Huhtamäki Oyj

Good morning to all and welcome to Huhtamäki's investor call. My name is Kristian Tammila, VP of IR. We have this morning released the results for Q4 and full year 2023, along with the proposals for the AGM, including the dividend. We will again start with presentations by our president and CEO, Charles Elmé, followed by our CFO, Tuomas Geust. And after that, we have time for some questions. And with that, let's get started and handing over to Charles.

Thank you, Christian. Good morning to all of you and thank you for joining us this morning. I'm happy to report to all of you that in Q4 and for the full year of 2023, we delivered a strong cash flow and a strong margin improvement. I would like to start, as usual, with a couple of words of introduction on the business context and the outlines of our performance and our strategy execution. From a market point of view, we have seen, as you know, a challenging first semester of 2023, which was impacted by the inflation. and this impact on the consumption and the demand. But as well, there was an impact of the destocking from most customers around the world. This demand from consumers continued to be affected during the second semester, based on the high inflation that we have all seen. This is important to remark, and you will see in our results, particularly in North America, that we start seeing the first shy signs of a slow recovery of the demand, and that we have seen in North America towards the end of the year. That's a positive sign. From a financial performance, we had a strong end of the year, so a strong Q4. We will see that. It was supported, obviously, and as expected by raw material price reductions. Our full year adjusted EBIT is almost at the level of 2022, so just 1% below. And I would say with the disclaimer that this is actually a positive evolution when you would discount 2022 results for the positive profit generated from our operations in Russia. that, as you know, we divested in September 2022. So comparable EBIT was actually higher, and our adjusted EBIT margin has improved significantly from 8.8% in 2022 to 9.4% for the full year 2023. As Christian was mentioning, we have a... issued the this morning the company has issued the proposal from our board of directors to have a dividend on the results 2023 of 1.05 euro per share and it's i think remarkable to to mention that um It would be, if approved, the 15th consecutive year of growing dividends paid out by Hutemaki, with a CAGR over these 15 years of 8% growth per year in average. Going forward, 2024, you will certainly have many questions about. One of the highlights that we want to underline is the fact that we have, back in the end of November last year, we have, it says 24 on the slide, but it should say 23, obviously. We have communicated an efficiency program for the next three years, 24, 25, 26. where we are going to tackle all the input costs from a procurement point of view, manufacturing footprint, labour productivity. And this is in order to accelerate the implementation of our strategy and accelerate the improvement of our profitability. growth and the plan is to reduce our cost structure by 100 million over three years. This program will of course have a cost evaluated at 80 million treated as IACs and it's obvious considering the magnitude of this program that we will communicate on a regular basis back to you about the evolution of our performance in delivery. Now, moving on immediately, I'm going to slide four for the ones who are offline, on the presentation offline, looking at the sales for quarter four 2023, where our sales decreased by 6%, reported sales. Important to mention that the impact from currency was a negative 4%. And it means that our comparable net sales are actually still negative, but if I may say only in the context, a comparable net sales decrease of 3%. When looking at the same view for the entire year 2023, the reported net sales decreased 7%. The comparable net size decreased 2% because we had, again, this currency negative impact of 3%. And then the divestment negative impact from divesting our operations in Russia, that has an impact full year on our size of minus 2%. So that's not an impact in Q4 because the divestment was in September 2022, but on the full year it has a significant impact both in sales but as well in the comparability of our results. Moving on to slide 6 and now breaking down the sales per segment. You see that in quarter four, 2023, the sales remain negative. The sales growth remain negative versus the same period of last year. And that's particularly in the flexible segments as well as also in the food service segment. Flexible with minus 9% in Q4 and food service with minus 5%. The positive aspect of Q4 is the development in fiber with a growth of 2%. We will see later on the back of a strong Q4 last year. Well, you see it on that slide. It was 17% growth a year ago in fiber. So on this basis, the 2% is quite a positive number. And then most importantly, if I may say, North America delivering a 4% growth in quarter four. We will see in detail where it is coming from. So that's the positive development in Q4 with demand improving. Moving on to the global P&L, the consolidated P&L, then I would say a remarkable achievement is in Q4 that despite these remaining tensions on volume, we delivered a record EBIT of 10.4% of net sales and a record EPS in a quarter of 68 cents per share. So that is extremely positive. The full year EBIT increased 0.6 points, as I said in introduction, from 8.8% to 9.4%. The EPS of €2.32 is a decrease of 7% versus last year, but again, We need to always compare apples with apples. 