to 5% or 6%. So how does that match to the 10% growth for the segment as a whole?

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Jukka Moisio, Huhtamaki Oyj - CEO and Chairman of the GET [3]

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Sorry. Fiber Packaging, probably if I missed -- I said it wrongly. I said it's up to EUR 1 million impact on EBIT from South America.

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Kalle Karppinen, Danske Bank Markets Equity Research - Senior Analyst [4]

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From the currency impact, you mean. I think it says in the text...

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Jukka Moisio, Huhtamaki Oyj - CEO and Chairman of the GET [5]

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No. Profitability impacted (inaudible) from Brazil on profit.

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Kalle Karppinen, Danske Bank Markets Equity Research - Senior Analyst [6]

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Yes, but the currency impact was positive EUR 1 million on sales for the whole segment. And that sounds very low to me considering that you have South Africa, Brazil and Russia in that segment and all currencies were significantly up. And then the continuing question is that if comparable growth is 4% and currency impact is very small, how do you get to 10% growth in reported sales?

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Jukka Moisio, Huhtamaki Oyj - CEO and Chairman of the GET [7]

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Did you have other questions in between?

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Thomas Geust, Huhtamaki Oyj - CFO [8]

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We will check the statement here. Yes. The currency, which is against in the Fiber Packaging is actually the U.K. bond.

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Kalle Karppinen, Danske Bank Markets Equity Research - Senior Analyst [9]

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Yes. That's what I thought. But is it big enough to offset ruble and South Africa and Brazil all? It probably is.

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Jukka Moisio, Huhtamaki Oyj - CEO and Chairman of the GET [10]

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And then...

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Kalle Karppinen, Danske Bank Markets Equity Research - Senior Analyst [11]

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But still -- how do you get your 10% growth with 4% comparable and only EUR 1 million from currency? It's puzzling to me.

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Jukka Moisio, Huhtamaki Oyj - CEO and Chairman of the GET [12]

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Yes. We'll check that. Any other questions?

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Operator [13]

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We have no further questions at present. (Operator Instructions)

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Thomas Geust, Huhtamaki Oyj - CFO [14]

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Okay. The negative side also comes from Netherlands on the trading side. So the trading side, basically the trading. So like-for-like growth is including the product, so fiber product, so packaging and so on. So on top of that, we have the wastepaper trading and equipment sales. And the equipment sales to external parties and the wastepaper trading is not included in the like-for-like sales because that's not the main business, but it's in the reported numbers. Overall, reported numbers include these things, but not the like-for-like. Statutory numbers include items which are outside the like-for-like growth because they are not really part of the packaging business, but they are part of the segment in terms of statutory reporting.

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Operator [15]

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(Operator Instructions) We have no further questions today. So at this point, I hand the call back to the speaker for any additional or [closing] remarks.

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Kaisa Uurasmaa, Huhtamaki Oyj - Head of IR [16]

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Okay. Yes, thank you all for participating on the call. And we will now conclude the call. And at the Investor Relations, we are happy to help you afterwards if any further questions. Thank you, and have a good day.

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Operator [17]

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That concludes the conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.