2022 has a very positive impact from the results coming from Russia. So if we would discount 2022 for this, then our EPS 2023 is very close to 2022 comparable level. We will see the cash flow a bit later, but it's important to note that we have continued to invest. We are confident about the future. We have many growth opportunities in various markets, particularly in North America, and we have continued to invest, but at the same level as 2022. So during the year, many of you were asking questions whether we would maintain the same level of investment. It's not by design, but we land exactly on the same level. Sustainability, before we go into the business details, per business segment, sustainability performance is continuing to be positive. We are very pleased with the way it is embedded in everything we do, the way all segments and factories are very committed to deliver on the plans. And it shows up. It's a dashboard where all the numbers, all the performance is basically green, if I may say green, in terms of improving versus last year. So I may not take you through each and every single indicator. You know that we have a global sustainability and safety index that is improving year after year in line with our trajectory or slightly above our trajectory to 2030 targets. If I focus on just a few of the indicators, renewable electricity above 40% now in 2023, It's comparing to last year at 25%. And not written on the slide, but if I would say 2019 when we started, we were basically at 0%. We were at 3% in 2020. So, you know, remarkable development. Next one, industrial waste recycled. We were at 70% on our baseline 2020. We are at 79%. Obviously, we have a much higher ambition towards 90% by 2030. But we are progressing. Waste to landfill, which is a very important aspect for really protecting the environment. We were now, top of my memory, 19% in 2020. Last year, 12%. Now, 8%. So this is a really steady improvement. And I think we are proud of this and as well encouraged to continue on the same path. Moving on to slide 10 now with further comments by business segments now, and starting with the food service Europe, Asia, Oceania, where the first point I would say is that the demand for food service packaging continued to be soft in line with the rest of the year. Nothing dramatic, but still a mid-single-digit kind of volume reduction. The net sales remain relatively flat in Europe. But we have continued to see a decrease in the Middle East and Africa, and particularly in Asia-Oceania, specifically in China, as you know, and we have commented in the previous quarters. The pricing continued to support the net sales. However, the sales volume had a negative impact. And in this context, still, it is important to remark that... Our EBIT, if you look at quarter four, our EBIT margin reaches 10%. And one could say, yes, raw material is supporting a lot. Actually, in food service, that's probably the segment where the raw material is actually not supporting. supporting so much yet. So the paper board prices have been relatively high still in 2023, and we expect a cooler situation on the paper board prices in 2024. So from that point of view, the margin in Food service is quite solid. You may see bottom of the page on the left, capital expenditure, that we have invested. You probably remember that in 2022, this is one of the segments where we really invested quite a lot, particularly for smooth molded fiber applications. And therefore, in 2023, we had capital. comparably to 2022, much less investment. And the cash flow has been strong with 130 million versus 28 in 2022. North America is, as expected, a strong story in Q4, but as well for the full year. The demand started to show signs of improvement in Q4. The prices as well of most raw materials decreased, which is supporting the margin improvement. Our comparable net sales increased in all key product categories. Particularly, we are pleased with the development in 2023, the development of food service demand in the U.S. We achieved in Q4 a strong adjusted EBIT margin at 14.3%. which is supported by temporary, and I'm saying temporary here on the slide, because I'm sure that some of you may ask, is this the new North America standard? I think we should probably look more at the full year as a good comparison that is a benchmark where we are improving the margin by more than a point in 2023. So this is altogether a remarkable performance, including generating a cash flow that is between two and three times more than last year, almost three times actually, despite investing in the US and we are investing more than last year and we're very pleased to invest more because North America is such a profitable segment for us and where there is demand on the market, we see growth and therefore we have decided a year ago to further invest in that segment. Moving on to flexible packaging on slide 12. where the overall demand for flexible packaging continued to be soft due to a strong inflationary pressure on consumption and inflationary pressure across the board in all geographies, but particularly in emerging markets. A margin in Q4 is much better than in Q4 last year. You see from 4% last year to 8% this year in the quarter 4. We need to remind to be completely comparable that Q4 last year was hampered by a one-time cost. in one of our units. So not fully comparable. The full year is basically at the same level as last year, but with lower volume. We are impacted by the lower volume of 2023. So the key matter for going forward is to get the market demand to recover. And with this, we will be able to deploy our innovation and win in a much better and in a much more remarkable way in the market. Capital expenditure has increased quite significantly from 68 to 103 million. And that's linked, as you know, to the Blue Loop innovation deployment, where we will see the fruits in the coming 24, 25, 26. And operating cash flow is as well a positive result for the year. Finally, fiber packaging, where we have seen flat volumes overall. But I need to mention that the avian flu that we informed about, the avian flu in South Africa that we informed about a quarter ago, it was still on during the last quarter of the year, impacting our volumes overall. Pricing has helped us to sustain a growth of 2% of the net size in quarter four. Again, as I said at the beginning, this 2% growth in quarter four is compared to a very strong quarter four last year. And when we look at the margin for the full year, we are maintaining a margin above an adjusted EBIT margin above 11%, which is quite a good performance with a good cash flow as well generated by this business segment. With this, I hand over to Thomas for the financials.

Thank you, Charles. And I'm turning immediately to slide 15. If I look at the year as such, I think it's in a way a year with plenty of challenges and a well-maintained profit and cash flow. I think that's summarizing the year. As such, we have had a difficult environment, and looking at averages, which is basically the outcome you see in the P&L, is hiding the good work, to some extent, done on managing costs. We do have benefits, that's absolutely true. We have, I would say, more tailwind on the raw material than headwinds. On the other hand, we need to remember that other costs have also been inflated, like labour cost, clearly challenging in the year. And net-net on labor costs, we are up despite the cost outs we have been doing on that item as well. If I highlight some things on this slide, I would pinpoint to the EBIT growth. The EBIT growth in the quarter was strong at 15%, as Charles said earlier, and that's accelerating versus the full year numbers. Here, I think it's important to highlight that flexible delivered stable results during the second half of the year. And that's of course important for us when it comes to delivering a good performance also going forward. Other items to be highlighted that in the reported EBIT we have also benefits from sale of assets. I would highlight that if you look at the IACs over two years, we had a roughly 10 million positive IAC reported last year, roughly 10 million, 11 million this year negative. So over two years, we have on EBIT level, basically a wash when it comes to IACs. And I think that's also important to acknowledge. Financial costs, as we have been highlighting through the year, have been going up, but you also see that we had less one-time impacts in the quarter, so more stable through finance cost levels in the last quarter. And then on the tax level, we are roughly, I would say, from an ETR point of view, on previous year's level, we were 22% now adjusted versus 21% in the previous year. Then, of course, highlighting that we, in the previous quarter, flagged also the... IAC taxes related to high inflation environment countries like Turkey and Egypt. So you can read in more on that item from the Q3 report. On the currency side, all currencies trending negatively. So if you consider this one as well, so obviously with net sales impact, we will also see a negative impact on the EBIT in comparison. numbers so only brazilian real trending positively both on average and closing rate british pound slightly positive in in the in the last quarter but all in all a very strong headwind from currency throughout the year If we look at the balance sheet, this has been one of our key priorities in this year. Supported then by the strong cash flow, we have been able to deleverage now to 1.288 billion in depth, in the net depth, that takes us to a net depth EBITDA level of 2.2 and thereby we have deleveraged from the time of the ELIF acquisition when we were roughly at 3x net depth EBITDA. So good deleveraging story over the last years here. Low maturities, we are roughly on a similar level as last year, so close to three years of average maturity. Maybe the key highlight of the quarter was the issuance of the 300 million bond issued at roughly 5.13 coupon. It's a five-year bond, and we had a very strong book building and interest when issuing that one. Cash flow really the highlight, one of the biggest highlights of the year here. 321 million versus 11 million previous year. I would highlight that we have maybe roughly 60 million of one-time items. in here, but so operationally roughly 260 million of free cash flow delivered. So really steep step up, of course, mainly driven by the change in working capital on this one. Charles already to some extent highlighted that the variations by segments, North American flexibles investing more this year, food service clearly lower than 2022, and fiber basically stable. So again, on average, we remain on a flat development versus previous year. So strong cash despite having continue to invest for the future opportunities. The balance sheet as such, we have currency movements in the balance sheet, otherwise highlighting the decrease of the working capital. The gearing is now at 0.67 versus 0.77. Last year, the return on investments now trending slightly upwards, and I think you should take a look rona by rona by the segments, North America really being on a very high return on net assets currently. Looking more in detail on the proposal from the Board to the AGM on dividend for this year, which, as Charles said, would be the 15th year of consecutive growth, highlighting a few things. With a 105, we would have a 5% increase versus previous year. It would mean a payout ratio of 45, which is just in the middle of our payout ratio of 40 to 50%. and if you calculate the yield based on the share price at the end of the year, which was 15% up versus end of year 2022, then we would have a dividend yield of 2.9 for the dividend. Here you see the long-term trajectory, so basically going from 0.34 to 1.05 over this 15-year period. Ambition levels, on ambition obviously we are not satisfied with the comparable net growth, although a lot of that is market driven. Then if you look at the EBIT margin, there we have already a few segments food service and North America, at least in Q4, delivering basically on the ambition or the lower end of the ambition in the case of food service. So the trend is the right one on this one, though not yet meeting the target. And then if we look at the other parameters, they are on net activity. well in the range on the payout ratio, well in the range. And then if you take the return on investments, there we are slowly creeping up towards the lower end of the ambition. So for the outlook 2024, we have an updated outlook and we have an updated short-term risks and uncertainties. I will not be reading through them, but basically the core elements here is that we assume the trading conditions to improve in 2024 compared to 2023. Obviously, there are a number of risks and uncertainties out there, which are beyond the company's control.